Hazem Hassan: The Story of Building the Largest Professional Institution in Egypt and the Region
Hazem Hassan: The Story of Building the Largest Professional Institution in Egypt and the Region
Accounting is not just an arbitrary way of recording numbers; it is a discipline governed by a “Professional Constitution.” Fundamental accounting principles and accounting concepts are the rules of the game that ensure financial statements are comparable and reliable. Without principles like the Accrual Basis or Prudence, one company’s “profit” could be another’s “loss,” leading to total market chaos—Digital Salla.
- The fundamental concepts: Going Concern and Business Entity.
- Operational principles: Accrual Basis vs. Cash Basis.
- Safety rules: Prudence (Conservatism) and Materiality.
- The Matching Principle: Linking revenue to its true cost.
- Consistency and Full Disclosure: Ensuring long-term transparency.
- Interactive assessment on the application of accounting principles.
1) What are Accounting Principles? (The Quality Standard)
Accounting principles are a set of rules and guidelines that companies must follow when reporting financial data. They are commonly grouped under GAAP (Generally Accepted Accounting Principles) or IFRS (International Financial Reporting Standards). Their goal is simple: Standardization and Comparability.
2) The Accrual Basis: Reality vs. Cash
This is the heart of professional accounting. Under the Accrual Basis, you record revenue when it is earned and expenses when they are incurred, regardless of when cash changes hands.
- Example: If you deliver a service in December but get paid in January, the revenue belongs to December’s reports.
- Why? It provides a more accurate picture of a company’s performance during a specific period.
3) Going Concern Assumption
Accounting assumes that the business will continue to operate for the foreseeable future (at least 12 months). This allows accountants to record assets at their “historical cost” and depreciate them over years rather than recording them at “liquidation value” (fire-sale prices).
4) Prudence (Conservatism): Don’t celebrate too early
The Prudence principle requires accountants to be cautious. When faced with two equally likely options:
- Choose the one that does not overstate assets or income.
- Choose the one that does not understate liabilities or expenses.
5) Materiality: Focus on the Impact
Not every cent matters. An item is material if its omission or misstatement could influence the economic decisions of users. Buying a $10 stapler is technically an asset, but because it’s “immaterial,” most companies record it immediately as an expense to save time.
Practical IFRS Applications - PDF File
6) Business Entity: Separation of Pockets
The company is a separate legal and financial entity from its owners. If the owner buys a personal car with company funds, it is recorded as a “Withdrawal” or “Distribution,” not as a company asset. This protects the integrity of the company’s financial position.
7) The Matching Principle
To determine profit correctly, you must match expenses to the specific revenues they helped generate within the same period. If you sell goods today, you must record the “Cost of Goods Sold” today, even if you haven’t paid the supplier yet.
8) Consistency and Full Disclosure
- Consistency: Once you choose an accounting method (like a specific depreciation method), you must use it every year to allow for valid comparisons over time.
- Full Disclosure: All information that is material to a user’s understanding of the financial statements must be included, either in the statements or the accompanying notes.
9) The Pillars of Trust: Core Principles (SVG)
This diagram summarizes the interaction between the primary concepts that hold up the ledger.
10) Interactive Quiz: Identify the Principle
11) Frequently Asked Questions
What is the main purpose of accounting principles?
To ensure that financial information is relevant, reliable, comparable, and provides a “true and fair view” of the company’s financial position.
Can a company change its accounting principles?
Yes, but only if the change results in more relevant or reliable information. The change must be fully disclosed, and previous years’ figures might need to be restated for consistency.
What happens if a company ignores the ‘Going Concern’ assumption?
It must prepare its financial statements on a “Liquidation Basis,” recording assets at what they could actually be sold for today, which usually results in significantly lower asset values.
Is the ‘Cash Basis’ illegal?
No, it is often used by very small businesses and for personal finance. However, for companies required to follow IFRS or GAAP, the Accrual Basis is mandatory.
12) Conclusion & Summary
Fundamental accounting principles are the “Gravity” that keeps the financial world in orbit. By mastering the Accrual Basis, respecting Prudence, and maintaining a strict Business Entity, you ensure that your financial reports are not just a collection of numbers, but a reliable tool for strategic growth—Digital Salla.