Accounting concepts are basic assumptions on which we base our accounting records. They are the things that we assume but, in certain cases, that may not be correct. For example, one of the most common assumptions is that money has a stable value. We all know that this is not really correct because inflation continuously erodes the value of monetary units. However, it would be tedious and of no great value to keep amending every company’s accounting records on the basis of an ever-changing value of the monetary unit. For this reason, we assume that money has a stable value. Everyone accepts this assumption and all accounting records and statements prepared on the basis of this assumption are generally accepted by all concerned. In this fact—namely, acceptance by all concerned—lies the importance of adhering to these accounting concepts or assumptions. Common accounting concepts are given below:Accounting Concepts
- Cost concept of accounting
- Business entity concept
- Money measurement concept
- Going concern concept
- Dual aspect of accounting concept
Accounting Principles
Accounting principles are the rules that have emerged from the use of basic accounting concepts. These rules have evolved over a long period of time; they represent the collective wisdom of accounting history.
Adherence to these rules ensures that accounting records are maintained on more or less the same basis by all business units and can, therefore, be relied upon and used for comparison.
As a business language, accounting must be simple to understand for the people who own or manage the company’s affairs. So, to achieve that purpose, standards were invented that were uniform, scientific, and easily adaptable for all.
These standards are known as accounting principles.
If these principles didn’t exist, the situation would be disastrous. Every accountant would practice accounting on their own terms and conditions, making it impossible for people attached to the company’s affairs to understand them.
Uniformity would also be missing. Therefore, accounting principles play a crucial role in ensuring that accounting practices are uniform, scientific, and easily adaptable.
It is imperative to follow accounting principles when measuring business routines, which may include incomes, expenses, and other aspects.
Significant accounting principles are mentioned as follows:
- Principle of objective evidence
- Accounting period principle
- Matching principle
- Accrual principle
- Conservatism or prudence principle
- Consistency principle
- Materiality principle
- Principle of adequate disclosure
Do you want to test your knowledge about Accounting Concepts and Principles? Take the quiz we have prepared for you here.
Accounting Concepts and Principles FAQs
The fundamental accounting concepts and principles include the accrual basis of accounting, the matching principle, the revenue recognition principle, the going concern assumption, the consistency principle, the materiality concept, the cost concept, the full disclosure principle, and the objectivity concept.
The accrual basis of accounting recognizes revenues and expenses in the period incurred, regardless of when cash is received or paid. This means that a company records transactions in the period they occur, rather than when payment is made or received.
The matching principle states that all costs associated with the generation of revenue should be recorded in the same period as when the revenue is earned. This allows companies to more accurately measure their performance and profitability by matching their associated expenses with the revenues generated from them.
The going concern assumption states that a business will remain in operation for the foreseeable future. This means that a company does not need to liquidate its assets and settle its accounts immediately, as it has every intention of continuing to operate as normal.
The materiality concept states that transactions and events must be reported if they are material, meaning they have a significant effect on the financial statements of a business. This means that companies must disclose all information relevant to their financial statements in order to provide an accurate picture of their performance.
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.
To learn more about True, visit his personal website or view his author profiles on Amazon, Nasdaq and Forbes.
