List of 12 Basic Accounting Principles

1. Accounting Entity is the business unit for which the financial statements are being prepared. The accounting
entity recognizes that there is a business entity that is separate from its owner(s). In addition, the economic
unit engages in identifiable economic activities and controls economic resources.

2. Going Concern Accounts assume that the life of the business entity is infinitely long and will never dissipate.
In some cases, if there is a clear sign that a business may go bankrupt, the accountant must issue a qualified
opinion stating the potential of a demise.
3. Measurement Accounting only deals with things that can be measured, quantifiable. Therefore, aspects that
are crucial to profits may be overlooked such as customer loyalty.
4. Units of Measure The US Dollar (USD) is the standard value used in financial statements for companies in
the United States. Any foreign transactions must be translated to USD based on the current exchange rate.
5. Historical Cost The transactions that results in what a business owns and owes are recorded at their original
cost. This may cause the companys books to be understated. For example, a company can own a
manufacturing facility that is valued at $25,000,000 but carry it on the books for their purchase price of
$7,000,000.
6. Materiality The concept of materiality allows you to violate another accounting principle if the value is so
tiny that the financial reports will not have an impact. Materiality is a judgment call by the accountant.
7. Estimates and Judgments Often times, it is okay to guess due to the nature that businesses are complex. It
is legal, if the accounting is the best you can do, the expected error would not affect the financial reports and
the guesses are consistent for each period.
8. Consistency Each individual enterprise must choose a single method of accounting and reporting
consistently over time.
9. Conservatism Accountants must agree more with an understatement than an overvaluation. This accounting
guideline states that if doubt exists between two alternatives, the accountant should choose the result with a
lesser asset amount and/or a lesser profit.
10. Periodicity Is the activity within the scope of an accounting period that must be recorded within the time
period on a financial statement. Normally the life of a business can be divided into periods of time (month,
quarter or year).
11. Substance Over Form This is a concept where the entity is accounting for items according to their substance
and economic reality and not just its form.
12. Accrual Basis of Presentation In accrual accounting, if a business transaction makes money in a period then
all of its associated costs and business expenses should also be reported in that particular period. All
businesses with inventory must use the accrual basis. The alternative for business that dont carry inventory
is cash basis accounting in which transactions are recorded as they are physically received or paid out.