Accounting Theory Flashcards
What is accounting theory?
A set of assumptions, frameworks and methodologies used in studying and applying financial reporting principles
What are the 4 principles that form the basis of accounting theory?
- Cost principle
- Matching principle
- Conservatism principle
- Monetary unit assumption
What is cost principle
Requires financial assets to be recorded as soon as they’re acquired
What is matching principle
Requires that all transactions associated with a type of revenue are kept together and reported as a unit
What is conservatism principle
Ensures a company holds onto enough of its money for their outgoing bills
Conservatism requires all liabilities to be recorded as soon as they’re anticipated
What is monetary unit assumption
Considers the value of currency and whether this value will change over time
By anticipating fluctuations of currency, organisations can plan for the future
