Accounting chapter 1 and 2

Business Entity Principle

Business Entity Principle

the financial data for the business must be kept separate from the owner's personal assets. The business is a separate entity in order to keep accounting records.

cost principle

when an asset is purchased the value of the asset is recorded at its actual cost, either its acquisition or construction cost. the figure can never be increased or decreased.

accrual basis accounting

a business records the revenue or expense when its incured

cash basis accounting

revenue and expenses are recorded only when cash is paid

Principle of objectivity

requires that accounting records be based on objective evidence. source documents provide objective evidence to support the value used to record transactions

economic entity concept

requires that accounting for an economic entity's activity be kept separate from the accounting of the owner and all other economic entities.

going concern assumption

the assumption that the economic entity will continue to operate in the foreseeable future.

recognition

the process of recording a transaction in the accounting records that effect asset, liability, revenue and expense.

measurement

the process of determining the amount that should be recognized.

fair value

the amount the asset should be sold for in the market assuming the company is a going concern, not the amount the company would receive in an involuntary liquidation or distressed state.

monetary unit assumption

an assumption that states that the only transaction data that can be expressed as an amount of money may be included in the accounting records.

principle of conservatism

when accountants can choose between two acceptable methods, they are required to use the one that realizes a lower more conservative net income or asset value

revenue recognition

revenue should be taken to account at the time the transaction is completed

matching principle

each expense related to revenue earned must be recorded in the same accounting period as the revenue it helped to earn

time period assumption

the fiscal periods should be equal in length

materiality principle

accounts are required to use accounting standards except when doing so would be expensive or difficult and where it makes no difference if the rules are ignored.

full disclosure

all financial information that affects the full understanding of a company's financial statements must be included in the financial statements

consistency principle

accountants should apply the same methods from period to period