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Christine Miranda China TRAVEL ACCOUNTING

BSTM-

Accounting Principles Definition of 'Accounting Principles' The rules and guidelines that companies must follow when reporting financial data. The common set of accounting principles is the generally accepted accounting principles (GAAP). To remain listed on many major stock exchanges in the U.S., companies must file regular financial statements reported according to GAAP. Accounting principles differ around the world, and countries usually have their own, slightly different, versions of GAAP. According to investopedia, accounting principles explains that investors should be aware of these differences and account for them when comparing companies in different countries. The problem of differences in accounting principles does not much affect mature markets. Still, investors should be careful, since there is still leeway for the distortion of numbers under many sets of accounting principles. Business Entity Concepts In accounting we treat a business or an organization and its owners as two separately identifiable parties. This concept is called business entity concept. It means that personal transactions of owners are treated separately from those of the business. Businesses are organized either as a proprietorship, a partnership or a company. They differ on the level of control the ultimate owners exercise on the business, but in all forms the personal transactions of the owners are not mixed up with the transactions and accounts of the business. Exchange price of cost principle The cost principle is an accounting concept that states goods and services should be recorded at their original or historical cost. This concept is mainly used when recording short- and long-term assets and liabilities or equity investments. This concept takes a conservative approach when recording items into the companys accounting ledger. Detractors of the historical cost principle believe this concept does not present the most current or most accurate value for balance sheet items. Even though many accounting educators and theorists have criticized the historical cost principle, it is still the most widely used method for recording items in accounting ledgers. Current assets, such as inventory, short-term market securities and accounts receivable are recorded at historical cost since this is the value at which these items are worth and may be sold for in the open market. Although the value of these items may change frequently in the open market, they remain on the accounting ledgers at historical cost until sold. Once sold, the company will recognized a gain or loss on these items depending on the sale price. Going Concern Concept Financial statements are prepared assuming that the company is a going concern which means that the company intends to continue its business and is able to do so. The status of going concern is important because if the company is a going concern it has to follow the generally accepted accounting standards. The auditors of the company determine whether the company is a going concern or not at the date of the financial statements.

Disclosure Principle It states that you should include in an entity's financial statements all information that would affect a reader's understanding of those statements. Your interpretation of this principle is highly

judgmental, since the amount of information that can be provided is potentially massive. To reduce the amount of disclosure, it is customary to only disclose information about events that are likely to have a material impact on the entity's financial position or financial results. This disclosure may include items that cannot yet be precisely quantified, such as the presence of a dispute with a government entity over a tax position, or the outcome of an existing lawsuit. Full disclosure also means that you should always report existing accounting policies, as well as any changes to those policies (such as changing an asset valuation method). Several examples of full disclosure are: The nature and justification of a change in accounting principle The nature of a non-monetary transaction The nature of a relationship with a related party with which the business has significant transaction volume The amount of encumbered assets The amount of material losses caused by the lower of cost or market rule A description of any asset retirement obligations The facts and circumstances causing goodwill impairment You can include this information in a variety of places in the financial statements, such as within the line item description in the income statement or balance sheet, or in the accompanying disclosures.