Accounting Concepts (Principles) to follow for Principles of accounts
1. Prudence Concept (Conservatism)
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Profits and Assets should not be overstated, while
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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
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Business is assumed to operate indefinitely (a very long time)
3. Objectivity
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All transactions must be supported by documentary evidence or source documents
Eg. Invoice, Credit note, Debit note
4. Historical Cost
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All Non-Current Assets are to be recorded at the original cost price
5. Consistency
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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
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The business and owner are considered as two separate and different entities
Eg. Drawings & Capital
7. Accounting Period
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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
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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
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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
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Only transactions that can be expressed in monetary terms are recorded
Eg. Work experience cannot be recorded in accounts
11. Materiality
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Only items of significant value are to be treated as assets, otherwise, they are considered as expenses
Eg. Stationery
12. Realisation
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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
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Each transaction affects a business in two different ways
Eg. Double entry