The

The Building
Building Blocks
Blocks of
of Accounting
Accounting
Measurement Principles
Cost Principle (Historical) – dictates that companies record
assets at their cost.

Issues:
Reported at cost when purchased and also over the time the
asset is held.

Cost easily verified, market value is often subjective.

Fair value information may be more useful.

SO 4 Explain accounting standards and the measurement principles.

The
The Building
Building Blocks
Blocks of
of Accounting
Accounting
Measurement Principles
Fair Value Principle – indicates that assets and liabilities should
be reported at fair value.

In determining which measurement principle to use, companies

weigh the factual nature of cost figures versus the relevance of
fair value.

Only in situations where assets are actively traded, such as

investment securities, is the fair value principle applied.

SO 4 Explain accounting standards and the measurement principles.

The
The Building
Building Blocks
Blocks of
of Accounting
Accounting

Assumptions
Monetary Unit Assumption – include in the accounting records
only transaction data that can be expressed in terms of money.
Economic Entity Assumption – requires that activities of the
entity be kept separate and distinct from the activities of its
owner and all other economic entities.
Proprietorship.
Forms of Business
Partnership.
Ownership
Corporation.

SO 5 Explain the monetary unit assumption and the economic entity assumption.
The
The Building
Building Blocks
Blocks of
of Accounting
Accounting

Proprietorship Partnership Corporation

Generally owned Owned by two or Ownership divided

by one person. more persons. into shares
Often small Often retail and Separate legal
service-type service-type entity organized
businesses businesses under state
Owner receives Generally unlimited corporation law
any profits, suffers personal liability Limited liability
any losses, and is
Partnership
personally liable for
agreement
all debts.

SO 5 Explain the monetary unit assumption and the economic entity assumption.