Concept: historical cost

The actual amount paid or received is the amount recorded in accounting records.

A microcomputer is advertised at a price of $1,500.00. However, John Workoski arranges to buy the microcomputer for $1,200.00. The micro­computer is recorded at a value of $1,200.00. A year later, Mr. Workoski has a disk drive installed in the microcomputer at a cost of $695.00. His total historical cost is now $1,895,00, Mr. Workoski believes he could sell the microcomputer for §2,000.00. However, accounting practice requires that all things be recorded at a historical cost that is known. Therefore, Mr. Workoski's records continue to show the microcomputer's value as $1,895.00, the definite, known value.

CONCEPT: Adequate Disclosure

Financial statements should contain all information necessary for a reader to understand a business' financial condition.

Many persons need a business' financial information. These persons include owners, managers, bankers, and other executives. All financial information must be reported if good business decisions are to be made. A financial statement with incomplete information is similar to a book with missing pages. The complete story is not told.

CONCEPT: Consistent Reporting

In the preparation of financial statements, the same accounting concepts are applied in the same way in each accounting period.

Sarah keeps records about her school costs. In her personal records last year, Sarah reported the number of lunches she bought at school. This year Sarah reported the amount she spent for lunches at school. Sarah cannot compare her lunch costs for the two years very effectively because she has not been consistent in reporting lunch costs.

Owners and managers use information reported on financial statements when making business decisions. Information from one year is often compared to similar information for the previous year. If accounting information is recorded and reported differently from one year to the next, the information cannot be compared. Unless changes in recording and reporting make information more easily understood, changes in accounting methods are not made.

CONCEPT: Prudence

Revenues and profits are only included in the accounts when they are realized or their realization is reasonably certain.

This is the concept that where alternative procedures, or alternative valuations, are possible, the one selected should be the one which gives the most cautious presentation of the business’s financial position or results.