Accounting Principles

Accounting Principles

1. Going Concern

   • The life of the business is assumed to be continuous and its records are kept on that basis.
   • EG: We can divide assets and liabilities into current and non-current because we assume the business will go beyond 1 year.

2. Consistency

   • Accounting methods should be applied in a consistent manner to ensure that reports are comparable between periods
   • Profit should be comparable between, changes in profit may be merely due to a change in accounting method rather than improved performance.
   • EG: Using FIFO as opposed to identifies costs, Change of depreciation methods.

3. Historical Cost

   • The recording of a transaction at its original cost, as this is the value verifiable by reference to a source document.
   • EG: Assets need to be recorded in balance sheet as the price you paid for them.

4. Entity

   • The business is assumed to be seperate from the owner and other businesses, and its records should be kept on this basis.
   • We record drawings and capital contributions as it shows the assets going to the business from the owner.
   • Each business needs its own report prepared.

5. Reporting Period

   • The life of a business must be divided into periods of time to allow revenues earned to be matched against expenses incurred in order to determine an accurate net profit for that reporting period.
   • EG: Balance Day Adjustments.

6. Monetary Unit

   • All items must be recorded and reported in the currency of where the business is located.
   • EG: Australian dollar is to be used in Australia.

7. Conservatism

   • Losses should be recorded when probable and gains when certain, so that liabilities and expenses are not understated & revenues and owners equity are not overstated.
   • EG: Stock writedown AND value stock at its cost price not selling price.