topic 3

• Accounting Concepts and Principles serve as rules and guidelines when preparing financial reports, ensuring that a financial report is complete, consistent, and comparable.
• Generally Accepted Accounting Principles (GAAP) is a set of guidelines, principles, and procedures that companies and accountants follow when preparing financial statements and reporting it to the users of financial information.
• The Business Entity concept in accounting recognizes the business as a separate entity, separating records for business transactions and personal transactions.
• The Monetary Unit Concept in accounting states that only information on transactions that can be quantified or measured in terms of money should be included.
• The Going Concern Principle in accounting assumes that a business entity would continue its operations, that it is stable and can meet its obligations.
• The Time Period Principle in accounting states that financial transactions should be reported over a standard period, with one accounting period being equal to one year.
• A calendar year is a twelve-month period, starting from January 1 to December 31.
• A fiscal year is a twelve-month period, which may not necessarily start on January 1.
• Full Disclosure Principle - including all relevant and necessary information that would affect the user’s understanding of the financial statement
• Conservatism Principle - assets and revenue should not be overstated - liabilities and expenses should not be understated
• April 1 - March 31 Objectivity Principle - reporting based on solid evidence - avoiding opinionated or biased financial statements
• Accrual Accounting Principle - recording revenue and expenses when incurred rather than when payment is received or made
• Matching Principle - reporting revenues and related expenses together in the same time period - showing the cause - and - effect relationship in a transaction
• Revenue Recognition Principle - recognizing revenue when it is realized and earned - example: when goods or services are received, even if the customer has not paid yet
• Materiality Principle - Businesses deal with significant information, those considered business-critical - example: transactions with no significant effect on the net profit or loss may be recorded as expense
• Cost Principle - recording acquired assets, liabilities, and equity investments at their original cost - does not take inflation and depreciation into account
• Application of Accounting Concepts and Principles are sets of rules and guidelines that a business follows when preparing financial reports to ensure that a company’s reports are valid, reliable, consistent, and comparable.
• Business Entity Concept states that financial transactions must be recorded separately from those of its owners and other businesses.
• Monetary Unit Concept requires recording only the transactions that can be expressed in terms of a currency.
• Going Concern Principle assumes that a business entity will operate indefinitely.
• Time Period Principle states that financial transactions must be reported in a standard period of time.
• Objectivity Principle requires financial reports to be based on solid evidence.
• Cost Principle states that acquired assets, liabilities, and equity investments should be recorded at their original cost.
• Accrual Accounting Principle involves recording revenues when earned and expenses as incurred.
• Revenue Recognition Principle guides businesses on how and when revenue is to be recognized.
• Matching Principle states that revenues are reported together with related expenses in the same reporting period.
• Full Disclosure Principle requires including all relevant and necessary information relevant to the understanding of the financial statements.
• Conservatism Principle states that assets and revenue should not be overstated and liabilities and expenses should not be understated.
• Materiality Principle allows companies to ignore some misstatements if the impact is immaterial.