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ACCOUNTING PRINCIPLESACCOUNTING PRINCIPLES

Course Title-Financial AccountingCourse Title-Financial Accounting

Course code- ACC -134Course code- ACC -134

ACCOUNTING PRINCIPLES:ACCOUNTING PRINCIPLES:

ASSUMPTIONSASSUMPTIONS

PRINCIPLESPRINCIPLES

CONSTRAINTS IN ACCOUNTINGCONSTRAINTS IN ACCOUNTING

ASSUMPTIONS:ASSUMPTIONS:MONETRARY UNIT:MONETRARY UNIT:

The monetary unit assumption states that only transaction The monetary unit assumption states that only transaction data that can be expressed in terms of money be included data that can be expressed in terms of money be included in the accounting record in the accounting record ECONOMIC ENTITY:ECONOMIC ENTITY:

Economic entity assumption - the business is an entity Economic entity assumption - the business is an entity that is separate and distinct from its owners, so that the that is separate and distinct from its owners, so that the finances of the firm are not co-mingled with the finances of finances of the firm are not co-mingled with the finances of the ownersthe ownersTIME PERIOD:TIME PERIOD:

Fixed time period assumption - info prepared and reported Fixed time period assumption - info prepared and reported periodically (quarterly, annually, etc.)periodically (quarterly, annually, etc.)GOING CONCERN:GOING CONCERN:

Going concern assumption - the business is going to be Going concern assumption - the business is going to be operating for the foreseeable future.operating for the foreseeable future.

PRINCIPLES:PRINCIPLES:REVENUE RECOGNITION PRINCIPLE :REVENUE RECOGNITION PRINCIPLE :

Revenue recognition principle - revenue is realized (reported on the books Revenue recognition principle - revenue is realized (reported on the books as earned) when everything that is necessary to earn the revenue has been as earned) when everything that is necessary to earn the revenue has been completed.completed.

MATCHING PRINCIPLE: MATCHING PRINCIPLE: The principle that expenses should be matched with revenues in the period The principle that expenses should be matched with revenues in the period

when efforts are expended to generate revenues.when efforts are expended to generate revenues.

FULL DISCLOSURE PRINCIPLE :FULL DISCLOSURE PRINCIPLE : Full disclosure principle - all of the information about the business entity that Full disclosure principle - all of the information about the business entity that

is needed by users is disclosed in understandable form.is needed by users is disclosed in understandable form.

COST PRINCIPLE :COST PRINCIPLE : Cost principle - assets are reported and presented at their original cost and Cost principle - assets are reported and presented at their original cost and

no adjustment is made for changes in market value. One never writes up no adjustment is made for changes in market value. One never writes up the cost of an asset.the cost of an asset.

CONSTRAINTS IN ACCOUNTING:CONSTRAINTS IN ACCOUNTING:

1. Materiality (materiality threshold) 1. Materiality (materiality threshold) - insignificant amounts need - insignificant amounts need not be recorded and reported according to the GAAP rules.not be recorded and reported according to the GAAP rules.

2. Conservatism 2. Conservatism - when in doubt on how to record or report or - when in doubt on how to record or report or when two different acceptable methods could be used, choose the when two different acceptable methods could be used, choose the one that won’t overstate assets or profits.one that won’t overstate assets or profits.

3. Summery of conceptual framework3. Summery of conceptual framework– when deciding what – when deciding what course of action to take, try to insure the cost of providing the course of action to take, try to insure the cost of providing the information does not exceed the benefits derived from using the information does not exceed the benefits derived from using the information. In effect, efforts should not be greater than information. In effect, efforts should not be greater than accomplishments accomplishments

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