Accounting Concepts

There are several accounting concepts and assumptions that provide the foundation of accounting and finance. These accounting concepts are important to understand financial statements.

This is Chapter 1 in Financial Accounting. This chapter includes:

1. Introduction to Accounting
2. 10 Tips to Make an A in Accounting
3. Accounting Concepts
4. Accounting Careers and Certifications
5. Introduction to Accounting YouTube playlist

For all the chapters, see The Ultimate Guide to Learn Accounting

Accounting concepts

There are several accounting concepts and assumptions to consider. These accounting concepts are defined in the United States by the Financial Accounting Standards Board.

These accounting concepts include:

• business entity
• going concern
• monetary unit
• measurement concept
• periodicity
• matching principle
• objectivity
• full disclosure
• consistency
• conservatism
• materiality

Business entity

The business entity concept is the idea that a business is separate from its owner(s). Business records are separate from personal records.

Going concern

Going concern is the assumption that the business will continue to exist unless there is evidence to the contrary. Without this assumption, the value of future benefits and liabilities would be useless.

Monetary unit

The monetary unit concept requires that all activities of a company can be recorded in a single monetary unit, such as the dollar, euro, or yen. Multinational companies may have transactions in many different currencies, but they use a single currency for financial reporting. The monetary unit concept also assumes a stable monetary currency.

Measurement concept

The measurement concept requires assets to be recorded, typically at their original cost. This means that assets, like land, are shown at their historical cost and not their current fair market value.

The alternative to historical cost is the fair value of an asset.

Periodicity

The periodicity assumption, or time period assumption, is the concept that a company’s life may be meaningfully evaluated in time periods of months, quarters, and years for financial reporting purposes.

Matching principle

The matching principle is the concept that requires matching, within an accounting period, revenues with the expenses that generated the revenues. The revenues must be matched with the related expenses, even if the expenses are paid in the following period.

Objectivity

Objectivity is the concept that accounting information and financial reporting should be independent, verifiable, and free from bias.

Full disclosure

Full disclosure is the principle that all relevant information must be provided in the accounting information and financial statements.

Consistency

Consistency is the concept that accounting methods and principles must be consistently used from year to year. This is a basic idea for comparison from company to company and from year to year.

Conservatism

Conservatism is the policy of estimating potential losses and expenses but not potential revenues or gains. This concept attempts to avoid overstating assets and net income.

Materiality

The materiality concept refers to the significance of a transaction. Large amounts are material to the company. Small or insignificant items are immaterial.

Accounting concepts tutorial

https://youtu.be/eCR2hwGT9vk