Accounting Concepts & Principles

📘 1. What is the Conceptual Framework?

Think of it as the rules and goals behind financial reports. Just like games have rulebooks, accounting has principles (like GAAP or IFRS) to make sure everyone plays fair. These rules help companies decide how to show their financial information.

Example: If no rule says how to record a new crypto asset, accountants use the framework to make a logical decision.

🧾 2. Entity & Going Concern Concepts

• Entity: The business is separate from the owner. Even if the manager uses the company car for personal use, that part must be treated separately.

• Going Concern: We assume the business will keep operating in the future, not shut down next week.

Example: If a hotel buys a building, we record its cost, assuming the business keeps going—not as if we’re selling everything tomorrow.

📅 3. Reporting Period

A business year usually lasts 12 months, but it doesn’t have to be January–December. It’s just a way to break time into chunks so we can report finances regularly.

Example: A ski resort might report its year from May to April, based on the ski season.

🧮 4. Accruals Concept

You record things when they happen, not when money moves.

Example: A guest pays in January for a December stay? The hotel shows the revenue in December, because that’s when the service was provided.

⚖ 5. Prudence

Always prepare for bad news. Show losses when you expect them, but only show profits when they are certain.

Example: If a souvenir becomes unsellable, you should reduce its value now—even before it’s sold.

💰 6. Measurement

We measure everything in money, and usually at the original purchase price (called historical cost).

Example: If a hotel buys land for €130,000, we record that price—even if its market value goes up.

✔ 7. Faithful Representation

The info in reports should be:

• Complete (nothing left out),

• Neutral (no bias),

• Free from errors.

Example: A company’s annual report must show a true and fair view of its finances, not just the good parts.

📈 8. Relevance

Only useful info should be included. Not every tiny detail matters—just what helps users make decisions.

Example: We don’t list every sale a big supermarket made, just summaries.

📊 9. Comparability & Duality

• Comparability: Reports should use the same methods every year, so you can compare.

• Duality: Every transaction affects two accounts.

Example (Duality): If you get a €10,000 loan, your cash goes up (asset) and your debt goes up (liability).

🕒 10. Verifiability, Timeliness & Understandability

• Verifiability: Every number should be traceable to a real document.

• Timeliness: Reports shouldn’t be published years late.

• Understandability: They should be clear and simple.