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Generally Accepted Accounting Principles

The document discusses the underlying assumptions, general principles, modifying constraints, and qualitative characteristics of generally accepted accounting principles (GAAP). It provides examples to illustrate the economic entity, going concern, monetary unit, and periodicity assumptions. Additional examples demonstrate applying the cost principle, revenue recognition, matching, full disclosure, materiality, cost-benefit, and conservatism in financial reporting.

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79 views

Generally Accepted Accounting Principles

The document discusses the underlying assumptions, general principles, modifying constraints, and qualitative characteristics of generally accepted accounting principles (GAAP). It provides examples to illustrate the economic entity, going concern, monetary unit, and periodicity assumptions. Additional examples demonstrate applying the cost principle, revenue recognition, matching, full disclosure, materiality, cost-benefit, and conservatism in financial reporting.

Uploaded by

dea
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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ACTBAS1

GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES
GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES

 Underlying Assumptions
 General Principles
 Modifying Constraints
 Qualitative Characteristics
GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES (UNDERLYING
ASSUMPTIONS)

 SCENARIO (ECONOMIC ENTITY)


Johnny Raffles opened a laundry shop last August 31, 2015.
The following events took place:
a. He purchased a new washing machine to be used
in his laundry shop.
b. He purchased a delivery van that is to be used in
deliveries to customers.
c. He borrowed P150,000 from a bank for his personal
use.
GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES (UNDERLYING
ASSUMPTIONS)

 SCENARIO (GOING CONCERN)


Entity A violated some regulations which would require
payment of large amounts of penalties as a form of
sanction. The owner of Entity A assesses that the
penalties can be paid by the entity and will not affect
business operations.

Entity B is faced with great financial difficulties, with


maturing obligations that it cannot pay. The owner of
Entity B sees that the entity should declare Bankruptcy.
GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES (UNDERLYING
ASSUMPTIONS)

 SCENARIO (MONETARY UNIT)


Algeria owns a beauty salon in Manila. She employs 12
workers who provide services to her beauty salon.
Each month, workers in her parlor are paid P15,000 as
their salary in exchange of services rendered in the
salon.

Through expressing in monetary terms, we are able to


quantify and measure the worth of the SERVICES
provided by Algeria’s employees to her business.
GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES (UNDERLYING
ASSUMPTIONS)

SCENARIO (TIME PERIOD OR PERIODICITY)


Rachel owns a restaurant business that opened last
January 1. She was eager to measure the activities of
her business every quarter. As such, in order to properly
monitor her business activities, quarterly and annual
financial statements are prepared.
GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES (GENERAL PRINCIPLES)

SCENARIO (COST PRINCIPLE)


Last January 1, 2014, Alloysius bought a delivery van for
his water refilling station at a cost of P1,600,000. On
December 31, 2015, the fair market value of the
delivery van is P1,2000,000.
• The delivery van, is to be recorded on January 1,
2014 at its acquisition cost, P1,600,000.
• On December 31, 2015, it will still be shown at cost of
P1,600,000 less any depreciation.
GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES (GENERAL PRINCIPLES)

SCENARIO (COST PRINCIPLE)


Last January 1, 2014, Alloysius bought a delivery van for his
personal use at a cost of P1,600,000. On January 1, 2015, he
decided to invest the delivery van in his water refilling
station. At that time, the fair market value of the van is
P1,400,000.
• The delivery van, is not to be recorded on January 1, 2014
because it is for Alloysius’ personal use.
• On January 1, 2015, the delivery van is to be recorded in
the accounting books since it is now invested in the
business at its fair market value of P1,400,000
GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES (GENERAL PRINCIPLES)

SCENARIO (REVENUE RECOGNITION)


Last August 31, 2015, Emily went to Victoria’s Hand and
Foot Spa. Emily felt relaxed because of the services
provided to her by Victoria’s staff. When it’s time to
pay her bill, Emily told Victoria that she will pay next
week September 7, 2015, to which Victoria agreed.
Since the services were fully rendered on August 31,
2015, revenue is considered earned and therefore
recorded in the accounting books even if payment will
still be received on September 7.
GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES (GENERAL PRINCIPLES)

SCENARIO (MATCHING)
For the month of August, Jamie earned P75,000
revenue arising from her buy and sell business of hand-
crafted bags. Cost of the bags sold for August
amounted to P55,000.

Revenues earned in August P75,000


Expenses incurred in August (55,000)
Net Income (Net Loss) P20,000
GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES (GENERAL PRINCIPLES)

SCENARIO (FULL DISCLOSURE)


As of December 31, 2014, Paul reported a building
which houses its operations as one of its assets. On
January 1, 2015, a fire broke out and the building was
destroyed by fire.

Paul should disclose in its financial statements that the


building was destroyed by fire that broke out January
1, 2015.
GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES (MODIFYING
CONSTRAINTS)

SCENARIO (MATERIALITY)
A business purchased a stapler worth P200.
Q: How would the business account for the P200-worth
stapler?
A: It depends upon the materiality of the P200 stapler.
If the business is reporting a P1,000 net income, the
P200 is considered material.
If the business is reporting a P100,000 net income, the
P200 is considered immaterial and should be expensed.
GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES (MODIFYING
CONSTRAINTS)

SCENARIO (COST-BENEFIT)
A business purchased a stapler worth P200. The owner
is considering preparing a detailed depreciation
schedule with respect to the stapler.
Applying cost-benefit, it would be costly, in terms of
time and effort to prepare the detailed schedule for a
P200 stapler. If the item is immaterial, a detailed
schedule need not be prepared because the cost of
preparing the schedule exceeds the benefit that could
be obtained.
GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES (MODIFYING
CONSTRAINTS)

SCENARIO (CONSERVATISM)
Entity X is uncertain as to how specific Asset and
Income items are to be measured, in the presence of
competing alternatives.
ALTERNATIVE 1 ALTERNATIVE 2 CHOICE
ASSET P20,000` P35,000 P20,000
INCOME P45,000 P25,000 P25,000

In the presence of uncertainty, an understatement of


assets or income is preferred rather than an
overstatement.

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