Set of basic standards and rules to be observed in accounting, in order to guarantee the quality and legality of the latter.
The accounting principles are included in the General Chart of Accounts.
These accounting principles are intended to transmit reliable and consistent economic and financial information. Their respect is essential.
What are accounting principles used for?
The Commercial Code declares that the annual accounts drawn up by companies must be regular, sincere and give a true picture of the assets, the financial situation and the results.
Accounting principles ensure the reliability of accounting information.
Accounting Principles
There are ten essential accounting principles in France. Any company is legally bound to respect them when drawing up its annual accounts.
Here they are detailed:
1. Intangibility of the balance sheet.
The balance sheet at the start of the financial year must correspond to the balance sheet at the end of the previous year. (Except for the first financial year).
2. Business continuity.
When establishing the balance sheet, it is considered that the company will continue its activity after the end of the current financial year. Thanks to this principle, it is possible to record depreciation over several years and distribute the investment costs over several successive accounting years.
3. Independence of financial years.
The accounting years are spread over a period of one year, at the end of which the company generates the annual accounts.
This involves attaching an accounting act to the accounting year during which it takes place. We will thus attach a payment to the financial year during which it is obtained, regardless of whether it corresponds to a service which itself took place during a previous financial year.
4. Historical cost.
It is compulsory to record goods purchased at their acquisition cost, free goods at their estimated value and goods produced at their production cost. When establishing accounting principle balance sheet, we stick to these original costs, we do not have to re-evaluate them.
So if the company bought equipment for £ 1,500 in 2012, its value in 2015 will still be £ 1,500.
5. Be careful.
This principle indicates that it is preferable not to transfer uncertainties from the present to future accounting years. Indeed, these uncertainties can affect the result or the assets of the company. It is therefore important that the accounts be drawn up with caution.
Any probable loss, even if it will not actually occur until a subsequent financial year, must be taken into account. Future impairment should be subject to amortization or provision. On the other hand, an expected subsequent gain cannot be taken into account in advance.
6. Non-compensation.
Offsetting between assets and liabilities on the balance sheet is prohibited. This means that one cannot add together liabilities and assets and simply record the balance in the books. For example, it is forbidden to merge a debt and a receivable or an expense and a product.
The offsetting between income and expenses in the income statement is also prohibited.
7. Permanence of methods.
A company is required to always use the same accounting methods, over all financial years. It cannot, for example, change its depreciation methods for the same type of asset from one financial year to another.
But it can derogate from this principle in the following two cases:
- when the company changes its method and chooses a preferential method
- when the company changes method due to an exceptional situation
8. Materiality.
Items of no importance may be neglected, but on the other hand, all items that are significant for decision-making or for a fair representation of assets and activities must be duly recorded in the accounts.
9. Good information.
Accounting documents must present fair, reliable and complete information. The various readers of financial documents must have access to satisfactory information, that is to say information that they can understand.
10. Preeminence of reality over legal status.
This principle can prove difficult to respect in France because of the regulations. It just means that accounts should prioritize reality over legal status.
The operations that the company has carried out must be presented in accordance with their economic reality.
For example, according to this principle, it will be advisable to record on the assets side of the balance sheet purchases even with a retention of title clause, or even in consolidation of goods which are the subject of a financial lease.
