What are accounting principles?

Accounting principles are a set of standards that represent the essence of the doctrines and theories related to this science. Accounting principles govern the exercise of the profession, and their respect is a condition of legitimacy in accordance with the Brazilian Accounting Standards.

The standards currently in force in Brazil, defined by the Federal Accounting Council (CFC), reduced the number of principles from 7 to 6. Resolution CFC No. 1,282 / 2010 revoked the text of CFC No. 750/1993, making the principle of monetary restatement is incorporated into the principle of registration at its original value. The change in the resolution also changed the nomenclature by replacing the expression Fundamental accounting principles with Accounting principles.

What are the accounting principles?

Currently, the accounting principles in force in Brazil are: of the entity, continuity, opportunity, prudence, recording at original value and competition. There is no hierarchy among these principles, and all must be observed simultaneously. Know what each one says:

Entity principle

The entity principle says that the object of accounting is net worth. In addition, this principle establishes that the entity’s assets should not be confused with private assets, for example, those of its partners.

Capital autonomy also covers the relationship with the capital of other companies and determines that the addition or aggregation of assets from different entities does not create a new entity. For example, even if a person has multiple companies and reports on all of them in a consolidated way to get a more comprehensive view of their businesses, these assets remain independent of each other.

Principle of continuity

The principle of continuity is that what it says that the accounting of the company must be done based on the assumption that the company will maintain its activities, that is, it will continue to operate indefinitely in the future. This assumption must be maintained until contrary evidence arises, for example, if the partners decide to close the deal effectively.

This principle is important because the suspension of activities can have an effect on the utility of some assets. For example, the company may have very specific machines, which it could not sell to other companies and whose only destination in the event of business closure would be to turn them into scrap metal. If the company goes out of business, the value of these machines would be nil. However, for accounting purposes, they have a value as an asset, since the business continues to operate.

Opportunity principle

The principle of opportunity can be subdivided into the principle of integrity and opportunity. It determines that a company’s accounting must produce complete information, without omissions or excesses, in a timely manner for decision making. This is because, if completeness and timeliness are lacking, the information may lose its relevance.

The opportunity principle is applied when there is a change in equity in the entity. These variations may occur due to transactions with other entities, events of external origin that have an impact on equity (changes in exchange rates, natural disasters, etc.) or internal movements, such as the scrapping of goods and the transformation of materials. in products. As soon as the information is reliable, the impact of these events on the asset should be recorded, for example.

Principle of prudence.

Also called the principle of conservatism, the principle of prudence aims to leave the company always prepared for the worst scenarios, avoiding overestimating assets and underestimating liabilities.

According to this principle, whenever there are changes in equity with an impact on shareholders’ equity, if equally valid alternatives exist, accounting should always record the lower values ​​for assets and the higher values ​​for liabilities.

For example, even if the company challenges the calculation of any tax in court, it must record it in liabilities for the amount in question, not counting that the process will win.

Start of recording at original value

This principle says that transactions with the world outside the entity must be recorded with the original values, expressed in the currency of the country. If the transaction was made in foreign currency, the amount will be converted to national currency at the time of registration. This care allows to homogenize the register of assets and their mutations in the comparison between companies.

The original value determines the baseline of the equity record, which is not changed. However,  the recording for the original amount is divided into historical cost and historical cost variance. The variations that can be registered are the current cost, the realizable value, the present value, the fair value and the monetary restatement.

With the inclusion of the monetary restatement within the recording principle in its original value, in 2010, the number of accounting principles was reduced from seven to six. Before, even reflecting the periods of hyperinflation, the accounting standardization separately placed the principle of monetary updating.

Competition principle

The competition principle determines that income and expenses must be included in the entity’s records in the period in which they occurred, regardless of actual receipt or payment.

For example, a sale made in December of one year, but with a ticket generated for January of the following year, would be recorded by the year of the sale, not the year the ticket was paid for.