Accounting theory

• Accounting entity

  The activities of a business are separate from the actions of the owner. All transactions are recorded From the point of view of the business.
• Accounting period

  The life of a busies is divided into regular time intervals.
• Accrual basis of accounting

  Business activities that have occurred, regardless of whether cash is paid or received, should be recorded in the relevant accounting period.
• Consistency

  Once an accounting method is chosen, this method should be applied to all future accounting periods to enable meaningful comparison.
• Going concern

  A business is assumed to have an indefinite economic life unless there is credible evidence that it may close down.
• Historical cost

  Transactions should be recorded at their original cost.
• Matching

  Expenses incurred must be matched against income earned in the same period to determine the profit for that period.
• Materiality

  A transaction is considered material if it makes a difference to the decision-making process.
• Monetary

  Only business transactions that can be measured in monetary terms are recorded.
• Objectivity

  Accounting information recorded must be supported by reliable and verifiable evidence so that financial statements will be free from opinions and biases.
• Prudence

  The accounting treatment chosen should be the one that least overstates assets and profits and least understates liabilities and losses.
• Revenue recognition

  Revenue is earned when goods have been delivered or services have been provided.