1. The consistency principle states that all
accounting methods used by a company should be
consistent which means using the same methods
every year unless there is a good reason to change a
policy.
2. The historical cost principle states that companies
record the original purchase price of their assets but
not their current selling price or replacement cost.
3. The continuity or going concern assumption states
that a business will continue into the future, so the
current market value of its assets is not important.
4. The replacement cost accounting values all assets
at their current replacement cost – the amount that
would be paid to replace them now.
5. The full disclosure principle states that financial
reporting should include all significant information:
everything that can be important to the users of
financial statements.
6. The principle of materiality says that very small
and unimportant amounts do not need to be shown.
7. The principle of conservatism says that where
different accounting methods are possible, it is
necessary to choose that one which is least likely to
overstate or overestimate assets or income.
15. The separate entity or business entity assumption
states that a business as an accounting unit is
separate from its owners, creditors, managers and
their assets. These people can change but the
business will continue.
8. The objectivity principle says that accounts should
be based on facts and not on personal opinions or
feelings. Accounts therefore should be verifiable:
internal and external auditors should be able to prove
that they are true.
9. The revenue recognition principle is that revenue
is recognized in the accounting principle in which it
is earned. Revenue is recorded when a service is
provided not when it is paid for.
10. The matching principle is related to revenue
recognition and states that each cost or expense
related to revenue earned must be recorded in the
same accounting period as the revenue it helped to
earn.
11. Depreciation involves reducing the value of
assets in the company’s accounts. It makes it
possible not to charge the whole cost of an asset
against the profits in the year it is purchased.
12. Amortization is an accounting technique used to
periodically lower the book value of a loan or
an intangible asset over a set period of time.
Concerning a loan, amortization focuses on
spreading out loan payments over time. When
applied to an asset, amortization is similar
to depreciation.
13. Double-entry bookkeeping is a system that
records two aspects of every transaction. Every
transaction is a debit - a deduction – in one account
and a corresponding credit – an addition- in another.
14. Inflation accounting takes into account changing
prices. This system is used in countries with high
inflation. They also use appreciation instead of
depreciation.
16. The time period assumption states that the
economic life of the business can be divided into
official time periods such as the financial (fiscal
Am.) year or a quarter of it.