Basic Principles

1. Basic Principles • We are taking a USER perspective, not a PREPARER perspective.

2. Basic Principles • The Accounting Entity • The business unit for which the financial statements are being prepared

3. Basic Principles • Going Concern • Unless there is evidence to the contrary, accountants assume that the life of the business entity is infinitely long

4. Basic Principles • Measurement • Accounting deals with things that can be quantified – resources and obligations upon which there is an agreed-upon value

5. Basic Principles • Units of Measure • U.S. dollars are the units of value reported in the f/s of U.S. companies • Results of any foreign subsidiaries are translated into dollars when consolidating • As exchange rates vary, so do the values of any foreign currency denominated assets and liabilities

6. Basic Principles • Historical Cost • What a company owns and what it owes are recorded at their original (historical) cost with no adjustment for inflation • This is objective – do not have to appraise and reappraise

7. Basic Principles • Materiality • Relative importance of financial information • All transactions must be reported if they would materially effect the financial condition of the company

8. Basic Principles • Estimates and Judgments • Any measurement is probably less than exact • Expected error should not be material • Be consistent

9. Basic Principles • Conservatism • Accounting is biased to the downside • Prefer understatement to overvaluation • Example: • Record loss when probability of it actually occurring is great • Record a gain when it actually occurs, not when it is anticipated

10. Basic Principles • Periodicity • Life of a business can be divided into periods of time • Month, quarter, year

11. Basic Principles • Substance Over Form • Report the economic “substance” of a transaction rather than just its form • Equipment lease vs. Equipment purchase

12. Basic Principles • Accrual Basis • Matches revenue and expense when the transactions occur, not when the cash is received or paid

13. Basic Principles • Generally Accepted Accounting Principles (GAAP) • Series of conventions, rules and procedures for preparing f/s • Financial Accounting Standards Board (FASB)