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:
- Cost concept of accounting
- Business entity concept
- Money measurement concept
- Going concern concept
- Dual aspect of accounting concept
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.