Principal of Accounts

Theories

Accounting / Business Entity

The business and the owner are treated as two separate entities. All business transactions are to be recorded from the point of the view of the business. Only business activities are to be recorded in its books.

Going concern

The business is assumed to have an indefinite lifespan unless there is credible evidence that it may close down.

Prudence

The business should not overstate profits and asset and not understate expenses and liabilities.

Consistency

The same accounting treatments are used from period to period to enable meaningful comparison over time.

Matching

Expenses incurred should be matched against income earned in the same accounting period to determine the accurate profit for that period.

Accrual basis of accounting

Income is recognised when it is earned and expenses are recognised when it is incurred, regardless if cash is received or paid in the same.

Objectivity

All business transactions must be supported by reliable and verifiable evidence so that financial statements will be free from opinions and biases.

Materiality

To avoid presenting too much details in financial statements that are insignificant to decision making.

Accounting Period

The lifespan of the business is divided into fixed periods to enable financial statements to be prepared for the particular period.

Historical Cost

All transactions are recorded at the price at the original cost.

Revenue recognition

Recognising revenue and other income when services are provided or when goods have been delivered.

Monetary

Only transactions that can be presented in dollars and cents can be recorded.

Asset

Resources a business own or controls that are expected to provide future benefits.

Liabilities

Obligations owed by a business to others that are expected to be settled in the future.

Equity

The claim by the owner(s) on the net asset of a business.

Income

Amounts earned through the activities of a business.

Expenses

Cost incurred in the operation of a business to earn income in the same accounting period.

Drawings

Assets taken from a business for the owner’s personal use.

Capital

Resources contributed by the owner for business use.

Share capital

Cash raised by issuing shares to investors

Retained earnings

Accumulation of profits and losses that has not been distributed to shareholders yet since operation.

Dividends

A portion of retained earnings that is distributed to shareholders.

Depreciation of non-current assets

A portion of the original cost of the non-current asset allocated over its useful life.