What are Accounting Principles?

Definition: Accounting principles are the building blocks for GAAP. All of

the concepts and standards in GAAP can be traced back to the underlying
accounting principles. Some accounting principles come from long-used
accounting practices, whereas others come from ruling-making bodies like
the FASB.
It's important to have a basic understanding of these main accounting
principles as you learn to account. This isn't just memorizing some
accounting information for a test and then forgetting it two days later. These
principles show up all over the place in the study of accounting. Trust me.
After knowing the basic accounting principles, most accounting topics will
make more sense. You will be able to reference these principles and
reason your way through revenue, expense, and any other problems later
on in the study course.

List of 10 Basic Accounting Principles

Here's a list of more than 5 basic accounting principles that make up
GAAP in the United States. Here is a short description of each and an
explanation of how they relate to financial accounting.
 Historical Cost Principle
 Revenue Recognition Principle
 Matching Principle
 Full Disclosure Principle
 Cost-Benefit Principle
 Conservatism Principle
 Consistency Principle
 Objectivity Principle
 Accrual Principle
 Economic Entity Principle
Historical Cost Principle
The historical Cost Principle – requires companies to record the purchase
of goods, services, or capital assets at the price they paid for them. Assets
then remain on the balance sheet at their historical without being adjusted
for fluctuations in market value.
Revenue Recognition Principle
The revenue Recognition Principle – requires companies to record revenue
when it is earned instead of when it is collected. This accrual basis of
accounting gives a more accurate picture of financial events during the
period.

1
Matching Principle
The matching principle – states that all expenses must be matched and
recorded with their respective revenues in the period that they were
incurred instead of when they are paid. This Principle works with the
revenue recognition principle ensuring all revenue and expenses are
recorded on an accrual basis.
Full Disclosure Principle
Full Disclosure Principle – requires that any knowledge that would
materially affect a financial statement user's decision about the company
must be disclosed in the footnotes of the financial statements. This
prevents companies from hiding material facts about accounting practices
or known contingencies in the future.
Cost-Benefit Principle
Cost-Benefit Principle – limits the required amount of research and time to
record or report financial information if the cost outweighs the benefit. Thus,
if recording an immaterial event would cost the company a material amount
of money, it should be forgone.
Conservatism Principle
Conservatism Principle – accountants should always err on the most
conservative side possible in any situation. This prevents accountants from
overestimating future revenues and underestimating future expenses that
could mislead financial statement users.
Objectivity Principle
Objectivity principle – financial statements, accounting records, and
financial information should be independent and free from bias. The
financial statements are meant to convey the company's financial position
and not to persuade end-users to take specific actions.
Consistency Principle
Consistency Principle – all accounting principles and assumptions should
be applied consistently from one period to the next. This ensures that
financial statements are comparable between periods and throughout the
company's history.
List of Key Accounting Assumptions
Here is a list of the key accounting assumptions that make up generally
accepted accounting principles:
 Monetary Unit Assumption
 Periodicity Assumption

2
Monetary Unit Assumption
Monetary Unit Assumption – assumes that all financial transactions are
recorded in a stable currency. This is essential for the usefulness of a
financial report. Companies that record their financial activities in
currencies experiencing hyper-inflation will distort the company's true
financial picture.
Periodicity Assumption
The periodicity Assumption – simply states that companies should be able
to record their financial activities during a specific period. The standard
periods usually include a full year or quarter year.
Fundamental Accounting Concepts and
Constraints
Here is a list of the four basic accounting concepts and constraints that
make up the GAAP framework in the US.
 Business Entity Concept
 Going Concern Concept
 Materiality Concept
 Industry Practices Constraint
Business Entity Concept
The business Entity Concept – is the idea that the business and the
business owner are separate entities and should be accounted for
separately. This concept also applies to different businesses. Each
business should account for its own transactions separately.
Going Concern Concept
Going Concern Concept – states that companies need to be treated as if
they will continue to exist. This means that we must assume the company
will not be dissolved or declare bankruptcy unless we have evidence to the
contrary. Thus, we should assume that there will be another accounting
period in the future.
Materiality Concept
Materiality Concept – anything that would change a financial statement
user's mind or decision about the company should be recorded or noted in
the financial statements. If a business event occurred that is so insignificant
that an investor or creditor wouldn't care about it, the event need not be
recorded.

Why Are Accounting Principles Important?

Generally Accepted Accounting Principles are important because they set
the rules for reporting and bookkeeping. Often called the GAAP framework,

3
these rules maintain consistency in financial reporting from company to
company across all industries.

Remember, the entire point of financial accounting is to provide helpful

information to financial statement users. If everyone reported their financial
information differently, it would be difficult to compare companies.
Accounting principles set the rules for reporting financial information to be
compared uniformly to all companies.

What is the Purpose of Accounting

Principles?
Accounting principles aim to establish how financial accounting is recorded
and reported on financial statements. When every company follows the
same framework and rules, investors, creditors, and other financial
statement users will have an easier time understanding the reports and
making decisions.

List of 10 Basic Accounting Principles

Here's a list of more than five basic accounting principles that make up
GAAP in the United States. I wrote a short description for each and
explained how they relate to financial accounting.
 Historical Cost Principle
 Revenue Recognition Principle
 Matching Principle
 Full Disclosure Principle
 Cost-Benefit Principle
 Conservatism Principle
 Consistency Principle
 Objectivity Principle
 Accrual Principle
 Economic Entity Principle
Historical Cost Principle
The historical Cost Principle – requires companies to record the purchase
of goods, services, or capital assets at the price they paid for them. Assets
then remain on the balance sheet at their historical without being adjusted
for fluctuations in market value.

Revenue Recognition Principle

The revenue Recognition Principle – requires companies to record revenue
when it is earned instead of when it is collected. This accrual basis of

4
accounting gives a more accurate picture of financial events during the
period.
Matching Principle
Matching Principle – states that all expenses must be matched and
recorded with their respective revenues in the period that they were
incurred instead of when they are paid. This Principle works with the
revenue recognition principle ensuring all revenue and expenses are
recorded on an accrual basis.
Full Disclosure Principle
Full Disclosure Principle – requires that any knowledge that would
materially affect a financial statement user's decision about the company
must be disclosed in the footnotes of the financial statements. This
prevents companies from hiding material facts about accounting practices
or known contingencies in the future.
Cost-Benefit Principle
Cost-Benefit Principle – limits the required amount of research and time to
record or report financial information if the cost outweighs the benefit. Thus,
if recording an immaterial event would cost the company a material amount
of money, it should be forgone.
Conservatism Principle
Conservatism Principle – accountants should always err on the most
conservative side possible in any situation. This prevents accountants from
overestimating future revenues and underestimating future expenses that
could mislead financial statement users.
Objectivity Principle
Objectivity principle – financial statements, accounting records, and
financial information should be independent and free from bias. The
financial statements are meant to convey the company's financial position
and not to persuade end-users to take certain actions.
Consistency Principle
Consistency Principle – all accounting principles and assumptions should
be applied consistently from one period to the next. This ensures that
financial statements are comparable between periods and throughout the
company's history.
List of Key Accounting Assumptions
Here is a list of the key accounting assumptions that make up generally
accepted accounting principles:
 Monetary Unit Assumption
 Periodicity Assumption
Monetary Unit Assumption
Monetary Unit Assumption – assumes that all financial transactions are
recorded in a stable currency. This is essential for the usefulness of a
5
financial report. Companies that record their financial activities in
currencies experiencing hyper-inflation will distort the company's true
financial picture.
Periodicity Assumption
The periodicity Assumption – simply states that companies should be able
to record their financial activities during a specific period. The standard
periods usually include an entire year or quarter year.
Fundamental Accounting Concepts and
Constraints
Here is a list of the four basic accounting concepts and constraints that
make up the GAAP framework in the US.
 Business Entity Concept
 Going Concern Concept
 Materiality Concept
 Industry Practices Constraint
Business Entity Concept
The business Entity Concept – is the idea that the business and the
business owner are separate entities and should be accounted for
separately. This concept also applies to different businesses. Each
business should account for its transactions separately.
Going Concern Concept
Going Concern Concept – states that companies need to be treated as if
they will continue to exist. This means that we must assume the company
will not be dissolved or declare bankruptcy unless we have evidence to the
contrary. Thus, we should assume that there will be another accounting
period in the future.
Materiality Concept
Materiality Concept – anything that would change a financial statement
user's mind or decision about the company should be recorded or noted in
the financial statements. If a business event occurred that is so insignificant
that an investor or creditor wouldn't care about it, the event need not be
recorded.
Industry Practices Constraint
Industry Practices Constraint – some industries have unique aspects of
their business operation that don't conform to traditional accounting
standards. Thus, companies in these industries can depart from GAAP for
specific business events or transactions.

Why Are Accounting Principles Important?

Generally Accepted Accounting Principles are important because they set
the rules for reporting and bookkeeping. Often called the GAAP framework,

6
these rules maintain consistency in financial reporting from company to
company across all industries.

Remember, the entire point of financial accounting is to provide helpful

information to financial statement users. If everyone reported their financial
information differently, it would be difficult to compare companies.
Accounting principles set the rules for reporting financial information, so all
companies can be compared uniformly.

What is the Purpose of Accounting

Principles?
Accounting principles aim to establish how financial accounting is recorded
and reported on financial statements. When every company follows the
same framework and rules, investors, creditors, and other financial
statement users will have an easier time understanding the reports and
making decisions.

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