This document outlines key assumptions and principles of accounting. It discusses concepts like the economic entity assumption, monetary unit assumption, and historical cost principle. It also covers principles such as objectivity, going concern assumption, materiality, disclosure, consistency, and conservatism. The assumptions and principles establish guidelines for properly recording and reporting financial information.

2.  Economic entity assumption (Entity concept) –
requires that the activities of the entity be
kept separate and distinct from the activities
of its owner and all other economic entities.
An economic entity can be any organisation
or unit in society.

3.  Monetary unit assumption – requires that
only transaction data that can be expressed
in terms of money be included in the
accounting records. This assumption enables
accounting to quantify (measure) economic
events.

4.  Cost principle (historical cost principle) –
states that assets should be recorded at their
cost. Cost is the value exchanged at the time
something is acquired.

5.  Objectivity or Reliability – Information is
reliable when it is free of material errors or
bias (neutrality) and can be depended upon
by users to represent faithfully what it
purports to represent (faithful
representation).
◦ Substance over form – Transactions and events
should be accounted for in accordance with their
economic reality, and not merely their legal form.
◦ Completeness – Information must be complete
within the bounds of materiality and cost.

6.  Going concern assumption – assumes that
the entity will continue in operation long
enough to carry out its existing objectives.
The financial statements therefore are
prepared on the assumption that the
company will continue in operation for the
foreseeable future.

7.  Materiality – relates to an item’s impact on an
entity’s overall financial condition and
operations. An item is material when it is
likely to influence users’ decisions.

8.  Disclosure (Full disclosure principle) –
requires that circumstances and events that
make a difference to financial statement
users be disclosed.

9.  Time period (Periodicity) – To provide timely
information, accountants have divided the
economic life of a business into artificial time
periods.
◦ Fiscal year – a period of any twelve consecutive
months
◦ Calendar year – an annual period ending on
December 31
◦ Interim period – a period of less than a year

10.  Revenue recognition principle (Income
recognition) – dictates that revenue should be
recognised in the accounting period in which
it is earned.

11.  Matching principle (Expense recognition) –
dictates that expenses be matched with
revenue in the period in which efforts are
made to generate revenue. “Let the expense
follow the revenue.”

12.  Accrual basis of accounting – the effects of
transactions and other events are recognised
when they occur and they are recorded in the
accounting records and reported in the
financial statements of the period to which
they relate.

13.  Consistency – An entity uses the same
accounting principles and methods from year
to year.

14.  Conservatism (Prudence) – This is the
inclusion of a degree of caution in the
exercise of judgment needed in making the
estimates required under conditions of
uncertainty, such that assets or income are
not overstated and liabilities or expenses are
not understated.