The 6 accounting principles that govern in Europe

The bookkeeper newcastle accounting principles are the essential rules which must be based accounting firms. In this article we will see the 6 accounting principles that govern in Europe according to the current General Accounting Plan and we will see what happens if a conflict arises between the different principles.

Importance of knowing the accounting principles for investors

Investors who follow the criteria of value investing attach great importance to accounting information when making our investment decisions. Therefore, it is important to know the principles on which companies are based in providing the accounting information they present to investors.

These accounting principles are mandatory for all companies present their financial statements according to the current General Accounting Plan in Europe.

Principle of business in operation

The General Accounting Plan explains the operating principle in the following way:

“Unless there is evidence to the contrary, the management of the enterprise shall continue to be foreseeable, so that the application of accounting principles and criteria is not intended to determine the value of net assets for the purpose of their global transfer or The resulting amount in the event of liquidation. ”

This principle is important for investors, since the liquidation value of a company in most cases will be different from the book value, so different modifications will have to be introduced to obtain the real value, either up or down To the bottom.

Accrual principle

The transactions or economic facts will be part of the accounting at the time they occur, not at the time of payment or collection.

This principle is important, since even if a company can have a large accounting benefit, it may not be very realistic if it does not charge. In fact, it is not trivial the number of companies that, despite having accounting benefits, end up in competition of creditors because of clients who do not pay their debts.

Principle of uniformity

Accounting legislation allows different criteria to be used to account for transactions or economic events. The principle of uniformity requires that the criteria selected can not be changed without more, but an analysis of the impact of the change in accounting criteria in the annual report of the report is required.

Principle of prudence

The principle of prudence requires that transactions or economic events should be accounted for prudently in the event of uncertainty. This implies that future benefits can not be accounted until the business is definitively perfected.

This principle also implies that the risks should be accounted for in the annual accounts, either in the report, or that future losses are appropriated if risks are identified that could cause future losses.

Principle of non-compensation

Unless a rule expressly provides otherwise, the items of assets and liabilities or expenses and income can not be offset. In addition, the items included in the annual accounts shall be valued separately. This makes the accounting reflect the reality in a more extensive way than if there were no principle of non-compensation.

Principle of relative importance

The principle of relative importance speaks about the intensity with which these principles should be applied in different cases. The General Chart of Accounts determines that:

“Strict non-application of some of the accounting principles and criteria shall be permitted where the relative importance in quantitative or qualitative terms of the variation that such a development produces is scarcely significant and, consequently, does not alter the expression of the true image.”

That is to say, it softens the application of these principles in some cases as long as they do not alter the true image that must give the accounting of a company.

What happens in case of conflict between accounting principles?

As a closing rule, the General Accounting Plan offers us a solution for cases of conflict between different accounting principles. In this case, the accounting principle that best leads the annual accounts to express a true and fair view of the assets, financial position and results of the company must prevail.

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