Unit 2

ACCOUNTING PRINCIPLES

Overview
In this unit, students will be provided knowledge about the general acceptance of an
accounting principle.

Learning objectives
After this unit, students should be able to:
>> Understand and describe accounting principles
>> Appreciate the importance and advantages of uniformity in accounting policies
and practices

Think and discuss

1. What are accounting principles used for?
2. How many principles of accounting? And what are they?

English for accounting 22

1. SPECIAL TERMS
Match the words or expressions in the column A with their definition in column
B. You can look it up for more detailed explanations in specialist dictionary.

Column A
1. Revenue principle
2. Historical cost principle
3. Matching principle
4. Full-diclosure principle
5. Business entity
assumption
6. Going-concern
assumption
7. Time-period assumption
8. Money measurement
9. Consistency
10. Conservatism
Column B
A. The initial price paid for the acquisition of
assets is the one that is recorded in accounts.
B. The business will continue indefinitely
into the future.
C. Financial reporting must include all
signifiant information.
D. Revenue is realized at the moment when
goods are sold (or change hands) or when
services are rendered.
E. The same methods (of inventory
valuation, depreciation, etc.) must be used
from one period to the next
F. The revenues generated in an accounting
period are identified with related costs
whenever they were incurred.
G. All transactions and other items to be
accounted for must be in monetary units
H. Financial data must be reported for
particular periods, which makes accrual and
deferral necessary
I. An enterprise is an accounting unit
separate from its owners.
J. Where alternative accounting methods are
possible, one understates rather than
overstates profits.

2. READING

READING 1

Reading text 1: Accounting principles and do exercise 2.1 below

ACCOUNTING PRINCIPLES

Reasons accounting principles are important

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 Accounting principles are the essential guidelines under which businesses prepare
their financial statements. These principles guide the methods and decisions for a business
over a short and long-term. For both internal and external reporting purposes, it is important
to understand the concepts presented below because they serve as a guideline for the
analysis of financial reporting issues.
Principles of accounting
Revenue Recognition Principle - Under this principle, revenue is to be recorded
when it is realized (or realizable), and when it is earned and not when it is received.
Revenue is realized when goods and services are exchanged, is realized when assets
received can be converted to cash, and is earned when all necessary requirements are met
entitling the company to the benefits represented by the revenue. For example, suppose a
neighborhood coffee house orders 100 coffee mugs from a coffee wholesaler in June. The
coffee house takes delivery of the new mugs in July and pays for the order in August. The
wholesaler does not recognize the revenue from this sale in June, when the order was
placed, or in August, when the cash was received. For recording purposes, the revenue is
recognized in July, when the coffee mugs were delivered to the coffeehouse.
Historical Cost Principle - the historical cost principle deals with the valuation of
both assets and liabilities. The value at the time of acquisition is used to value most assets
and liabilities. For example, say the coffee wholesaler purchased an office building in 1990
for $ 1,2 million. Over time this asset has most likely appreciated in value. However, in
accordance with the cost principle, the original (historical) price of the building is what is
recorded as the cost of the building in the books of the business.
Note that another basis for valuing elements of financial statements is coming into
play. The new basis is fair value. With the convergence of global standards, fair value is
used more often in the United States to value elements of financial statements.
Matching Principle - this principle mandates that the expenses of a business need to
line up with its revenue. The expense or cost of doing business is recorded in the same
period as the revenue that has been generated as the result of incurring that cost. In the case
of the coffee wholesaler, when the 100 coffee mugs were delivered in July, they changed
from being a part of inventory (asset) to a cost of goods sold entry (expense) in the month
that the revenue from the sale was recognized. At this point, the difference between the
revenue and expense is determined as the gross profit from the sale.
Full Disclosure Principle - This principle states that all past, present and future
information that may have an impact on the financial performance of the company needs
to be fully disclosure. The historical performance of a company is readily available, but
examining the numbers does not always provide the entire financial picture of a company.
Sometimes there are alternative situations that need to be reported. Pending or current
lawsuits are one example of a transaction that could severely impact a company’s bottom
line. In addition, incomplete financial transactions or any other conditions that could

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impact the company’s performance must also be disclosed. Most of these transactions are
disclosed in the footnotes to the financial statements.
(Source: https://simplestudies.com/)

2.1 Answer the following question based on the information in text 1

1. Under review recognition principle, when is revenue to be recorded?
2. When is revenue realizable?
3. What does the historical cost principle deal with?
4. What is used to value most assets and liabilities?
5. What does matching principle mandate?
6. What does full disclosure principle state?
7. Does examining the numbers always provide the entire financial picture of a
company?

READING 2
Reading text 2: Accounting assumptions and conventions and do exercise 2.2, 2.3
below

ACCOUNTING ASSUMPTIONS AND CONVENTIONS

When writing accounts and financial statements, aside from accepted accounting
principles, accountants have to follow a number of assumptions and conventions.
Accounting assumption
An assumption is something that is generally accepted as being true. Some of the
main assumptions used by accountants are:
The separate entity or business entity assumption: this assumption means that a
business is an accounting unit separate from its owners, creditors and managers and their
assets. The personal assets or spending of the owner do not appear in the accounting records
of the business. For instance, when a person invests $10,000 into a business, it will be
treated as if the business has borrowed that much money from the owner, and it will be
shown as a "liability" in the books of accounts of the business.
The accounting period assumption: this concept states that the economic life of the
business can be divided into a time period for reporting results of operations and changes
in financial position. One year is the usual accounting period. For most entities, the
accounting year, or fiscal year, corresponds to the calendar year, but some businesses use
the natural business year instead of the calendar year.

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 The continuity or going concern assumption: this concept says that a business will
continue to operate for a long time in the future unless there is good evidence to the
contrary. This is the reason why in many countries, accounting follows the historical cost
principle: companies record the original purchase price of assets, and not their current
market value (as a going concern, the business will need its assets and therefore not going
to sell them).
The money measurement assumption: this concept means that only information that
can be expressed in terms of money can be recorded in the accounting records. Money is a
recognized unit of measure and is a traditional way of valuing transactions. There are many
aspects of a business which cannot be measured in monetary terms and, therefore, do not
appear in the accounting records, such as the effectiveness of a good manager, the benefits
of a staff training course or the morale of the workforce.
Accounting conventions
Accounting convention is something that is generally accepted to simplify
interpretation of financial information. Accountant worldwide depend on three
conventions in recording transactions and preparing financial reports:
Consistency: There are some areas of accounting where a choice of methods is
available. For example, there are several different ways to calculate the depreciation of a
non-current asset. Companies can choose their accounting methods, but they have to be
consistent, which means using the same methods every year, unless there is a good reason
to change. If this is not done, a comparison of the financial results from year to year is
impossible, and the profit of a particular year can be distorted. For instance, if a company
depreciates certain items of plant on the straight-line basis, similar items of plant must be
also depreciated on the straight-line basis and the straight-line method must also be used
in the next accounting period. When it is necessary to change methods, the consequences
should be noted in the financial statements.
Materiality: The term materiality refers to the relative importance of an item or
event. If an item is relevant to the decisions a user of financial statements makes, it is
material. In other words, an item is material if users would have done something differently
if they had not known about the item. The materiality of an item is normally determined
by relating both its value and nature to an element of the financial statements. A laptop
computer may be regarded as immaterial for a large multi-national business, but would be
material for a small sole trader. A large business may decide that assets costing less than
$1,000 will be regarded as immaterial and be charged as expense. A small business may
have a much lower figure.
Conservatism: Conservatism means that when there is uncertainty about which
accounting procedure to use, the one that is least likely to overstate assets and income
should be used.

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 In other words, it means that an accountant should record the lowest possible value
for assets and revenues, and the highest possible value for liabilities and expenses.
Conservatism can be a useful tool when uncertainty exists, but the abuse of the convention
will certainly lead to incorrect and misleading financial statements.
(Source: Maire Loughran, 2019, Financial Accounting for Dummies, Canada,
John Wiley &Sons, Inc )

2.2 Match the two parts of the sentences

1. Business can publish financial statements for a. and not their current value, is
a 15-month period, recorded in accounts.
2. There are different ways of doing accounting b. need to know the current market
but companies have to be consistent, value of its assets.
3. The business entity is regarded c. because this will show better profits.
4. The historical cost principle is that the price d. as separate from the personal
paid to buy assets activities of its owners.
5. A going concern usually doesn’t e. which means regularly using the
same methods.

2.3 Decide whether the following sentences are True (T) or False (F)

Question T/F
1. In accounting we make a distinction between business and the owner.
2. In many countries, companies do not record the current value of their
assets.
3. A fact or transaction of happening which can not be expressed in terms
of money is recorded in the accounting books.
4. Companies can change their accounting policies whenever they like.
5. According to the conservatism concept, assets and liabilities should be
recorded at the highest possible value.

3. LISTENING

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3.1 You are going to listen to a speaker talk about fundamental principles
of accounting. Fill each blank with the information you hear.

Fundamental Principles of Accounting

Accountants oversee and (1) ……………. the exchange of money. These

talented professionals work in every sector of society. (2) ……………., governments,
and (3) ……………… depend on them. All accountants are (4) ……………. by the
same (5) ……………….
(6)
……………….. entity - every business is a (7) ………………. entity. It is
important that its (8) ………………. be kept separate from its owners' records. This
is true of any type of business: Partnerships, sole proprietorships, or corporations.
Conservatism - accountants use (9) ……………. methods. The account for
the most likely scenario rather than the most (10) ……………. scenario.
(11)
……………… (12) ……………… - accounting records include all
available information. Nothing is withheld or hidden.

3.2 Now listen again and choose the correct answers

1. What is the passage mainly about?

a. how to verify conservatism
b. ideas that guide accountants
c. when principles must be changed
d. how to predict the most-likely scenario
2. Full disclosure means that
a. a sole proprietorship is unbiased
b. business records must be practice
c. optimistic scenarios are not hidden
d. managers should include all information
3. Conservatism means
a. separating personal records
b. using only verifiable numbers
c. following feelings and opinions
d. accounting for optimistic scenarios

English for accounting 28

4. VOCABULARY EXERCISES

4.1 Fill in the blanks with a correct accounting concept

1. The …………… principle states that financial reporting must include all
significant information: anything that makes a difference to the users of financial
statements.
2. The …………… concept is that where different accounting methods are possible,
you choose the one that is least likely to overstate or over-estimate assets or income.
3. The …………… principle is that revenue is recognized when a service is
provided or goods delivered, not when they are paid for.
4. The …………… principle, which is related to revenue recognition, states that
each cost or expense related to revenue earned must be recorded in the same accounting
period as the revenue it helped to earn.
5. When preparing accounts, one must assume that the enterprise will be viable in
the years to come. It means the business is a ……………
6. According to …………… concept, assets are recorded at their original purchase
price.
7. Accounts should be produced using the same methods from one year to the next.
Deviations from this principle must be noted, and the effects on the accounts shown. It’s
…………… concept.
8. The concept of …………… says that very small and unimportant amounts do not
need to be shown.

Complete the paragraph with the correct word from the box. You will
4.2
not use all the words.

maintained standard preparation financial reason

guidelines includes reported right accounting

Every country has its own (1) …………… accounting practice of GAAP with
standards set by a national governing body (National GAAP). Many countries use the
International Financial Reporting Standards (IFRS), established and (2) …………… by the
International Financial Reporting Standard Board (International GAAP). Generally
Accepted Accounting Principles (GAAP) is the standard framework of (3) …………… for
financial accounting that is primarily used in the United States of America. It (4)
…………… the standards, conventions, and rules accountants follow in recording and
summarizing transactions and in the (5) …………… of financial statements. (6) ……………
accounting information must be assembled and reported objectively. Those who must rely
on such information must have it assembled and reported objectively. Those who must rely

English for accounting 29

on such information have a (7) …………… to be assured that the data is free of financial
bias and inconsistency. For this (8) ……………, financial accounting relies on certain
standards or guides that are called "Generally Accepted Accounting Principles" (GAAP).

4.3 Match each word with similar meaning

1. wholesale a. debts
2. footnote b. properties owned by a person or a company
3. assets c. lawyer
4. liabilities d. selling of goods in large quantities to shopkeepers for resale to
the public
5. disclose e. to instruct somebody to act or vote in a certain way
6. revenue f. to make something known in public
7. convert g. to change form one form or use to another
8. benefit h. a thing that one gains from something
9. attoney i. the total annual income of a state or an organization
10. mandate j. additional piece of information at the bottom of a page in a book

4.4 Decide which principles do these sentences refer to

1. The personal assets of the owner of a company will not appear on the company's
balance sheet because of which principle/guideline?
a. Historical cost
b. Economic entity
c. Monetary measurement
2. Which principle/guideline requires a company's balance sheet to report its land at
the amount the company paid to acquire the land, even if the land could be sold today at a
significantly higher amount?
a. Historical cost
b. Economic entity
c. Monetary measurement
3. Which principle/guideline requires the company's financial statements to have
footnotes containing information that is important to users of the financial statements?
a. Conservatism
b. Full disclosure
c. Materiality

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 4. Which principle/guideline justifies a company violating an accounting principle
because the amounts are immaterial?
a. Conservatism
b. Full disclosure
c. Materiality
5. Which principle/guideline is associated with the assumption that the company
will continue on long enough to carry out its objectives and commitments?
a. Economic entity
b. Going concern
c. Time period
6. Which principle/guideline directs a company to show all the expenses related to
its revenues of a specified period even if the expenses were not paid in that period?
a. Historical cost
b. Matching
c. Monetary measurement
7. When the accountant has to choose between two acceptable alternatives, the
accountant should select the alternative that will report less profit, less asset amount, or a
greater liability amount. This is based upon which principle/guideline?
a. Conservatism
b. Historical cost
c. Materiality
8. The creative chief executive of a corporation who is personally responsible for
numerous inventions and innovations is not reported as an asset on the corporation's
balance sheet. The accounting principle/guideline that prevents the corporation for
reporting this person as an asset is
a. Conservatism
b. Going concern
c. Monetary measurement
9. A retailer wishes to report its merchandise inventory on its balance sheet at its
retail value. This would violate which accounting principle/guideline?
a. Historical cost
b. Full disclosure
c. Monetary measurement
10. Which principle/guideline allows a company to ignore the change in the
purchasing power of the dollar over time?
a. Historical cost

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 b. Business entity
c. Monetary measurement

4.5 Complete the text with the correct form of the word in parentheses
Monetary Unit Assumption – This (1) ……………(ASSUME) states that
information in the financial statements must be expressed in monetary units. The reason is
that (2) ……………(ECONOMY) activity is expressed in monetary units, and thus, it
makes sense to apply the same basis for accounting purposes. Monetary units are relevant,
(3)
……………(UNIVERSE) available, and understandable. (4) ……………(USE) the
neighborhood coffeehouse as an example, the intrinsic value of the best coffee server
cannot be valued in the financial statements, (5) ……………(REGARD) of how many
customers frequent the coffeehouse due to this individual. The inherent value of this
person cannot be quantified in the financial statements as an asset.
The monetary unit assumption also states that a stable unit of currency is to be used
as the unit of record. In the United States, the US Dollar is (6) ……………(TYPICAL)
the currency of choice. Important to note, accounting ignores (7) ……………(INFLATE)
or deflation and assumes that the US Dollar remains reasonably stable. For instance, no (8)
……………(ADJUST) are necessary when adding 1990 dollars to 2010 dollars, unless
economic conditions change dramatically (e.g.hyperinflation).

5. SPEAKING

5.1 Individual work

Based on the information in two texts above, describe each accounting principle
or accounting assumption and convention. You should say about:

 What it is
 Explain meaning of each concept
 Examples

5.2 Pair work or group work

Choose one of accounting principles or accounting assumptions and prepare to
give a one-minute presentation about it to the group.
Focus on delivering the presentation very clearly and accurately. Record your
presentations and discuss your performance with a partner afterwards.

English for accounting 32

 Being an effective group member
 Asking for more information
Could you tell me more about…?
I’d like some further information on…

 Add your comments to other people’s view

That’s interesting
That’s a good point

 Offer suggestions
Shall we…?

 Giving example
Let me offer an example
For example/instance
Take, for example, …
.
 Referring to sources
According to a report/an article…
According to the FASB, IAFC…

6. WRITING

6.1 Rearrange the following words to make complete sentences

1. or/revenue/is/when/realized/goods/services/exchanged/are.
………………………………………………………………………………………
2. principle/the historical cost/deals/valuation/with/the/of/and/both/liabilities/assets.
………………………………………………………………………………………
3. the transactions/most/disclosed/of/are/in/financial/the footnotes/ to/ the/
statements/.
………………………………………………………………………………………
4. statements/prepare/accounting/are/principles/the/essential/under which/the
businesses/their/guidelines/financial/.
………………………………………………………………………………………

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 5. revenue/against/means/matching/the/principle/ matched/period/same/is/the/the/
costs/of/the.
………………………………………………………………………………………
6.2 Complete the following sentences using the given words
1. The business entity assumption/ mean/ business/ treated/ completely/ separate/
owners.
………………………………………………………………………………………
2. The monetary unit/assumption/state/information/the financial statements/must
expressed/in/monetary/units.
………………………………………………………………………………………
3. Conservatism/ensure/profits/assets/not overstated/and/liabilities/ not understated.
………………………………………………………………………………………
4. The revenue recognition principle/ used/ for/the recognition/ revenue/ both/
goods/ services.
………………………………………………………………………………………
5. These aspects/the business/that/cannot/measured/in/monetary/terms/not/appear
/the/accounting/records.
………………………………………………………………………………………
6.3 Translate the following sentences into Vietnamese

1. There are about a dozen generally accepted “accounting principles” that

accountants must follow in order to present “a true and fair view” of a company’s finances.
………………………………………………………………………………………
……………………………………………………………………………………………...
2. The revenues generated in an accounting period are identified with related costs
whenever they were incurred.
………………………………………………………………………………………
……………………………………………………………………………………………...
3. Conservatism requires that when two acceptable accounting options are available,
the accountant should choose the option that results in less assets, less profit, or a greater
liability amount in order to 'break the tie' between the options.
.……………………………………………………………………………………
……………………………………………………………………………………………
4. The principles of accounting between countries vary significantly. In the USA,
there are Generally Accepted Accounting Principles (GAAP), and in most of the rest of the
world, there are International Financial Reporting Standards (IFRS).

English for accounting 34

 ………………………………………………………………………………………
……………………………………………………………………………………………...
5. The cost principle requires that assets be recorded at their cost at the time they
are acquired. The cost principle prohibits increasing the cost of items in inventory before
an item is sold.
………………………………………………………………………………………
……………………………………………………………………………………………...
6.4 Translate the following sentences into English

1. Nguyên tắc kế toán là những hướng dẫn cơ bản nhất mà tất cả các tổ chức, doanh
nghiệp phải thực xuyên suốt trong quá trình thực hiện các công việc kế toán và lập các báo
cáo tài chính nhằm đảm bảo độ tin cậy thông tin tài chính cung cấp cho nhiều đối tượng
khác nhau.
………………………………………………………………………………………
……………………………………………………………………………………………...
2. Theo tính nhất quán trong kế toán, các chính sách, phương pháp kế toán mà doanh
nghiệp đã lựa chọn phải được áp dụng nhất quán từ kỳ này sang kỳ khác.
………………………………………………………………………………………
……………………………………………………………………………………………...
3. Thông tin được coi là trọng yếu nếu thiếu thông tin hoặc thiếu độ chính xác có
thể làm sai lệch đáng kể báo cáo tài chính, làm ảnh hưởng đến quyết định kinh tế của người
sử dụng thông tin.
………………………………………………………………………………………
……………………………………………………………………………………………...
4. Tính trọng yếu của thông tin được xem xét trên cả phương diện định lượng và
định tính, nó phụ thuộc vào độ lớn và tính chất thông tin được đánh giá trong hoàn cảnh
cụ thể.
………………………………………………………………………………………
……………………………………………………………………………………………...
5. Giả định hoạt động liên tục có nghĩa doanh nghiệp sẽ tiếp tục hoạt động trong
một khoảng thời gian không xác định và không có ý định đóng cửa hay thu hẹp đáng kể
quy mô của doanh nghiệp.
………………………………………………………………………………………
……………………………………………………………………………………………...

English for accounting 35