Accounting Concepts and Principles

• The concept of going concern assumes that the business will continue to operate into the foreseeable future.
• The matching principle states that revenues and expenses must be matched against one another in the same period.
• The accounting principle of materiality refers to whether or not an item or transaction is significant enough to be included in financial statements. Materiality depends on the size of the item and its nature, and is determined by its implications relative to other items.
• The concept of accrual basis of accounting requires revenue and expenses to be recorded when they are earned or incurred, regardless of whether cash has been received or paid out.
• Accounting is known as the language of business, communicating the financial condition and performance of a business to interested users for decision-making purposes
• Generally Accepted Accounting Principles (GAAP) are a widely accepted set of rules, concepts, and principles that govern the application of accounting procedures
• Accounting standards used in the Philippines are Philippine Accounting Standards (PAS) and Philippine Financial Reporting Standards (PFRS) adopted by the Financial Reporting Standards Council (FRSC)
• Underlying Accounting Assumptions:

  • Economic Entity Assumption: business transactions are separate from the business owner's personal transactions
• Basic Accounting Principles:

  • Cost Principle: amount spent when an item was obtained, not adjusted for inflation
• GAAP has been developed by the accounting professionals to guide preparers of financial statements in recording and reporting financial information regarding a business enterprise, hence aiding in the effective execution of the accounting procedure and in communicating the financial condition of the business.
• In the practice of financial accounting, basic assumptions are important to an understanding of the manner in which data are processed and presented.
• Basic accounting principles are detailed accounting rules and guidelines that entities must follow when measuring, recording,. and reporting financial data.
• Basic Accounting Principles:

  • Full Disclosure Principle: include sufficient information in financial statements for stakeholders to make informed judgments
• Basic Accounting Principles:

  • Matching Principle: expenses should be matched with revenues in a given accounting period
• Basic Accounting Principles:

  • Revenue Recognition Principle: revenues recognized when goods are sold or services rendered, regardless of when money is received
• Basic Accounting Principles:

  • Objectivity Principle: transactions require impartial supporting evidence, and financial recording should be free of bias
• Underlying Accounting Assumptions:

  • Accrual Basis Assumption: all business transactions and events are recognized when they occur
• Underlying Accounting Assumptions:

  • Going Concern Assumption: a business entity is assumed to remain in existence for an indeterminate period
• Underlying Accounting Assumptions:

  • Monetary Unit Assumption: only transactions expressible in money are recorded
• Underlying Accounting Assumptions:

  • Time-Period Assumption: economic entity's life is divided into artificial time periods for periodic reports
• Fundamental Qualitative Characteristics of accounting information:

  • Relevance: capable of making a difference to the decisions made by users
  • Predictive value: helpful in making predictions about ultimate outcomes of past, present, and future events
  • Confirmative Value: helps users to confirm or correct prior expectations
• Fundamental Qualitative Characteristics of accounting information:

  • Materiality: business transactions that may affect the decision of a user of financial information are considered important or material and must therefore be reported properly
• Fundamental Qualitative Characteristics of accounting information:

  • Faithful Representation: financial reports represent what really existed or happened, accounting information must be complete, neutral, and free from error
• Fundemental Qualitative Characteristics are attributes that make accounting information useful to the users.
• Enhancing Qualitative Characteristics in financial statements:

  • Completeness: All necessary information is fully disclosed, facilitating understanding and avoiding erroneous implications
• Enhancing Qualitative Characteristics in financial statements:

  • Neutrality: Accounting information is unbiased and serves the common needs of many users
• Enhancing Qualitative Characteristics in financial statements:

  • Free from Error: Ensures no inaccuracies or omissions of information
• Enhancing Qualitative Characteristics in financial statements:

  • Comparability: Enables users to identify similarities and differences between two sets of economic events
• Enhancing Qualitative Characteristics in financial statements:

  • Verifiability: Information faithfully represents what it purports to, supported by evidence
• Enhancing Qualitative Characteristics in financial statements:

  • Timeliness: Information is available to decision makers when needed
• Enhancing Qualitative Characteristics in financial statements:

  • Understandability: Quality of information allows users to perceive its significance