Accounting Theory

This chapter will introduce you to the fundamental theories and rules that guide the system of accounting. The key tenets of accounting are explained, including: double entry, substance over form, the matching principle, the revenue recognition principle, cost-benefit, materiality, and conservatism, as is their impact on the overall application of GAAP (Generally Accepted Accounting Principles). The underlying intent behind creating financial reports is for the information in the reports to be reliable enough to support sound business decision-making. By the time you finish this chapter, you should have a better understanding of the overall structure of accounting rules and guiding principles.

Learning objectives

After studying this chapter, you should be able to:

  • Identify and discuss the underlying assumptions or concepts of accounting. 
  • Identify and discuss the major principles of accounting. 
  • Identify and discuss the modifying conventions (or constraints) of accounting. 
  • Describe the conceptual framework project of the Financial Accounting Standards Board. 
  • Discuss the nature and content of a company's summary of significant accounting policies in its annual report.

Source: Textbook Equity,
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