The Differences Between Fundamental Accounting Concepts & Underlying Accounting Concepts

by Kayla Lowe, Demand Media

Accounting is often referred to as the language of business because it is the concept that presents information to business leaders who need it to make important decisions. It condenses the activities of a business into an understandable format. Two basic concepts govern accounting: fundamental accounting concepts and underlying accounting concepts.

Fundamental Accounting Concepts

Four fundamental accounting concepts exist. One is the accrual concept (also known as the historical cost concept), which mandates that revenue and expenses are accounted for when they occur and not after the fact. Another is the consistency concept (also known as the full-disclosure concept), which mandates that the same accounting method should be used for each entity and any change in method should be disclosed. Another is the revenue recognition concept, which mandates that revenue is only reported when everything else needed to earn it is complete. The last is the matching concept, which mandates that all revenue and expenses are matched in the accounting period they are earned.

Underlying Accounting Concepts

Underlying accounting concepts are also known as accounting assumptions. One assumption is that the business and the owners’ records be kept separate since the business is its own entity. Another is the going concern concept, which assumes the business will continue to be in business in the future. Another is that there is one stable currency in which records will be recorded. The last is that information be recorded and prepared in a fixed time period, such as quarterly or annually.


Fundamental accounting concepts and underlying concepts relate in that the underlying concepts are upon what the fundamental ones are based. Hence, that is why the underlying concepts are termed such. They are the basis upon which the fundamental ones are derived. However, they are different because underlying concepts are merely understood assumptions among accountants, whereas fundamental concepts are specific rules that accountants follow.


Sometimes accounting concepts are modified due to practically and constraints. Four basic conventions allow for modifications. One is the materiality convention, which allows some requirements to be modified if they aren’t significant enough to affect decision-making. Another is the cost-benefit convention, which allows for modifications if the cost of reporting the information isn’t worth the benefit of doing so. Another is the conservatism convention, which states that businesses should use the accounting method that is least likely to overstate information. The last is the industry practices convention, which mandates that industry practices should be followed even if they differ from the generally accepted accounting principles.

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