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Fundamental Accounting Concepts and Principles

The document discusses key accounting concepts and principles including: 1) The economic entity concept which separates a business' transactions from its owners. 2) The going concern assumption which assumes a business will continue operating for the foreseeable future. 3) The periodicity concept which divides a business' life into equal accounting periods for reporting. 4) Fundamental principles like historical cost, materiality, revenue/expense recognition, and adequate disclosure.

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Arvin Toralde
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67 views

Fundamental Accounting Concepts and Principles

The document discusses key accounting concepts and principles including: 1) The economic entity concept which separates a business' transactions from its owners. 2) The going concern assumption which assumes a business will continue operating for the foreseeable future. 3) The periodicity concept which divides a business' life into equal accounting periods for reporting. 4) Fundamental principles like historical cost, materiality, revenue/expense recognition, and adequate disclosure.

Uploaded by

Arvin Toralde
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Basic Accounting

Concepts and Principles


Financial Accounting and Reporting
Fundamental Accounting Concepts
and Underlying Assumption
Economic entity concept
• Transaction associated with an entity must be separately recorded from those its owners or other
entities.

• Transactions and balances of the business are recorded in the accounting records, while
transactions and balances of the owners are excluded.

• Comingled transactions (i.e., business transactions mixed with that of the owners and vice versa)
must be properly identified and charged to the proper party.

• Economic entity concept will not prevent the owners from accessing the assets of the business,
however, its accounting treatment will be different compared to business transactions.
Going concern assumption
• An entity is viewed as a continuing business in the foreseeable future, unless there is
evidence to the contrary.

• At the minimum, the Company is expected to continue operating within 12 months


from reporting date.

• If there is evidence showing that the Company is no longer a going concern, it shall
disclose such fact and discontinue the use going concern assumption.
Periodicity concept
• An entity’s life can be divided into meaningfully equal time period
(“accounting periods”) for reporting purposes.
• Sets the frequency of financial reporting to users.
Fiscal year
12 months on different year

2020 2021

Calendar year Interim period


12 months within the same year less 12 months (monthly, quarterly, semi-annual)
Stable monetary unit concept
• Assumes that the value of a currency (Philippine Peso) is stable over time.
• Impact of inflation is disregarded.
Fundamental accounting principles
Historical cost
• Transaction and balances are carried at actual cost, unless required/
permitted by the standard to use a different measurement basis.
Materiality
• Financial reporting is concerned with information that is significant enough
to affect evaluations and decisions.
• Accounting information is deemed material if its inclusion or exclusion can
change user’s decisions.
Revenue recognition principle
• Revenue is recognized in the period realized or earned irrespective of the
timing of cash receipt.
• Revenue is said to be earned when services are rendered, or goods were
delivered to the customer.
• When cash is received after the delivery of goods or services, the company
recognizes a receivable.
• When cash is received before the delivery of goods or services, the company
recognizes a liability.
Expense recognition principle
• Expense is recognized in the period incurred or used up irrespective of the
timing of cash payment.
• Expense is said to be incurred when services are provided by, or goods were
received from the supplier.
• When cash is paid after the receipt of goods or services, the company
recognizes a liability.
• When cash is paid before the receipt of goods or services, the company
recognizes an asset.
Adequate disclosure
• The entity should provide footnotes, supplementary schedule and other
relevant information that will complement the figures in the financial
statement and give the users a better understanding of the Company's
financial statement.

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