Accounting Principles (Cambridge (CIE) IGCSE Accounting)
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Accounting Principles
What are accounting principles?
These are the rules, principles and guidelines used when preparing the financial statements of a business
These are used by all accountants internationally
Accountants must comply with these principles so that:
Financial statements can be accurately compared with those of similar businesses
The owner(s) of a business can compare the year-by-year performance of the business
The ten accounting principles are:
Business entity
Money measurement
Going concern
Historic cost
Materiality
Duality
Consistency
Matching
Realisation
Prudence
What is the business entity principle?
Definition | Financial statements only record and report on business activities |
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What is the money measurement principle?
Definition | Financial statements only contain information about the transactions involving money |
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What is the going concern principle?
Definition | The assumption that a business will continue to operate into the foreseeable future by undertaking its current trading activities |
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What is the historic cost principle?
Definition | Assets and liabilities are valued at the cost of the original transaction and kept as such on the financial statements |
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What is the materiality principle?
Definition | Transactions which have a low monetary value can be grouped rather than entered into separate accounts |
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What is the duality principle?
Definition | Each transaction is recorded using two accounting entries of opposite and equal values |
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What is the consistency principle?
Definition | When a business chooses a method for a particular item, it should continue to use that method each year |
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What is the matching principle?
Definition | Incomes and expenses must be matched to the year to which they relate or in which the benefit is gained |
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What is the realisation principle?
Definition | Business transactions are only recorded in the financial statements when a payment is made or the ownership has been transferred |
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What is the prudence principle?
Definition | A business should not overstate its profit or its net assets |
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Exam Tip
You need to remember all ten accounting principles. Try to make a fun sentence to help you remember them.
"A business whose entity was called Prudence sold dual materials and measured its money consistently. It was a going concern that the historic cost did not match the realised cost."
Worked Example
Charity is a sole trader who applies all the accounting principles when maintaining her accounting records.
Name the accounting principle applied by Charity in each of the following situations.
Accounting principle | |
Charity goes on holiday with her family. She does not enter the costs into her business accounts. | |
A customer phones up Charity and asks her to reserve some goods for them to collect the following week. Charity does not record this as a sale. | |
Charity received a bad review from a customer. She did not enter this into her accounting records. | |
Charity has not paid her rent however she still enters the amount in her income statement. |
Answer
Accounting principle | |
Charity goes on holiday with her family. She does not enter the costs into her business accounts. | Business entity |
A customer phones up Charity and asks her to reserve some goods for them to collect the following week. Charity does not record this as a sale. | Realisation |
Charity received a bad review from a customer. She did not enter this into her accounting records. | Money measurement |
Charity has not paid her rent however she still enters the amount in her income statement. | Matching |
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