What is Accounting?
- Accounting is an information system that identifies, records and communicates economic events of an entity to interested users. The users of accounting are of two types: Internal Users (i.e. manager) and External Users (i.e. investor, creditor, customer, regulatory authority).
A. Accounting Assumption
1. Monetary Unit Assumption- Companies include the accounting records only transaction data that can be expressed in terms of money.
2. Economic Entity Assumption- The activities of the entity be kept separate and distinct from the activities of its owner and all other economic entities.
3. Going Concern Assumption- An entity will continue to operate for the foreseeable future.
4. Time Period Assumption- The economic life of an entity can be divided into artificial time periods, i.e. quarterly, half-yearly, yearly etc.
B. Accounting Principles
1. Historical Cost Principle- Companies should record assets at their acquisition cost.
2. Revenue Recognition Principle- Companies recognize revenues in the accounting period in which it is earned.
3. Full Disclosure Principle- Companies disclose all circumstances and events that would make a difference to financial statement users.
4. Matching Principles- Companies match expenses with revenues.
C. Accounting Constraints
1. Cost Benefit Analysis- The cost of providing information must not be more than the benefits derived from using that information.
2. Consistency- A company uses the same accounting principles and methods from year to year.
3. Conservatism- A company, when in doubt, chooses the method that will be least likely to overstate assets and net income.
4. Materiality- Companies may omit an item or information that would not make a difference in decision making.
5. Industry Practice- The nature of certain industries and their practices may require the departure from traditional accounting theory.
Collected from: Books: Accounting Principles by Weygandt, Kimmel and Kieso.