Basic Accounting Concepts

Entity Concept

A business is a separate legal entity from its owners. Financial activities of the business must be recorded separately from personal transactions.

Going Concern Concept

Assumes that a business will continue operating indefinitely, without plans to liquidate. This affects how assets and liabilities are reported.

Time Period

Divides the business's life into time intervals (months, quarters, years) for regular financial reporting, facilitating performance evaluation over time.

Monetary Concept

All financial transactions are recorded in a stable currency, providing a consistent measure for evaluating economic activity.

Accrual Concept

Revenues and expenses are recognized when earned or incurred, regardless of when cash is exchanged, giving a more accurate view of financial performance.

Consistency Concept

Requires businesses to use the same accounting methods over time, allowing for accurate comparisons and reliable financial reporting.

Cost Concept

Assets are recorded and reported at their historical cost, which is the original purchase price, rather than their current market value.

Revenue Realization Concept

Revenue is recognized when it is earned and realizable, meaning that the goods or services have been delivered or performed, and payment is expected.

Matching Concept

Expenses should be matched with the revenues they help to generate within the same accounting period, ensuring accurate financial reporting of performance.

Verifiability Concept

Financial statements should be based on objective evidence and verifiable data, minimizing personal bias and ensuring reliability in reporting.

Materiality Concept

Financial information should be disclosed if it could influence the decisions of users; trivial details can be omitted to avoid cluttering financial statements.

Disclosure Concept

Financial statements should provide all necessary information that could impact a user’s understanding of the financial position and performance of the business.

Conservatism or Prudence Concept

Revenues and profits should only be recognized when they are certain, while expenses and losses should be recorded as soon as they are reasonably possible, ensuring a cautious approach to financial reporting.