Games such as basketball, soccer, baseball, and football all have rules. Accounting is no different. Accounting also has its own established set of rules and guidelines. Why do we need rules for sporting games and also accounting ? The answer is quite simply in order to know how to play the 'game'. Everyone that plays the 'game' abides by the same rules. Let's take a look at some of the rules used to play the 'Accounting Game'.
The Accrual Concept supports the idea that income should be measured at the time major efforts or accomplishments occur rather than when cash is received or paid.
The Revenue Recognition Principle requires companies to record revenue when it is realized or realizable and actually earned. In other words, at the time the goods are actually sold or the services are rendered.
The Matching Principle goes hand in hand with the Revenue Realization Principle. The matching principle is recording the revenues earned during a period using the revenue realization principle and matching (offsetting) the revenues with the expenses incurred in generating this revenue.
The Business Entity Assumption requires every business to be accounted for separately from the owner. Personal and business-related transactions are kept apart from each other. In other words, the separate personal transactions of owners and others are not commingled with the reporting of the economic activity of the business. One of the first recommendations almost all accountants tell a client is to at least establish a business checking account and to use it to only record their business transactions.
The Going Concern Concept assumes that a business will continue operating and will not close or be sold. It assumes that a business will be in operation for a long time. Based on this assumption, actual costs instead of liquidation values are used for presenting financial information. This assumption is abandoned in the event that a business is actually going out of business.
The Cost Concept requires that most assets are recorded at their original acquisition cost and no adjustment is made for increases in market value.
The Materiality Concept states that the significance and importance of an item should be considered in order to determine what is reported. Insignificant events need not be measured and recorded.
The Accounting Period Concept assumes that business operations can be recorded and separated into different time periods such as months, quarters, and years. This is required in order to provide timely information that is used to compare present and past performance.
The Cost-Benefit Convention states that the benefit of providing the financial information should also be weighed against the cost of providing it.
The Industry Practices Convention states that when customary industry practices exists they should be followed and used for financial reporting.