Accounting Principles
Accounting principles are used to establish fundamental norms and rules in accounting practice,
which all preparers of accounts must adhere to.
- Entity Principle – The business and its owner are separate entities, and the owner’s personal finances should be kept separate from the business finances.
- Double Entry Principle – This principle states that every transaction of a company has a dual effect, with one aspect receiving and the other giving, forming the basis of double-entry accounting.
- Monetary Measurement Principle – Transactions should be recorded and reported in terms of a universally accepted currency unit.
- Matching Principle – This principle dictates that revenues earned in a certain accounting period must be matched with the costs incurred during the same period.
Even if revenue for the next year is received in advance, it cannot be recognized.
- Consistency Principle – This principle states that once a company chooses a method for accounting treatment, it must maintain consistency in the future.
For example, if a company chooses the straight-line method for depreciation,
it must follow the same depreciation method in the future.
- Reliability Principle – This principle dictates that only transactions that can be verified with objective evidence should be recorded in accounting.
Evidence includes purchase receipts, bank statements, etc.
- Historical Cost Principle – This principle dictates that companies should account for and record all assets at their original cost or purchase price.
- Going Concern Principle – This principle assumes that the company’s operations will continue in the foreseeable future, allowing for continuity in accounting.
The assumption of going concern is beneficial for the accounting process of the company.
- Materiality Principle – This principle dictates that transactions with insignificant amounts and minimal impact on financial statements can be grouped with similar items.
Materiality depends on the size of the amount and the nature of the item.
- Revenue Recognition Principle – This principle states that companies should record revenue in their books immediately upon earning it, regardless of when the cash is received.
Recording sales, even if payment is received later.
