7.1 Accounting Principles

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What Are Accounting Principles?

Accounting principles are the basic rules and guidelines that all accountants must follow when preparing financial statements (the reports that show how a business is doing financially). Think of them like the rules of a game — everyone must play by the same rules so the game is fair and makes sense.

These principles are used by accountants all around the world. They exist for two important reasons:

• So that the financial statements of one business can be fairly compared with those of similar businesses.
• So that the owner of a business can compare how the business has performed year after year.

There are ten accounting principles you need to know for IGCSE. Each one is explained in full below.

1. Business Entity Principle

Definition: The financial records of a business must only include the activities of that business — not the personal activities or belongings of the owner.

Think of it this way: The business and its owner are treated as two completely separate "people," even if the owner runs the business alone. The business has its own identity in accounting.

How it is applied:

• Only business transactions are recorded in the business's accounts.
• If the owner uses their own money to buy a holiday, groceries, or personal items, those costs are never entered into the business's accounts.
• When an owner puts their own money into the business (for example, to start it up), this is recorded in the capital account — because it is now money belonging to the business.
• When an owner takes money out of the business for personal use, this is recorded in the drawings account — it is not treated as a business expense.

Example: A business owner pays for a family dinner using the business's cash. Under the business entity principle, this personal expense must be recorded as drawings, not as a business expense.