Unit 2: Accounting Concepts and Principles Flashcards
Faithful representation
Free from material error
Separate Economic Entity
States that the business is a separate entity from the owner’s personal expenses
Going Concern
Business will continue to operate indefinitely
Monetary Unit Principle
Business transactions should only be recorded if they can be expressed in terms of a currency and must be recorded with only one currency
Periodicity of Income
The indefinite life of a company can be divided into periods of equal length for financial reports
Accrual Accounting
Revenue is recorded in the period in which it is earned and expenses are recorded in the period in which incurred
Historical Cost
Under this accounting principle, assets are to be recorded when they were purchased even though the value of this asset has increased over
Revenue Recognition Principle
Revenue should be recognized when it was earned
Matching Principle
Accrual basis of accounting & match business income to business expense in a given time period.
Conservatism
Covers the reliability of the financial statement of an entity as liabilities, expenses and losses are anticipated but assets, revenues, and income are not
Cost/Benefit Test
Used to determine if the benefit is valuable enough to spend an additional cost to be able to comply with the GAAP
Materiality
Refers to the significance of certain financial data with regard to the financial statements of the company
Industry Practice
Constraint is observed when businesses have varying operations, thus accounting principles are unique in nature
Comparability
Enables users to identify and understand similarities in items and differences among items.
Verifiability
Helps assure users that different knowledgeable and independent observers could reach consensus
