Basic accounting concepts
The task of the company's accounting is to calculate the result for a certain period and to determine the company's financial position at the end of the period. Achieving this goal requires financial information about both the company’s internal operations and external stakeholder's operations.
DEFINITION: Action or event measurable in terms of money that affect the financial position of a business and arise from an external activity is called a transaction (business or financial transaction, business operation or deal).
The company's result and financial condition are defined using transaction data. The data is processed and compiled periodically into reports that can be used in management decision-making and stakeholder informing.
Business transactions are by nature revenue and expense transactions, as well as financial transactions.
When a company buys raw materials for processing and further finished product sale, purchase of machinery, equipment and buildings, pay employee wages, it incurs costs. All these inputs using to produce goods and services are called factors of production and they can be divided into the following main parts: land, labour, capital and entrepreneurship ability. In general, it can be said that the acquisition of these factors of production incurs costs.
Expenditure is incurred when the company receives the factor of production.
Each expense transaction leads to a cash outflow (payment), and each revenue transaction leads to a cash inflow (receipt). Expenses and income can arise long before the payment transaction is made. This principle is called accrued revenue and expense, and means that revenue is earned or expense is incurred even prior the cash transferring. Indeed, the terms "expenses" and "income" are used in accounting in a slightly different sense than in other situations, when they are often equated with payments made. Expenditure and revenue payments are financial transactions.
There are also other types of financial transactions. When costs are incurred even before earning income, then income money will be available to pay for the expenses only later. In order for a company be able to acquire the factors of production it needs to use capital financing. Owners' investments, loans from creditors and its disbursement, interest payments and profit distributions are financial transactions as well.