Accounting Principles

Historical Cost Principle

Requires companies to record the purchase of goods, services, or capital assets at the price they paid for them. Assets are then recorded on the balance sheet at their historical cost without being adjusted for market value changes.

Revenue Recognition Principle

Requires companies to record revenue when it is earned instead of when it is collected. This accrual basis of accounting gives a more accurate picture of financial events during the period.

Matching Principle

States that all expenses must be matched and recorded with their respective revenues in the period that they were incurred, not when they are paid. This ensures expenses align with revenues under the accrual basis of accounting.

Full Disclosure Principle

Requires that any information that could influence the decision-making of users of financial statements must be disclosed, usually in the footnotes. This includes material facts about accounting practices or known future events.

Cost Benefit Principle

Limits the amount of detail provided in financial statements to what is necessary. If the cost of recording or reporting something exceeds its benefit to users, it should not be included.

Conservatism Principle

Accountants should err on the side of caution and choose the more conservative option when there’s uncertainty, to avoid overstating assets or income and understating liabilities or expenses.

Consistency Principle

All accounting principles and assumptions must be applied consistently over time. This ensures comparability across reporting periods and supports analysis of financial trends.

Objectivity Principle

Financial statements and records should be based on objective, verifiable evidence, free from bias. Their purpose is to reflect the company’s financial status accurately, not influence users’ decisions.

Accrual Principle

States that revenue and expenses are recognized when they are incurred, not when cash is exchanged. This ensures financial statements reflect the actual financial position of a company during a period.

Economic Entity Principle

Assumes the business is a separate entity from its owners or other businesses, and its financial records should reflect only its own financial activities.

Historical Cost Principle

Indicates that fair value changes subsequent to purchase are not recorded in the accounts.

Full Disclosure Principle

Ensures that all relevant financial information is reported.

Expense Recognition Principle

Requires recognition of expenses in the same period as related revenues.