Cambridge IGCSE Accounting 0452 – Topic 7.1: Accounting Principles
Learning outcome
Students will be able to identify, explain and apply the eleven accounting principles required by the Cambridge IGCSE Accounting syllabus (0452). They will also be able to match statements to the correct principle, prepare adjusting entries, and evaluate the impact of applying (or ignoring) a principle on financial statements.
1. Overview of the eleven accounting principles
The syllabus lists the following principles. The wording below follows the exact phrasing used in the syllabus (the word “principle” is added for consistency).
| Principle |
Brief definition (exam‑style) |
| 1. Business‑entity principle | Transactions of the business are recorded separately from those of its owners or other businesses. |
| 2. Duality (double‑entry) principle | Every transaction affects at least two accounts – one debit and one credit – keeping the accounting equation in balance. |
| 3. Going‑concern principle | Financial statements are prepared on the assumption that the business will continue to operate for the foreseeable future. |
| 4. Historical‑cost principle | Assets are recorded at the cost paid at the time of acquisition and are not re‑valued to current market values. |
| 5. Money‑measurement principle | Only transactions that can be expressed in monetary terms are recorded. |
| 6. Realisation (revenue‑recognition) principle | Revenue is recognised when it is earned, not necessarily when cash is received. |
| 7. Matching principle | Expenses are recognised in the same period as the revenues they help generate. |
| 8. Prudence (conservatism) principle | Potential losses are recognised as soon as they are probable; potential gains are recorded only when realised. |
| 9. Consistency principle | Accounting methods and policies must be applied consistently from one period to the next. |
| 10. Materiality principle | Only items that could influence a user’s economic decisions need to be recorded and disclosed. |
| 11. Accrual basis of accounting | Transactions are recorded when they occur, not when cash is received or paid. |
2. Detailed look at each principle
2.1 Business‑entity principle
- Why it matters (exam relevance): Guarantees that the financial statements reflect only the business’s performance, preventing owner‑related transactions from distorting results.
- Worked example: John invests £5,000 of his personal savings into his shop.
Cash 5,000 Dr
Owner’s Capital 5,000 Cr
- Common error: Recording the owner’s personal expenses as business expenses.
- Exam tip: Always check whether the transaction relates to the business or the owner before posting.
2.2 Duality (double‑entry) principle
- Why it matters: Keeps the accounting equation
Assets = Liabilities + Capital in balance, which is essential for an accurate trial balance.
- Worked example: Purchase of equipment for £2,000 cash.
Equipment 2,000 Dr
Cash 2,000 Cr
- Common error: Forgetting the credit side of a transaction, leading to an unbalanced trial balance.
- Exam tip: After each entry, verify that total debits = total credits.
2.3 Going‑concern principle
- Why it matters: Allows assets to be valued at cost rather than at liquidation values, which would be lower.
- Worked example: A machine bought for £10,000 is recorded at £10,000 even though its market value today is £7,500, because the business intends to keep using it.
- Common error: Re‑valuing assets to current market prices without a change in accounting policy.
- Exam tip: Mention the going‑concern assumption when asked to justify the use of historical cost.
2.4 Historical‑cost principle
- Why it matters: Provides an objective, verifiable basis for asset values.
- Worked example: Land purchased for £15,000 is recorded at £15,000, even if its market value rises to £20,000 later.
- Common error: Adjusting the recorded cost of an asset to its current market price without an impairment loss.
- Exam tip: When a question asks for “recorded value”, think historical cost unless an impairment or revaluation policy is explicitly stated.
2.5 Money‑measurement principle
- Why it matters: Ensures that only quantifiable information is entered into the accounts.
- Worked example: Employee morale is important but cannot be measured in money, so it is not recorded in the accounts.
- Common error: Trying to record non‑monetary information such as “customer satisfaction”.
- Exam tip: If a transaction cannot be expressed in £, it is excluded from the financial statements.
2.6 Realisation (revenue‑recognition) principle
- Why it matters: Revenue is recognised when earned, giving a true picture of performance.
- Worked example: Services rendered on 30 Nov for £1,200, cash received on 5 Dec.
Accounts Receivable 1,200 Dr
Revenue 1,200 Cr
- Common error: Recognising revenue only when cash is received (cash‑basis error).
- Exam tip: Look for “earned” or “performed” wording – that signals revenue recognition.
2.7 Matching principle
- Why it matters: Links expenses to the revenues they generate, preventing over‑ or under‑statement of profit.
- Worked example: A company pays £600 for a 12‑month insurance policy on 1 Jan. The monthly expense is £50.
Prepaid Insurance 600 Dr
Cash 600 Cr
At the end of January, the adjusting entry is:
Insurance Expense 50 Dr
Prepaid Insurance 50 Cr
- Common error: Forgetting the adjusting entry, resulting in inflated profit.
- Exam tip: Always ask “Which revenue does this expense relate to?” when preparing adjusting entries.
2.8 Prudence (conservatism) principle
- Why it matters: Prevents the over‑statement of assets and income.
- Worked example (warranty provision): Expected warranty costs of £300 are recognised as an expense even though the actual out‑flow may be less.
Warranty Expense 300 Dr
Provision for Warranty 300 Cr
- Common error: Recording anticipated gains before they are realised.
- Exam tip: Look for wording such as “probable loss” – that signals a prudence adjustment.
2.9 Consistency principle
- Why it matters: Enables meaningful comparison of financial information across periods.
- Worked example: If straight‑line depreciation is used in Year 1, the same method must be used in Year 2 unless a justified change is disclosed.
- Common error: Changing depreciation methods without explanation.
- Exam tip: When a question asks for a comparative statement, assume the same policies have been applied unless told otherwise.
2.10 Materiality principle
- Why it matters: Focuses attention on information that could influence decisions.
- Worked example (immaterial purchase): A £5 office pen is bought in a company with £500,000 revenue.
Office Expenses 5 Dr
Cash 5 Cr
Because the amount is immaterial, it is recorded directly in an expense account rather than creating a separate ledger account.
- Common error: Recording every tiny transaction in separate accounts, cluttering the ledger.
- Exam tip: Use materiality to decide whether a transaction needs a separate journal entry or can be grouped.
2.11 Accrual basis of accounting
- Why it matters: Provides a more accurate picture of financial performance than cash basis.
- Worked example: Interest earned £120 on 31 Dec but received on 15 Jan.
Interest Receivable 120 Dr
Interest Income 120 Cr
- Common error: Mixing cash‑basis and accrual‑basis entries in the same set of statements.
- Exam tip: The syllabus expects all statements to be prepared on an accrual basis unless the question explicitly states otherwise.
3. Matching activity – apply what you have learned
Read each statement in Column A and write the correct letter (A–K) from Column B next to it. Note for teachers: the first option in Column B (“Cash basis”) is a *distractor* – it is not a principle required by the IGCSE syllabus. Students should recognise that it does not belong to the list of eleven principles.
| Column A – Statements |
Column B – Principles |
| 1. Transactions are recorded when cash is received or paid. | A. Cash basis (distractor) |
| 2. Transactions are recorded at the time they occur, regardless of cash flow. | B. Accrual basis of accounting |
| 3. Assets are recorded at their original cost and are not re‑valued. | C. Historical‑cost principle |
| 4. Revenue is recognised when it is earned, not when cash is received. | D. Realisation (revenue‑recognition) principle |
| 5. Expenses are matched with the revenues they help generate. | E. Matching principle |
| 6. The business is treated as a separate entity from its owners. | F. Business‑entity principle |
| 7. Every transaction affects at least two accounts. | G. Duality (double‑entry) principle |
| 8. Financial statements assume the business will continue operating. | H. Going‑concern principle |
| 9. Only transactions that can be expressed in monetary terms are recorded. | I. Money‑measurement principle |
| 10. Potential losses are recognised as soon as they are probable. | J. Prudence (conservatism) principle |
| 11. The same accounting methods must be used from one period to the next. | K. Consistency principle |
Answer key (teacher use)
- A (distractor – not a required principle)
- B
- C
- D
- E
- F
- G
- H
- I
- J
- K
4. Additional practice questions
- Multiple‑choice (1 mark): Which principle justifies the entry “Prepaid Rent Dr / Cash Cr” when rent is paid in advance?
- A. Matching principle
- B. Accrual basis of accounting
- C. Historical‑cost principle
- D. Consistency principle
Answer: B
- Short answer (2 marks): Explain why the business‑entity principle is important when a proprietor withdraws cash for personal use.
- Calculation (4 marks): A machine costing £12,000 is depreciated using the straight‑line method over 4 years with no residual value. Prepare the annual depreciation journal entry and show its effect on the profit‑and‑loss account for the first year.
- Evaluation (3 marks – AO3): Discuss the consequences of preparing a Statement of Financial Position without applying the going‑concern principle.
5. Quick‑revision checklist (exam day)
- Identify which principle each statement refers to – use the table in Section 1 as a reference.
- Remember that the IGCSE requires the accrual basis of accounting; cash‑basis entries are only distractors.
- Value assets at historical cost unless a specific revaluation or impairment policy is given.
- Apply the matching principle when preparing adjusting entries for prepaid expenses, accrued expenses, depreciation, and inventory.
- Maintain consistency of accounting policies across periods; disclose any justified changes.
- Use materiality to decide whether a transaction needs a separate journal entry or can be grouped.
- When asked to evaluate, consider the impact on asset valuation, profit measurement, and the reliability of the financial statements.