Basic Accounting Principles and Concepts

Basic Accounting Principles and Concepts

Accounting is referred to as “the language of business” because it communicates the financial condition and performance of a business to interested users.

In order to become effective in carrying out the accounting procedure, as well as in communication, there is a widely accepted set of rules, concepts and principles that governs the application of the accounting. These concepts and principles are referred to as the Generally Accepted Accounting Principles or GAAP.

In this article, you will learn and familiarize yourself with the accounting principles and concepts relevant in the performance of the accounting procedures. It is a necessity to learn and understand it because you need to apply these concepts and principles during the accounting process.

Guidelines on Basic Accounting Principles and Concepts

GAAP, is the framework and guidelines of the accounting profession. Its purpose is to standardise  the accounting concepts, principles and procedures.

Here are the basic accounting principles and concepts:

1. Business Entity

A business is considered a separate entity from the owner(s) and should be treated separately. Any personal transactions of its owner should not be recorded in the business accounting book unless the owner’s personal transaction involves adding and/or withdrawing resources from the business.

2. Going Concern

It assumes that an entity will continue to operate indefinitely. In this basis, generally, assets are recorded based on their original cost and not on market value. Assets are assumed to be held and used for an indefinite period of time or during its estimated useful life.  And  that assets are not intended to be sold immediately or liquidated.

3. Monetary Unit

The business financial transactions recorded and reported should be in monetary unit, such as US Dollar, Canadian Dollar, Euro, etc. Thus, any non-financial or non-monetary information that cannot be measured in a monetary unit are not recorded in the accounting books, but instead, a memorandum will be used.

4. Historical Cost

All business resources acquired should be valued and recorded based on the actual cash equivalent or original cost of acquisition, not the prevailing market value or future value. Exception to the rule is when the business is in the process of closure and liquidation.

5. Matching

This principle requires that revenue recorded, in a given accounting period, should have an equivalent expense recorded, in order to show the true profit of the business.

6. Accounting Period

This principle entails a business to complete the whole accounting process over a specific operating time period.

Accounting period may be monthly, quarterly or annually. For annual accounting period, it may follow a Calendar or Fiscal Year.

7. Conservatism

This principle states that given two options in the amount of business transactions, the amount recorded should be the lower rather than the higher value.

8. Consistency

This principle ensures similar and consistent accounting procedures is used by the business, year after year, unless change is necessary.

Consistency allows reliable comparison of the financial information between two accounting periods.

9. Materiality

Business transactions that will affect the decision of a user are considered important or material, thus, must be reported properly. This principle states that errors or mistakes in accounting procedures, that which involves immaterial or small amount, may not need attention or correction.

10. Objectivity

This principle states that the recorded amount should have some form of impartial supporting evidence or documentation. It also states that recording should be performed with independence, that’s free from bias and prejudice.

11. Accrual

This principle requires that revenue should be recorded in the period it is earned, regardless of the time the cash is received. The same is true for expense. Expense should be recognized and recorded at the time it is incurred, regardless of the time that cash is paid. This is to show the true picture of the business financial performance.

Comments

  1. actually this is a very good post in a learn basic accounting theory.i ve a store in a lot of knowledge this letter thank you for editor.
    well done & good luck !!!

  2. very helpful information. Thank you for your site

  3. Mathius nyangali says:

    This principles are truely related to our daily business

  4. jagannatham says:

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  14. am jst done wit ma course work…..thank u

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  16. Gangaraju.K G says:

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  17. more explanation on business entity

  18. These basic Principles of Accounting are very well explained here. This really helped me to understand the concept of Principle Accounting. Each principle is expalained thoroughly with simple and short language, which helped me to learn very important aspect in the field of Accounting.

    Thank you very much for this useful article.

  19. George Onyach says:

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  24. very helpful for a young learner of 9th std

  25. wonderful site for understanding a/c.

  26. Ronald Mwanza says:

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  27. really i learn from this site,its help me to gain more about accounting.. just i study as accounting and this site perfectly give a knowledge ..thank you

  28. the comprehension of Accounting is so complicated but then y,ve made the studying of Accounting more comprehensible. great work.

  29. very much in order

  30. karthik h s says:

    Really its help to clear understand…its a basic thing that learn for commerce students…

  31. THE BASIC ACCOUNTING PRINCIPLES ARE CLEARLY INTRODUCED AND ANALYSED INTO AN UNDERSTANDABLE MANNER. BEFORE, I WAS’NT FAMILIER WITH THESE PRINCIPLES BUT NOW EVERYTHING IS ABSOLUTELY CLEAR

  32. Many many thanks.

  33. Ali Mohamed Omar says:

    Thanks this is basic learning of Accounting Principal.

  34. is very good guideline really thanks for your site

  35. kwizera mike says:

    first of all i thank you , and i request u to help us by provinding more accounting topics, more questions and answers.
    be blessed

  36. passionflower says:

    this is good basic information , i’m bookmarking it because i’m certain i’ll be using it again. Thanks!!

  37. thanks for that answers. it helps me a lot , 🙂 now., i can answer my assignment 🙂

  38. James m Gayflor says:

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  39. It’s information very useful.

  40. Chetankumar. Haveri says:

    This is very helpful who have not studied Well. Anyway thank you for information.

  41. Muhammad Raza says:

    Could you please more elaborate the term Conservatism

  42. namayanja ritah says:

    these application are still put in practice, though some are ignored by some organizations, hence putting their businesses at a great risk. Am still a student , and they have helped me in understanding the accounting concept.

  43. namayanja ritah says:

    this is good knowledge

  44. udita bhatta says:

    thank u very much for information of basic principle.

  45. Future cpa student says:

    this just adds up to what I know, very clear. However I think I have heard the conservatism rule before but not as a principle, when was it introduced separately?

  46. thanks to make this website!!!

  47. Wow.I understood the material and I love the simplicity and clarity with which it was written

  48. Very helpful information. Please update a flow chart of accounting procedure if possible.

  49. i think i need to give a round of applause to you people thank you so much.

  50. Czarina Jane Mandac says:

    this post is very very helpful and makes people to refresh whatever they learned from the past. 🙂 thank you..

  51. Abdulrasaq kayode says:

    This is one of the perfect and understandable site for accounting and bookkeeping stuff…Thank you

  52. Thank you very much for this informative Basic Accounting Concepts and Principles. I would also like you to explain more on the basic concept of double entry and contra entry as most learners tend to confuse the two moreso for those that are from Non Financial Management back ground.

  53. Your style is very simple and understanding tanks

  54. JOHN MANG'OKA says:

    it’s a very helpful information,i think it will help me in my course.Thankyou.

  55. Thanks for this. I read it thoroughly.

  56. Catherine Daniel says:

    really helpful, tnk u.

  57. Adekolu Akinwumi says:

    Wow! This is the best of its kind. It has a long way to go to benefit the Accountants in the making globally.

  58. Ikeomu Nkechi patricia says:

    i love the post it remands me of the accounting principles .looking forward to see more through my facebook page and mail box if possible

  59. Am grad to inform you that have enjoyed your site. Am jubilated with your short and clear information about the accounting principles. They are going to boost me since am hoping to be a serious and focused accountant. This will help our country a lot on how to handle money. Thank you and God bless you.

  60. this is a most accurately accounting principles and concepts

  61. mohhmad saleem bhat says:

    my from point of view i have many books but it is the first time i have understood everything

  62. Thanks for the the information it has helped me in my assignment

  63. Rahim Kamara says:

    this has been very useful in preparing my teaching lesson.

  64. Adeleke Simeon A. says:

    Straight to the point. Highly helpful. Keep it up.

  65. This is marvelous and splendid,am very much proud of your site.Keep powering,God bless you.Thanks

  66. I just done my assignment from these information, thanks guys!!

  67. thank you. this is really helpful

  68. Bett Vincent says:

    thanks for i have achieve alot by using the stated and analysed principles and concepts. May the Lord Expond your mind much more. thanks alot.

  69. the principles are self explanatory save for the principle of materiality and conservatism.

  70. It really help tx.

  71. kiplangat elisha says:

    it is a useful information as it explains the principles in a well understood mode for students

  72. Peter bamusi says:

    True

  73. Hellen bernad says:

    This principle are truly

  74. Aminu Abdullahi Usman says:

    Very interesting unambiguous writeup. Thanks for your contribution.

  75. thank you for webside ,i will remind for when i prepare of financial reporting .

  76. Alex M. Machumu says:

    I have real enjoyed this notes.

  77. sekou s konneh says:

    Accounting is my life career
    It helps me most of the times
    Thank you accounting authors

  78. thanks a lot for helping me

  79. ABDUL SAMI BHAYO says:

    Nicely provided, what we say, the introductory lines and one can understand easily what is the meaning

  80. a very interesting learning session, I will love to be sending more latest issue on accounting related to Nigeria setting. thank so much.

  81. enya eborty says:

    I wouldn’t have asked more,,, a geologist finding in an accounting position and continually seeking for accounting knowledge… it can only get better…thank you and thank you…

  82. Talie Sepania says:

    Can i asked u a question? at the beginning of the year,a new vehicle was purchased for k36 ooo with an estimated useful life of 4 years.Depreciation for the year was recorded as follows in order to avoid reporting a loss.
    depreciation expense 2000
    accumulated depreciation 2000
    does it violate any accounting concept?which is the proper entry to be recorded?

  83. Didas Nuwekatungye says:

    Thank you very much for the right information on accounting principles.This has motivated me to register for CPA so that i can be a good manager in a corporate organisation.

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