Basic Accounting Principles

Video Transcript

"In this clip we're going to talk about four basic accounting principles. Those four basic accounting principles are historical cost, realization, matching and full disclosure. The first basic accounting principle is historical cost. And what that means is that you record items at what you paid for them. So, in other words, if you bought a house for two hundred and fifty thousand dollars, but it was actually worth three hundred and fifty thousand dollars, you just got a great deal in a bad market, you would record that for two hundred and fifty thousand dollars. Not three hundred and fifty thousand dollars. The next principle is realization. And that essentially means when do we record the things on our income statement, when do we say that we have earned revenue or we have an expense. The third principle is called matching. And what that means is that when you recognize the revenue or record the revenue for an item, you also want to record the expense for that item. So let's say you hold a conference that you prepaid for in January, but the conference actually happens in March, you would want to recognize the expense for it in March as well as the revenue for the attendees in March. The fourth item is full disclosure, and that basically means tell it like it is. If there is something that doesn't show on the face of your financial statements, you need to disclose them in a separate disclosure or attachment."