Concepts in Accounting Cheat Sheet (DRAFT) by yotka

There are a number of conceptual issues that underly how accounting works:
Accruals concept : revenues recognized when earned, expenses recognized when assets are consumed.
Auditors will only certify the financial statements of a business that have been prepared under the accruals concept.
Conser­vatism concept: revenues only recognized when there is a reasonable certainty that they will be realized, whereas expenses are recognized sooner, when there is a reasonable possib­ility that they will be incurred.
Consis­tency concept: once a business chooses to use a specific accounting method, it should continue using it on a go-forward basis. By doing so, the financial statements prepared in multiple periods can be reliably compared.
Economic entity concept: the transa­ctions of a business are to be kept separate from those of its owners.
Going concern concept: financial statements are prepared on the assumption that the business will remain in operation in future periods. Under this assump­tion, revenue and expense recogn­ition may be deferred to a future period, when the company is still operating. Otherwise, all expense recogn­ition in particular would be accele­rated into the current period.
Matching concept: the expenses related to revenue should be recognized in the same period in which the revenue was recogn­ized.
Materi­ality concept: transa­ctions should be recorded when not doing so might alter the decisions made by a reader of a company's financial statem­ents. This tends to result in relatively small-size transa­ctions being recorded, so that the financial statements compre­hen­sively represent the financial results, financial position, and cash flows of a business.

Owners contribute CAPITAL (called EQUITY) funding. The Business leverages that funding by borrowing funds from lenders. That creates busine­sses' LIABIL­ITIES. With these two sources of funding, the business acquires ASSETS, whose primary purpose is to generate INCOME. But to do that, the business must destroy value as EXPENSES in order to generate INCOME. The surplus value accrues to the owners as PROFIT.