Accounting Basics
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The following concepts are the fundamentals of business accounting:

  • CONTINUITY - Unless it is obvious that a business is in financial danger, it is presumed a business will keep running as a 'going-concern' forever.

  • CONSISTENCY - Using the same method year on year for preparation of accounting records and financial statements.

  • CONTROL - How the business controls its income and expenditure, to ensure financial stability.

  • COST - All expenses paid by the business are seen as costs necessary to run the business.

  • DUALITY -  When observing the accounts of any business, the records should show, where money/capital originates and where it is applied in the running of the business.

  • ENTITY - A business is seen as being an individual entity, separate from it's owners. The business is accountable for all profits, expenses and losses it generates. All this data will be recorded in separate manner to the accounts of the business owners.

  • INCOME - All money coming into the business in terms of sales of goods/products/commission payments needs to be recorded and analyzed.

  • MEASURING - The standard unit of measurement is money.

  • PRUDENCE - This is based looking at worse case business performance analysis, by using lower asset values, but maintaining the same liability levels you show the business as not being as 'cash-rich' as you think, this is to ward off potential hostile takeovers.

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Information presented in financial accounts should be:

  • Accurate - Your accounts should present an accurate picture of your business.

  • Cost Effective - In terms of preparation and monitoring.

  • Cash Flow - The accounts should reflect good cash flow management.

  • Observed - All the major financial reports, trading profit & loss and balance sheet accounts need to be produced by an external accountant, by having your business externally audited you present an impartial set of accounts.

  • Understandable - The accounts should be understood by all users of the information.

  • Not Restricted - Financial accounts for Public and Private limited companies should be available to any member of the public to observe a business financial performance. They will be issued to Companies house, and available to all (UK applicable only).

  • Timely - The information will be prepared quickly and reflect the state of the business over a given time period, usually one financial year.

  • Standard - The accounts of any business should follow a standard accounting practice format, which is universally accepted by all businesses within a industry.

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Once the financial accounts of a business have been published, there are several users of the information presented in the financial accounts:

  • BANKS/LENDING INSTITUTES - To observe the financial viability of a business.

  • EMPLOYEES - They will wish to find out out the stability of their employer business, this will be useful data to use in wage negotiations.

  • EXISTING INVESTORS - They will obviously wish to enquire about the status of their investments in a business.

  • GENERAL PUBLIC - Anyone wishing to find out data about a business. The public will of course these days have access to the internet to get that data. 

  • GOVERNMENT - The government will use financial data for a whole host of reasons such as VAT, Corporation Tax, Employee Earnings Tax, National Insurance, etc.

  • POTENTIAL INVESTORS - To assess the potential risk of investing in a business. 

  • PRESS - The press will use company data in specialist trade and business publications.

  • SUPPLIERS - To assess the credit suitability of a business.

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(c)  Est 08/00 - Last Updated 28/05//2001