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Basic Accounting Principles and Concepts

The document discusses the basic accounting principles and concepts known as Generally Accepted Accounting Principles (GAAP). It explains that GAAP provides a standardized framework for accounting procedures and notes 11 key concepts: 1) business entity, 2) going concern, 3) monetary unit, 4) historical cost, 5) matching, 6) accounting period, 7) conservatism, 8) consistency, 9) materiality, 10) objectivity, and 11) accrual. Understanding and applying these concepts is necessary for effective accounting.

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Ramzan
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104 views

Basic Accounting Principles and Concepts

The document discusses the basic accounting principles and concepts known as Generally Accepted Accounting Principles (GAAP). It explains that GAAP provides a standardized framework for accounting procedures and notes 11 key concepts: 1) business entity, 2) going concern, 3) monetary unit, 4) historical cost, 5) matching, 6) accounting period, 7) conservatism, 8) consistency, 9) materiality, 10) objectivity, and 11) accrual. Understanding and applying these concepts is necessary for effective accounting.

Uploaded by

Ramzan
Copyright
© © All Rights Reserved
Available Formats
Download as DOC, PDF, TXT or read online on Scribd
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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 standardize 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 are 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

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