Accounting Principles

Financial statements only record and report on business activities

• The records relate to the activities of one specific business

• These records and reports must not include any personal assets, expenses and liabilities of the owner

• Personal activities must be kept separate from the business

• Assets invested into the business by the owner are recorded in the  capital account

• Assets withdrawn from the business by the owner are recorded in the  drawings account

Financial statements only contain information about the transactions involving money

• Non-monetary information is not reported on the financial statements

• Information such as experience of the staff and employee satisfaction are not included in the statements

The assumption that a business will continue to operate into the foreseeable future by undertaking its current trading activities

• The business will not cease to operate in the near future 

• The business will not liquidate its non-current assets

• Assets are recorded at their net book value or cost and not their market value

• The business will continue to maintain a set of accounting records yearly

Assets and liabilities are valued at the cost of the original transaction and kept as such on the financial statements

• The market value of an asset is not entered on the financial statement

• It can be difficult to maintain non-current assets at their original cost

  • The net book value is adjusted for depreciation to present a more realistic view of the value

  • The cost of a non-current asset is recorded and kept separate from the provision for depreciation

Transactions which have a low monetary value can be grouped rather than entered into separate accounts

• Small expense items such as window cleaning  may be grouped as sundry expenses

• Non-current assets which are low cost such as staplers and calculators are treated as expenses on the income statement and not recorded as capital expenditure

  • Unused stationery at the end of the financial  year such as paper clips and photocopying paper should be included with the rest of the stationery as an expense on the income statement (instead of recording it as an asset)

Each transaction is recorded using two accounting entries of opposite and equal values

• Each transaction has a debit and a credit entry

• The double entry system adheres to duality

When a business chooses a method for a particular item, it should continue to use that method each year

• The method of depreciation used for a particular type of non-current asset should be used for that type each year

• The method for deciding on a provision for doubtful debts should be used each year

• The method for the valuation of inventory should be the same each year

• The method can be changed if there is a good reason

  • But this decision and its impact needs to be recorded

Incomes and expenses must be matched to the year to which they relate or in which the benefit is gained

• Incomes and expenses must be adjusted on the income statement for accruals and prepayments to match the year in which the  benefit was gained

• Non-current assets are depreciated and the yearly depreciation is charged as an expense to match the cost to the year of its useful life

• A provision for doubtful debts is used to reduce the profit by an amount that is unlikely ever to be received

Business transactions are only recorded in the financial statements when a payment is made or the ownership has been transferred

• A sale is included in the calculation of business profit only when a payment is made or there is a promise to pay

  • Such as agreed credit

• The sale and purchases of goods are recorded when the goods are exchanged

A business should not overstate its profit or its net assets

• A provision for doubtful debts is used to account for the debts that are unlikely to be paid

• Inventory is valued at the lower value between the cost and the net realisable value

• Non-current assets are depreciated to give a realistic net book value

• Irrecoverable debts are written off if it is unlikely that the business will be able to retrieve the money