Accounting Principles and Assumptions

Study Notes

Expense Recognition Principle (Matching Principle): Requires recording expenses incurred to generate reported revenue, essential for accurate financial reporting.
Full Disclosure Principle: Mandates detailed reporting behind financial statements, often through footnotes, to ensure informed decision-making by users.

Going Concern Assumption: Assumes a business will continue operating, affecting the valuation of assets reported at cost rather than liquidation value.
Monetary Unit Assumption: Permits expressing transactions in monetary terms, establishing a common denominator for accounting; companies may use multiple currencies based on operations.
Time Period Assumption: Suggests a company's lifespan can be divided into time periods (months/years) for reporting purposes.
Business Entity Assumption: Treats a business as a separate entity from its owners, necessitating distinct financial information for effective decision-making.

Sole Proprietorship: Owned by one person, no legal distinction between owner and business; advantages include tax simplicity, while disadvantages include unlimited liability for debts.
Partnership: Owned by two or more individuals with shared liability; requires an agreement on profit/loss sharing; may have unlimited liability unless structured as specific types of partnerships.

Limited Partnership (LP): Comprises general partners with unlimited liability and limited partners whose liability is restricted to their investment.
Limited Liability Partnership (LLP): Shields partners from liabilities arising from the negligence of other partners while still being accountable for partnership debts.

Combines limited liability benefits of a corporation with the tax advantages of a partnership, popular for proprietorships and partnerships.

Corporation: A legal entity separate from its owners, responsible for its actions and debts; provides limited liability to owners (shareholders), protecting personal assets.
Double Taxation: Refers to taxation at both the corporate level and on dividends received by shareholders, leading to a higher overall tax burden.

Qualified Dividends: Special tax treatment rates for specific dividends, typically lower than ordinary income tax rates, encouraging investment in corporations.