lesson 3

• Accounting concepts and principles


  a set of logical ideas and procedures that guide the accountant in recording and communicating economic information. provide a general frame of reference by which accounting practice can be

  evaluated and they serve as guide in the development of new practices and procedures.
• Philippine Financial Reporting Standards (PFRSs)


  the Standards
• Separate entity concept


  Under this concept, the business is viewed as a separate person, distinct from its owners. Only the transactions of the business are recorded in the books of accounts. The personal transactions of the business owners are not recorded.
• Historical cost concept (Cost principle)


  Under this concept, assets are initially recorded at their acquisition cost.
• Going concern assumption


  Under this concept, the business is assumed to continue to exist for an indefinite period of time. This is necessary for accounting measurements to be meaningful. For example, measuring assets at historical cost (historical cost concept) is appropriate only when the business is a going concern.
• liquidating concern.


  the business intends to end its operations or if it has no other choice but to do so, (e.g., the business is bankrupt). The assets of a liquidating concern are measured at net selling price rather than at historical cost.
• Matching (or Association of cause and effect)


  Under this concept, some costs are initially recognized as assets and

  charged as expenses only when the related revenue is recognized.
• Accrual Basis of accounting


  Under the accrual basis of accounting, economic events are recorded in the period in which they occur rather than at the point in time when they affect cash.
• cash basis- recognizing income - cash received
• accrual basis - recognize income - earned but not yet received (record 1st)
• Prudence (or Conservatism)


  Under this concept, the accountant observes some degree of caution when exercising judgments needed in making accounting estimates under conditions of uncertainty. (negative)
• Time Period (Periodicity, Accounting period, or Reporting period concept)


  Under this concept, the life of the business is divided into series of reporting periods.
• calendar year period


  January 1 and ends on December 31 (12 months) same year.
• fiscal year period


  also covers 12 months but starts on a date other than January 1, e.g., July 1, 2019 to June 30, 2020.
• interim period


  can be a month, a quarter (3 months) or a semiannual period (6 months). is shorter than 12 months
• Stable monetary unit


  Under this concept, assets, liabilities, equity, income and expenses are stated in terms of a common unit of measure, which is the peso in the Philippines. Moreover, the purchasing power of the peso is regarded

  as stable. Therefore, changes in the purchasing power of the peso due to inflation are ignored.
• Materiality concept


  This concept guides the accountant when applying accounting principles. This is because accounting principles are applicable only to material items.
• Cost-benefit (Cost constraint)


  Under this concept, the cost of processing and communicating information should not exceed the benefits to be derived from it.
• Full disclosure principle


  This concept is related to both the concepts of materiality and cost-benefit. Under the full disclosure principle, information communicated to users reflect a series of judgmental trade-offs that strive for Sufficient detail and Sufficient condensation
• Sufficient detail


  to disclose matters that make a difference to users
• Sufficient condensation


  to make the information understandable, keeping in mind the costs of preparing and using it.
• Consistency concept


  This concept requires a business to apply accounting policies consistently, and present information consistently, from one period to another. This means that like transactions must be accounted for in like manner.
• in Accounting standards Accounting concepts and principles are either explicit or implicit.
• Explicit concepts and principles


  are those that are specifically mentioned in the Conceptual Framework for Financial Reporting and in the Philippine Financial Reporting Standards (PFRSs).
• Implicit concepts and principles


  are those that are not specifically mentioned in the foregoing but are customarily used because of their general and longtime acceptance within the accountancy profession.