Section 1 of 7
Accounting concepts (also called accounting principles or conventions) are the fundamental assumptions that underpin the preparation of financial statements. They ensure that accounts are prepared consistently and that the information they contain is reliable and comparable.
| Concept | One-line definition |
|---|---|
| Accruals (matching) | Income and expenditure are matched to the period in which they are earned or incurred |
| Business entity | The business is treated as separate from its owner(s) |
| Consistency | The same accounting methods are used from one period to the next |
| Cost (historical cost) | Assets are recorded at their original purchase price |
| Duality | Every transaction has two equal and opposite effects |
| Going concern | The business is assumed to continue trading for the foreseeable future |
| Materiality | Only items that are significant enough to affect a user's decision are treated separately |
| Money measurement | Only transactions measurable in money terms are recorded |
| Prudence | Profits are not anticipated; losses are recognised as soon as they are foreseeable |
| Realisation | Income is recorded only when the legal right to receive it has been established |
Exam tip: Questions will often give you a scenario (e.g. "inventory is valued at the lower of cost and net realisable value") and ask you to name and/or explain the concept that applies. Learn the one-line definition of each concept by name.
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