🏛️ Accounting Principles
1. Measurement Principle (Cost Principle)
Record what was paid, not necessarily what it's worth now.
🧠Analogy: If you bought a phone for $800 last year, and now it's worth $400, you still record it at $800.
Accounting is like a photo album, not a live video—it's a record of what actually happened, not what things are currently worth.
2. Revenue Recognition Principle
Record revenue when it’s earned, not when cash is received.
Remember the acronym D.E.R.:
- Deliver goods or services
- Earn the revenue
- Then you Record it
🧠Analogy: If you mow someone’s lawn today, and they pay you next week—you earned the money today, so you record the revenue today.
3. Expense Recognition (Matching) Principle
Expenses are recorded in the same period as the related revenues they helped generate.
🧠Analogy: Think of a lemonade stand:
You buy lemons and sugar today,
Sell lemonade tomorrow,
Even though the purchase happened earlier, you record the expense at the same time as the sale, because the lemons helped you earn that revenue.
4. Full Disclosure Principle
All info that could affect a decision must be disclosed in the financial statements (or footnotes).
🧠Analogy: Like a nutrition label on food—just listing "pizza" isn’t enough. You need to reveal the calories, ingredients, and allergens so people can make informed choices.
🧱 Accounting Assumptions
These are the foundations that accounting is built on—like invisible rules we assume to be true.
1. Going Concern Assumption
The business will continue operating unless there's evidence it will close.
🧠Analogy: It’s like driving a car assuming the road continues ahead—you don’t plan for the bridge to collapse unless there’s a warning.
2. Monetary Unit Assumption
Everything is recorded using a common unit (money).
🧠Analogy: You can’t compare apples and oranges—so we convert everything into dollars to measure and compare meaningfully.
3. Time Period Assumption
The life of a company is broken into time chunks (months, quarters, years) for reporting purposes.
🧠Analogy: Like a Netflix show with episodes. Even though the story is continuous, you need periodic stopping points to understand what’s going on.
4. Business Entity Assumption
The business is a separate legal and accounting entity from its owner(s) and other businesses.
🧠Analogy: Imagine each business as a separate player in a video game—even if one person is controlling multiple characters, each has its own inventory, score, and rules.