Accounting Concepts vs Accounting Principles: Difference and Comparison

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 it has achieved over a period.

The revenue generated, the cost reduced, and the expenses incurred are all covered under one umbrella called accounting.

The clarity in the maintenance of accounts gives clarity to the organisation’s growth. 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 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 also involve assumptions.

Financial reporting and accounting standards have their guidelines and procedures. Unbiased, precise accounting is the order of the day, achieved following strict guidelines.

On these lines, the two most prominent terms around the finance department are Accounting concepts and principles.

They are both interrelated; however, specific critical differences between them help the standards of the data remain intact.

Key Takeaways

1. Accounting concepts are the basic assumptions and ideas that form the foundation of the accounting process, such as the going concern, accruals, and consistency concepts.
2. Accounting principles are the rules and guidelines for applying accounting concepts, such as revenue recognition, matching, and historical cost principles.
3. Both accounting concepts and principles aim to ensure accuracy, consistency, and transparency in financial reporting, but concepts provide the foundational framework while principles guide specific applications.

Accounting Concepts vs Accounting Principles

Accounting concepts refer to the basic assumptions, rules, and ideas that underpin the practice of accounting, providing a framework for recording and reporting financial transactions. Accounting principles are guidelines and rules that govern how financial transactions are recorded and reported.

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Comparison Table

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 per the concepts.	Accounting principles are internal aspects that must be presented to external bodies for verification.
Hierarchy of process	Accounting concepts precede accounting principles.	Accounting principles succeed the accounting concepts.
Major Outcome	Accounting concepts help clarify the data recorded for making financial statements.	Accounting principles must follow GAAP norms to even avail of a bank loan, which is legal.

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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 to be observed during accounting processes. 

Accounting concepts are similar throughout the nation. It helps 

1. The accounting information to be complete in all aspects
2. The accounting information is to be available for the stakeholders on time.
3. The accounting information is to be understandable by anyone.
4. Also, in presenting the accounting information relevant to the analyzer.

There are many more aspects of following accounting concepts. However, the above 4 are the primary of all.

Accounting concepts are varied, and each element plays a vital role.

1. Entity Concept: This concept treats businesses and owners as separate entities.
2. 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 assets are 1 Million. At the same time, the company also owes the person who invested 1 million to be recorded separately.
3. Going Asset Concept: This assumption is made that the business shall run forever, and the forced sale value of assets is not valued.
4. Money measurement concept: Every aspect of a business is recorded as money using this concept.
5. Cost Concept: The cost is considered 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 per the guidelines offered by the country’s regulatory body.

 

What are Accounting Principles?

Accounting principles are the rules to be followed by a company while reporting 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.

The Chief officers and external auditors are expected to ascertain and certify that the financial statements are prepared following the GAAP.

In the case of privately-owned companies, if invested by investors or money lenders, it would require the company to file GAAP. The GAAP financial statements are considered 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.

A few critical accounting principles play a vital role in ordinary. Accrual, Conservatism, Consistency, and Cost Principle form the base of any financial data.

The above principles make the financial report complete, consistent, and 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.

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Main Differences Between Accounting Concepts and Accounting Principles

1. 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.
2. The primary 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.
3. 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.
4. Accounting concepts are to be followed first to record data, while accounting principles are followed later to report the financial data.
5. Accounting concepts help clarify the finance data, while accounting principles must be followed to report the finance data for legal compliance.

References

1. https://www.jstor.org/stable/2490520
2. https://pdfs.semanticscholar.org/f073/d4cf97ad4390c1756b032dfe9bd33816dcef.pdf
3. https://heinonline.org/hol-cgi-bin/get_pdf.cgi?handle=hein.journals/taxlr15&section=30