The Basic Accounting Concepts -principles upon which the process of accounting is based. Used interchangeably with accounting assumptions and accounting theory. - some are derived from the Conceptual Framework and the PFRSS but some are implicit or generally accepted because of their long-time use. • Double-Entry System - each accountable event is recorded in two parts, the Debit and Credit. • Going Concern - the entity is assumed to carry on its operations for an indefinite period of time. • Separate Entity - the entity is treated separately from its owners. • Stable Monetary Unit amounts in the financial statements are stated in terms of a common unit of measure; changes in purchasing power are ignored. • Time Period - the life of the business is divided into series of reporting periods. • Materiality concept - information is material if its omission or misstatement could influence economic decisions. • Cost-benefit - the cost of processing and communicating information should not exceed the benefits to be derived from it. • Accrual Basis of Accounting - effects of transactions are recognized when they occur (and not as cash is received or paid) and they are recognized in the accounting periods to which they relate. • Historical Cost Concept - the value of an asset is determined on the basis of acquisition cost. • Concept of Articulation - all of the components of a complete set of financial statements are interrelated. • Full Disclosure Principle - financial statements provide sufficient detail to disclose matters that make a difference to users, yet sufficient condensation to make the information understandable, keeping in mind the costs of preparing and using it. • Consistency Concept - financial statements are prepared on the basis of accounting policies which are applied consistently from one period to the next. • Matching Principle- costs are recognized as expenses when the related revenue is recognized. • Residual Equity Theory - this theory is applicable where there are two classes of shares issued, ordinary and preferred. The equation is "Assets - Liabilities Preferred Shareholders' Equity = Ordinary Shareholders' Equity." • Entity Theory- the objective is proper income determination (matching of cost and revenues in the income statement). Exemplified by the equation "Assets Liabilities + Capital" • Proprietary Theory the objective is the proper valuation of assets in the balance sheet. Exemplified by the equation "Assets- Liabilities = Capital" • Fund Theory - the accounting objective is the custody and administration of funds. • Realization - the process of converting non-cash assets into cash or claims for cash. • Prudence (Conservatism) - the inclusion of a degree of caution in the exercise of the judgments needed in making the estimates required under conditions of uncertainty, such that assets or income are not overstated and liabilities or expenses are not understated. • Systematic and rational Allocation - costs that are not directly related to income generation are initially recognized as an asset and recognized as expenses over the period where their economic benefits are consumed. • Immediate recognition costs that do not/ceases to meet the definition of assets are expensed immediately. Note: Some accounting concepts are implicit, or they are not expressly stated in the framework but are generally accepted because of their long-time use in the profession.
