Core Accounting Principles and Valuation Methods Explained

Core Accounting Principles

Principle of Uniformity

Indicates that once an accounting standard is adopted, it must be maintained over time and applied uniformly without altering the approach taken. If this criterion is changed, the change must be informed, indicating the quantitative and qualitative impact.

No-Netting Principle

Prevents the offsetting of asset and liability items; they must appear to be reflected and valued separately.

Principle of Materiality

Recognizes that strict compliance with every accounting principle and criterion is not necessary if it does not affect the true image of the company. Therefore, small accounting errors are allowed, provided they do not alter the company's true picture.

Accrual Basis

States that any income or expense should be recorded when incurred, regardless of when it is received or disbursed.

Precautionary Principle

Each year, only benefits made with certainty will be counted. In contrast, losses and risks, even if only possible and predictable, are calculated from the moment they are known.

Principle of Correlation of Income and Expenses

Provides that the profit or loss is equal to the sum of all revenue for the year less the sum of all expenses for the year.

Start of Registration

Economic facts must be registered when the rights or obligations arising therefrom occur.

Assessment Criteria for Assets and Liabilities

Historical Cost

This is the purchase price or production cost. The purchase price is the cash amount paid plus all the tradeoffs resulting from the acquisition necessary to place the asset into operation.

Fair Value

This is the amount by which an asset could be exchanged or a liability settled between knowledgeable, willing, and informed parties conducting a transaction at arm's length, without considering transaction costs.

Net Realizable Value

For an asset, this is the amount the company can gain from its sale in the market, after deducting the necessary costs to carry out the sale.

Current Value

For an asset or a liability, the present value is the amount of the cash flows received or paid in the ordinary course of business, discounted using an appropriate discount rate.

Value in Use

For an asset or a cash-generating unit, this is the present value of expected future cash flows in the ordinary course of business, discounted up to a market rate without risk.

Amortized Cost

For a financial instrument, this is the amount at which a financial asset or financial liability was initially valued, less principal repayments that would have occurred.

Book Value

This is the amount by which a net asset or liability is recorded in the Balance Sheet.

Residual Value

The residual value of an asset is the amount that could currently be obtained from its sale, net of selling costs, if the asset had reached the end of its useful life.