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The Five Accounting Concepts Known As Principles: Revenue Recognition Principle

The document discusses the five key accounting concepts known as principles: 1) Revenue recognition principle - revenue is recognized when goods/services are provided, not when payment is received. 2) Expense principle - expenses are recognized when goods/services are received by a business. 3) Matching principle - expenses must be matched to the revenues they helped generate. 4) Cost principle - assets are recorded at their original historical cost. 5) Objectivity principle - accounting relies on measurable, verifiable information. It also outlines underlying assumptions like continuity, unit of measurement, and treating a business as a separate entity from its owners.

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21 views

The Five Accounting Concepts Known As Principles: Revenue Recognition Principle

The document discusses the five key accounting concepts known as principles: 1) Revenue recognition principle - revenue is recognized when goods/services are provided, not when payment is received. 2) Expense principle - expenses are recognized when goods/services are received by a business. 3) Matching principle - expenses must be matched to the revenues they helped generate. 4) Cost principle - assets are recorded at their original historical cost. 5) Objectivity principle - accounting relies on measurable, verifiable information. It also outlines underlying assumptions like continuity, unit of measurement, and treating a business as a separate entity from its owners.

Uploaded by

hafsa mudassar
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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The Five Accounting Concepts Known as Principles

Revenue Recognition Principle

Revenue is considered earned at the time goods or services are provided. This means
that you would recognize lawn service fees as earnings at the time you finish the job,
even if the customer doesn't pay until the following week. You would recognize
revenue from selling a pallet of merchandise at the time the customer takes control of
it from you, not when they eventually pay.

Expense Principle

The expense principle is essentially the reverse of the revenue principle. When your
business receives goods or has services provided to it, it has incurred an expense. It
now owes money for those goods or services.

Matching Principle

Expenses should be matched to the revenue they generated. For example, if you run
a restaurant, you need food, paper goods and cleaning supplies to operate. In a
month, you made $10,000 in sales. You would record the supplies you used to earn
that revenue as an expense. Unused supplies would be kept until another period.

Cost Principle

Items in the accounting records appear at the historical cost paid for them. You do not
later modify the items because they have gained or lost value.

Objectivity Principle

Accounting records rely on objective information, that which can be measured and
verified.

The Underlying Assumptions


Several additional concepts, called assumptions, underlie the five accounting
principles. These assumptions ensure that everyone using accounting information can
rely on standardized reporting. This allows for a better understanding of what is written
in financial records.

Continuity Assumption

Also called the "going concern" assumption, this concept states that a business is
expected to continue unless otherwise stated. When a business is closing, the values
of inventory and other assets are more difficult to determine.
Unit-of-Measure Assumption

The most appropriate unit of measure for a business's accounting records is the
currency in its home country. This is sometimes called the monetary unit assumption.
This assumption means that a United States business would keep their accounting
records in U.S dollars, while a Japanese business would state its financials in yen.

Separate Entity Assumption

A business is a separate economic entity from its owners or stockholders. Only the
business's financial information is shown in its statements. Consequently, a restaurant
owner's personal vehicle, titled in his name, would not be an asset on the restaurant's
balance sheet, for example.

Materiality

Materiality might allow an accountant to overlook another principle or assumption if an


amount is too low to make a difference. For example, a multimillion dollar company
may expense the purchase of $500 of computer mice in the year they were
purchased, rather than expensing only a part of the purchase for each year they are
expected to be in use.

Conservatism

When there is more than one acceptable way to determine an amount, it is better to
record a transaction in a way that understates assets or income rather than overstates
either. This is to prevent accountants from making a business look more profitable or
stable than it is. This principle protects investors.
What is GAAP in Accounting?
Generally accepted accounting principles (GAAP) are the minimum
standard and uniform guidelines for the accounting and reporting which
establishes proper classification and measurement criteria of financial
reporting and provides a better picture when the financial reports of
different companies are compared by the investors.
The Basic Principles of Generally Accepted
Accounting Principles
Following are the top 10 basic principles of GAAP (Generally
Accepted Accounting Principles).
#1 – The Business as a single Entity Principle
A business is a separate entity in terms of the law, all its activities are treated
separately from that of its owners. In terms of accounting the business is
separate and the owners are different.

#2 – The Specific Currency Principle


A currency is specified for the reporting of financial statements. In India we
deal with Indian Rupee, hence it should be treated as INR for the currency
specific. The in United States they economically deal with the US dollar and
their financial reporting’s will be mentioned in USD.

#3 – Time period Specific Principle


Financial statements should always pertain to a specific period of time. The
statements have an end time and start time. Balance sheets are also reported
on a certain date. This can be like monthly, quarterly, half yearly, and annually.

#4 – The Cost Principle


In accounting, the term Cost refers to the amount spent on obtaining the
goods or services in which the purchase happened now or in the past. Hence
for this, the amounts shown in the financial statements also referred to as the
Historical cost amounts.

#5 – The full disclosure Principle


The full disclosure principle states that a company should disclose all the
financial statements fully. It is very important for an investor or the lender to
know about the significant account policies. A company generally lists
its accounting policies as the first note to its financial statements.
#6 – The Recognition Principle
This revenue recognition principle states that the companies should reveal the
income and expenses of the company in that time period where they have
occurred.

#7 – The Non-death Principle of Business


This is also called as Principe of continuity as for accounting there should not
be an end as its continuing to operate, until and unless any winding up of the
company.

#8 – Matching Principle
This Matching Principle requires companies to use the accrual basis of
accounting. The matching principle requires that expenses should be matched
with the revenues.

#9 – The Principle of materiality


This Principle generally states about the adjustment of the very minute errors,
that is while maintaining accounting reports there could be some small errors
like $5 error which is not matching, here this can be used and adjusted
accordingly.

#10 – The Principle of Conservative Accounting


Conservative Accounting Principle should be adopted by all companies
wherein when expenses occur that are to be recorded immediately but the
income to be recorded only when actual cash flow is there. In addition to all
these, the Principle of Honesty to be maintained.

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