Accounting: Basic Principles
Instructional Video Published on January 29, 2018
Last Updated 1/10/2019
Audio: Instrumental
Visual: Title slide “Accounting: Basic Principles.”
Audio: Terren: Accounting basic principles. This instructional video is presented by the Accounting and Finance tutoring Team in the Academic Skills Center at Walden University.
Visual” Slide changes to “Learning Objectives” and includes
- Identify six basic principles of accounting
- Define each principle
- Provide examples of each principle
- Recognize differences among the principles
Audio: Terren: We designed this video to help you strengthen your skills in basic accounting. After you watch this presentation you should be able to complete the tasks listed on this slide.
Visual: Slide changes to “Basic Accounting Principles” and includes:
- Cost principle
- Time period principle
- Revenue recognition principle
- Full disclosure principle
- Matching principle
- Comparability principle
Audio: Terren: In accounting the rules and guidelines that companies must follow when reporting financial data are known as principles of accounting. Companies must use the accounting principles, known as the generally accepted accounting principles, when reporting information in a financial statement or regular filing of the financial statement. The main principles are listed on this slide.
Visual: Slide changes to “Cost Principle” and gives an example of how to report assets and services at the amount paid or actual cost.
Audio: Terren: The cost principle simply says that all acquired assets and services must be reported at their actual cost. Also known as historical cost. This principle says that the cost of an item should be the one on the receipt, the amount that you paid. This is an area where accountants hide profit to evade taxes. For example, assume that you went to a car dealership and saw the price of a Toyota Sienna for $10,000 but due to your negotiation skills you paid $7,000. You must report $7,000 not $10.000. If you report or record $10,000 you have just committed fraud of tax evasion because the $3,000 you are not going to pay on taxes since you have posted it as an expense.
Visual: Slide changes to “Time Period Principle” and give an example of how to divide financial activities into time periods.
Audio: Terren: The time period principle is a financial accounting principle that assumes all companies and organizations can divide activities into time periods. These accounting and reporting time periods are usually reported monthly quarterly or annually. This is convenient for lenders and investors to see company-wide progress as well as growth. Private companies are not required to issue quarterly financial statements. Usually they use a year as their accounting or reporting period. Most of the time these companies accounting and reporting near coincides with their tax year, but it doesn't always coincide with a calendar year. Remember that some companies may choose to end their fiscal year on June 30th. Standardizing accounting organizations have June 30th year ends so their yearend doesn't interfere with the tax season.
Visual: Slide changes to “Revenue Recognition Principle” and explains that the accrual concept is when revenue and expenses are recognized when transactions occur.
Audio: Terren: Revenue recognition provides a meaningful and consistent measurement of business performance. In reoccurring revenue, it is important to match the revenue and the costs incurred to generate the revenue in the same period regardless of when the seller's invoice is issued or the customers payment is received. To recognize revenue, you must understand the accrual concept of accounting. This principle works together with the accrual concept which states that revenue or expenses must be recognized the moment the transaction occurs. Under the accrual concept when a transaction takes place you have to open two transactions the first when the transaction was negotiated, and the second when the payment was made. The key word to look for under this concept is “on account” which means that the transaction was on credit. The generally accepted accounting principles GAAP gave to subsidiary accounts to use while waiting to receive the payment. For example, you went to a store to buy a cellphone at the cost of $500 but you did not pay for it. However, the phone was mailed to you. You must post two transactions, one debit the cellphone because you now owned it, and credit account payable to remind you that you have not paid for the phone. Two, debit account payable to cancel the debit and credit cash to show that the asset account has been received to complete the payment.
Visual: Slide changes to “Full Disclosure Principle” and includes what financial information must be provided about a company.
Audio: Terren: The full disclosure principle requires a company to provide accurate information so that individuals from institutions who wish to read the financial information can make informed decisions concerning the company. Examples of such institutions are banks, creditors, investors, the IRS, etc. The disclosures can be seen in the following: the company's financial statements, including any supplementary schedules, and notes or footnotes, management’s discussion and analysis that is included in a publicly traded corporations annual report to the US Securities and Exchange Commission, quarterly earnings reports, press releases, and other communications.
Visual: Slide changes to “Matching Principle” and includes information on matching all expenses and revenues in the same time period.
Audio: Terren: To successfully apply the matching principle you must combine the accrual accounting concept and the revenue recognition principle. The principle says that all expenses must be matched in the same accounting period as the revenues they helped earn. For example, imagine you spend $1,000 for labor, $500 for parts, and $200 and utilities to produce one photocopier which is then sold for $2,000, you must report the total expenses of and the $300 profit this principle says that you cannot decide to post $1,000, in expenses now and post the remaining in another accounting period.
Visual: Slide changes to “Comparability Principle” and details applying consistent standards and policies across time periods and regions.
Audio: Terren: Accounting information is comparable when accounting standards and policies are applied consistently from one period to another, and from one region to another. Comparability is one of the key qualities which accounting information must possess. Financial statements of one accounting period must be comparable to another for the users to derive meaningful conclusions about the trends in an entity of financial performance and position over time. For example we can compare the ExxonMobil financial statements with that of VP if both are prepared in accordance with the same set of accounting standards, such as IFRS or US GAAP etc. Or for example if a company that retails leather jackets that valued its inventory based on the FIFL method in the past it must continue to do so in the future to preserve consistency in the reported inventory balance.
Visual: Slide changes to “Test Your Knowledge” and details a scenario.
Audio: Terren: Test your knowledge! Select the principle that applies to this scenario.
Which principle requires a company’s balance sheet to report its land at the amount the company paid to acquire the land even a felon could be sold today at a significantly higher amount?
- time period principle
- full disclosure principle
- cost principle
Answer C. cost principle. Record the actual price paid as shown on the check or receipt
Visual: Slide changes to “Test Your Knowledge” and details a scenario.
Audio: Terren: Which principle requires the company’s financial statements to have footnotes containing information important to users of the financial statements?
- full disclosure principle
- matching principle
- comparability principle
The answer is a full disclosure principle.
Visual: Slide changes to “Test Your Knowledge” and details a scenario.
Audio: Terren: The accountant of an U.S. based company decided to post transactions in the financial statement with British pounds instead of US dollars, which principle of accounting has been violated?
- matching principle
- revenue recognition principle or
- comparability principle
C comparability principle
Visual: Slide changes to “Test Your Knowledge” and details a scenario.
Audio: Terren: Which principle 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?
- revenue recognition principle
- matching principle
- time period principle
The answer is B matching principle.
Visual: Slide changes to “Additional Resources” and provides links to other resources.
Audio: Terren: Additional resources can be found on our quantitative reasoning success strategy webpage to build your skills: using data to inform or persuade, present numerical data in narrative or graphical formats, interpret data and make data-driven decisions in a practice case study.
If you would prefer one-on-one tutoring you can schedule an appointment with one of our tutors for individualized assistance and support.
As a reminder the Academic Skills Center is here to help. We offer a variety of academic support including one-on-one tutoring in multiple subject areas as well as a success strategies webpage that offers resources to improve your skills in critical thinking and reading, time management, and much more.
And lastly if you prefer to attend live presentations, we offer webinars and drop-in sessions on a regular basis. To stay informed about everything current and new in the ASC we recommend that you subscribe to our Savvy Student Newsletter, it is a one-page email that we will send you at the beginning of each month. Last but not least the ASC posts a monthly blog and podcast and you can keep up to date on ASC happenings via our ASC twitter page.
Thank you for viewing this presentation on basic principles of accounting if you have any questions please email academicskills@mail.waldenu.edu
Visual: Closing credits
Audio: Instrumental