Definitions – Assumptions, Principles, and Constraints

Expense recognition principle (matching principle)

Record expenses in the same period as the related revenues.

Periodicity assumption

The life of a business is divided into artificial time periods (months, quarters, years).

Historical cost principle

Assets are recorded at their original transaction value when acquired.

Materiality

The importance of an item is judged by whether its size/nature could affect decisions.

Revenue recognition principle

Revenue is recorded when it is earned, usually at the point of sale or delivery.

Going concern assumption

Assumes the business will continue to operate indefinitely.

Monetary unit assumption

A stable unit of measure (the dollar) is used in financial reporting.

Economic entity assumption

The business is separate from its owners and other entities.

Full disclosure principle

All information that could affect users’ decisions must be reported.