Financial Accounting Principles

⁣1. Business Entity Principle



What It
Means: The business is treated as a separate entity from its owner(s).
The owner's personal finances are not mixed with the business's accounts.

Example: If you
own a bakery and use your personal savings to buy a car for yourself, it
should not appear in the bakery’s accounts.








2. Going Concern Principle



What It
Means: It ****umes the business will continue to operate for the
foreseeable future and won’t shut down soon.

Example: A
company buys a machine for $10,000, expecting it to last 5 years. Because
of this principle, the machine's cost is spread over 5 years, not recorded
as an immediate expense.








3. Historical Cost Principle



What It
Means: Assets are recorded at their original purchase price, not their
current market value.

Example: If you
bought a building 10 years ago for $50,000, it will still be recorded in
the books at $50,000, even if its market value is now $200,000.








4. Accounting Period Principle



What It
Means: Financial performance is reported over specific time periods
(monthly, quarterly, yearly).

Example: A
company reports its income and expenses from January to December as a
yearly accounting period.








5. Money Measurement Principle



What It
Means: Only transactions that can be measured in monetary terms are
recorded.

Example: The
business can record the purchase of a $2,000 computer but cannot record
the skill level of its staff, as it cannot be measured in money.








6. Consistency Principle



What It
Means: The business must use the same accounting methods over time for
comparability.

Example: If a
business uses the straight-line depreciation method for an ****et this
year, it should not switch to another depreciation method next year
without reason.








7. Prudence Principle



What It
Means: Always record expenses or losses immediately if uncertain but
recognize income only when it's certain.

Example: If a
company expects a $5,000 bad debt, it should record it immediately, even
if the customer hasn’t confirmed they won’t pay.








8. Matching Concept



What It
Means: Match expenses with the revenues they help generate in the same
period.

Example: A bakery
sells cakes worth $1,000 in December and spends $400 on ingredients in
November. The $400 expense should be recorded in December, not November,
to match with the revenue.








9. Duality Principle (Double-Entry Accounting)



What It
Means: Every transaction has two effects – a debit and a credit – and
both must balance.

Example: If a
company buys furniture for $500:



Debit:
Furniture (an ****et increases).

Credit: Cash
(an ****et decreases).









Summary with Analogy

Imagine a bakery:



The business
entity principle separates your bakery's finances from your personal
expenses.

The going
concern ****umes the bakery will keep selling cakes next year.

You record
the bakery equipment at its historical cost.

You
prepare income statements every month as per the accounting period.

You only
record measurable items like sales ($1,000) as per money measurement.

The consistency
principle ensures you always value leftover flour the same way each year.

If unsure
about a debt being repaid, you record a loss immediately as per prudence.

Expenses
for flour are recorded in the same month as cake sales to follow the matching
concept.

And
finally, every transaction (like buying flour) is recorded using duality.


These principles ensure accounting is accurate, reliable, and
standardized!