PRINCIPLES OF ACCOUNTING (ACC101)

LECTURE NOTES: By Mr Shiyntum Emeal

Accounting practice is the process and activity of recording the day-to-day
financial operations of a business entity. Accounting practice is necessary to
produce the legally required financial statements of a company. There are
different accounting methods that companies can choose to use (cash
accounting and accrual accounting, and there are principles that companies must
abide by. These are known as generally accepted accounting principles (GAAP)
refer to a common set of accounting principles, standards, and procedures
issued by the Financial Accounting Standards Board (FASB). Public companies
must follow GAAP when their accountants compile their financial statements.
What are Accounting Principles?
Accounting principles are the rules and guidelines that companies must follow
when reporting financial data. The Financial Accounting Standards
Board (FASB) issues a standardized set of accounting principles in the U.S.
referred to as generally accepted accounting principles (GAAP).1 Some of the
most fundamental accounting principles include the following:

1) Accrual principle
- Also known as matching principle, the accrual principle is an
accounting concept that requires transactions to be recorded in the
time period in which they occur, regardless of when the actual cash
flows for the transaction are received. The idea behind the accrual
principle is that financial events are properly recognized by
matching revenues against expenses when transactions – such as a
sale – occur, rather than when the actual payment for the
transaction may be received.
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2) Conservatism principle

This states that, as a business, should anticipate and record future losses
rather than future gains. The principle of conservatism in accounting
gives guidance when recording cases of uncertainty or estimates. In other
words, you should always lean towards the most conservative side of any
transaction.
3) Consistency principle

he consistency principle states that once you decide on an accounting

method or principle to use in your business, you need to stick with and
follow this method or principle consistently throughout your accounting
periods.

4) Cost principle

The cost principle is an accounting principle that records assets at their

respective cash amounts at the time the asset was purchased or acquired. The
amount of the asset that is recorded may not be increased for improvements in
market value or inflation, nor can it be updated to reflect any depreciation.
Assets that are recorded can include short-term and long-term assets, liabilities
and any equity, and these assets are always recorded at their original cost.

5) Economic entity principle

The economic entity principle states that the recorded activities of a

business entity should be kept separate from the recorded activities of
its owner(s) and any other business entities. This means that you must
maintain separate accounting records and bank accounts for each
entity, and not intermix with them the assets and liabilities of its
owners or business partners. Also, you must associate every business
transaction with an entity.

6) Full disclosure principle

The full disclosure principle is a concept that requires a business to report

all necessary information about their financial statements and other
relevant information to any persons who are accustomed to reading this
information.

7) Going concern principle

The going concern concept of accounting implies that the business

entity will continue its operations in the future and will not liquidate or be
forced to discontinue operations due to any reason. A company is a going
concern if no evidence is available to believe that it will or will have to
cease its operations in foreseeable future.
8) Matching principle

Matching principle is the accounting principle that requires that the

expenses incurred during a period be recorded in the same period in
which the related revenues are earned. This principle recognizes that
businesses must incur expenses to earn revenues

9) Materiality principle

Materiality Principle or materiality concept is the accounting

principle that concern about the relevance of information, and the size
and nature of transactions that report in the financial statements.
The main objective of the materiality principle is to provide guidance for
the accountant to prepare the entity’s financial statements.
And the most important thing is to make sure that information using by
shareholders and investors is sufficient enough for them in making the
correct decision.

10) Monetary unit principle

he monetary unit principle states that business transactions should only

be recorded if they can be expressed in terms of a currency. In other
words, anything that is non-quantifiable should not be recorded in a
business' financial accounts

11) Reliability principle

The accounting rule of the reliability principle concerns the financial

information of a business, and states that the information presented in the
accounting records and statements should be the most accurate and
relevant information available.

12) Revenue recognition principle

Revenue recognition is a generally accepted accounting

principle (GAAP) that identifies the specific conditions in which revenue
is recognized and determines how to account for it. Typically, revenue is
recognized when a critical event has occurred, and the amount is easily
 measurable to the company. For example, revenue accounting is fairly
straightforward when a product is sold, and the revenue is recognized
when the customer pays for the product. However, accounting for
revenue can get complicated when a company takes a long time to
produce a product. As a result, there are several situations in which there
can be exceptions to the revenue recognition principle.

13) Time period principle

The time period principle (or time period assumption) is an accounting

principle which states that a business should report their financial
statements appropriate to a specific time period.