Accounting Principles IGCSE

The money measurement principle

Accounting information is concerned with facts that: 1. can be measured in money 2. most people will agree to that money value.

The time interval principle

Financial Statements are prepared at regular intervals of one year. This is an underlying principle of accounting.

Consistency

Once a firm has fixed a method for the accounting treatment of an item, it will enter all similar items that follow in the same way. If the firm does change the method, it should be after a lot of consideration. If profits are affected by a material amount due to a change then, either in the profit and loss account itself or in the reports accompanying it, the effect of the change should be stated.

The realisation principle

Profits should be realized on a sale when the title has passed. Profits should be treated as realized only when realized in the form of cash or of other assets (e.g. Trade receivables).

The prudence principle

There are two aspects to this principle: 1. All assets should be understated rather than overstated and all liabilities should be overstated rather than understated. The accountant should choose the figure that will cause the capital of the firm to be shown at a lower amount rather than at a higher one. This ensures 'a true and fair view' of the balance sheet. 2. Profits should not be anticipated and all loses should be recorded. This ensures 'a true and fair view' of the Profit and Loss account.

The business entity principle

This principle implies that the affairs of the business are treated as being separate from the nonbusiness activities of its owner/s.

The going concern principle

This principle implies that the business will continue to operate for the foreseeable future.

The historical cost principle

This principle requires that all assets are normally shown at cost price. It is the cost price that is used as a basis of valuation of an asset.

The accruals principle

This principle states that the difference between the revenues and expenses is the net profit for the accounting period. It should be remembered that the revenues and expenses should be taken into account according to the matching principle which states that all expenses and income relating to the financial period to which the accounts relate should be taken into account without regard to the date of payment or receipt, respectively.

The dual aspect principle

This principle states that there are two aspects to every transaction. One account is always debited and another is credited. These two aspects are always equal to each other. The name given to this method of recording transactions is : The double entry method.