Basic principles of accounting

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Accounting is often seen as a complex and intimidating field, but at its core, it relies on a set of
fundamental principles and concepts that serve as the foundation for all financial record-keeping
and reporting.
In this article, we will discuss these accounting principles and concepts in simple language,
making them easily understandable for everyone, whether you're a student, a small business
owner, or just someone looking to gain a better grasp of financial matters.
Accounting Principles and Concepts
1. The Accrual Principle
Imagine you run a small bakery, and you've just sold a dozen cupcakes to a customer.
According to the accrual principle, you record this sale as soon as it happens, regardless of
when the payment is received. This principle ensures that financial transactions are recognized
when they occur, providing a more accurate picture of your business's financial health.
2. The Matching Principle
The matching principle goes hand in hand with the accrual principle. It dictates that expenses
should be recorded in the same accounting period as the revenue they helped generate.
For instance, if you spent money on ingredients for the cupcakes you sold, those expenses
should be recorded in the same period as the cupcake sale to reflect the true profitability of your
business.
3. The Going Concern Concept
The going concern concept assumes that a business will continue to operate indefinitely. This
concept influences how assets and liabilities are valued.
For example, your bakery's ovens are considered assets and valued based on their expected
useful life because your business is expected to continue operating for a long time.
4. The Consistency Principle
Consistency is key in accounting. It means that a business should use the same accounting
methods and principles from one period to the next, ensuring that financial statements can be
compared over time. Changing accounting methods too frequently can make it challenging for
stakeholders to assess a business's financial performance.
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5. The Materiality Principle
Not every financial detail is equally important. The materiality principle suggests that only
significant financial transactions should be recorded in detail. Minor expenses, like a box of
paper clips for the bakery, may not need to be individually recorded since they won't have a
substantial impact on your financial statements.
6. The Conservatism Principle
Accountants are encouraged to be conservative in their estimates and judgments. This means
that when faced with uncertainty, it's better to stray on the side of caution.
For instance, if there's doubt about whether a customer will pay a debt, it's wise to record it as a
potential loss.
7. The Objectivity Principle
Financial statements should be based on objective, verifiable evidence rather than personal
opinions or biases. For example, the value of your bakery's inventory should be based on its
actual cost rather than what you think it might be worth.
8. The Money Measurement Concept
Money is the common denominator in accounting. It means that only transactions that can be
expressed in monetary terms are recorded. Non-monetary factors like employee morale or
customer satisfaction, though important, are not accounted for directly in financial statements.
Purpose of Accounting Principles
Accounting principles serve a crucial purpose in the world of business and finance. These
principles establish fundamental guidelines and standards that govern the recording, reporting,
and interpretation of financial information. Their purposes are as follows:
1. Consistency: Accounting principles provide a consistent framework for organizations to
record their financial transactions. Consistency is vital for comparing financial information
over time, across different companies, or within industries.
2. Transparency: Accounting principles promote transparency by ensuring that financial
statements accurately represent a company's financial position and performance. This
transparency is essential for stakeholders, including investors, creditors, and regulatory
bodies, to make informed decisions.
3. Accuracy: Accounting principles emphasize the accuracy and reliability of financial
information. They require businesses to use methods and procedures that reduce errors
and biases in financial reporting, enhancing the trustworthiness of financial statements.
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4. Comparability: These principles enable the comparison of financial data among
different companies. By following standardized accounting rules, businesses make it
easier for investors and analysts to assess their performance and make investment
decisions.
5. Legal and Regulatory Compliance: Accounting principles often align with legal and
regulatory requirements. Adhering to these principles helps organizations stay compliant
with financial reporting laws and regulations, reducing the risk of legal issues and
penalties.
6. Decision-Making: The information generated through accounting principles assists
management in making informed decisions about resource allocation, budgeting, pricing,
and other strategic matters. It provides a basis for evaluating a company's financial
health and identifying areas for improvement.
7. Investor Confidence: Investors and shareholders rely on financial statements prepared
in accordance with accounting principles to assess a company's financial health and
prospects. Following these principles increases investor confidence and can lead to
improved access to capital.
8. Creditor Assurance: Lenders and creditors use financial information to evaluate a
company's creditworthiness before extending loans or credit. Accounting principles
help creditors assess the risk associated with lending to a particular entity.
9. Accountability: Accounting principles foster accountability within organizations. By
providing a standardized framework for financial reporting, they encourage companies to
be accountable for their financial actions and outcomes.
10. Global Compatibility: Accounting principles, such as International Financial Reporting
Standards (IFRS) and Generally Accepted Accounting Principles (GAAP), aim to
facilitate global financial reporting consistency. This is especially important for
multinational companies and cross-border investments.
Conclusion
Understanding these accounting principles and concepts is like having a roadmap to navigate
the world of finance. They provide a clear framework for recording, reporting, and interpreting
financial information accurately. Whether you're managing personal finances, running a small
business, or just curious about the financial world, these principles and concepts are invaluable
tools for making informed decisions and achieving financial clarity. So, embrace them, and let
them guide you on your journey to financial success!

In accounting, assets are always equal to the sum of liabilities and owner’s equity.

A financial statement that showcases the profitability of an enterprise over a specific period is called the balance sheet.

Revenue recognition concept allows the recognition of revenue when the transaction is not yet completely fulfilled.

The principle of consistency requires that the same accounting methods should be applied over periods of time.

Match the basic principle of accounting with its definition.

Draggable item		Corresponding Item
Revenue Recognition Principle		Revenue is recognized and recorded when it is earned, not when the cash is received.
Historical Cost Principle		Assets are recorded at their original cost, not their current market value.
Matching Principle		Expenses are recorded in the same period as the revenues they help to generate.

Match the type of account with its description.

Draggable item		Corresponding Item
Liability Account		It shows the ownership interest in the business.
Equity Account		It represents the value of what the company owns or controls.
Asset Account		It registers what a company owes to others.

Match the financial statement with the information it provides.

Draggable item		Corresponding Item
Income Statement		Provides a snapshot of a company's financial position at a specific point.
Balance Sheet		Illustrates the inflow and outflow of cash during a specific period.
Cash Flow Statement		Shows a company's revenues, expenses, and profits or losses over a period.

Associate the accounting term with its relevant concept.

Draggable item		Corresponding Item
Audit		An official inspection of a company's accounts, typically by an independent body.
Accrual		The recognition of revenue when earned and expenses when incurred.
Depreciation		Reflects the decrease in value of a company's fixed assets over time.

While both French and UK accounting systems share common principles due to international accounting standards, there are some key differences between the two. It's important to note that accounting standards and practices can evolve, so the information provided here might not cover the most recent changes. As of my last knowledge update in January 2022, here are some general differences:

1. **Legal Framework:**
   - French Accounting: The legal framework for accounting in France is largely influenced by the French Commercial Code. Additionally, French companies are required to follow the standards set by the Autorité des Normes Comptables (ANC).
   - UK Accounting: The UK follows the Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS). For private companies, the Financial Reporting Standard for Smaller Entities (FRSSE) or FRS 102 may be applicable.

2. **Financial Reporting Standards:**
   - French Accounting: France primarily uses the Plan Comptable Général (PCG) as the standard for financial reporting.
   - UK Accounting: The UK follows the Financial Reporting Standard (FRS) and may also adopt International Financial Reporting Standards (IFRS).

3. **Chart of Accounts:**
   - French Accounting: The French accounting system uses a unique chart of accounts called the "Plan Comptable Général," which is a standardized list of accounts that businesses must use.
   - UK Accounting: The UK has its own chart of accounts, and specific requirements may vary depending on the accounting framework adopted (e.g., FRS, IFRS).

4. **Taxation:**
   - French Accounting: In France, accounting practices are closely linked to taxation. There are specific accounting rules for tax purposes, and companies must reconcile financial and tax accounting.
   - UK Accounting: Similarly, in the UK, there are specific rules for tax accounting, and companies need to ensure compliance with tax regulations alongside financial reporting.

5. **Audit Requirements:**
   - French Accounting: French law mandates that certain companies undergo an annual audit. The audit threshold is based on factors such as turnover, balance sheet total, and the average number of employees.
   - UK Accounting: The UK also has audit requirements, and the thresholds for mandatory audits depend on similar factors such as turnover, balance sheet total, and the number of employees.

6. **Language and Terminology:**
   - French Accounting: Naturally, accounting documents and terminology in France are in French.
   - UK Accounting: In the UK, accounting documents and terminology are typically in English.

7. **Conservatism vs. Prudence:**
   - French Accounting: Historically, French accounting has been associated with a principle called "prudence," emphasizing caution in recognizing profits and providing for potential losses.
   - UK Accounting: The UK traditionally follows the principle of conservatism, which also emphasizes caution but may have subtle differences in application.

It's crucial to consult the latest accounting standards and regulations for the most up-to-date information, as accounting practices can change over time.

Match the accounting principles with their definitions

Draggable item		Corresponding Item
Historical cost principle		Records business transactions based on the actual exchange amount
Matching principle		Expenses should be matched with the revenues they helped to generate
Revenue recognition principle		Revenue is recognized when earned, not necessarily when collected

Match the accounting equation components with their descriptions

Draggable item		Corresponding Item
Assets		Obligations a company owes to the outsiders
Owner's Equity		Resources a company owns with future economic benefits
Liabilities		Owner's investment in the business minus withdrawals

Match the accounting types with their functions

Draggable item		Corresponding Item
Financial accounting		Provides information for internal decision making
Tax accounting		Provides information for external parties
Managerial accounting		Provides information for tax purposes

Match the following financial statements with their descriptions

Draggable item		Corresponding Item
Income Statement		Shows a company's financial position at a given time
Balance Sheet		Reflects a company's cash transactions over a period
Cash Flow Statement		Details a company's profits or losses over a period

Basic principles of accounting

In accounting, assets are always equal to the sum of liabilities and owner’s equity.

A financial statement that showcases the profitability of an enterprise over a specific period is called the balance sheet.

Revenue recognition concept allows the recognition of revenue when the transaction is not yet completely fulfilled.

The principle of consistency requires that the same accounting methods should be applied over periods of time.

Match the basic principle of accounting with its definition.

Match the type of account with its description.

Match the financial statement with the information it provides.

Associate the accounting term with its relevant concept.

Match the accounting principles with their definitions

Match the accounting equation components with their descriptions

Match the accounting types with their functions

Match the following financial statements with their descriptions

What is the accounting principle that considers all business transactions in terms of money?

Which accounting principle states that expenses should be matched with revenues?

What principle states that a business will continue its operations indefinitely?

Which principle dictates that companies disclose all circumstances that might make a difference to financial statement users?