SEPARATE ENTITY

The separate entity concept states that we should always separately record the transactions of a
business and its owners. The concept is most critical in regard to a sole proprietorship, since this is the
situation in which the affairs of the owner and the business are most likely to be intermingled. Here
are several examples: An owner cannot remove funds from a business without recording it as either
a loan, compensation, or an equity distribution. Otherwise, the owner may buy something (such as
real estate) and leave it on the books of the business, when in fact the owner is treating it as a
personal possession.
An owner cannot extend funds to a business without recording it as either a loan or a stock purchase.
Otherwise, undocumented cash appears in the business.

HISTORICAL COST CONCEPT

All transactions are recorded at their cost to the business.
Example: a machine bought for a bargain at 50% less than what it is worth, will
still be recorded at the cost paid and not at the higher value it may be worth.

GOING CONCERN ASSUMPTION

It is assumed that a business will continue to exist for a long period of time.
Example: on the last day of the financial year, the government passes a law which
prevents us from selling our product. We should still continue to draw up the final
accounts.

MATCHING
Matching Concept is closely related to accounting period concept. The chiefaim of the business
concern is to ascertain the profit periodically.bTo measure the profit for a particularperiod it is
essential to match accurately the costs associated with the revenue. Thus, matching of costs
andrevenues related to a particular period is called as Matching Concept.
ACCRUAL BASIS
The accrual basis of accounting is advocated under both generally accepted accounting principles
(GAAP) and international financial reporting standards (IFRS). Both of these accounting frameworks
provide guidance regarding how to account for revenue and expense transactions in the absence of
the cash receipts or payments that would trigger the recordation of a transaction under the cash
basis of accounting.
example a company should record an expense for estimated bad debts that have not yet been
incurred. By doing so, all expenses related to a revenue transaction are recorded at the same time as
the revenue, which results in an income statement that fully reflects the results of operations.
Similarly, the estimated amounts of product returns, sales allowances, and obsolete inventory may be
recorded. These estimates may not be entirely correct, and so can lead to materially inaccurate
financial statements. Consequently, a considerable amount of care must be used when estimating
accrued expenses.

PRUDENCE OR CONSERVATISM
The prudence concept refers to a crucial principle used in accounting to ensure that income and
assets are not overstated in financial statements. Alternatively known as the conservatism principle, it
also makes sure that liabilities are not understated and provisions are made for income and losses.
The prudence principle is, for example, applied when a company is expecting bad or doubtful debts.
Here, the business creates a special contra asset to accounts receivable called allowance for bad
debts. This ensures that the accounts receivable balance shows a realistic figure of anticipated profits
or losses. The accounting prudence concept can also be helpful if there are certain liabilities of a
company that are very likely to occur, but not certain. In this case, it is possible to try and judge the
probability of this liability occurring, and if that is more than 50%, to record a liability and
corresponding expense.

TIME PERIOD
In financial terms, a time period is often referred to as the accounting year, or accounting and
reporting time periods. These periods can be quarterly, half yearly, annually, or any other interval
depending on the business’ and owners’ preference.
The time period concept is one of the fundamental accounting principles and rules, applicable to both
cash accounting and accrual accounting.
STABLE MONITARY UNIT
One of the generally accepted accounting principles is the monetary unit principle. The monetary unit
principle states that business transactions should only be recorded if they can be expressed in terms
of a currency. In other words, anything that is non-quantifiable should not be recorded a business’
financial accounts.
Over time, money has been adopted as a measurement unit in accounting. According to the
monetary unit principle, when business transactions or events occur, they are first converted into
money, and then recorded in the financial accounts of a business.
The monetary unit principle simply applies to the monetary expression of economic events, and
business transactions. As an accounting principle, the monetary unit ensures that everything which is
recorded in the [financial statements](/dictionary/financial-statement of a business can be measured
in monetary terms by currencies which are stable and reliable.

MATERIALITY CONCEPT
standard can be ignored if the net impact of doing so has such a small impact on the financial
statements that a reader of the financial statements would not be misled. Under generally accepted
accounting principles (GAAP), you do not have to implement the provisions of an accounting
standard if an item is immaterial. This definition does not provide definitive guidance in distinguishing
material information from immaterial information, so it is necessary to exercise judgment in deciding
if a transaction is material.
The Securities and Exchange Commission has suggested for presentation purposes that an item
representing at least 5% of total assets should be separately disclosed in the balance sheet. However,
much smaller items may be considered material. For example, if a minor item would have changed a
net profit to a net loss, that item could be considered material, no matter how small it might be.
Similarly, a transaction would be considered material if its inclusion in the financial statements would
change a ratio sufficiently to bring an entity out of compliance with its lender covenants.
COST BENEFIT
The Cost-Benefit principle focuses on the benefits which the receiver should get from a given activity.
You should take action only if the benefits from taking action are at least as much as the extra costs.
For example, the company’s controller should not spend excessive time fine-tuning the financial
statements with immaterial/irrelevant adjustments. Additionally, information through footnotes
should also be avoided since it can give an impression of too much window dressing or perhaps
distortion of facts.
Critics of this approach often object that people don’t calculate costs and associated benefits when
deciding.

FULL DISCLOSURE
The full disclosure principle states that all information should be included in an entity's financial
statements that would affect a reader's understanding of those statements. The interpretation of this
principle is highly judgmental, since the amount of information that can be provided is potentially
massive. To reduce the amount of disclosure, it is customary to only disclose information about
events that are likely to have a material impact on the entity's financial position or financial results.
This disclosure may include items that cannot yet be precisely quantified, such as the presence of a
dispute with a government entity over a tax position, or the outcome of an existing lawsuit. Full
disclosure also means that you should always report existing accounting policies, as well as any
changes to those policies (such as changing an asset valuation method) from the policies stated in
the financials for a prior period.
You can include this information in a variety of places in the financial statements, such as within the
line item descriptions in the income statement or balance sheet, or in the accompanying footnotes.
More substantial disclosures are always included in the footnotes.

CONSISTENCY
The consistency principle states that, once you adopt an accounting principle or method, continue to
follow it consistently in future accounting periods. Only change an accounting principle or method if
the new version in some way improves reported financial results. if such a change is made, fully
document its effects and include this documentation in the notes accompanying the financial
statements.
Auditors are especially concerned that their clients follow the consistency principle, so that the results
reported from period to period are comparable. This means that some audit activities will include
discussions of consistency issues with the management team. An auditor may refuse to provide an
opinion on a client's financial statements if there are clear and unwarranted violations of the principle.
The consistency principle is most frequently ignored when the managers of a business are trying to
report more revenue or profits than would be allowed through a strict interpretation of the
accounting standards. A telling indicator of such a situation is when the underlying company
operational activity levels do not change, but profits suddenly increase

SUBSTANCE OVERFORM
Substance over form is the concept that the financial statements and accompanying disclosures of a
business should reflect the underlying realities of accounting transactions. Conversely, the
information appearing in the financial statements should not merely comply with the legal form in
which they appear. In short, the recordation of a transaction should not hide its true intent, which
would mislead the readers of a company's financial statements.

Thus far, the substance over form argument assumes that someone is attempting to deliberately
hide the true intent of a transaction - but it may also arise simply because a transaction is extremely
complex, which makes it quite difficult to ascertain what the substance of the transaction is - even
for a law-abiding accountant.