The Accounting Formula

The basic accounting formula is: assets = liabilities + owner's equity. This basic equation is the formula and theory behind the double-entryaccounting system. Every entry will have an offsetting entry to a corresponding asset, liability or owner's equity account. This is the basis for all financial accounting.

Accrual Concept

This concept states that all revenue transactions are recorded when they occur and not when the cash changes hands. This applies to revenue transactions that do and do not generate liabilities. The liabilities are also recorded when they occur and not when they are actually paid. Cash accounting, accounting for transactions only when the cash is paid or received, is not a theory and is used for small businesses without inventory.

Consistency

This concept states that once a company chooses an accounting method, this method should be applied consistently over all future accounting periods. The accounting method can be changed if there is a valid business reason. Once the new method is adopted, the consistency concept is in place again. This new method will be followed for all future accounting cycles. Accounting method changes should never take effect in the middle of an accounting cycle.