Topic 2b - accounting principles Flashcards
Monetary Principle
all business events can be measured in terms of money. a business event may be given a money value before it can be recorded in an accounting system.
Monetary: example
motor vehicle cost $31,000 to buy, so $31,000 is monetary value
Business entity principle
A business is separate from the owner of the business. The personal actions of the owner are not recorderd in the accounting system of a business.
Buisness entity: example
Camera bought by owner for business, goes into accounting system.
Golf clubs bought by owner for owner, does not go into accounting system.
Accounting period principle
The life of a business is divided into intervals of time known as accounting periods.
Accounting period: example
1 financial year, 1 July - 31 June
Each financial year, the income statement starts again
Going concern principle
Allows assets to be valued at their purchase price in a balance sheet, however assets that usually increase over time, such as land, are shown at current market value in a balance sheet.
Going concern : A business must
exist for the foreseeable future
Going concern example:
Items are being valued at their purchase price not sale price.
eg. pens for 90c not $1.50 sale price
Historical cost principle
An asset is recorded in an accounting system at its acquisition (purchase) value and this value does not change as time passes. The historical cost principle is not always followed as assets that usually increase in value over time, such as land, are shown at their current market value.
Historical cost example:
bought car in 2015 for $50,000. In 2023 historical cost is $50,000.
Materiality principle:
Information is material if the omission of the info from an accounting report could influence the investment decisions of the users of this report. an accounting report should contain all the material information.
materiality: example
club saying players get paid $1 million, when they only get $500,000, could affect how many sponsors club gets.
