Accounting Concept and Principles
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It is important in the
preparation of financial
statements.
It is the foundation of
generally accepted
principle
Without this accounting
concepts there will be no
uniformity in the practice
of accounting
The financial statements
will be meaningless
GAAP (Generally Accepted Accounting
Principle)
» it refers to the common set of
accounting principles, standards and
procedures set by financial accounting
standards board (FASB)
» These are the guidelines on how we will
record every accounting transaction to
be able to record transaction with
uniformity and consistency
» Philippine Accounting Standards;
• PFRS – Philippine Financial
Reporting Standards
• PAS – Philippine Accounting
Standards
Concepts and Principles of Accounting
Economy Entity or Business Entity Concept
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The personal transaction of the owner is
separate and distinct from the business
Also known as separate entity concept
Going Concern
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The company will continue to operate
indefinitely until foreseeable future, and
that closure is imminent.
Also known as continuity concept
Accrual Basis of Accounting
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Revenue is recorded when earned,
regardless of when received. Expenses
are recorded when incurred regardless
of when paid.
Is the opposite of cash basis
We need to record the revenue and
expenses when it happens regardless
whether we already received the cash
or paid the expense.
Cash basis VS. Accrual Basis
CASH BASIS
REVENUE
EXPENSE
Received
Paid
ACCRUAL
BASIS
Earned
Incurred
Unit of Measure
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Transactions are expressed in a
monetary unit of measure.
Philippines unit of measure is
“Philippine Peso”
Time Period Concepts
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Transactions summarized and
reported at regular time interval
The business is divided to equal
accounting period where in the end
of each period financial statements
are repaired
The time periods can be either;
Monthly, Quarterly, Semi-Annually, or
Annually
A financial statement should be
prepared at least annually.
2 Accounting Time Period
• Calendar Year (Jan. 1 – Dec.
31)
• Fiscal Year (any starting point
but not Jan. 1)
Cost Principle
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Accounts should be recorded initially
at cost.
Matching Principles
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Matching revenues and expenses to
know the profit of the business.
Full Disclosure Principle
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Sufficient and relevant information
should be reported.
All information relevant to the
decision making should be reported
for the users to have informed
judgement.
Revenue Recognition Principle
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Conservatism
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If there are two acceptable alternatives
in a situation, choose the alternative that
will result in lesser income or resources.
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Accounting records should be based on
reliable and verifiable data as evidence
of transaction.
Objectivity follows honesty
Materiality
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This means that determining the
valuation of an item should be
practicable
Refers to the impact of an omission or
misstatements of in a company’s
financial statements on the user of
those statements.
Materiality depends on size and
nature of the item judge in the
particular circumstance of its
omission.
Recognize revenue when goods are sold
or service are rendered, regardless of
when cash is received.
Two conditions must be presented for the
recognition of revenue:
• It is probable that future
economic benefits will flow to the
enterprise
• The economic benefits can be
measured reliably.
Objectivity
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Qualitative characteristics
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To ensure the information are useful in making economic decisions
Fundamental
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Relates to the content or substance of financial information
RELEVANT
• The information has the capability of making difference in the decisions of users
• Predictive Value
~ The information can be used as an input to process employed by users to
predict future outcomes
• Confirmatory Value
~ Enables to check or confirm earlier predictions or evaluation
FAITHFUL REPRESENTATION
• The financial information in the financial reports should represent what it purports
to represent
• Complete
~ Adequate or full disclosure of all necessary information
• Neutral
~ Absence of bias, fairness
• Free from error
enhancing
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This only enhance the information that is already relevant and faithfully represented
VERIFIABILITY
• Reliable and Credible
COMPARABILITY
• Enable comparison within entity and across entity
~ Within Entity
- Compared to the accounting period to another
~ Across Entity
- Enables analysis of similarities and differences between different
companies.
UNDERSTANDABILITY
• The quality of the information that enables users to comprehend its meaning
• The accounting financial information should be presented using the following
guidelines;
~ Complete
~ Concise
~ Organized
TIMELINES
• How quick the information is available to the users of accounting information
• The less timely the less useful