Historical Cost Principle

Historical Cost Principle – requires companies to record the purchase of

goods, services, or assets at the price they paid for them. Assets then remain
on the balance sheet at their historical value without being adjusted for
fluctuations in market value.

Revenue Recognition Principle

Revenue Recognition Principle – requires companies to record revenue when
it is earned instead of when it is collected. This accrual basis of accounting
gives a more accurate picture of financial events during the period.

Matching Principle
Matching Principle – states that all expenses must be matched and recorded
with their respective revenues in the period that they were incurred instead of
when they are paid. This principle works with the revenue recognition principle
ensuring all revenue and expenses are recorded on the accrual basis.

Prudence Principle
Prudence Principle – accountants should always record on the most
conservative side possible in any situation. This prevents accountants from
over estimating future revenues and underestimated future expenses that
could mislead financial statement users.

Objectivity Principle
Objectivity Principle – financial statements, accounting records, and financial
information as a whole should be independent and free from bias. The
financial statements are meant to convey the financial position of the company
and not to persuade end users to take certain actions.

Consistency Principle
Consistency Principle – all accounting principles and assumptions should be
applied consistently from one period to the next. This ensures that financial
statements are comparable between periods and throughout the company’s
history.

Business Entity Concept

Business Entity Concept – is the idea that the business and the owner of the
business are separate entities and should be accounted for separately. This
concept also applies to different businesses. Each business should account
for its own transactions separately.

Going Concern Concept

Going Concern Concept – states that companies need to be treated as if they
are going to continue to exist. This means that we must assume the company
isn’t going to be dissolved or declare bankruptcy unless we have evidence to
the contrary. Thus, we should assume that there will be another accounting
period in the future.

Materiality Concept
Materiality Concept – anything that would change a financial statement user’s
mind or decision about the company should be recorded or noted in the
financial statements. If a business event occurred that is so insignificant that
an investor or creditor wouldn’t care about it, the event need not be recorded.