Page 210 - Accounting Principles (A Business Perspective)

5. Accounting theory

Principle Description Importance
Exchange-price (or Requires transfers of resources to be Tells the accountant to record a transfer of
cost)
recorded at prices agreed on by the parties resources at an objectively determinable amount at
to the exchange at the time of the the time of the exchange. Also, self-constructed
exchange. assets are recorded at their actual cost rather than
at some estimate of what they would have cost if
they had been purchased.
Revenue recognition Revenues should be earned and realized Informs accountant that revenues generally should
before they are recognized (recorded). be recognized when services are performed or
goods are sold. Exceptions are made for items such
as installment sales and long-term construction
projects.
Matching Expenses should be recognized (recorded) Indicates that expenses are to be recorded as soon
as they are incurred to produce revenues. as they are incurred rather than waiting until some
future time.
Gain and loss Gains may be recorded only when realized, Tells the accountant to be conservative when
recognition
but losses should be recorded when they recognizing gains and losses. Gains can only be
first become evident. recognized when they have been realized through
sale or exchange. Losses should be recognized as
soon as they become evident. Thus, potential
losses can be recorded, but only gains that have
actually been realized can be recorded.
Full disclosure Information important enough to influence Requires the accountant to disclose everything that
the decisions of an informed user of the is important. A good rule to follow is—if in doubt,
financial statements should be disclosed. disclose. Another good rule is—if you are not
consistent, disclose all the facts and the effect on
income.
Exhibit 29: The major principles

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