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Lesson 4: Accounting Principles

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Page 1: How to read a Balance Sheet - Accounting Principles

Lesson 4: Accounting Principles

Page 2: How to read a Balance Sheet - Accounting Principles

© KayOne Education, 2015

The Accounting Entity Principle

•  This principle states that the business is a separate entity from that of its owner

Salary

Salary is accounted as a cost

Entity

Page 3: How to read a Balance Sheet - Accounting Principles

© KayOne Education, 2015

Measurement Principle

•  States that only transactions that are quantifiable are recorded in the entity’s accounts.

•  Therefore, things that cannot be measured such as employee’s loyalty towards the owners/management are not accounted in the entity’s accounts.

Page 4: How to read a Balance Sheet - Accounting Principles

© KayOne Education, 2015

Historical Cost Principle

•  What a business owns and what is owes are recorded at their original cost, with no adjustment for inflation or change in the market value.

•  So, theoretically a building having a market value of $50 million can still be shown in the accounts at its original cost of $500,000.

•  Why? Because it is easy and there is no need to revalue the assets all the time.

Page 5: How to read a Balance Sheet - Accounting Principles

© KayOne Education, 2015

Materiality Principle

•  Materiality concept states that accountants account for only those items that have an impact on the business.

•  For example; accountants won’t bother if they lost 50 cents, since it has no impact on the business.

•  Materiality is highly relative.

•  A $1,000 transaction might be material for a small pizza shop, but would be highly insignificant for Apple Inc.!

Page 6: How to read a Balance Sheet - Accounting Principles

© KayOne Education, 2015

Conservatism

•  Conservatism states that all expenses, costs and losses are accounted for even when they are anticipated.

•  However, gains or profits are accounted for only when they are actually received

Page 7: How to read a Balance Sheet - Accounting Principles

Summary

Accounting principles

•  The Accounting Entity •  Measurement •  Historical Cost •  Materiality •  Conservatism


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