Essential Accounting Principles

Timeliness Principle

The Timeliness principle in accounting refers to the need for accounting information to be presented to users in time to fulfill their decision-making needs.

• Example: Users of accounting information must be provided financial statements on a timely basis to ensure that their financial decisions are based on up-to-date information. This can be achieved by reporting the financial performance of companies with sufficient regularity (e.g., quarterly, half-yearly, or annually) depending on the size and complexity of the business operations. Unreasonable delay in reporting accounting information to users must also be avoided.

Prudence Principle

Prudence requires that accountants should exercise a degree of caution in the adoption of policies and significant estimates such that the assets and income of the entity are not overstated, whereas liabilities and expenses are not understated.

• Example: Inventory is recorded at the lower of cost or net realizable value (NRV) rather than the expected selling price. This ensures profit on the sale of inventory is only realized when the actual sale takes place.

Neutrality Principle

Neutrality dictates that information contained in the financial statements must be free from bias. It should reflect a balanced view of the affairs of the company without attempting to present them in a favored light. Information may be deliberately biased or systematically biased.

• Example: Managers of a company are provided a bonus based on reported profit. This might tempt management to adopt accounting policies that result in higher profits rather than those that better reflect the company's performance in line with GAAP.

Matching Concept Principle

The Matching Concept principle requires that expenses incurred by an organization must be charged to the income statement in the accounting period in which the revenue, to which those expenses relate, is earned.

• Examples: Deferred taxation, cost of goods sold, government grants.

Historical Cost Principle

Historical Cost is the original cost incurred in the past to acquire an asset.

• Example: A machine is depreciated using a straight-line basis over its useful life of 10 years.