Accounting Principles ...

CHER at the MCG

This is just a way to remember the 7 Accounting Principles!

These principles are the foundation of the accounting system and work to ensure that the records and reports of different businesses are produced using the same rules.

Consistency.  Example:  use the same format/design of the reports from reporting period to reporting period to help stakeholders compare performance overtime.  Example:  use the same depreciation method for a particular non current asset over its useful life.

Historical Cost.  Example:  record and report transactions at their original cost which can be verified by documentarly evidence.  This ensures the reports are reliable.  Exception is agreed value when the owner contributes assets to the business.

Entity.  Stakeholders are only interested in transactions that relate to the business entity and not transactions of other entities such as the owner.  Data about other entities is not relevant.

Reporting Period.  The period of time over which profit is calculated.  It cuts across the indefinite life of the business due to the going concern principle.  The reporting period is identified on the top of the Cash Flow Statement and Income Statement.  The Balance Sheet is prepared at the end of the reporting period.

Monetary Unit.  All transactions must be expressed in Australian Dollars.  

Conservatism.  More about this in Unit 4 but a good way to sum it up is .... "do not provide stakeholders with overly optimistic information".  In particular, do not overstate revenue, profit and assets.  A good example is a telephone call to the business to enquire about the price of stock or if the busienss received an order from a customer.  Would the business record and report this at this point in time?  No, there is no certainty.  If you did count that as revenue, revenue, profit and assets (cash or debtors) would be overstated which is contrary to conservatism.  The revenue is only counted at the point of sale, when the stock is exchanged and invoice/receipt created.  Other examples later in the course.

Going Concern Principle.  Assumes the life of the business goes on forever, that is, beyond the current reporting period.  The best key word is "future", that is, the business has a future life beyond the current reporting period.  Assets, for example, represent future benefits beyond the end of the current reporting period and liabilities for example, represent current obligations that will lead to a future outflow of economic resources.