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© KayOne Education, 2015
The Accounting Entity Principle
• This principle states that the business is a separate entity from that of its owner
Salary
Salary is accounted as a cost
Entity
© KayOne Education, 2015
Measurement Principle
• States that only transactions that are quantifiable are recorded in the entity’s accounts.
• Therefore, things that cannot be measured such as employee’s loyalty towards the owners/management are not accounted in the entity’s accounts.
© KayOne Education, 2015
Historical Cost Principle
• What a business owns and what is owes are recorded at their original cost, with no adjustment for inflation or change in the market value.
• So, theoretically a building having a market value of $50 million can still be shown in the accounts at its original cost of $500,000.
• Why? Because it is easy and there is no need to revalue the assets all the time.
© KayOne Education, 2015
Materiality Principle
• Materiality concept states that accountants account for only those items that have an impact on the business.
• For example; accountants won’t bother if they lost 50 cents, since it has no impact on the business.
• Materiality is highly relative.
• A $1,000 transaction might be material for a small pizza shop, but would be highly insignificant for Apple Inc.!
© KayOne Education, 2015
Conservatism
• Conservatism states that all expenses, costs and losses are accounted for even when they are anticipated.
• However, gains or profits are accounted for only when they are actually received