02 Principles of Accounting
Accounting Concepts¶
| Money Measurement | All transactions are recorded in terms of currency (monetary value) Only money transactions are recorded |
| Business Entity | A corporation is considered as a separate legal entity from its owners |
| Dual Aspect | Assets = Liabilities + Capital (Assets + Expenses = Liabilities + Equity + Revenue) |
| Going Concern | Assumption that business will continue to trade for the foreseable future Allows cost of purchases to be distributed across time |
| Historical Cost | Assets are quantified by their cost & not their market value |
| Accounting Period | |
| Matching Cost | When calculating net income, only relevant revenue and relevant expenses for the specific accounting period should be used |
| Revenue Realisation | Sale should be considered as complete only after complete exchange of ownership between both parties, for the goods/services |
Accounting Conventions¶
| Full Disclosure | All information should be informed to users of statements |
| Materiality | Only those information should be stated that impacts the decision of the users of statement and unnecessary information should not be disclosed |
| Conservatism | Incorporate anticipated losses, but not anticipated profits |
| Consistency | Transactions/events are recorded in the same way, in every accounting period |
Derivation of Accounting Equation¶
\[ \begin{aligned} \text{Assets} &= \underbrace{\text{Liabilities + Capital}}_\text{Total Liabilities} \\ \text{Capital} &= \text{Equity+Net Margin} \\ \text{Net Margin} &= \text{Revenue-Expenses} \\ \implies \text{Assets + Expenses} &= \text{Liabilities + Equity + Revenue} \end{aligned} \]
- Capital: Soft Contract
- Liabilities: Hard Contract
Something¶
- Debit: Indebted
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Creditor: Gets credit for the transaction
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Capital is when owners invest funds
- Drawings is when owners withdraw funds