Financial Accounting — Basic Principles, Conventions, and Assumptions

Financial Accounting -- Basic Principles, Conventions, and Assumptions

Financial accounting depends on a few basic concepts (Also see Common Concepts in Accounting) which possess notable effects on the procedures of accounting.


Listed below are some fundamental principles in financial accounting.

Matching Principle

A company should match its earnings and expenditures within the period that it has earned and incurred the amount.

Full Disclosure Principle

A business entity should disclose all the information about it which the users will need in an understandable form.

Historical Cost Principle

A firm should report and present its assets at their original prices, and it should not adjust the amount as a result of the changes in the assets’ market value (Also see Understanding Mark-to-market). Note that you should never write up the cost of your assets. In some occasions, you may need to write down the cost, for instance, for some short-term marketable securities and investments. However, you should never write up costs.

Revenue Recognition Principle

A company may realise the revenue, that is, to report the amount as income earned by the firm on the books, when it has completed all the things it needs to do to earn it.

Modifying Conventions:

As a result of the industry practices as well as the practical constraints, some organisations will not apply the principles of the applicable accounting standards such as IFRS strictly, but they will adjust them as needed. Below are some common modified conventions:

Conservatism Convention

When a company can choose from a few fairly acceptable accounting methods, it should utilise the one which has the lowest possibility to overstate its assets (Also see How Do Tangible and Intangible Asset Differ from Each Other?) or profits.

Materiality Convention

This makes particular accounting requirements to be less strict, given that the impact is not significant enough to affect the decisions of a firm itself or others. The information should not overburden its users.

Industry Practices Convention

The firms should adhere to the accepted industry practices even though they may be different from the accounting standards.

Cost-benefit Convention

This convention relaxes the requirements of IFRS, given that the advantages of reporting something are less than the predicted cost of reporting it.


There are also some assumptions in financial accounting which leads to some of the accounting principles.

Going Concern Assumption

A firm will continue operating for the predictable future.

Time Period Assumption

An organisation should prepare and report the information periodically. It can be doing this annually, quarterly, or others.

Stable Dollar Assumption

The accountants assume that the dollar is a reliable measuring unit when they prepare financial statements expressed in dollars and use money as a unit of measurement.

Separate Entity Assumption

It assumes that the business is distinct and separate from its owner. Hence, the finances of the owner are not mixed up with the firm’s finances.

If accounting is not your thing, you may find it hard to comprehend the financial accounting. Thus, if you need any assistance in accounting, hire an accounting firm in Johor Bahru so that you may stay on top of the financial health of your business.