Accounting Principles
Module 1:
Foundations of Accounting
Duration:
45-60 minutes
Level:
Beginner to Diploma-Level
Lesson Objectives
➛ Explain what accounting principles are.
➛ Describe the difference between GAAP and IFRS.
➛ Identify key accounting principles | revenue recognition, matching, etc.
➛ Apply principles to simple real-life scenarios.
➛ Distinguish between rule-based and principle-based systems.
Key Vocabulary
➛ GAAP
➛ IFRS
➛ FASB
➛ IASB
➛ Principle-based
➛ Rule-based
➛ Revenue Recognition
➛ Matching Principle
➛ Conservatism
➛ Historical Cost
➛ Full Disclosure
What Are Accounting Principles?
Accounting principles are the rules, concepts, and guidelines used to prepare financial statements.
They ensure
➛ Accuracy
➛ Consistency
➛ Comparability
➛ Transparency
Two major systems exist
➛ Generally Accepted Accounting Principles
➛ International Financial Reporting Standards
Generally Accepted Accounting Principles
➛ Used mainly in the United States
➛ Created by Financial Accounting Standards Board
➛ Rule-based | very detailed rules
➛ Less flexibility
➛ Strong focus on consistency and structured reporting
International Financial Reporting Standards
➛ Used in 140+ countries worldwide
➛ Created by International Accounting Standards Board
➛ Principle-based | broader guidelines
➛ More flexibility and professional judgment
➛ Focuses on economic reality
GAAP vs IFRS | Simple Comparison
Topic
Approach
Flexibility
LIFO
Revaluation of assets
Development costs
Approach
Flexibility
LIFO
Revaluation of assets
Development costs
GAAP
Rule-based
Low
Allowed
Rare
Expense
Rule-based
Low
Allowed
Rare
Expense
IFRS
Principle-based
High
Not allowed
Allowed
Some capitalized
Principle-based
High
Not allowed
Allowed
Some capitalized
Key Accounting Principles
Revenue Recognition Principle
Record revenue when it is earned, not when cash is received.
Matching Principle
Expenses must match the revenue they helped produce.
Full Disclosure Principle
All necessary information must be stated in the financial statements and notes.
Historical Cost Principle
Record assets at their original cost.
Conservatism Principle
When uncertain, choose the method that does not overstate profits or assets.
Consistency Principle
Use the same accounting methods each period.
Materiality Principle
Ignore small items that do not affect decision-making.
Objectivity Principle
Use verifiable evidence | receipts, invoices.
GAAP or IFRS?
Identify whether it belongs to GAAP or IFRS
➛ Uses LIFO
➛ Allows revaluation of land
➛ Uses detailed rules
➛ Uses broad guidelines
Identify the Principle
➛ Revenue recorded when service is provided
➛ Asset recorded at purchase price
➛ Notes added to explain financial statements
➛ The same depreciation method used every year
➛ Business avoids overstating profit
True or False
➛ IFRS allows LIFO.
➛ GAAP is rule-based.
➛ Full disclosure means hiding information.
➛ Conservatism avoids overstating assets.
➛ Revenue should be recorded when cash is received.
Mini Case Study
A mobile phone shop sells phones on credit. In December, it earns KES 450,000, but customers will pay in January.
The company records the revenue in December.
Questions
➛ Which accounting principle applies?
➛ Why not record the revenue in January?
➛ Is this rule the same under GAAP and IFRS?
Quick Quiz
➛ What does GAAP stand for?
➛ What does IFRS stand for?
➛ Which system is used in Kenya?
➛ Name one accounting principle.
➛ True or False | Historical cost means recording assets at their market value.
Answers ➧ Here
Accounting Equation ➧ Here