The document discusses the 7 key accounting principles that help ensure high-quality and comparable accounting information. These principles are: the accounting entity principle, historical cost principle, accounting period principle, objectivity principle, consistency principle, materiality principle, and matching principle. Adhering to these principles allows accountants to produce financial reports that present a true and fair view of a business's financial performance and position.

1. Accounting
Principles
Lecture No. 1 (Part 2)

2. What are accounting principles?
 Recall that accounting information is used for
decision-making, evaluating performance and
discharging accountability.
 Therefore, the accounting information produced
should be of high-quality.
 Producing high-quality information is only
possible when accountants follow the accounting
principles or rules.

3. What are accounting principles?
 Before we start, here’s a pop quiz: Who’s the oldest?
(8.5 years old) (98 months & 6 days) (583 weeks)

4. What are accounting principles?
 Wouldn’t it be easier if the children’s ages are all
shown in number of years?
 Similarly, if you own 3 different businesses and
they each use different methods of accounting,
wouldn’t you feel frustrated if you wanted to
compare the results?

5. What are accounting principles?
 The following 7 accounting rules or principles
are important because, if all accountants agree
to adopt them, then high-quality and comparable
accounting information can be produced.

6. The Accounting Principles

7. The Accounting Principles
Accounting
Principles
Accounting
Entity
Historical Cost
Matching
Materiality
Consistency
Objectivity
Accounting
Period

8. The Accounting Principles
 Accounting Entity Principle
– An accounting entity is a unit that carries out
business transactions and has its own economic
resources i.e. assets.
– An accounting entity usually refers to a business.

9. The Accounting Principles
 Accounting Entity Principle
– This principle says that the transactions of an
accounting entity (i.e. business) are seen as
different from that of its owners.
– This also means that the accounting information
of a business is to be recorded separately from
its owners.

10. The Accounting Principles
 Accounting Entity Principle
– Example:
Bill Gates’ Assets Microsoft’s Assets
$5M in the bank $5B in the bank
Lamborghini car Factories
30-bedroom mansion Warehouses w goods
Shares of Microsoft

11. The Accounting Principles
 Accounting Entity Principle
– It is important not to mix together the accounting
information of the owner and the business,
because otherwise it will become difficult to judge
their individual performance.

12. The Accounting Principles
 Historical Cost Principle
– This principle says that all items in an accounting
report must be shown in their original price.
– Example: Amy bought a house worth $50,000 in
1995. Today, the house’s market value is worth
$150,000. However, she still records the house at
the original price of $50,000 in her accounting
books even today.

13. The Accounting Principles
 Historical Cost Principle
– Example:
Amy’s Assets (in 2014)
Money in bank $15,000
Myvi car $46,000
House $50,000
Total Assets $111,000

14. The Accounting Principles
 Historical Cost Principle
– In accounting, only historical costs are used
because they are reliable.
– Other values (say, market value) change very
frequently and can be subjected to human
manipulation.

15. The Accounting Principles
 Accounting Period Principle
– This principle says that accounting reports should
be prepared on a periodic basis (e.g. weekly,
monthly, annually) so that accounting users can
obtain up-to-date business’ results frequently.

16. The Accounting Principles
 Accounting Period Principle
– Example: Microsoft’s accounting period is 1 year,
therefore it produces annual reports that explain the
business performance during the year.
Accounting Period
Yr 2012 2013 2014 2015

17. The Accounting Principles
 Accounting Period Principle
– Following this rule also allows users to compare
the results of a business for different periods (e.g.
2014 vs. 2013).
– It also allows comparison of results of different
businesses during a specific accounting period
(e.g. Apple vs. Samsung for the year 2014).

18. The Accounting Principles
 Objectivity Principle
– A cousin of the historical cost principle, this rule
says that all transactions (e.g. sales, expenses,
assets) must be recorded in an objective manner.
– This means that the recording must be both
measurable (can be measured) and verifiable (i.e.
can be proven).

19. The Accounting Principles
 Objectivity Principle
– Example: Apple’s 2014 accounting report says
that it has $30 billion of cash in that year. This
amount is measurable (i.e. $30 billion) and can be
proven true (or false) by checking its bank
statement of 2014.

20. The Accounting Principles
 Objectivity Principle
– On the other hand, even though brand names (such
as Coca Cola, MacDonald’s) can be very valuable,
they are not recorded in a company’s accounting
reports because they cannot be measured nor
verified.

21. The Accounting Principles
 Consistency Principle
– This principle stresses that once a business has
chosen an accounting method to record its
information, it should continue using that method.
– Constantly changing the methods can make
comparison of results over the different periods
difficult.

22. The Accounting Principles
 Consistency Principle
– For example, in this semester, your grades are
shown in letters (e.g. A,B,C,D…). However, in the
following semester, your grades are expressed in
scores (e.g. 85, 64, 47….).
– This makes it difficult for you to compare the 2
semesters results. Therefore, it is preferable to
use only one method/system.

23. The Accounting Principles
 Materiality Principle
– This principle states that only items with a large
dollar amount are considered material i.e.
important.
– Accounting reports will include only material items
and ignore the immaterial ones so that users can
see the big picture and not get distracted by minor
details.

24. The Accounting Principles
 Materiality Principle:
– Example:
Residential Project A
Expense A $ 42,000
Expense B $300,000
Expense C $ 25
Total Expenses $342,000
Immaterial!!

25. The Accounting Principles
 Matching Principle
– This principle says when a business receives an
income (e.g. selling 1 sushi for $5), that income is
the result of a relevant expense (e.g. cost of
making that sushi is $3).
– Therefore, accountants will match the income of
an accounting period with the expenses that
created the income to obtain the correct profit
figure.

26. The Accounting Principles
 Matching Principle
– Example: During the year of 2014, Sushi King
bought $20M of food ingredients.
– The restaurant sold 5 million units of sushi at $5
each in 2014. The ingredient cost for each sushi
is $3.
– Using the matching principle, what is the profit
made in 2014?

27. The Accounting Principles
 Matching Principle (continued)…
Revenue = 5 million sushi x $5 = $25M
Expenses = 5 million sushi x $3 = $15M
Profit = Revenue ($25M) – Expenses ($15M)
= $10M

28. The Accounting Principles
 Matching Principles
– It is wrong to treat the whole $20M of food
ingredients as expenses because not all of them
were responsible for generating the $25M
revenue.
– The remaining $5M of unsold food ingredients will
be treated as expenses next year when it is finally
sold as sushi.

29. Summary
 The purpose of accounting principles
 The Accounting Principles
– Accounting Entity
– Historical Cost
– Accounting Period
– Objectivity
– Consistency
– Materiality
– Matching