Accounting Concepts (Principles) to follow for Principles of accounts

1. Prudence Concept (Conservatism)

  • Profits and Assets should not be overstated, while

  • Losses and Liabilities should not be understated

Eg. Calculation of Allowance for impairment on Trade Receivables/Valuation of inventory at lower of cost or Net Realisable Value/ Depreciation & accumulated depreciation

2.  Going Concern

  • Business is assumed to operate indefinitely (a very long time)

 

3. Objectivity

  • All transactions must be supported by documentary evidence or source documents

Eg. Invoice, Credit note, Debit note

4. Historical Cost

  • All Non-Current Assets are to be recorded at the original cost price

 

5. Consistency

  • The same accounting method should be applied for each accounting period for the same business

Eg. Reducing-balance method or straight-line method to calculate depreciation

6. Accounting Entity/ Separate Entity Concept

  • The business and owner are considered as two separate and different entities

Eg. Drawings & Capital

7. Accounting Period

  • Life of a business is divided into many fixed periods of time for the preparation of financial reports

Eg. 4, 6 or 12 months. For eg, 12 months for accounting period beginning 1 January 2018 will end on 31 December 2018 (if you start on 1 January you count this month as one month too)

8. Accrual

  • All expenses incurred and all income earned in the year have to be recorded regardless whether they have been paid or received

9. Matching principle

  • All expenses incurred must match against all income earned in the same accounting period to derive an accurate profit for the year

10. Monetary measurement

  • Only transactions that can be expressed in monetary terms are recorded

Eg. Work experience cannot be recorded in accounts

 

11. Materiality

  • Only items of significant value are to be treated as assets, otherwise, they are considered as expenses

Eg. Stationery

 

12. Realisation

  • Income (including sales) should be recorded as earned in the period in which goods or services are provided to customers by the business

 

13. Duality

  • Each transaction affects a business in two different ways

Eg. Double entry

*notes are applicable to Principles of Accounts, based on Singapore O/N level syllabus

©2020 by Joshua Raphael Tan.