Thứ Sáu, 7 tháng 10, 2011

Section 2: Accounting Basics - Part 2: Accounting Principles

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 .

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