Fundamental accounting concepts

There are a number of other accounting principles that underpin the preparation of financial statements in addition to the qualitative characteristics. The most significant ones include:

The business entity concept

This principle means that the financial accounting information presented in the financial statements relates only to the activities of the business and not to those of the owner. From an accounting perspective the business is treated as being separate from its owners.

The accruals basis of accounting

This means that transactions are recorded when revenues are earned and when expenses are incurred. This pays no regard to the timing of the cash payment or receipt.

For example; if a business enters into a contractual arrangement to sell goods to another entity the sale is recorded when the contractual duty has been satisfied; that is likely to be when the goods have been supplied and accepted by the customer. The payment may not be received for another month but in accounting terms the sale has taken place and should be recognised in the financial statements.

The going concern assumption

Financial statements are prepared on the basis that the entity will continue to trade for the foreseeable future (i.e. it has neither the need nor the intention to liquidate or significantly curtail its operations).

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Tags:	business entity concept;accruals concept;Going concern