There are various possible ways of recording debits and credits, valuing assets and liabilities, calculating profits and losses etc. But there are about a dozen generally accepted "accounting principles" that accountants must follow in order to present "a true and fair view" of a company's finances.
2.4 + 2.5 Accounting Principles 1; 2
I. These twelve accounting principles with the definitions below:
1. The separate-entity or accounting entity assumption:
An enterprise is an accounting unit separate from its owners, creditors, etc.
2. The continuity or going-concern assumption:
The business will continue indefinitely into the future.
3. The unit-of-measure assumption:
All transactions and other item to be accounted for must be in a single, supposedly stable monetary unit.
4. The time-period or accounting period assumption:
Financial data must be reported for particular (short) periods, which makes accrual and deferral necessary.
5. The historical cost principle:
The initial price paid for the acquisition of assets is the one that is recorded in accounts.
6. The revenue or realization principle:
Revenue is realized at the moment when goods are sold (or change hands) or when services are rendered.
7. The matching principle:
The revenues generated in an accounting period are identified with related costs whenever they were incurred.
8. The objectivity principle:
All data recorded should be verifiable and free from bias.
9. The consistency principle:
The same methods (of inventory valuation, depreciation, etc.) must be used from one period to the next.
10.The full-disclosure principle:
Financial reporting must include all significant information.
12.The principle of conservatism (or prudence):
Where alternative accounting methods are possible, one understates rather than overstates profits.
II. Which principles do these sentences refer to?
1. This accords with a company's legal status as an artificial person:
Separate-entity.
2. This implies that the current market value of fixed assets is irrelevant, as they are not for sale:
Continuity.
3. This makes it unnecessary to estimate current market values every year:
Historical cost.
4. This means that each company has its own financial year (US: fiscal year):
Time-period.
5. This requires multinational companies to convert their consolidated statements into a single currency:
Unit-of-measure.
6. This is why balance sheets often contain entry for debtors: goods that have been sold, but are not yet paid for:
Revenue or Realization.
7. This is the contrary of recording "below-the-line" items:
Conservatism.
8. This is one of the justifications for historical cost accounting, which requires no subjective assessments of replacement values:
Objectivity.
9. This leads to the accrual (accumulation) and deferral (postponement) of costs.
Matching (Time-period).
10. This means that insignificant trivial expenses, like each pencil or typewriter ribbon, need not be accounted for separately, but are exempted by the principle of materiality.
Full-disclosure.
11. This prevents companies selecting methods according to the inflation rate, etc.
Consistency .
Financial data must be reported for particular (short) periods, which makes accrual and deferral necessary.
5. The historical cost principle:
The initial price paid for the acquisition of assets is the one that is recorded in accounts.
6. The revenue or realization principle:
Revenue is realized at the moment when goods are sold (or change hands) or when services are rendered.
7. The matching principle:
The revenues generated in an accounting period are identified with related costs whenever they were incurred.
8. The objectivity principle:
All data recorded should be verifiable and free from bias.
9. The consistency principle:
The same methods (of inventory valuation, depreciation, etc.) must be used from one period to the next.
10.The full-disclosure principle:
Financial reporting must include all significant information.
12.The principle of conservatism (or prudence):
Where alternative accounting methods are possible, one understates rather than overstates profits.
II. Which principles do these sentences refer to?
1. This accords with a company's legal status as an artificial person:
Separate-entity.
2. This implies that the current market value of fixed assets is irrelevant, as they are not for sale:
Continuity.
3. This makes it unnecessary to estimate current market values every year:
Historical cost.
4. This means that each company has its own financial year (US: fiscal year):
Time-period.
5. This requires multinational companies to convert their consolidated statements into a single currency:
Unit-of-measure.
6. This is why balance sheets often contain entry for debtors: goods that have been sold, but are not yet paid for:
Revenue or Realization.
7. This is the contrary of recording "below-the-line" items:
Conservatism.
8. This is one of the justifications for historical cost accounting, which requires no subjective assessments of replacement values:
Objectivity.
9. This leads to the accrual (accumulation) and deferral (postponement) of costs.
Matching (Time-period).
10. This means that insignificant trivial expenses, like each pencil or typewriter ribbon, need not be accounted for separately, but are exempted by the principle of materiality.
Full-disclosure.
11. This prevents companies selecting methods according to the inflation rate, etc.
Consistency .
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