13 Top Accounting Principles ( Books, Definition, and

Examples)
Accounting Principle
Definition:
Accounting principles are the principle, concept, basic, guidance, as well as the
rule that use by the accountant to prepare the financial statements of an entity.
They are also used by the standard-setting body to develop accounting
standards and frameworks.
You may find out some of the accounting principles have been set out in the
qualitative and quantitative characterization of information in IFRS.
Most of the accounting principles are also set in the accounting standard and well
as frameworks. Even those accounting standards (local GAAP) vary from one
country to another, but the principles that set out in the standards are in the same
fashion.
For example, GAAP or IFRS is different in many areas but the principles that use
in those standards are very much the same.
Recommend Book for Accounting Principle: The book is written by Mike Piper,
CPA, and got positive feedback more than 370 from readers.
Even the accounting principles in one financial reporting standard to another is
not much different, most investors still not get comfort when the investments are
moved to the country where different accounting standards are required.
Yet, in the near future, IFRS will replace the local GAAP and be the world
accepted accounting standard. In this article, we will explain the detail of most of
the accounting principles that use to prepare financial statements:
List of accounting principles:
1) Accrual Principle:
Accrual accounting concept has required the revenues and expenses to be
recorded and recognized in the entity’s financial statements when they are
incurred rather than when cash is paid or received.
This principle helps the users of financial statements to get the financial
information that really reflected in the current financial status or the economic
situation of the entity.
The recognition is not only related to the cash flow like a cash basis where the
revenues are recorded and recognized in the financial statements only when the
cash is collected from the customers for the services or products that entity sells
to them.
And the expenses are recordings and recognized in the financial statements
when the cash is an outflow from the entity.
For example, based on accrual accounting principle, sales revenues from selling
of cloths are recognized where the right and obligation are transferred from seller
to buyer even the seller does not receive the payments from buyer.
Records and recognize the sales based on the accrual basis, the users could see
all of the sales that entity make during the period for both credit sales and cash
sales. It provides a complete picture of sales during the period.
Another example related to accrued expenses is that the maintenance expenses
are recognizing at the time that services consume by entity rather than at the
time that the entity paid to suppliers.
This recognition will bring the complete picture to the users of financial
statements about how much the maintenance expenses incurred during the
period rather than just showing how much the payments are made for
maintenance expenses during the period as per cash basis.
2) Conservatism principle:
Conservatism principle concern about the reliability of Financial Statements of an
entity for the benefit of users especially in the areas of overstating the revenue
and assets as well as understating the liabilities and expenses.
This accounting principle requires the entity to record and recognize the liabilities
and expenses in the financial statements as soon as possible when there is
uncertainty about the outcome.
And the entity should not recognize assets or revenue in the financial statements
if the outcome is not certain. If it does, the revenues might be overstated and
lead users to make the wrong economic decision.
For example, the entity should recognize the expenses immediately in the
financial statements if there is the probability that an entity might lose the lawsuit
to its customers.
This is to ensure that the liabilities are recognized in the financial statements and
it is actually reflecting the current financial situation of the entity that it probably
makes a loss.
If these expenses are material to financial statement and they are not recording,
then the potential investors who make their decision make their decision based
on the financial statements that off these expenses could potentially make loses.
The entity might come to the situation where it is probably of winning the lawsuit.
In this case, and base on this principle, the entity should not recognize the
possible revenue from this lawsuit.

Related article  Modified cash basis

In addition, the entity might also come to the situation where inventories or fixed
assets that entity just purchased last month could be purchase now by spending
less money.
In this case, the entity should consider writing off the portion that different into
expenses so that assets could be present at the realizable value.
3) Consistency principle:
Consistency Principle is the accounting principle that requires the entity to
apply the same accounting method, policies, and standard for reporting its
financial statements.
There are many benefits for the stakeholders of financial statements when the
consistency principle is correctly and strictly applied.
For example, if different accounting policies or methods are used to measure and
recognize the revenues then there will a significant different revenue amount
present in the income statement while there could be slightly differenced if the
same accounting policies or methods of measurement and recognition are used.
For example, depreciation rate and methods should be applying consistently
from one accounting period to period to the same fixed assets. If there is any
change in accounting policies, the appropriate standard should be applying.
Normally, if your financial statements are prepared and present by accounting
IFRS, then IAS 8 change in accounting policies, is the standard that you should
look for.
This standard guides you on how to deal with such a case that you want to
change the accounting policies or accounting estimate.
Another example is that your entity is current using FIFO to value your
inventories and this method should be used to value your inventories not only in
this period but also in the next period. This is also assumed your entity should
FIFO was used to value previous inventories.
4) Cost Principle or Historical Cost Principle:
The concept of historical cost principle is that the assets should be recorded
base on the price at the time they are purchased.
And the liabilities should be recorded based on the values that expected to pay at
the original value rather than market value or inflation-adjusted value.
The historical cost principle is also called the cost principle. To avoid incorrect
recognition and measurement, it is recommended that the accountant should
follow the accounting standards that they are using to prepare the financial
statements.
For example, you are using IFRS to prepare your financial statements, then you
should go to each standard under IFRS that is applicable for the items you are
dealing with. For example, the recognition of PPE is initially measured at costs
and subsequently, the entity could use costs module or revaluation module to
measure.
However, some financial assets and financial liabilities are not applicable to use
this principle. The cost principle is a benefit to accountant and other related
stakeholders who use the financial statements since the financial transactions
are records at the identify costs and verifiable evidence. For example, the costs
of fixed assets could be verified with the suppliers’ purchase invoices.
5) Economic Entity Principle:
Business Entity Concept or Business Entity Principle considers the owner of an
entity has different legal liabilities. Under this concept, the entity must record all
transactions separately from its owner or owners and other business.
This means that the transactions that record in the entity accounts are only those
transactions that belong to the entity.
Any financial transactions, assets, liabilities, and equities that belong to owner,
owners or other entity should not include in entity accounts.
Example, Sinra shop sell the cake in Bangkok, Thailand. Sinra takes two take-
ups for his wife’s birthday. In this case, we need to identify who is the owner and
what is the entity. And what transactions happening between Sinra and the
entity.
So, Sinra is the owner and Sinra Shop is the entity. Sinra withdraws the cases for
this wife. Therefore, by using the business entity concept, the accounting records
for the shop is recording decreasing for stoke and increasing owner withdrawal.
Or maybe treat as sell to normal customers.
This principle could help to minimize conflict between owners in case there are
many owners of the entity. And it also prevents the owner to avoid tax obligation
to the government.
It also benefits to owners or shareholders to assess the performance of each
entity separately and well as to assess the financial position of the entity.

Related article  Audit and Assurance in Auditing

6) Full Disclosure Principle:

Full Disclosure Principle requires the entity to disclose all necessary
information in its financial statements. The main idea behind this principle is that
the users of financial statements of entity might depend on the financial
information disclosed in the financial statements to make their decision.
Therefore, it is important to make sure that all the information that they should
know are available to them.
This is why this principle is introduced to ensure that information that should be
disclosed in the entity’s financial statements as per the requirement of accounting
standards or frameworks had been disclosed.
In practice, you might follow each accounting standard whether the situation that
happens in your entity should be disclosed or not as per standard.
The information to be disclosed is only the financial information but also non-
financial information such as new law and regulation that come into effect soon
and the entity’s business might get hurt from that law and regulation. The
subsequent adversely affect the revenues or the going concern of the entity.
For example, the government of the country where the entity run its business just
amount that numbers of the tax rate will increase and it will come to effect next
year. Entity’s business and specifically profits will get hurt.
Going concern of entity is questionable. This case, based on full disclosure
principle, this revision and how it is affected the entity should be fully disclosed in
the entity’s financial statements.
7) Going Concern Principle:
Going concern is the concept that assumes entity will remain the business in the
foreseeable period which is normally twelve months from the operating date. If
the financial statements are prepared based on the going concern basis.
In others words, the entity does not face going concern problem, then the users
of financial statements could their reliance on entity’s financial information that
they are valued by considering the entity could survive in the period of twelve
months.
There are many factors that indicate entity might face going concern problem. Or
entity might stop it business in the period of twelve months from the reporting
date of financial statements.
For examples, the entity’s main services or products are no longer need in the
markets and sales dramatically drop also most to zero. This situation indicates
that an entity probably liquidates its assets to support its operation in the period
of less than twelve months.
And, we could say that it will go into solvency in a period of fewer than twelve
months. In this case, the financial statements should not prepare by using the
going concern problem. For example, there is no accrual of expenses recognize
in both balance sheet and income statement. Prepayments should not also
recognize.
The entity should conduct going concern assessment annually to see if it is in the
going concern problems. The assessment should not only focus on financial
factors but also non-financial factors that might affect the entity to shut down its
business.
8) Matching principle:
Matching Principle is the accounting principle that uses to records and
recognizes expenses and revenues in the financial statements.
This principle wants to make sure that the incomes and expenses in the income
statement really reflected in the period that they actually incurred.
When this principle is correctly applied, net income is truly and fairly present in
the income statement. It is not the result of overstatement or understatement of
revenues or expenses.
For example, when the entity sells goods to its customers, the entity will generate
revenues and at the same time, the entity also has to spend its finish goods to its
customers.
In this case, sales revenues are recognized in the income statement and the cost
of goods sold is also recognized in the same period. Revenues are matched with
cost of goods sold in the income statement.
If either revenue or costs of goods sold are deferred to the next period because
of whatever reason, then net income will not arrive as it should be. Then the
users’ decision could when wrong if it is depending on this information.
The entity might come into the situation where customers pay for the goods they
have not received. In this case, the entity could not recognize the payments that
they received from customers as revenue. This is because goods are not
delivered to customers yet.

Related article  Periodicity Assumption

The entity should recognize the payment received from customers as unearned
revenues under liabilities accounts.
Subsequently, the entity delivers the goods to customers then the entity could
move from unearned revenues to revenues in the income statement. At the same
time, the costs of goods sold are also recognized.
9) Materiality principle:
Materiality Principle or materiality concept is the accounting principle that
concern about the relevance of information, and the size and nature of
transactions that report in the financial statements.
Based on this concept, financial information is material if its omission and
addition could be misleading the users’ decision. The same size and nature of
financial information might material to one entity’s financial statements but might
not material to another.
For example, the wrong recognition of revenues amount USD 50k of ABC is not
material if we compare to its total revenues USD 500,000K. However, 50K is
material to financial statements of DEF and especially it could be misleading to
the users’ decision if it is over or under recognize when the total revenues are
just USD 100K.
This principle is not only used by the accountant to prepare the financial
statements as the basis to decide the financial transaction and event that is
material to financial statements, but it is also used by the auditor as to calculate
the tolerable error, performance materiality as well as planning materiality.
These materiality use as the matrix or tools for auditors to decide if unadjusted
transactions or amounts are material to financial statements. This unadjusted
transactions or amounts is part of auditors’ evident to support their opinions.
10) Monetary unit principle:
Monetary Unit Assumption is the accounting principle that concern about the
valuation of transactions and event that entity records in its financial statements.
In monetary unit assumption, transactions or even could records in the Financial
Statements only if they could measure in the monetary.
 There are many transactions that occur in and by entity every day. Not all of
those transactions are recording in the financial statements. For example, sales
staff got accident and the entity pay for the costs of accident and hospital.
The entity could record these costs in the income statement but the entity could
not record the costs that sales staff’s performance becomes low as the result of
an accident.
Entity’s financial transactions and events use a monetary unit to records in the
financial statements due to many reasons. Some of those including:
 Simple and easy to use. Money is very simple to use and easy to
understand therefore it is easy to use to records business transactions. It is easy
to understand by users.
 Universally recognized and communicated. Money is generally and
globally used in a normal business transaction.
 The monetary unit that is used to records the financial statements should
be stable like USD currency. The currency that is not stable is not applicable for
use as a unit to record financial statements.
 The entity uses a monetary unit to record financial transactions and events
The value of assets that record in the financial statements is changed due to
inflation.
11) Reliability principle:
Reliability Principle is the accounting principle that concern about the reliability
of financial information that presents in the financial statements of an entity. This
accounting concept is quite an importance for the users of financial information. If
the information is not reliable, then the decision making will be unlikely correct.
12) Revenue Recognition Principle:
There are many principles that use to recognize revenue in the Financial
Statements. For example, Accrual Basis or Cash Basis. In accrual accounting
Principle, Revenue should be recognized when risks and rewards are
transferred.
Here is the detail of Revenue Recognition Principle
13) Time period principle:
Time Period Principle or Periodicity Principle, Financial Statements of an entity
could be prepared in an artificial period of time. They are no need to be prepared
based on the regulatory requirement.