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Basic Accounting Concepts

A number of basic accounting principles have been developed through common usage. They form the
basis upon which the complete suite of accounting standards have been built. The best-known of these
principles are as follows:

1. Entity concept- The accountant keeps all of the business transactions of a sole proprietorship
separate from the business owner's personal transactions. Thus, the accounting entity
assumption establishes boundaries or limits as to what information should be included in the
financial statements of a given company.
2. Going concern concept- This is the concept that a business will remain in operation for the
foreseeable future. This means that the business will stay in operation for a period of time
sufficient to carry out contemplated operations, contracts, and commitments.
3. Time period concept- This is the concept that a business should report the results of its operations
over a standard period of time. This means that the economic activities undertaken during the life
of an accounting entity are assumed to be divisible into various artificial time periods for financial
reporting purposes.
4. Monetary concept- This is the concept that a business should only record transactions that can
be stated in terms of a unit of currency. For example, for the ASEAN countries, monetary concept
would be in terms of their different currencies such as Peso for the Philippines, Baht for Thailand,
Dong for Vietnam, and Ringgit for Malaysia.
5. Cost concept- This is the concept that a business should only record its assets, liabilities, and
equity investments at their original purchase costs, whether that purchase happened last year or
thirty years ago. For this reason, the amounts shown on financial statements are referred to as
historical cost amounts.
6. Accrual concept- This is the concept that accounting transactions should be recorded in the
accounting periods when they actually occur, rather than in the periods when there are cash flows
associated with them. This is the foundation of the accrual basis of accounting. This concept
requires that income should be recorded regardless whether cash is received. And an expense be
recognized when incurred whether payment is made.
7. Revenue Realization concept- This is the concept that you should only recognize revenue when
the business has substantially completed the earnings process, regardless of when the money is
actually received. Under this basic accounting principle, a company could earn and report
P100,000 of revenue in its first month of operation but receive $0 in actual cash in that month.
8. Matching concept- This accounting principle requires companies to use the accrual basis of
accounting. The matching principle requires that expenses be matched with revenues. Thus, you
charge inventory to the cost of goods sold at the same time that you record revenue from the sale
of those inventory items.
9. Verifiability concept- This is the concept that only those transactions that can be proven should
be recorded. For example, a supplier invoice is solid evidence that an expense has been recorded.
This concept is of prime interest to auditors, who are constantly in search of the evidence
supporting transactions.
10. Materiality concept- This is the concept that you should record a transaction in the accounting
records if not doing so might have altered the decision making process of someone reading the
company's financial statements. This is quite a vague concept that is difficult to quantify, which
has led some of the more picayune controllers to record even the smallest transactions.
11. Disclosure concept- This is the concept that you should include in or alongside the financial
statements of a business all of the information that may impact a reader's understanding of those
statements. It is because of this basic accounting principle that numerous pages of "footnotes"
are often attached to financial statements.
12. Consistency- This is the concept that, once you adopt an accounting principle or method, you
should continue to use it until a demonstrably better principle or method comes along. Not
following the consistency principle means that a business could continually jump between
different accounting treatments of its transactions that makes its long-term financial results
extremely difficult to discern.