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Accounting Theories

According to Michael Dennis and Steven Kozack in Credit and Collection Manager's Manual, the following comprise some of the most important basic accounting theories, assumptions and principles.

The Business Entity: A corporation is a business entity separate and distinct from its owners.

The Going Concern Concept: Financial statements are prepared based on an assumption that the company is a "going concern" meaning it is likely to remain in business. If a CPA has questions about the viability of the company under audit, that information will be reflected in its auditor's opinion letter.

Historical Cost Basis: Most non current assets are recorded at their historical cost less accumulated depreciation. As a result, the value of an asset recorded on the balance sheet may have little in common with the market value of that asset.

Conservatism Principle: This principle states that given a choice of reporting options, a CPA must select the accounting method that has the least favorable impact on the net income, or the asset value of the company being audited.

The Matching Principle states that a company must determine revenue, and match the appropriate costs or expenses against that revenue. The goal of the matching principle is to make certain companies do not overstate profits by recording sales revenues but failing to record the expenses associated with generating the sales and recording the revenue.

Full Disclosure Requirement: A requirement that a publicly traded corporation will disclose in its financial statements all facts that would be considered relevant to readers of financial statements including bondholders and stockholders.

The Consistency Principle states that companies must normally use the same accounting method from one accounting period to the next. In this way, unrelated third parties can easily and accurately evaluate changes in the company's financial position over time.

The Objective Evi...

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Accounting Theories. (1969, December 31). In LotsofEssays.com. Retrieved 12:29, October 02, 2014, from http://www.lotsofessays.com/viewpaper/1706309.html