Accounting Concepts (Cambridge International AS Accounting)
Exam board Cambridge International · ASUpdated 2026-02-05
Spec point — the accounting concepts underpinning the preparation of accounts: business entity, historic cost, money measurement, going concern, consistency, prudence, realisation, duality, materiality, objectivity, matching /accruals and substance over form
Accounting concepts
What are accounting concepts?
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These are the rules, principles and guidelines used when preparing the financial statements of a business
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These are used by all accountants internationally
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Accountants must comply with these concepts so that:
- Financial statements can be accurately compared with those of similar businesses
- The owner(s) of a business can compare the year-by-year performance of the business
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The accounting concepts are:
- Business entity
- Money measurement
- Going concern
- Historic cost
- Materiality
- Duality
- Consistency
- Matching/accruals
- Realisation
- Prudence
- Objectivity
- Substance over form
Business entity
| Definition | Financial statements only record and report on business activities |
|---|---|
| Applications | - The records relate to the activities of one specific business - These records and reports must not include any personal assets, expenses and liabilities of the owner - Personal activities must be kept separate from the business - Assets invested into the business by the owner are recorded in the capital account - Assets withdrawn from the business by the owner are recorded in the drawings account |
Money measurement
| Definition | Financial statements only contain information about the transactions involving money |
|---|---|
| Applications | - Non-monetary information is not reported on the financial statements - Information such as experience of the staff and employee satisfaction are not included in the statements |
Going concern
| Definition | The assumption that a business will continue to operate into the foreseeable future by undertaking its current trading activities |
|---|---|
| Applications | - The business will not cease to operate in the near future - The business will not liquidate its non-current assets - Assets are recorded at their net book value or cost and not their market value - The business will continue to maintain a set of accounting records yearly |
Historic cost
| Definition | Assets and liabilities are valued at the cost of the original transaction and kept as such on the financial statements |
|---|---|
| Applications | - The market value of an asset is not entered on the financial statement - It can be difficult to maintain non-current assets at their original cost - The net book value is adjusted for depreciation to present a more realistic view of the value - The cost of a non-current asset is recorded and kept separate from the accumulated depreciation |
Materiality
| Definition | Transactions which have a low monetary value can be grouped rather than entered into separate accounts |
|---|---|
| Applications | - Small expense items such as window cleaning may be grouped as sundry expenses - Non-current assets which are low cost such as staplers and calculators are treated as expenses on the income statement and not recorded as capital expenditure - Unused stationery at the end of the financial year such as paper clips and photocopying paper should be included with the rest of the stationery as an expense on the statement of profit or loss (instead of recording it as an asset) |
Duality
| Definition | Each transaction is recorded using two accounting entries of opposite and equal values |
|---|---|
| Applications | - Each transaction has a debit and a credit entry - The double entry system adheres to duality |
Consistency
| Definition | When a business chooses a method for a particular item, it should continue to use that method each year |
|---|---|
| Applications | - The method of depreciation used for a particular type of non-current asset should be used for that type each year - The method for deciding on a allowance for irrecoverable debts should be used each year - The method for the valuation of inventory should be the same each year - The method can be changed if there is a good reason - But this decision and its impact needs to be recorded |
Matching (accruals)
| Definition | Incomes and expenses must be matched to the year to which they relate or in which the benefit is gained |
|---|---|
| Applications | - Incomes and expenses must be adjusted on the statement of profit or loss for accruals and prepayments to match the year in which the benefit was gained - Non-current assets are depreciated and the yearly depreciation is charged as an expense to match the cost to the year of its useful life - An allowance for irrecoverable debts is used to reduce the profit by an amount that is unlikely ever to be received |
Realisation
| Definition | Business transactions are only recorded in the financial statements when a payment is made or the ownership has been transferred |
|---|---|
| Applications | - A sale is included in the calculation of business profit only when a payment is made or there is a promise to pay - Such as agreed credit - The sale and purchases of goods are recorded when the goods are exchanged - Goods sold on a sale or return basis are not entered into the sales account until the customer accepts the goods |
Prudence
| Definition | A business should not overstate its profit or its net assets |
|---|---|
| Applications | - An allowance for irrecoverable debts is used to account for the debts that are unlikely to be paid - Inventory is valued at the lower value between the cost and the net realisable value - Non-current assets are depreciated to give a realistic net book value - Irrecoverable debts are written off if it is unlikely that the business will be able to retrieve the money |
Objectivity
| Definition | A business should ensure that its accounting information is free from bias and supported by evidence |
|---|---|
| Applications | - Businesses should use business documents to show proof of their accounts |
Substance over form
| Definition | Transactions should be accounted for and presented in accordance with their substance and economic reality, not merely their legal form |
|---|---|
| Applications | - A business should list a leased non-current asset in its statement of financial position even though the business technically does not own it |
Worked Example Charity is a sole trader who applies all the accounting principles when maintaining her accounting records.
Name the accounting principle applied by Charity in each of the following situations.
Accounting principle Charity goes on holiday with her family. She does not enter the costs into her business accounts. A customer phones up Charity and asks her to reserve some goods for them to collect the following week. Charity does not record this as a sale. Charity received a bad review from a customer. She did not enter this into her accounting records. Charity has not paid her rent however she still enters the amount in her statement of profit or loss. Answer:
Accounting principle Charity goes on holiday with her family. She does not enter the costs into her business accounts. Final answer: Business entity A customer phones up Charity and asks her to reserve some goods for them to collect the following week. Charity does not record this as a sale. Final answer: Realisation Charity received a bad review from a customer. She did not enter this into her accounting records. Final answer: Money measurement Charity has not paid her rent however she still enters the amount in her statement of profit or loss. Final answer: Matching/accruals
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