About Basic Accounting Principles

Video Transcript

"My name is Miranda Chook, CPA. We are going to cover the definitions for a few of the major accounting concepts in this video. First let's summarize the accounting process. First you need to identify an accounting transaction. Then you need to be able to measure specific attributes of that transaction, thirdly of course we need to record it in an accounting system and finally we need to periodically prepare financial statements. One of the major guiding principles or concepts of how we would go about this is called historical costs. Transactions are recorded at historical costs. Now recently the US has implemented requirements for fair value disclosures in addition to the historical cost recording of transactions and even more recently US GAP has implemented some new fair value pronouncements where accounting is actually done at fair value and certain balances are remeasured at every financial statement period and they will be measured at fair value and no longer at historical costs. Another major concept underlying the accounting process is accrual accounting. Now in accrual accounting cash is not necessarily relied upon to trigger an accounting event. Instead under accrual accounting revenue is recognized when a significant event in the earnings process has been completed and on the expense side accrual accounting states that expenses are recognized when it is reasonable and probable that an obligation has occurred. Now working in tandem with this is another accounting concept, accounting principle which is the matching concept and what this says is that expenses that relate to the generation particular of revenues is recognized in the same period as the revenues that are generated. Now there are many more concepts and underlying principles for accounting but these are the major ones to start with, historical costs, accrual accounting and the matching concept."