Overview

accounting concepts


Show Summary Details

Quick Reference

The basic theoretical ideas devised to support the activity of accounting. As accounting developed largely from a practical base, it has been argued that it lacks a theoretical framework. Accountants have therefore tried to develop such a framework; although various concepts have been suggested, few have found universal agreement. However, four are often deemed to be fundamental: the going-concern concept assumes that the business is a going concern until there is evidence to the contrary, so that assets are not stated at their break-up value; the accruals concept involves recording income and expenses as they accrue, as distinct from when they are received or paid; the consistency concept demands that accounts be prepared on a basis that clearly allows comparability from one period to another; the prudence concept calls for accounts to be prepared on a conservative basis, not taking credit for profits or income before they are realized but making provision for losses when they are foreseen.These four principles were laid down in Statement of Standard Accounting Practice (SSAP) 2, Disclosure of Accounting Policies; they are also recognized in the EU's Fourth Accounting Directive and the UK Companies Acts together with a fifth principle, the accounting entity concept. SSAP 2 has now been superseded by Financial Reporting Standard (FRS) 18, which was issued in December 2000: this states that the consistency concept and the prudence concept should no longer be regarded as fundamental. FRS 18 also identifies four key objectives of financial information that can be regarded as fundamental principles: comparability, relevance, reliability, and understandability.

the going-concern concept assumes that the business is a going concern until there is evidence to the contrary, so that assets are not stated at their break-up value;

the accruals concept involves recording income and expenses as they accrue, as distinct from when they are received or paid;

the consistency concept demands that accounts be prepared on a basis that clearly allows comparability from one period to another;

the prudence concept calls for accounts to be prepared on a conservative basis, not taking credit for profits or income before they are realized but making provision for losses when they are foreseen.

Subjects: Financial Institutions and Services — Accounting.


Reference entries

Users without a subscription are not able to see the full content. Please, subscribe or login to access all content.