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ACCA Applied Knowledge · Financial Accounting

Key Principles and Concepts of Accounting for ACCA Financial Accounting

Key principles and concepts of accounting are the shared rules behind every set of financial statements: who uses them, the assumptions applied, the qualities information needs, the elements reported, how they are measured, and the regulation and ethics around them. Learn definitions precisely, then apply them to short scenarios in objective test questions.

What this chapter covers

This chapter sets out the ideas that sit under every number you will prepare in Financial Accounting. It covers why financial statements exist and who uses them, the underlying assumptions such as going concern and the accruals basis, and the qualitative characteristics that make information useful. It then defines the five elements of financial statements: assets, liabilities, equity, income and expenses. It also covers when each is recognised and how it is measured.

The chapter also looks outward. You meet the regulatory framework, including the role of IFRS Accounting Standards, and the basics of audit, governance and ethics. These are mostly knowledge topics. Questions are usually short and ask you to pick the correct definition, match a scenario to a concept, or identify the right ethical principle.

The rest of the paper depends on this chapter. When you later deal with inventory, non-current assets, accruals and provisions, and consolidations, you will justify the treatment using these ideas. For example, prudence-related thinking, the definition of an asset, and the recognition criteria explain why a cost is capitalised or expensed. Section A is made up of 35 two-mark objective test questions, so every concept you know cleanly is a quick, safe mark.

The chapter is compact, mostly definitional, and easy to turn into marks if you learn the exact wording. Objective test questions on concepts, elements and ethics reward precision, and a wrong option often differs from the right one by a single word. The same ideas also support your reasoning in later chapters, such as why a cost is an asset or why a liability is recognised. Time spent here is time saved later, because the principles make the detailed rules easier to remember rather than something to memorise blindly.

Key principles and concepts of accounting: topics in the order to study them

  1. 1Purpose and Users of Financial StatementsStart with why financial statements exist and who needs them, because every later concept is judged against that purpose.
  2. 2Fundamental Accounting Concepts and AssumptionsGoing concern and accruals are the base assumptions behind how all statements are prepared, so learn them next.
  3. 3Qualitative Characteristics of Useful InformationThese explain what makes information useful, and they build directly on the purpose and assumptions you have just covered.
  4. 4Elements of Financial Statements and RecognitionWith the purpose and quality of information clear, you can now learn the definitions and when items enter the statements.
  5. 5Accounting Measurement Bases and Capital MaintenanceMeasurement follows recognition: once an item is recognised, you must decide the amount at which it is carried.
  6. 6Regulatory Framework and Accounting Standards OverviewThis shows who sets the rules the earlier concepts support, and it is easier once you know the concepts.
  7. 7Audit, Governance and Ethical PrinciplesFinish with assurance, governance and ethics, which are largely separate knowledge points and good for last-stage recall.

How to prepare Key principles and concepts of accounting

This chapter is mainly about accurate definitions and applying them to short scenarios. Plan for small, repeated study sessions that suit a phone.

  1. Read each topic once in the order above and write a one-line definition for every key term in your own words.
  2. Make a short list of the five elements with their definitions, and check each definition against the recognition criteria.
  3. Build a comparison list of similar terms, such as relevance and faithful representation, or going concern and accruals, and note what separates each pair.
  4. Practise a range of objective test question types, such as multiple choice, multiple response where you select the stated number of answers, and number entry.
  5. For multiple response questions, read the required number of answers first, then test each option as true or false before choosing.
  6. Review every wrong answer and note which word in the option made it wrong. Rewrite the rule using that word.
  7. Do a final timed set mixing this chapter with earlier ones, and aim for roughly a minute or less per two-mark question.

Common mistakes in Key principles and concepts of accounting

  • Mixing up the fundamental and enhancing qualitative characteristics.

    Fix: Learn two groups: relevance and faithful representation first, then the four enhancing ones. Test yourself by sorting a shuffled list.

  • Confusing going concern with the accruals basis.

    Fix: Link going concern to the future of the business and the accruals basis to timing of recording. Use a one-line example of each.

  • Treating any cost as an asset because it benefits the business.

    Fix: Check the full definition and then the recognition criteria before deciding that an item is an asset rather than an expense.

  • Choosing too many or too few answers in multiple response questions.

    Fix: Note the stated number first, judge each option as true or false, and select exactly that number.

  • Confusing the role of the auditor with that of management or those charged with governance.

    Fix: Remember that management prepares the statements, governance oversees, and the auditor gives an independent opinion.

  • Applying a measurement basis without reading what the question asks for.

    Fix: Underline the basis named in the scenario, then recall how that basis treats changes in value.

Last-day revision: Key principles and concepts of accounting

  • Financial statements aim to give useful information to existing and potential investors, lenders and other creditors.
  • Going concern assumes the business will continue operating for the foreseeable future.
  • The accruals basis records items when they occur, not when cash moves.
  • The two fundamental qualitative characteristics are relevance and faithful representation.
  • Enhancing characteristics are comparability, verifiability, timeliness and understandability.
  • An asset is a present economic resource controlled by the entity as a result of past events.
  • A liability is a present obligation to transfer an economic resource as a result of past events.
  • Equity is the residual interest in assets after deducting liabilities.
  • Income is an increase in assets or a decrease in liabilities that increases equity, other than contributions from equity holders. Expenses are a decrease in assets or an increase in liabilities that decreases equity, other than distributions to equity holders.
  • Common measurement bases include historical cost, current cost, fair value and value in use.
  • IFRS Accounting Standards are issued by the IASB and aim to improve consistency between entities.
  • External auditors give an opinion on whether financial statements give a true and fair view or are fairly presented.
  • The fundamental ethical principles are integrity, objectivity, professional competence and due care, confidentiality, and professional behaviour.

Key principles and concepts of accounting practice questions

Key principles and concepts of accounting in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Key principles and concepts of accounting: frequently asked questions

How much of the FA exam does this chapter cover?

ACCA does not publish a fixed weighting per chapter that you should rely on. Concepts and principles can appear in Section A objective test questions and also support your reasoning elsewhere. Treat the chapter as essential, quick marks.

Do I need to memorise definitions word for word?

You need to know them accurately, but not as a script. Learn the key terms in each definition, such as present, control, past event and economic resource, because options often change one of them.

Is this chapter calculation based?

Mostly no. It is knowledge and application, so questions are usually multiple choice or multiple response. The ideas still decide how you treat items in later calculation questions.

What is the best way to practise this chapter on a phone?

Use short sessions with flashcards for definitions and a few objective test questions after each topic. Review every wrong option and note why it was wrong.