![]() ![]() Based on these accounting principles, more detailed and complex rules and guidelines are prepared known as accounting standards.įor instance, International Accounting Standards Board (IASB) issues International Financial Reporting Standards (IFRS) which is accepted as the reporting framework in many countries. These principles are the foundation of all accounting frameworks. Liabilities = Assets - Capital, or Capital = Assets - Liabilities.Purpose of this section “accounting principles” is to explain the fundamental accounting principles which are accepted as general rules and guidelines by almost all the accounting standard setting bodies of the world. The accounting equation may be rewritten as: Thus, the resulting balances of both sides will always be equal. The total change on the left side is always equal to the total change on the right. This is due to the two-fold effect of transactions. Nonetheless, the equation always stays in balance. It shows that assets owned by a company are coupled with claims by creditors and lenders (liabilities), and by the owners of the business (capital).Īs business transactions take place, the values of the elements in the accounting equation change. The basic accounting equation is: Assets = Liabilities + Capital. The accounting equation shows the relationships between the accounting elements: assets, liabilities and capital. Examples of non-current liabilities are: Loans Payable and Bonds Payable which are long-term in nature, and Deferred Tax Liabilities. Non-current liabilities include those that do not meet the above criteria. A liability is considered current of they are payable within 12 months from the end of the accounting period, or within the company's normal operating cycle if the cycle exceeds 12 months.Ĭurrent liabilities include: Accounts Payable, Short-term Notes Payable, Tax Payable, Accrued Expenses, and other short-term obligations. Liabilities can also be classified as current or non-current. Examples of non-current assets are: Long-term Investments Property, Plant and Equipment and Intangibles. Assets that do not meet the criteria to be classified as current are, by default, non-current assets. In addition, cash is generally considered current asset.Ĭurrent assets include: Cash and Cash Equivalents, Marketable Securities, Accounts Receivable, Inventories, and Prepaid Expenses. An asset is considered current if it is for sale, if it can be realized within 12 month from the end of the accounting period or within the company's normal operating cycle if it exceeds 12 months. AssetsĪssets can be classified as current or non-current. Assets are resources owned by a company liabilities are obligations to creditors and lenders and capital refers to the interest of the owners in the business after deducting all liabilities from all assets (or, what is left for the owners after all company obligations are paid). The elements of accounting pertain to assets, liabilities, and capital. The currency used has a stable purchasing power (stability). Monetary Unit Assumption – Transactions are recorded in terms of money (quantifiability).Time Period Assumption – The indefinite life of an enterprise is subdivided into time periods or accounting periods which are usually of equal length for the purpose of preparing financial reports.Accounting Entity Concept – A specific business enterprise is treated as one accounting entity, separate and distinct from its owners.Going Concern – Also known as continuing concern concept or continuity assumption, it means that a business entity will continue to operate indefinitely.Accrual – Income is recognized when earned regardless of when collected, and expenses are recognized when incurred regardless of when paid.Basic Accounting PrinciplesĪccounting assumptions and principles provide the bases in preparing, presenting and interpreting general-purpose financial statements.
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