Accounting, or accountancy, is the measurement, processing and communication of financial information about economic entities. Accounting Concepts and Principles are a set of broad conventions that have been devised to provide a basic framework for financial reporting. As financial reporting involves significant professional judgments by accountants, these concepts and principles ensure that the users of financial information are not mislead by the adoption of accounting policies and practices that go against the spirit of the accountancy profession. Accountants must therefore actively consider whether the accounting treatments adopted are consistent with the concepts and principles.
It is called the language of business that which communicates the financial condition and performance of a business to interested users, also referred to as stakeholders.
In order to become effective in carrying out the accounting procedure, as well as in communicating the financial information of the business, there is a widely accepted set of rules, concepts and principles that governs the application of the procedures, and it is referred to as the Generally Accepted Accounting Principles or GAAP.
The basic or fundamental principles are the cost principle, full disclosure principle, matching principle, revenue recognition principle, economic entity assumption, monetary unit assumption, time period assumption, going concern assumption, materiality, and conservatism. The last two are sometimes referred to as constraints. Rather than distinguishing between a principle or an assumption, it is better to simply say that these ten items are the basic principles or the underlying guidelines of accounting.
Accounting conventions are the rules and regulations that are required to be followed by accountants while maintaining company accounts and carrying out financial transactions. The most commonly encountered convention is the “historical cost convention”. This requires transactions to be recorded at the price ruling at the time, and for assets to be valued at their original cost.