What are the accounting principles, assumptions, and concepts?

Accounting principles and assumptions are the essential guidelines under which businesses prepare their financial statements. These principles guide the methods and decisions for a business over a short and long term. For both internal and external reporting purposes, 

Accounting concepts rules of accounting that should be followed in preparation of all accounts and financial statements. The four fundamental concepts are;

(1) Accruals concept: revenue and expenses are recorded when they occur and not when the cash is received or paid out;

(2) Consistency concept: once an accounting method has been chosen, that method should be used unless there is a sound reason to do otherwise;

(3) Going concern: the business entity for which accounts are being prepared is in good condition and will continue to be in business in the foreseeable future;

(4) Prudence concept (also conservation concept): revenue and profits are included in the balance sheet only when they are realized (or there is reasonable "certainty" of realizing them) but liaibilies are included when there is reasonable 'possibility' of incurring them

Accounting principles and assumptions are the essential guidelines under which businesses prepare their financial statements. These principles guide the methods and decisions for a business over a short and long term. For both internal and external reporting purposes, it is important to understand the concepts presented below because they serve as a guideline to the analysis of financial reporting issues.

Revenue Recognition Principle – Under this principle revenue is to be recorded when it is realized (or realizable), and when it is earned and not when it is received. Revenue is realized when goods or services are exchanged, is realizable when assets received can be converted to cash, and is earned when all necessary requirements are met entitling the company to the benefits represented by the revenue (e.g. services performed).

For example, suppose a neighborhood coffee house orders100 coffee mugs from a coffee wholesaler in June. The coffee house takes delivery of the new mugs in July and pays for the order in August. The wholesaler does not recognize the revenue from this sale in June, when the order was placed, or in August, when the cash was received.  For recording purposes, the revenue is recognized by the wholesaler in July, when the coffee mugs were delivered to the coffeehouse.

This principle is used for the recognition of revenue for both goods and services. For example, if an attorney is hired with an agreed upon retainer fee of $2,500 in May, and the services are not performed until July, the attorney does not recognize the revenue until July.  The attorney must earn the income before it can be recorded as such, even though he/she received cash for the service at an earlier date.

Historical Cost Principle – The historical cost principle deals with the valuation of both assets and liabilities.  The value at the time of acquisition is used to value most assets and liabilities.  For example, say the coffee wholesaler purchased an office building in1990 for $1.2 million.  Over time this asset has most likely appreciated in value.  However, in accordance with the cost principle, the original (historical) price of the building is what is recorded as the cost of the building in the books of the business.

Note that another basis for valuing elements of financial statements is coming into play.  The new basis is fair value.  With the convergence of global standards, fair value is used more in the United States to value elements of financial statements.

Matching Principle – This principle mandates that the expenses of a business need to line up with its revenue.  The expense or cost of doing business is recorded in the same period as the revenue that has been generated as the result of incurring that cost.  In the case of the coffee wholesaler, when the100 coffee mugs were delivered in July they changed from being a part of inventory (asset) to a cost of goods sold entry (expense) in the month that the revenue from the sale was recognized.  At this point, the difference between the revenue and expense is determined as the gross profit from the sale. 

  Comparability - allows users to identify similarities and differences                        1) one year to the next                               2) one company to another                           A format for financial statements is required.  It shows trends over time

Full Disclosure Principle – This principle states that all past, present and future information that may have had an impact on the financial performance of the company needs to be fully disclosed.  The historical performance of a company is readily available, but examining the numbers does not always provide the entire financial picture of a company. Sometimes there are alternative situations that need to be reported. Pending or current lawsuits are one example of a transaction that could severely impact a company’s bottom line.  In addition, incomplete financial transactions or any other conditions that could impact the company’s performance must also be disclosed. Most of these transactions are disclosed in the footnotes to the financial statements.

Accounting Underlying Assumptions - Basis for Generally Accepted Accounting     Principles (GAAP)

·         Entity Assumption - each business is its own “accounting” entity.

·         Periodicity Assumption- divides economic activities into time periods for reporting.

·         Going Concern Assumption  - the company will remain in business and will carry out existing commitments.  Assets will be used to bring future benefit and liabilities will be paid. 

·         Monetary Assumption - assume the dollar is stable over time. 

·         No adjustments are made for inflation or deflation.   

Agreed with the answer given by Mr. Mohammad Iqbal Abubaker 

The basic fundamental principle of accounting is " For every debit, there is corresponding credit".

The double entry accounting system consist ot3 principles.

1. Personal Account:   Rule: Debit the Receiver, Credit the Giver.

2. Real Account:           Rule: Debit what comes In, Credit what goes Out.

3. Nominal Account :   Rule: Debit All expenses and losses , Credit All gains and Incomes

Brief and good answer given by Mohammad Iqbal Abubaker, accounting principles, assumptions and concepts have been developed over the decades to make financial records standardized, apprehendable and anylisable by all the accounting and finance professionals all over the world.

Second thought is, that as like all other professions, accounting and finance profession has also evolved to include standard text and procedures to be followed by all in the career, which facilitates businesses, investors, creditors and governments to make  sound decisions based on accounting reports generated on common principles and concepts.

Accounting Principles are generally the Theoretical Principles laid out in the Accounting Framework to guide Professional Accountants worldwide. They provide a guideline and a broader view than written rules where flexibility is generally limited

Assumptions: Are the underlying beliefs on which FS are prepared. The Going Concern Assumption, The Monetary Unit Assumption, The Time Value of Information assumption and so forth.

Concepts: Are the common ground principles laid out for all Accountants to follow during the recording of accounting transactions. These include the Matching Concept, the Accruals Concept, the Materiality Concept and the Dual Entry Concept to name a few.

The basic or fundamental principles in accounting are the cost principle, full disclosure principle, matching principle, revenue recognition principle, economic entity assumption, monetary unit assumption, time period assumption, going concern assumption, materiality, and conservatism. 

Agree with the answer given by: Mr. Mohammad Iqbal Abubaker 

Accounting Principles are standards, rules, regulations and guidelines which must be followed in maintenance of accounts and preparation of financial statements. Examples are Matching Principle, Materiality Principle, etc.

Assumptions means your expectations of accounting numbers which you can not accurately know. Like you can assume that a certain asset may be used for5 years period.

Concepts are the basis of understanding accounting principles and assumptions.