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 part of Chapter 1 in Financial Accounting. The Chapter 1 articles include:
- Introduction to Accounting
- 10 Tips to Make an A in Accounting
- Accounting Concepts
- Accounting Careers and Certifications
For all the chapters, see The Ultimate Guide to Learn Financial Accounting
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
- matching principle
- full disclosure
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 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.
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.
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.
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.
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 is the concept that accounting information and financial reporting should be independent, verifiable, and free from bias.
Full disclosure is the principle that all relevant information must be provided in the accounting information and financial statements.
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 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.
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
Financial Accounting Chapters
Here are the financial accounting chapters in The Ultimate Guide to Learn Financial Accounting:
- Introduction to Accounting
- Recording Business Transactions
- Adjusting the Accounts
- Accounting for Merchandising Activities
- Inventory and Cost of Sales
- Time Value of Money
- Cash, Fraud, and Internal Control
- Accounting for Receivables
- Accounting for Long-Term Assets
- Accounting for Current Liabilities
- Accounting for Long-Term Liabilities
- Statement of Cash Flows
- Financial Statement Analysis