Basic Accounting Principles

Table of Contents

Basic accounting principles        1

1.1 Introduction        1

1.2 The main account principles        2

1.1.1 Economy entity assumption:        2

1.1.2 Monetary unit assumption:        2

1.1.3 Time period assumption:        2

1.1.4 Cost principle:        2

1.1.5 Full disclosure principle:        2

1.1.6 Going concern principle:        2

1.1.7 Matching principle:        2

1.1.8 Revenue recognition principle:        2

1.1.9 Materiality principle:        3

1.1.10 conservatism principle:        3

1.3 conclusion        3

1.4 References:        3

Basic accounting principles

1.1 Introduction

Accounting acquires a set of essential assumptions and principles, which are referred to as generally accepted accounting principles (GAAP).

GAAP is very useful, because it tries to simplify and adjust accounting definitions, methods, and assumptions, because of it, we can assume that there is consistency from year to year in the methods used to prepare a financial statement. Throughout the years the GAAP have become more complex, since financial transactions have become more complex as well.

There are ten main accounting principles, which are: (1) economy entity assumption,

(2) Monetary unit assumption, (3) time period assumption, (4) cost principle, (5) full disclosure principle, (6) going concern principle, (7) matching principle, (8) revenue recognition principle, (9) materiality principle, (10) conservatism principle

1.2 The main account principles

With these principles, accounting is more understandable and easily performed.

They form the origin upon which modern accounting is based. The best known of these principles are as follows:

1.1.1 Economy entity assumption:

This is where the transactions of a business should be kept separate from the transactions of the   owners and other businesses, so that it prevents combining assets and liabilities amongst several entities, which may cause complications when first auditing the financial statement of a new business.    

1.1.2 Monetary unit assumption:

This concept is where a business only records transactions that are in terms of a unit of currency, therefor it is easy to record the purchase of fixed assets, since it has a specific price, while the value of the quality control system is not recorded.

This concept prevents a business from going too deep into the estimation of how the value of it’s assets and liabilities were derived.

1.1.3 Time period assumption:

It is when a business reports the results of its operations in a regular period of time. This concept helps to compare the periods of the past and present data, which will be useful for the trend impact analysis.

1.1.4 Cost principle:

This is where the business records its assets, liabilities and equity when they were originally obtained at their original purchase cost, whether it happened last year or forty years ago. This is the reason why it is called historical coat amount. This is getting less valid, since they are starting to go with adjusting assets and liabilities to their fair value.