1. Financial Accounting
Lecture 06: Fundamental Principles Of
Accounting
Chapter
12
Masud Jahan
Department of Science and Humanities
Military Institute of Science and Technology
3. GAAP
๏ฎ Guidelines and rules for use by accountants in
preparing financial statements.
๏ฎ These principles, which evolved over a period of
years, are designed to help ensure that financial
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years, are designed to help ensure that financial
data are presented fairly and are comparable
from firm to firm and from industry to industry.
4. Business Entity Concept
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Business Entity Concept
A business entity is separate from the personal affairs of its owner.
Accounts are kept for entities and not the people who own or run the
company. Even in proprietorships and partnerships, the accounts for the
business must be kept separate from those of the owner(s).
5. Going Concern Principle
Now Future
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Going Concern Principle
Accounting assumes that an entity will continue to operate
indefinitely and will not liquidate in the foreseeable future.
This concept implies that financial statements do not represent a
companyโs worth if its assets were to be liquidated, but rather
that the assets will be used in future operations.
6. Money Measurement Principle
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Money Measurement Principle
For an accounting record to be made it must be able to be
expressed in monetary terms.
Only those economic events and transactions
that can be monetized (stated in a monetary unit such as
the U.S. dollars or BD Taka) are recorded.
7. Cost Principle
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Cost Principle
Transactions are recorded at their original cost to the
business as measured in monetary unit.
Goods and services purchased should be recorded at their
historical cost and not at their current market value.
8. Objectivity Principle
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Objectivity Principle
It states that accounting will be recorded on the basis of
objective evidence (invoices, receipts, bank statement, etcโฆ).
This means that accounting records will initiate from a source
document and that the information recorded is based on
fact and not personal opinion.
9. Accounting Period Principle
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Accounting Period Principle
It assumes that business operations can be recorded
and separated into different time periods such as
months, quarters, and years.
It defines a specific interval of time for which an entityโs reports
are prepared. This can be a year, a quarter or a month.
10. Revenue Recognition Principle
Realization Principle
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Realization Principle
Revenues are recognized when they are earned or realized.
Realization is assumed to occur when
the seller receives cash or a claim to cash (receivable)
in exchange for goods or services.
11. Matching Principle
Matching Principle
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Matching Principle
It aims to report expenses in the same accounting period as the
revenues that are earned as a result of these expenses.
In measuring net income for an accounting period, the expenses
incurred in that period should be matched against the revenue
generated in the same period.
12. Full Disclosure Principle
Full Disclosure Principle
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Full Disclosure Principle
Circumstances and events that make a difference to financial
statement users should be disclosed.
All material facts (whose non-disclosure may mislead the user
of a financial statement) must be disclosed.
13. Materiality Principle
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Materiality Principle
The accountants only records events that are significant
enough to justify the usefulness of the information.
Because of this basic accounting principle or guideline,
an accountant might be allowed to violate another
accounting principle if an amount is insignificant.
15. Conservatism Principle
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Conservatism Principle
If a situation arises where there are two acceptable
alternatives for reporting an item, conservatism directs
the accountant to choose the alternative that will result
in less net income and/or less asset amount.
