ACCOUNTING PRINCIPLES

• Concepts, rules, standards, assumptions or postulates that guide accountants in recording financial transactions and preparing/interpreting financial statements Guides accountants in doing their job, basically

1. Entity Principle

   • States that the business organization is a legal entity separate and distinct from the owners

   • Personal transactions of the owners should not be included in the books of accounts of the business

2. Monetary Principle

   • Money is the basic measuring unit It is used only in those transactions which are expressed in monetary terms

   • Transactions should be expressed in monetary terms We used the currency of the country in recording financial transactions

   • Debit and credit should be in local amounts -

3. Going Concern

   • The business is assumed to continue operation for an indefinite period of time in the future, unless situations would warrant its closure or liquidation

4. Time Period

   • To determine the profit and financial decisions of the business, audit is made at periodic time intervals

   • Fiscal year vs calendar year Calendar year

     • Calendar year → starts in January 1 and ends in December 31

     • Fiscal year →any 12-month accounting period

5. Cost Principle

   • States that plant assets should always be recorded at their original costs, never at their book value

   • This is because plant assets depreciate If we factor depreciation, it becomes its book value Book value → after deducting depreciation from the original cost Accumulated depreciation will change yearly

     • Ex: Machinery Machinery should always be recorded at its original cost, despite its accumulated depreciation Original cost is also called historical cost, appreciation cost, or purchase price

6. Dual Aspect

   • For every financial transaction, there is always a debit account affected and a credit account affected and these must be balanced

7. Matching Principle

   • Expenses are incurred for the purpose of generating revenue/income. Your expenses should be able to improve your income.

   • The expense that is incurred to generate income should both be recorded in the same accounting period. By applying depreciation accounting, both expenses and income will be recorded in the same accounting period. Link the cost of an asset or revenue to its benefits

8. Realization

   • Income is considered realized when goods have been delivered or services have been rendered, irrespective of when payment has been made

9. Conservatism

   • States to never anticipate profits, but provide for all possible losses

   • Don’t be very optimistic; goals and targets should be achievable, feasible, and realistic

10. Consistency

    • When one method or system is applied for one year, it should be consistently applied in the subsequent years for the purpose of comparability

    • If you change method, it should be disclosed and indicated in the financial statement

11. Objectivity

    • For every financial transaction, there should be supporting documents

    • Supporting documents must be original (never tampered with), accurate, and verifiable

12. Materiality

    • Any data or figure that is material are significant or relevant

    • Relevant (material) information known to the accountant must be shown in the financial statements

13. Full Disclosure

    • Footnoting → Indicating as footnotes to financial statements all significant information

      • To give the reader the correct interpretation of the financial statements