The purpose is to make accounting information more objective, uniform and useful to different users.
- Historical cost
- Going concern
- Stable monetary measures
A business is treated as an entity separate from its owner. Only transactions affecting the business should be recorded in the books of the business.
The assets of a frim are valued at their original cost of purchases or production. Any changes in their market value should be ignored.
A business will continue to operate for the foreseeable future. Assets of a business should therefore be valued at historical cost.
Stable monetary measure
The assumption is that the value of money is constatn, ignoring the effects of inflation or deflation.
Revenues should be recognised when earned. And, expenses should be recognised when incurred, and not when money is received or paid.
It specifies the point in time at which revenue should be recognised and recorded in the books.
it states that revenue should be linked with its relevant expense or cost in the same period.
It ensures that the net assests and profits of a business are not overstated.
It is used to judge what sorts of transactions or items are significant and their classification in the financial statements.
A firm shoul keep using the same accounting policy or method for similar items. A change is allowed only if it can give a more accurate view of a business.
Accounting is concerned only with transactions measurable in units of money.