What are the accounting principles in France? 10 principles to apply
Rigorous accounting requires compliance with a number of rules and standards, including the fundamental accounting principles.
Defined by the French Commercial Code, these are precepts to be followed in order to :
- harmonise practices with current standards and comply with expected formats (particularly for balance sheets and annual accounts) ;
- provide reliable financial and economic information.
What are the accounting principles in France? Let's look at them in detail.
The accounting principle of the intangibility of the opening balance sheet
Each opening balance sheet must be identical to the closing balance sheet that precedes it. The amount of cash available, for example, must remain unchanged. Consequently, there can be no changes 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 must prepare its balance sheet on the assumption that it will continue to operate after the end of the financial year. In other words, it prepares its annual accounts on the assumption that its business will continue in the future.
In particular, this accounting principle allows depreciation to be calculated over several financial 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 court decision to liquidate the company.
The accrual principle
This accounting principle means that income or expenses must be allocated to the financial year to which they relate, because accounting requires that financial information be recorded over a given period.
In other words, this means that each transaction is recorded in relation to the financial year in which it takes place, even if the associated invoicing occurs in the following financial year.
The historical cost accounting principle
This accounting principle implies that
- a purchased good is recorded at acquisition cost;
- an item produced should be 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: 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 requires :
- exercising caution and not conveying uncertainties in accounting documents;
- recognising an expense if it seems highly likely that it will be incurred, even if this occurs after the end of the financial year;
- only recognise income when it has been realised. A future gain should not be anticipated!
The accounting principle of consistency
The accounting methods applied by a company must remain the same from one financial year to the next. This allows 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, any change must be disclosed in the notes to the financial statements:
- why the company has opted for another method ;
- the impact of this change on its accounts;
- the "pro forma" accounts corresponding to the historical statements restated using 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 and liabilities, must be recorded.
Conversely, anything that is not considered material, because it has no impact on the company, does not have to be recorded.
The accounting principle of non-compensation
This accounting principle means that assets and liabilities may not 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 that assets and liabilities must not be offset:
- legal offsetting: this occurs in certain specific cases, such as when a receivable is reciprocated;
- voluntary set-off: two parties may voluntarily set off their claims under certain conditions;
- judicial set-off: certain debts can be set off under the supervision of a judge.
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 in which 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!