Fundamental Principles of Accounting

• Core assumptions that form the basis for the preparation of financial statements.

Significance of these principles

• Establishing uniformity in data recording and financial statement preparation.
• Enabling dependable and comprehensible comparisons among diverse businesses.

Fundamental Principles of Accounting

Accrual and Matching

• The recognition of revenue and expenses occurs when they are earned or incurred, rather than when cash is received or paid.
• Net Profit = Revenue - Expenses
• Ensuring accurate alignment of incurred expenses with earned revenues within the same period guarantees that the income statement accurately presents the net profit figure.

Prudence

• Exercising caution when declaring profits and making provisions for potential losses.
• Preventing overestimation of assets and understatement of liabilities.

Consistency

• Maintaining a consistent approach to recording and reporting financial information in all reports.

Separate Entity

• Treating the business as an independent and distinct entity from its owners.
• Personal resources of the owner only impact accounting records during capital introduction or withdrawals.

Going Concern

• Assuming the business will continue operating in the foreseeable future.

Money Measurement

• Including only transactions that can be expressed in monetary terms in the accounting records.

Historical Cost

• Recording the value of assets on the balance sheet at their original cost when acquired by the company.