What are Accounting Concepts?

Accounting concepts are a set of general conventions that can be used as guidelines when dealing with accounting situations. These concepts have also been integrated into the various accounting standards, so that a user will not implement a standard and then find that it is in conflict with one of the accounting concepts. The key accounting concepts are noted below.

Completeness

Accounting information should be complete in all respects. This concept can be taken too far, as some accountants will hold off on closing the books for an inordinate period of time, waiting for every possible transaction to be fully resolved. Accruals can be used to make reasonable estimates of these transactions.

Availability

Accounting information should be made available to users on a timely basis. This concept has driven many accountants to conduct a fast close, where financial statements are produced within a day or two of month-end. Some entities even use a soft close, where some entries are not made in selected months in order to generate financials as fast as possible.

Understandability

Accounting information should be presented in a manner that is easily understandable to the user. This can involve the extensive use of footnote disclosures and supporting schedules, to clarify matters that may be excessively summarized in the core financial statement line items.

Relevance

Accounting information should be relevant to the needs of users. This can involve discussions with users to determine the types of information they want to see - which may result in some financial statement restructuring to meet their needs. This is an ongoing task that will require changes to the accounting system as a business evolves.

Related AccountingTools Courses

Accountants’ Guidebook

Bookkeeping Guidebook

Reliability

Accounting information should be reliable. This means that you should only record those transactions in the accounting system that you can verify with objective evidence. This is especially difficult to do when you are recording a reserve, such as an allowance for doubtful accounts, since these reserves are essentially opinion-based. In these cases, it is particularly important to justify your actions with a detailed analysis of the reasons for the reserve.

Unbiased

Accounting information should contain no biases.

Faithful Representation

Accounting information should faithfully represent the related business transactions.

Consistency

Accounting policies should be consistently applied over time, so that financial statements are consistent and comparable.

Measurable

A business transaction should only be recorded when it can be measured in a currency.

Matches Revenue

Expenses should be recognized in the same period in which related revenues are recognized.

Going Concern

Financial statements are prepared under the assumption that a business will be a going concern.

Materiality

Information should be reported if its absence would otherwise cause a user to make a different decision.

Conservative

Revenue estimates should not be overstated, nor should expense estimates be understated.

Recognition

Revenue should be recognized only when it has been earned.

Entity Basis

The financial statements of a business are to be based solely on the entity’s own transactions, and will not be intermingled with those of its owners.