Accounting Principles Flashcards
The 11 accounting principles.
- Historical cost
- Money measuring principle
- Business entity
- Dual aspect/Double entry principle
- Realisation
- Going concern
- Consistency
- Prudence
- Accrual/Matching
- Substance over form
- Materiality
What is Historical cost?
- Transactions and assets should be recorded at their actual original cost.
(when buying assets for the business the original cost should be entered no matter the appreciation or depreciation)
What is the money measuring principle?
-Money measuring principle states that only transactions with a monetary value may be entered in the books of the business.
Only transactions with monetary values can be entered in the financial statements.
What is the business entity principle?
-The business and its owner’s books should be separate.
The only transactions that concern the wener is drawings and capital contribution.
What is the double entry principle?
Accounting deals with two aspects of a transaction- the double entry principle; every debit entry has a corresponding credit entry.
What is realisation?
- The profit can only be shown when it is earned.
- Revenue is only realised when the legal title to the good passed from the seller to the buyer. (The buyer becomes the legal owner of the goods)
What is the going concern?
-A business is open and should continue to operate in the future.
This principle helps when a business has to decide on additional financing.
What is consistency?
- The business must deal with similar transactions the same way every time.
- Accounting information must always be recorded using the same method.
What is prudence?
-when there is more than on way of recording a transaction, the business should record it in the most conservative way financially.
Profits should not be overstated and fixed assets should not be over valued.
What is accrual/Matching?
- The income earned in a specific financial eirond and the cost incurred in generating that income in the same financial period must match.
- Transactions must be recorded when they occur and not when payment is made or received.
Applied in the following income:
- Accrued income
- Accrued expenses
- Income received in advance
- Prepaid expenses
- Bad debts and provision for doubtful debts
- Depreciation
What is substance over form?
- Where the legal form and the real substance of a transaction differ, accounting should show the transaction according to its real substance (How the transaction effects the economic situation of the business)
- Financial information should be presented faithfully.
Example:
Business buys fixed asset on credit. Legally, the asset belongs to the supplier until fully paid.
From economic point of view this asset is currently generating an income for the business and should therefore be included as part of the assets of the business.
What is materiality?
-Something should be included in the financial statements only if it affects the stakeholders.
The business may decide not to waste time recording unimportant items that have little value.
What is Capital expenditure?
-Spending money that will provide economic benefits to the business over more than one financial period.
Business buys fixed assets or they add to existing assets already in the business.
Statement of financial position.
What is revenue expenditure?
- Expense paid for running the business everyday.
Income statement.
