Accounting Principles

Matching

Sets out the point of time at which revenue may be recognized

Breach: You signed a contract for advertising in your magazine, even though you won’t include any ads in this period’s work. You still include the advance payment.

Disclosure

The owner is obligated to disclose any transactions of a significant financial nature in their reports

Breach: The owner determines not to include the recent sale of property in the financial reports as this may deter potential buyers of the business

Consistency

Accounting reports from one period to the next should be prepared on the same basis.

Breach: The owner uses one method of depreciation for a particular asset in one period and an alternative method in the second period

Diversity

Allows for the fact that no two firms are the same and therefore may use different accounting methods.

Breach: The owner decides that because the business down the road uses the straight line method of depreciation his or her business should do the same

Dependability

Data used in accounting should be subject to stringent internal control.

Breach: Price calculations are based on outdated information

Materiality

Is concerned with which data should be disclosed in financial reports. All transactions regardless of size should be recorded.

Breach: The owner does not bother to record minor withdrawals of stock from the business.

Accounting Period

The life of the business is broken up into arbitrary periods for the purpose of measuring profit.

Breach: The owner decides to wait until the project is completed before preparing the financial reports

Monetary

Only events whose impact can be measured in money terms can be treated as a financial transaction and thus entered in the books of the business.
All transactions should be recorded in money terms.

Breach: Stock is shown in financial reports in quantity amounts

Verifiability

All transactions recorded in the books of the business are supported by documentary evidence.

Breach: Payments are made and recorded without supporting evidence, such as invoices or cheque butts

Going Concern

Assumes that the life of the business is ongoing, indefinite and continuous. Also known as the continuity principle.

Breach: The owner does not wish to prepare a balance sheet but rather reports non-current assets as costs in the period they were acquired

Entity

Recognizes that the business, from an accounting viewpoint, is separate from the owner.

Breach: The owner includes in the business balance sheet personal assets such as his or her golf clubs

Historical Cost

All items are recorded at the original cost, i.e. the cost at which they were acquired.

Breach: Property owned by the business is shown at the higher market value rather than for the amount at which it was originally acquired

Conservatism

also be known as prudence. Losses should be recognised as soon as the business is aware of their likely event, whilst profits should not be recognised until they actually occur.

Breach: The net realizable value of stock has fallen below cost yet the owner refuses to adjust cost of goods sold calculations