Chapter Summary

Accounting principles are the foundation of the structure – the rules that govern how financial data is recorded, presented, and interpreted, much as grammar governs a language. Without them, financial information loses its clarity and reliability; the collapses of Enron (2001) and Wirecard (2020) both traced back to principles being violated or circumvented. Two global frameworks shape these principles: US GAAP, which is detailed and rules-based and maintained by the FASB; and IFRS, which is principles-based, issued by the IASB, and used in over 140 countries. Both share one purpose – to make financial information clear, trustworthy, and useful – enabling comparison across periods and across companies, ensuring transparency, supporting sound decisions, and protecting the public. The block presents the key principles in three clusters. Foundational assumptions: Going Concern, Economic Entity, Monetary Unit, and Periodicity. Recognition and measurement: Accrual Basis, Historical Cost, Fair Value, Revenue Recognition, and Matching. Reporting quality: Full Disclosure, Consistency, Materiality, Conservatism (Prudence), Objectivity, and Substance over Form. These principles serve the qualitative characteristics set out in the IFRS Framework: the fundamental characteristics are Relevance and Faithful Representation (US GAAP uses Reliability in a similar sense), enhanced by Comparability, Understandability, Verifiability, and Timeliness.

Key Points