Cash is King is a widely known business feature. Accounting and Finance are the pillars of that. Business growth is measured by the financial aspect of an organization that has achieved over a period. The revenue generated, the cost reduced, the expenses incurred are all covered under one umbrella called accounting.
The clarity in the maintenance of accounts gives clarity to the growth of the organization. Maintaining accounting standards becomes inevitable under the law too.
Accounting standards are set by a nation’s financial authorities to streamline the accounting process. This indeed helped many countries understand the economic growth of any company in a structured manner.
Financial reporting is made easily understandable by these rules and regulations. It is a surprise to note that, accounting standards have also assumptions involved in it.
Financial reporting and accounting standards have their guidelines and procedures. Unbiased, clear accounting is the order of the day, and it is achieved following the strict guidelines. On these lines, the two most prominent terms that revolve around the finance department are Accounting concepts and Accounting principles.
They both are interrelated, however, there are certain critical differences in them which help the standards of the data remain intact.
Accounting Concepts vs Accounting Principles
The main difference between Accounting Concepts and Accounting Principles is that Accounting concepts are the important conventions with which the accounting data is recorded based on certain assumptions whereas Accounting principles are the rules to be followed while reporting financial data. The former is the data recorder while the latter is the data presenter.
Comparison Table Between Accounting Concepts and Accounting Principles (in Tabular Form)
| Parameter of Comparison | Accounting Concept | Accounting Principle |
|---|---|---|
| Meaning/Definition | Accounting concepts are the assumptions upon which the accounting data is recorded. | Accounting Principles are the rules to be followed while reporting the final data. |
| Purpose | The purpose is to record data based on the concepts. | The purpose is to report financial data based on regulatory norms. |
| Usage | Accounting concepts are purely internal as the companies record data as per the concepts. | Accounting principles are internal aspects that need to be presented to the external bodies for verification. |
| Hierarchy of process | Accounting concepts precede accounting principles. | Accounting principles succeed the accounting concepts. |
| Major Outcome | Accounting concepts help in giving clarity to the data recorded for making the financial statements. | Accounting principles must follow GAAP norms to even avail for a bank loan and it is legal |
What are Accounting Concepts?
Accounting concepts are the guidelines or rules to be followed while recording the data for accounting purposes. They may also be called postulates which are to be followed during accounting processes.
Accounting concepts are similar throughout the nation. It helps
- The accounting information to be complete in all aspects
- The accounting information to be available for the stakeholders on a timely basis.
- The accounting information to be understandable by anyone.
- also in presenting the accounting information relevant to the analyzer.
There are many more aspects of following the accounting concepts. However, the above 4 is the primary of all.
Accounting concepts are varied, and each element of it plays a vital role.
- Entity Concept: Business and Owners are treated as separate entities through this concept.
- Dual Aspect Concept: Every business transaction has two effects. Investing 1 Million in business is treated in two ways, Capital Account and Asset Account, Business’ asset is 1 Million while the company also owes the person who invested 1 million is recorded separately.
- Going Asset Concept: This is an assumption made that the business shall run forever and the forced sale value of assets is not valued.
- Money measurement concept: Every aspect of a business is recorded as money using this concept.
- Cost Concept: The cost is considered to be the same as what is paid in the beginning and never its realizable value at a later point in time.
There are many other concepts that the accounts department must record as per the guidelines offered by the regulatory body of the country.
What are Accounting Principles?
Accounting principles are the rules to be followed by a company while reporting the financial data. Generally accepted accounting principles (GAAP) are issued by the Financial Accounting Standards Board in the United States.
The quality of the financial information is improved by implementing these accounting principles. Publicly traded companies in the United States are required to follow GAAP.
It is expected of the Chief officers and external auditors to ascertain and certify that the financial statements are prepared following the GAAP.
In the case of the privately-owned companies, if invested by investors or money lenders, it would require the company to file GAAP. The GAAP financial statements are considered to be the prime document by the bank to offer a loan as well.
This makes the companies follow GAAP strictly. GAAP facilitates the proper reporting of financial data in a standardized form.
There are a few critical accounting principles that play a vital role in common. Accrual Principle, Conservatism Principle, Consistency Principle, and Cost Principle forms the base of any financial data.
The above-mentioned principles make the financial report complete, consistent, and even comparable with the previous year’s data. The materiality principle gives the completeness of the report as all the material transactions must be mentioned in the financial statement.
Main Differences Between Accounting Concepts and Accounting Principles
- The main difference between Accounting Concepts and Accounting Principles is; Accounting concepts are the assumptions, guidelines, and postulates with which the accounting data is recorded whereas Accounting principles are the rules to be followed while reporting financial data.
- The main purpose of accounting concepts is to record data by the accountant while the accounting principles are to report the financial data based on GAAP norms.
- Accounting Principles are considered internal for the process it follows to record the data, while accounting principles are also internal but the report has to be presented externally as well.
- Accounting concepts are to be followed first to record data while accounting principles are followed later to report the finance data.
- Accounting concepts help in giving complete clarity on the finance data while accounting principles are required to be followed to report the finance data for legal compliances.
Conclusion
The accounting standards must be at a very high level. At the same time, it must be easily understandable by any user. The financial statements’ prime requirement is to make the data recorded to be understood by any, on their point of view.
It is suggested to the investors to take care while understanding the financial statements from different countries as they may follow different accounting principles and procedures. The difference is considered less of a concern in major markets too.
However, distortion in the financial data must be analyzed carefully before making any decisions. The sets of accounting principles and concepts are framed for the betterment of the financial accounting process.
References
- https://www.jstor.org/stable/2490520
- https://pdfs.semanticscholar.org/f073/d4cf97ad4390c1756b032dfe9bd33816dcef.pdf
- https://heinonline.org/hol-cgi-bin/get_pdf.cgi?handle=hein.journals/taxlr15§ion=30