Company valuation is influenced by accounting, and accounting rules and principles dictate accounting. Therefore, the question is, how do the 10 important accounting principles affect the valuation of companies?

Let's start with the question, what are accounting principles?

What are Accounting Principles?
Accounting principles are the rules and guidelines companies and other bodies must follow when reporting financial data. 

Accounting principles are essential to communicate financial information in an acceptable and understandable language from one business to another.

What are the 10 most Important Accounting Principles?
Here are the most important Accounting principles:

· Accrual principle

· Consistency principle

· Consistency principle

· Economic entity principle

· Cost principle

· Going concern principle

· Materiality principle

· Matching Principle

· Revenue recognition principle

· Monetary unit principle

· Full disclosure principle 

Accounting Principle #1: Accrual principle

The accrual principle states that business transactions are recorded when they occur and not when the related payments are received or made, regardless of the actual cash flows for the transaction received.

Accounting Principle #2: Consistency Principle

The consistency principle states that businesses should maintain the same accounting methods or principles throughout the accounting period so that users of financial statements can make meaningful conclusions. 

Accounting Principle #3: Economic Entity Principle

According to the economic entity principle - a business entity's finances should be kept separate from those of the owner, partners, or shareholders.

Accounting Principle #4: Cost Principle

The cost principle states that a business should only record its assets, liabilities, and investments at their original purchase cost.

Accounting Principle #5: Going Concern Principle

The going concern principle means that a business will remain in operation for the foreseeable future.

Accounting Principle #6: Materiality Principle

This principle states that all items reasonably likely to impact investors' decision-making must be recorded or reported in detail in business financial statements.

Accounting Principle #7: Matching Principle

The matching principle states that all revenues and related expenses are recognized in the same accounting period. 

Accounting Principle #8: Revenue Recognition Principle

Revenue recognition states that companies' revenues are recognized when the product or service is considered to be delivered to the customer, not when the cash is received.

Accounting Principle #9: Monetary Unit Principle

Money itself is treated as a unit of measurement, and business transactions should only be recorded if they are expressed in terms of currency. That is the idea of the monetary unit principle.

Accounting Principle #10: Full Disclosure Principle 

According to the entire disclosure principle, a company should include in or alongside its financial statements all of the information that may impact understanding the financial statements.

Accounting Principles and Valuation of Companies

The question is, which accounting principles affect the valuation of companies?

The answer is simple. As you know, most of the methods for valuing companies are based on the financial statements of companies. The reports are based on the various accounting principles mentioned above. The conclusion is that all principles affect the company's value. But there is one principle that affects more than anything - it is the principle of the living business. The principle affects the discounted cash flows model.

The reason is that the cash flow discounting method discounts the cash flows that the firm will generate forever. And this is precisely the idea behind the living business principle.

Conclusion

In conclusion, in this article, we talked about the 10 most important accounting principles and their effect on the valuation of companies.

To know the value of the business, you are invited to try our excellent business valuation software Equitest for free. If you would like advice, you are invited to schedule a free meeting with us at this link.