FINANCIAL ACCOUNTING NOTES SUMMARY
DEFINITIONS

* Accounting - is the language of business and it is used to communicate financial information. * Accounting- is the process of communicating financial information about a business entity to users such as shareholders and managers. * Principles of accounting- those rules and concepts that are generally accepted as standards for the field of accounting by bodies such as GAAP and IASB.

Fundamental Concepts of Accounting Basic Accounting Principle | Description | Business Entity | This principle treats the company as a separate entity from its owners. Personal accounts of owners/partners should be kept separate from profits and expenses of the company. So, the accounting reports are prepared from the viewpoint of business purposes and not from the owner's outlook. | Cost | This principle states that the company has to consider the original cost of fixed assets like building and machinery, rather than market value. But today, most of the companies report only the market value. | Sincerity | According to this principle, the auditors should prepare the financial reports in order to project the real financial position of the company rather than fabricating facts. | Monetary Unit | This principle assumes that transactions should be recorded in a single currency and exchange rate. This will help the company compare its accounts to the previous years, in spite of a change in the rate of inflation. This principle actually supports the preparation of business reports in a uniform manner. | Consistency | According to this principle, the accountants should use the same methods and functions for different periods of time. For example, the same rate of percentage should be applied for all depreciation. This principle is also known as the principle of regularity. | Prudence | The main