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Core concepts of Accounting with Pictures
- 4. generally accepted concepts and are referred to as accounting . we prepare our accounts based on these accounting concepts.
- 5. Accounting Principles Assumptions • Monetary unit • Economic entity • Time period • Going concern Principles • Revenue recognition • Matching • Full disclosure • Cost Constraints in Accounting • Materiality • Conservatism
- 6. Assumptions Assumptions are the basics of financial accounting.
- 7. The monetary unit assumption states that only transaction data that can be expressed in terms of money be included in the accounting records.
- 8. A company does not report the value of the company in its financial records because that value cannot be expressed easily in dollars.
- 9. Economic Entity Assumption The economic entity assumption states that the activities of the entity be kept separate and distinct from the activities of the owner and all other economic entities.
- 11. Time Period Assumption The time period assumption states that the economic life of a business can be divided into artificial time periods and that useful reports covering those periods can be prepared for the business
- 12. The property tax bill is received on December 15 of each year. On the income statement for the year ended December 31, 2013, the amount is known; but for the income statement for the three months ended March 31, 2014, the amount was not known and an estimate had to be used.
- 13. Going Concern Assumption This States that the Business will remain in operation for the foreseeable future
- 14. In October 2011 the bank's license was withdrawn for money laundering violations. It was put into liquidation.
- 16. Revenue recognition principle tells that revenue is to be recognized at the time the service is performed.
- 17. A media company recognizes revenue when the ads are aired even if the payment is not received or where payment is received in advance.
- 18. The principle that requires a company to match expenses with related revenues
- 19. Examples: 1.$2,000,000 worth of sales are made in 2010. Total purchases of inventory were $1,000,000 of which $100,000 remained on hand at the end of 2010. The cost of earnings is $2,000,000 revenue is $900,000 [$1,000,000 minus $100,000] and this should be recognized in 2010 thereby yielding a gross profit of $1,100,000.
- 20. Full Disclosure Principle This principle says that companies reveal events that make a difference to the financial statement users.
- 21. Public companies need to disclose their financial information so that shareholders and investors will make use of their financial statement.
- 22. COST PRINCIPLE is the principle where a company is obliged to record its fixed assets at their actual purchase price or production cost. PRINCIPLE
- 23. if equipment is acquired for the cash amount of $50,000, the equipment will be recorded at $50,000
- 25. The materiality concept is the principle in accounting that trivial matters are to be disregarded, and all important matters are to be disclosed. Items that are large enough to matter are material items. Maternity Concept
- 26. Conservatism The conservatism principle is the general concept of recognizing expenses and liabilities as soon as possible when there is uncertainty about the outcome, but to only recognize revenues and assets when they are assured of being received.