2.3 Accounting Principle

There are several basic principles of accounting that are used to record transactions:

1. The Cost Principle-Valuing Assets

Traditionally, preparers and users of financial statements have found that cost is generally the most useful basis for accounting measurement and reporting under the cost principle, all goods and services purchased by an enterprise are recorded at acquisition and appear on financial statement at cost. This is often referred to as the historical cost principle.

Example:

Assume that you get a good deal on this purchase and pay only $2 000 for merchandise that would have cost you $3 000 elsewhere. The cost principle requires you to record this merchandise at its actual cost of $2 000, not the $3 000 that you believe it is worth.

The cost principle also holds that accounting records should maintain the historic cost of an asset for as long as the business holds the asset. Why? Because cost is a reliable measure.

2. The Realization Principle-Measuring Revenues

The realization principle means that revenue is usually measured in which they occur, rather than in the period in which they are collected.

In other word, this is the period in which goods are shipped or services are rendered, in which revenue is said to be realized. At this point the business has essentially completed the earning process and the sales value of the goods or service can be measured objectively.

3. The Matching Principle-Measuring Expenses

Matching principle requires that revenues and expenses be matched. It is well recognised that a business incurs expenses in order to earn revenues. The revenues earned are the results of the expenses paid. Consequently, it is only proper that expenses be matched with the revenues they helped to produce.