List of 12 Basic Accounting Principles

1. Accounting Entity – is the business unit for which the financial statements are

being prepared

2. Going Concern – Accounts assume that the life of the business entity

is infinitely long and will never dissipate.

3. Measurement – Accounting only deals with things that can be

measured, quantifiable.

4. Units of Measure – The US Dollar (USD) is the standard value used in

financial statements

5. Historical Cost – The transactions that results in what a business owns

and owes are recorded at their original cost. This may cause the

company’s books to be understated. For example, a company can own

a manufacturing facility that is valued at $25,000,000 but carry it on the

books for their purchase price of $7,000,000

6. Materiality – The concept of materiality allows you to violate another

accounting principle if the value is so tiny that the financial reports will

not have an impact

7. Estimates and Judgments – Often times, it is okay to guess due to the

nature that businesses are complex. It is legal, if the accounting is the

best you can do, the expected error would not affect the financial

reports and the “guesses” are consistent for each period.

8. Consistency – Each individual enterprise must choose a single method

of accounting and reporting consistently over time.

9. Conservatism – Accountants must agree more with an

understatement than an overvaluation. This accounting guideline states

that if doubt exists between two alternatives, the accountant should

choose the result with a lesser asset amount and/or a lesser profit.

10. Periodicity – Is the activity within the scope of an accounting period

that must be recorded within the time period on a financial statement.

11. Substance Over Form – This is a concept where the entity is

accounting for items according to their substance and economic reality

and not just its form.

12. Accrual Basis of Presentation – In accrual accounting, if a

business transaction makes money in a period then all of its associated

costs and business expenses should also be reported in that particular

period.