ACCOUNTING PRINCIPLES AND
CONCEPTS
Accounting
Principles
RELEVANCE
Financial information is considered relevant if it affects the business decisions.
RELIABILITY
Information should be free from significant errors, bias and independently verified.
COMPARABILITY
Information could be compared with other periods and similar businesses.
UNDERSTANDIBILITY
The financial report : Income Statements and Statement of Financial Position must be
capable of being understood by the users of the report.
Accounting
Concepts
BUSINESS ENTITY CONCEPT
This rule states that only the transactions of the business should be recorded and NOT
the owner’s private transactions.
MONEY MEASUREMENT CONCEPT
Only transactions that can be expressed in monetary terms are to be recorded.
HISTORIC COST CONCEPT
All transactions are recorded at their cost to the business.
REALISATION CONCEPT
• Profits are realised (actually earned) when goods are sent to the customer.
•A transaction is NOT realised when an order is received.
DUAL ASPECT (DUALITY)
• Every transaction will affect two items in the business.
• Every transaction is represented by both a debit AND a credit in the ledger.
CONSISTENCY CONCEPT
• Transactions of a similar nature should always be recorded in the same (consistent)
way.
• This is to ensure that the Income Statement and the Statement of Financial Position
can be meaningfully compared each year.
MATERIALITY CONCEPT
This concept refers that all material (significant items that could impact the financial
statements) should be reported properly in the financial statements.
ACCRUALS (MATCHING) CONCEPT
The Income Statement should only include the income earned and expenses incurred
for the current financial year.
PRUDENCE CONCEPT
• This concept states that the value of assets and profits (income) should NOT be
overstated and the liabilities and losses (expenses) should NOT be understated.
• Future losses are to be expected/anticipated in the current period.
GOING CONCERN CONCEPT
It is assumed that a business will continue to exist for a long period of time (i.e. more
than 12 months).
SUBSTANCE OVER FORM CONCEPT
The practical view (the substance) is preferred to the legal view (the form) in
accounting.