What are the accounting principles in France? 10 principles to apply
Rigorous accounting requires compliance with a number of rules and standards, including fundamental accounting principles.
Defined by the French Commercial Code, these are precepts to be followed in order to :
- harmonize practices with current standards and comply with expected formats (particularly for balance sheets and annual financial statements) ;
- provide reliable financial and economic information.
What are the accounting principles in France? Let's find out.
The accounting principle of intangibility of the opening balance sheet
Every opening balance sheet must be identical to the preceding closing balance sheet. The amount of cash available, for example, must remain unchanged. This means that no changes can be made to the opening balance sheet.
☝️ Of course, this accounting principle does not apply to a company's first balance sheet.
The accounting principle of going concern
A company's balance sheet must be prepared on the assumption that it will continue to operate after the end of the financial year. In other words, it prepares its annual financial statements on the assumption that its business will continue into the future.
This accounting principle enables depreciation to be calculated over several years.
☝️ The going concern principle is compromised when the formal resolution to cease trading has been pronounced by the company's directors, or by a judicial decision to liquidate the company.
The accrual principle
This accounting principle means that income and expenses must be allocated to the financial year to which they relate, since accounting requires that financial information be transcribed over a given period.
In other words, each transaction is recorded in relation to the year in which it takes place, even if the associated invoicing occurs in the following year.
The historical cost accounting principle
This accounting principle implies that
- a purchased good is recorded at acquisition cost;
- an item produced is recorded at its production or construction cost;
- free goods are recorded at their estimated value at the time they are received.
Consequently, if the value of the asset has changed, it is not revalued in the balance sheet. Equipment purchased for €5,000 in 2018 will still be recorded at €5,000 in 2020.
☝️ There is, however, one exception: the practice of free revaluation is permitted for tangible and financial fixed assets.
The accounting principle of prudence
This is one of the most important accounting principles. It implies :
- exercise caution and avoid conveying uncertainties in accounting documents;
- recognizing an expense if its realization seems highly probable, even if this occurs after the end of the accounting period;
- only recognize income when it has been realized. A future gain must not be anticipated!
The accounting principle of consistency
The accounting methods applied by a company must remain the same from one accounting period to the next. This enables comparisons to be made between financial years.
However, there are exceptions to this principle:
- when the company opts for a preferential method, in order to provide more qualitative information.
- in the event of an exceptional situation involving the choice of another method, always with the aim of guaranteeing the best possible information.
However, in the event of a change, the notes to the financial statements must specify:
- why the company has opted for a different method ;
- what impact the change will have on its accounts;
- the "pro forma" accounts corresponding to the historical statements restated by the new method adopted.
The principle of materiality
Every item that is of the least importance, because it affects the company's decisions or its assets, must be recorded.
On the other hand, anything that is deemed to be of little importance, because it has no impact on the company, need not be recorded.
The accounting principle of non-compensation
This accounting principle means that assets and liabilities cannot be offset on the balance sheet. Consequently, a debt and a receivable cannot be merged; they must be treated separately.
The same applies to the income statement, where income and expenses cannot be offset.
☝️ However, there are three exceptions to the rule of no netting between assets and liabilities:
- legal set-off: this applies in certain special cases, such as when a claim is reciprocated;
- voluntary set-off: two parties may voluntarily set off their claims under certain conditions;
- judicial set-off: under the supervision of a judge, certain debts can be set off.
The accounting principle of proper disclosure
The information provided in accounting documents must be sufficiently significant to be correctly understood and interpreted by readers.
Furthermore, this information must be accurate, complete and presented fairly.
The accounting principle of reality over appearance
The aim is to present reliable information, where substance takes precedence over form.
This means that, when faced with a complex transaction, we must not stop at its legal status, but take into account its financial and economic reality.
You are now familiar with the basic accounting principles to which all companies are subject in France!