14 Principles of Accounting: Concept,

Importance, and Regulatory Bodies

Jaya Sharma
Senior Execut ive Cont ent
Updated on Feb 15, 2024 19:12 IST
Accounting principles are the set of rules and guidelines adopted by
organizations for preparing comparable financial statements. Through
precise guidelines, the information presented is accurate and precise.

In this article, we will be discussing what is accounting and its different principles.

Table of Contents
What are principles of accounting?

Regulatory Bodies

How do accounting principles work?

Importance

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 List of Accounting Principles
Accrual principle

Consistency principle
Conservatism principle

Cost principle
Economic entity principle

Matching principle
Materiality principle

Full Disclosure Principle

Going Concern Principle

Monetary Unit Principle

Reliability Principle
Time Period Principle

Revenue Recognition Principle

Objectivity Principle

Limitations of Principle of Accounting

What are the Principles of Accounting?

Accounting principles refer to the rules and guidelines followed by companies while
reporting their financial data. Through these rules, experts can examine the financial
data by standardizing accounting methods. These principles ensure that the quality
of the financial information reported by companies is improved. Let us discuss the
concept and principles of accounting in the next section.

Explore accounting courses

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The aim of accounting principles is to compare multiple financial statements on the
same level. For this comparability, it is mandatory that these accounting principles
have been followed to same set of standards.

Regulatory Bodies For Setting Principles of Accounting

According to this principle, all revenues and expenses can be assigned
systematically to consecutive and distinctive accounting time periods. Although, the
principle does not require every transaction to be assigned to a specific accounting
period. If it is the case, then business transactions and periods should be estimated
to a specific time period. Through this principle, accountants can assess the
performance of their business. It allows comparison amongst transactions when
recorded in different time periods.

Learn the difference between assets and liabilities

How Do Accounting Principles Work?

Principles of accounting work on set standards due to which they minimize
irregularities as well as data mismanagement. Since these accounting prinicplesare in
line with the international standards, they can help identify cross-border investment
opportunities. The principles of accounting are subject to interepretation due to
which the inference drawn by different accountants can vary. Not all aspects of a
company's functioning are considered by accounting principles. This often poses a
limitation.

Importance of Principles of Accounting

The following points explain the importance of accounting principles:

Accounting principles and concepts determine income, expenses,

assets and liabilities f or f inancial reporting.

Companies implement these principles while preparing f inancial

statements to make them consistent and complete.

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 These properly f ormulated f inancial statements help investors in
analyzing usef ul inf ormation.
It becomes easier to compare f inancial inf ormation dif f erently.
Through these principles, transparency in the system is increased
and red f lags can be identif ied.

List of Principles of Accounting

Following are the twelve widely adopted principles in accounting:

1. Accrual Principle
It is one of the important accounting concepts and principles that mandate the
recording of transactions in the time period in which they occur. It is regardless of
the time when actual cash flows for the transactions are received. Through accrual
principle, one can gain an accurate insight into the financial status of a business.
Most large-scale businesses adopt an accrual system to determine the cash flow of
the business operations. Along with this, revenues and related expenses are
recorded in the same time period of reporting. Both IFRS and GAAP support this
concept. In case, a business has more than $5 million in revenue, then such
businesses must adopt this system for the purpose of taxation.

Explore free GAAP courses and free IFRS courses

2. Consistency principle
According to this principle, when an organisation adopts a specific accounting
method of reporting or documentation, then it should stay consistent with the
method. The aim of this basic accounting principle is to make f inancial
statements comparable across industries and companies. This principle has two
issues associated with it. First, the principle is not properly followed when many
people are recording data and compiling reports. To combat this issue,

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organizations need to have a set method internally. The second issue is related to
switching between the financial reporting methods. Some organizations do this in
order to manipulate the data to their advantage.

3. Conservatism Principle
T h e Conservatism principle gives you a realistic perspective of unexpected
situations. According to this principle, one should recognize expenses and liabilities
at the early stages even if there is uncertainty about the outcome. However, the
principle recognizes revenues and assets when there is an assurance of its receival.
This principle can be applied to recognizing the estimates. The conservatism
principle is the foundation of lower cost or market rule. As per this rule, one should
record inventory at a lower end of its current market value or at its acquisition cost.

4. Cost Principle (historical Cost)

T he Historical Cost principle is another name for the cost principle. Whenever a
business acquires an asset, its initial value is recorded in its financial reports of the
business. This value might not be improved in the market value of inf lation. It is also
not updated to reflect any depreciation or even appreciation. This value is known as
the cost principle. As per the principle, companies keep a record of their tangible
assets without reflecting the market value. Through this principle, companies can
assess the actual cost of using financial services for calculating the historical cost
principles of the assets of the company.

5. Economic Entity Principle

This principle is a basic of accounting that requires businesses to be treated as a
separate financial and legal entity. This means that the recorded activities of the
business entity must be kept separate from the recorded activities of the owner and
other entities. These may include either a sole trader, limited liability partnership, or
general partnership.

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 What is Equit y: Calculat ion, Types, and Import ance
The term equity refers to the amo unt o f mo ney that the co mpany o wns fro m its
shareho lders. The co mpany is liable to return its shareho lders under certain
co nditio ns. The equity represents...re ad m o re

What is Balance Sheet : It s Use and Import ance

Balance sheet is a type o f financial statement that pro vides data related to a
co mpany’s assets, liabilities, and shareho lder’s equity. Thro ugh a balance
sheet, yo u can also identify investments by...re ad m o re

All About Financial St at ement Analysis

A financial statement is an acco unting do cument that helps in understanding the
financial situatio n and cash flo ws in a business. There are different types o f
statements that serve different purpo ses....re ad m o re

6. Matching Principle
T h e matching principle is a concept in accounting that states that companies
must report their expenses and revenues simultaneously. The revenues and
expenses are matched on income statement for a specific time period. It is a part
of the accrual accounting method that provides an accurate representation of
operations on the income statement. This principle is quite useful for investors as
investors can match revenue and expenses to get a better sense of the finances of
a business. Along with the income statement, there is a need to assess the cash
f low statement as well.

7. Materiality Principle
As per the materiality principle, any item that may impact the decision-making
process of an investor must be recorded. These details must be recorded in length
in the financial statements using Generally Accepted Accounting Principles (GAAP).
The material principle states that the accounting standard can be ignored if the end

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result is small. It is an important principle for deciding if a transaction should be
recorded as a part of closing process.

Do check out our article on IFRS vs. GAAP

8. Full Disclosure Principle

In the Full Disclosure principle, each piece of information should be included in
the financial statement of an entity. This is necessary since it might affect the
reader’s perspective of understanding the statement. It is important to only disclose
information about events that have a material impact on the financial position of an
entity. As per the full disclosure principle, it may also include those items that cannot
be quantified. Businesses are also liable to report existing accounting policies and
any changes in them as well.

9. Going Concern Principle

According to this accounting principle, a company will complete its recent plans,
meet its financial obligations and use its existing assets. This process of continuing
operations indefinitely must go on until the company has any evidence on the
contrary. Through this principle, the company continues to make money to avoid
going bankrupt. In case, the company is unable to adopt this principle properly, the
chance of liquidation and bankruptcy increases.

Going concern concept is also known as the continuing concern concept. A

company continues to be a going concern till the time the sale of assets does not
hamper its operations. If a company is no longer a continuing concern, it needs to
start reporting specific information on financial statements. Through this principle,
accountants can make decisions related to which information should be reported on
financial statements.

10. Monetary Unit Principle

According to this principle, business transactions should be recorded only when they

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can be expressed as currency. Accountants should avoid recording non-quantifiable
entities in the financial accounts. Whenever a transaction or an event occurs, it is
first converted into money. After that, it is recorded into financial accounts of a
business. It ensures that every accounting record is measurable in monetary terms
by currencies.

11. Reliability Principle

This principle ensures that every transaction, business activity, event, etc is reliable
when presented in the financial statement. Information should be associated with
objective evidence and it can be checked, reviewed, and verified. This makes the
information more reliable. Along with this, the information should be accurate and
have a transparent representation. This makes the information reliable for its users.
This principle ensures every financial statement and business accounting records
are accurate.

12. Time Period Principle

There are two main regulatory bodies that develop the principles based on
accounting concepts. GAAP and IFRS develop these principles. US-based
companies follow GAAP principles whereas, outside the US, most countries follow
IFRS guidelines. GAAP is static in comparison with the IFRS. IFRS builds principles to
address the evolving financial condition in the world.

13. Revenue Recognition Principle

Revenue recognition is a part of GAAP that identifies certain conditions in which
the revenue is recognized. The revenue is recognized when a critical event has
occurred. This principle uses the accrual method of accounting. According to this,
revenues are recognized when realised and earned. It is a straightforward principle
when revenue is recognized when customers make payments. Whenever the
production takes longer, the accounting for revenue becomes more complicated.
This is one of the standard accounting principles in the industry.

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Get acquainted with accounting principles and practices. You can
enrol in accounting programmes from the top colleges, explore online
accounting courses, and make a career in this highly rewarding field.

14. Objectivity Principle

It refers to the concept of considering financial statements as solid evidence. These
statements should not be biased or opinionated. While constructing financial
statements, these statements should be helpful in evaluating the financial results,
financial position and cash flow of an entity. This principle of accounting must be
from the viewpoint of an auditor as well. In case an auditor is auditing a business
that he has worked with, then the audit report might not be free from bias as per the
relationship with the business owner.

Limitations of Principle of Accounting

Accounting principles has certain limitations including the following:

These f inancial recordings are measured in monetary value due to

which the signif icant events that are not monetary in nature, are not
accounted f or.

Accounting principles are maintained as per the historical cost and

are treated as per 'time value of money'
Only past records are accounted f or leaving no scope f or recording
any f uture events that might af f ect business f inance.

In case of accounting principles, f orm is given importance over

substance. Explanations of substantial inf ormation is not given any
importance.

Conclusion
Hope that this article has been able to explain the principles of accounting in detail.

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These Accounting principles are necessary for enhancing the significance of
financial statements. Through the implementation of these principles, there is a
uniformity in the process of preparing financial statements. These principles ensure
that stakeholders and investors get a standardized accounting system to compare
business performance on a global level.

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