For many years we operated quite well as accountants, but since we changed our model to service people over the Internet, we've found there are some ideas that seem really basic to us - but we're accountants so we live and breathe this stuff. So we thought it might help those new to accounting if we explained a few simple but key concepts.

 

First and foremost there is the question of the entity. Accounting records reflect the financial activities of a specific business or organization, not of its owners or employees. It is always important to identify to whom the transaction relates. And just to be clear, this doesn't just apply to companies and the like. If a sole trader runs a business, they should keep their business transactions separate from their personal transactions. Effectively this means they should have separate bank accounts for the two.

 

Then there is the accruals concept. Revenue and expenses are recorded when they occur and not when the cash is received or paid out. The timing of the cash is important - and especially if you're GST-registered on a payments basis. But profit and loss is calculated regardless of whether or not items have been paid.

 

Closely aligned with this is the accounting period. While accounts are for a specific year, there are other periods within that. For example, most GST is done on a two-monthly period. And most internal procedures are done on a monthly basis. Some are even done on a weekly or semi-monthly basis. So it is quite important to get the dates right. That means unless the cash is paid with the transaction, or at least within the same month or shorter time frame as appropriate, the transaction (e.g. invoice / bill) should be entered with its date, and the payment entered with its correct date. This latter is particularly important to make bank reconciliations simpler.

 

Also aligned is the concept of matching periods. Transactions affecting both revenues and expenses should be recognized in the same accounting period.