Bookkeeping Concepts - An overview

The aim of this article is to provide a brief overview of general Bookkeeping Concepts. These concepts are vital for small business owners or anyone wanting to study accounting or bookkeeping.

Definition of REVENUE

Revenues are inflows, or savings in outflows of economic benefits which lead to an increase in owner’s equity in the reporting period. Revenue inflows are usually from the sale of goods generated by a business or a performance of a service in exchange for a fee.

List of common Revenues of a business (non exhaustive)

Income from sales

Fees for services rendered

Interest received

Rental income

Dividends income

Definition of EXPENSES

Expenses are consumption or losses of economic benefit in the form of decreases in assets or increases in liabilities (these exclude drawings made by owners). Expenses usually arise from such things as purchase of inventory, rent, wages etc.

List of common Expenses of a business (non exhaustive)

Purchases of inventory

Utilities – electricity, water, gas

Wages & salaries

Rental

Depreciation

Advertising

Insurance

Office Supplies

Interest & borrowing expenses

Accrual accounting v Cash accounting

There are 2 methods of accounting. These are the Cash and Accrual methods. Essentially the differences in the 2 methods are due to the timing of transactions and when a transaction is recorded. Please review the explanation below for a better understanding.

Cash

Revenue Recognition - Revenues are recognized under the cash accounting system when cash is physically received (not when they are earned)

Expense Recognition – Expenses are recognized under the cash accounting system when they are paid (not when they are incurred)

Accrual

Revenue Recognition – Revenues are recognized under the accrual accounting system when they are earned (not when they are physically received) and can be realizable (ie there is a reasonable expectation that cash will be received in the future)

Expense Recognition – Expenses are recognized under the accrual accounting system when they are incurred (not when they are physically paid)

The matching Principle

The accrual accounting method is based on the principle that transactions are recognized by matching revenues to the corresponding expenses in the period which the transaction occurs rather than when payments are received or made. This principle is known as the matching principle.