Accounting principles and concepts
In the world of finance and accounting, accuracy and consistency are not optional, they are essential.
Accounting principles serve as the foundation for recording, reporting, and analyzing financial transactions. Without them, organizations would lack a common language for evaluating financial performance.
These principles ensure transparency, comparability, and reliability in financial statements, allowing stakeholders to make informed decisions.
Understanding these accounting principles and concepts is crucial for accountants, business owners, financial analysts, and anyone pursuing professional qualifications like CMA or CPA.
In addition, knowing what is the difference between financial accounting and managerial accounting helps place these principles in a broader business context. Let’s break them down step-by-step.
What Are Accounting Principles?
Accounting principles are standardized rules and guidelines used to prepare and present financial statements. They provide a framework that ensures uniformity in the way companies record and report their transactions.
These principles are designed to:
- Maintain consistency over time
- Provide comparability between different organizations
- Ensure accuracy and transparency
- Build trust with stakeholders
Globally, there are two primary frameworks: Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS).
While the details may differ, the core principles share common objectives. Understanding these also supports achieving the objectives of managerial accounting when aligning operational decisions with financial accuracy.
What are the 13 principles of accounting with examples?
While the exact number of principles can vary by framework, these 13 core principles are widely recognized in accounting practice:
1.
| Principle | Explanation | Example |
| Business Entity Principle | Separates personal and business finances to ensure clear accountability. | The owner’s personal car is not recorded in the company’s balance sheet. |
2.
| Principle | Explanation | Example |
| Money Measurement Principle | Only monetary transactions are recorded. | Recording the purchase of office equipment for $2,000 but not recording employee morale levels. |
3.
| Principle | Explanation | Example |
| Going Concern Principle | Assumes the business will operate indefinitely unless stated otherwise. | Depreciating a building over 30 years instead of expensing it immediately. |
4.
| Principle | Explanation | Example |
| Historical Cost Principle | Assets are recorded at their purchase cost, not current market value. | Recording land bought for $50,000 at that amount even if its market value rises to $70,000. |
5.
| Principle | Explanation | Example |
| Materiality Principle | Requires including all information significant enough to influence decisions.. | Expensing a $50 printer cartridge immediately instead of capitalizing it because it’s immaterial. |
6.
| Principle | Explanation | Example |
| Duality Principle | Every transaction has equal debit and credit entries. | Purchasing inventory for $5,000 increases assets and also increases liabilities (accounts payable). |
7.
| Principle | Explanation | Example |
| Consistency Principle | The same accounting methods should be applied from period to period. | Using the same depreciation method (e.g., straight-line) every year for machinery. |
8.
| Principle | Explanation | Example |
| Matching Principle | Expenses are recorded in the same period as the revenues they generate.. | Recording advertising expenses in the same month as the related sales revenue. |
9.
| Principle | Explanation | Example |
| Realisation Principle | Revenue is recognized when it is earned, not when cash is received. | Recording income when goods are delivered to the customer, even if payment is due in 30 days. |
10.
| Principle | Explanation | Example |
| Prudence Principle | Avoids overestimating income or assets; records probable losses.. | Creating a provision for doubtful debts based on estimated uncollectible receivables |
11.
| Principle | Explanation | Example |
| Accrual Principle | Records income and expenses when they occur, not when cash changes hands. | Recording utilities expense in December even if the bill is paid in January. |
12.
| Principle | Explanation | Example |
| Full Disclosure Principle | Requires revealing all relevant financial information to users.. | Including details of pending lawsuits in financial statement notes. |
13.
| Principle | Explanation | Example |
| Objectivity Principle | Ensures all financial data is supported by verifiable evidence. | Recording a purchase based on an official supplier invoice rather than verbal agreement. |
What is the business entity principle?
| Definition | This principle states that the financial transactions of a business should be kept separate from those of its owners or other businesses. |
| Example | If a business owner uses personal funds to pay a company bill, it should be recorded as a capital contribution or loan, not as business income. |
What is the money measurement principle?
| Definition | According to this principle, only transactions that can be measured in monetary terms are recorded in the financial statements. |
| Example | Employee skills or brand reputation are valuable but are not recorded because they cannot be measured in exact financial terms.. |
What is the going concern principle?
| Definition | The going concern principle assumes a business will continue its operations for the foreseeable future |
| Example | Assets are recorded at cost rather than liquidation value because the business is not expected to close |
What is the historic cost principle?
| Definition | Under this principle, assets are recorded at their purchase price, not their current market value |
| Example | If a company bought land for $200,000 ten years ago and its value has risen to $400,000, it will still be reported at $200,000 in the books |
What is the materiality principle?
| Definition | This principle states that all significant information should be included in financial statements if it could affect decision-making. |
| Example | A small stationery purchase might be expensed immediately rather than capitalized because its value is immaterial to overall financial results. |
What is the duality principle?
| Definition | The duality principle is the foundation of double-entry bookkeeping. Every transaction has two sides: a debit and a credit. |
| Example | If a business takes a bank loan, it records an increase in cash (asset) and an increase in liabilities. This dual recording approach is also vital in cost accounting and managerial accounting to ensure accurate cost tracking. |
What is the consistency principle?
| Definition | Once an accounting method is chosen, it should be applied consistently from one period to another to ensure comparability. |
| Example | If a company uses straight-line depreciation, it should continue using it unless a justified change is needed. |
What is the matching principle?
| Definition | This principle ensures expenses are recorded in the same period as the revenues they help generate. |
| Example | Commission expenses are recorded in the same period as the sales they relate to, not when they are paid |
What is the realisation principle?
| Definition | The realisation principle dictates that revenue should only be recognized when it is earned, regardless of when payment is received. |
| Example | A construction company recognizes revenue when a project is completed, not when the client pays. |
What is the prudence principle?
| Definition | Also called conservatism, this principle encourages caution recording expenses and liabilities as soon as possible but recognizing revenues only when they are assured |
| Example | If a lawsuit could result in a loss, the expected loss is recorded immediately, even if the outcome is not final. |
What are the 10 principles of GAAP in accounting?
GAAP includes a set of core principles used in U.S. accounting. While similar to the above list, its 10 key principles are:
- Principle of Regularity
- Principle of Consistency
- Principle of Sincerity
- Principle of Permanence of Methods
- Principle of Non-Compensation
- Principle of Prudence
- Principle of Continuity
- Principle of Periodicity
- Principle of Full Disclosure
- Principle of Good Faith
Mastering these also builds a strong foundation for preparing managerial accounting statements that support internal decision-making.
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A deep understanding of accounting principles is not just for accountants
it’s for anyone involved in financial decision-making.
At HPA, our training programs are designed to help you master these concepts and apply them confidently in real business scenarios.
Whether you aim to strengthen your career or manage your organization’s finances more effectively, our professional courses like the CMA certification will give you the expertise to excel while also helping you recognize the advantages of managerial accounting in driving strategic business success.