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FAR1_SELFPACED-MODULE

Chapter 2 of Financial Accounting and Reporting 1 focuses on accounting concepts and principles, outlining fundamental ideas that guide accountants in recording economic information. It discusses basic accounting concepts such as the separate entity concept, historical cost principle, and going concern assumption, as well as qualitative characteristics of useful financial information. Additionally, it highlights the Philippine Financial Reporting Standards (PFRSs) and relevant regulatory bodies that influence accounting practices.

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7 views

FAR1_SELFPACED-MODULE

Chapter 2 of Financial Accounting and Reporting 1 focuses on accounting concepts and principles, outlining fundamental ideas that guide accountants in recording economic information. It discusses basic accounting concepts such as the separate entity concept, historical cost principle, and going concern assumption, as well as qualitative characteristics of useful financial information. Additionally, it highlights the Philippine Financial Reporting Standards (PFRSs) and relevant regulatory bodies that influence accounting practices.

Uploaded by

mariellerienna
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 DOCX, PDF, TXT or read online on Scribd
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Financial Accounting and Reporting 1 || Chapter 2 || Week 2

SUBJECT: FINANCIAL ACCOUNTING & REPORTING 1

PROFESSOR: MS. KRISHA JOY M. VILLARIN, CPA

Chapter 2
Accounting Concepts and Principles
Learning Objectives

1. Give examples of accounting concepts and principles.

2. Apply the concepts in solving accounting problems.

ACCOUNTING CONCEPTS AND PRINCIPLES

- are a set of logical ideas and procedures that guide the accountant in
recording and communicating economic information.
- provide reasonable assurance that information communicated to users
is prepared in a proper way.

ACCOUNTING ASSUMPTIONS

- basic notions or fundamental premises on which the accounting


process is based.
- serve as the foundation or bedrock of accounting in order to avoid
misunderstanding but rather enhance the understanding and
usefulness of financial statements.

BASIC ACCOUNTING CONCEPTS

1. Separate entity concept – The business is viewed as a separate


entity, distinct from its owner(s). Only the transactions of the business
are recorded in the books of accounts. The personal transactions of the
business owner(s) are not recorded.
2. Historical cost concept (Cost principle) – assets are initially
recorded at their acquisition cost.
3. Going concern assumption – The business is assumed to continue to
exist for an indefinite period of time.

CARD-MRI Development Institute, Inc. Modular Learning


Financial Accounting and Reporting 1 || Chapter 2 || Week 2

4. Matching – Some costs are initially recognized as assets and charged


as expenses only when the related revenue is recognized.
5. Accrual Basis of accounting – income is recorded in the period when
it is earned rather than when it is collected, while expense is recorded
in the period when it is incurred rather than when it is paid.
6. Prudence – The observance of some degree of caution when
exercising judgments under conditions of uncertainty. Such that, if
there is a choice between a potentially unfavorable outcome and a
potentially favorable outcome, the unfavorable one is chosen. This is
necessary so that assets or income are not overstated and liabilities or
expenses are not understated.
7. Reporting Period – The life of the business is divided into series of
reporting periods.
8. Stable monetary unit – Assets, liabilities, equity, income and
expenses are stated in terms of a common unit of measure, which is
the peso in the Philippines. Moreover, the purchasing power of the
peso is regarded as stable. Therefore, changes in the purchasing power
of the peso due to inflation are ignored.
9. Materiality concept – An item is considered material if its omission or
misstatement could influence economic decisions. Materiality is a
matter of professional judgment and is based on the size and nature of
an item being judged.
10. Cost-benefit – The costs of processing and communicating
information should not exceed the benefits to be derived from the
information’s use.
11. Full disclosure principle – Information communicated to users
reflect a balance between detail and conciseness, keeping in mind the
cost-benefit principle.
12. Consistency concept – Like transactions are accounted for in
like manner from period to period.

ACCOUNTING STANDARDS

- Accounting concepts and principles are either explicit or implicit.


Explicit concepts and principles are those that are specifically
mentioned in the Conceptual Framework for Financial Reporting and in
the Philippine Financial Reporting Standards (PFRS). Implicit concepts
and and principles are those that are not specifically mentioned in the
foregoing but are customarily used because of their general and
longtime acceptance within the accountancy profession.

CARD-MRI Development Institute, Inc. Modular Learning


Financial Accounting and Reporting 1 || Chapter 2 || Week 2

PHILIPPINE FINANCIAL REPORTING STANDARDS (PFRSs)

The PFRSs are Standards and Interpretations adopted by the FRSC. They
consist of the following:

1. Philippine Financial Reporting Standards (PFRSs);

2. Philippine Accounting Standards (PASs); and

3. Interpretations

RELEVANT REGULATORY BODIES

Other than the Financial Reporting Standards Council (FRSC), the following
also affect the accounting policies used by businesses and their financial
reporting:

a. Securities and Exchange Commission (SEC);

b. Bureau of Internal Revenue (BIR);

c. Bangko Sentral ng Pilipinas (BSP); and

d. Cooperative Development Authority (CDA).

QUALITATIVE CHARACTERISTICS OF USEFUL FINANCIAL


INFORMATION

- Qualitative characteristics are the traits that determine whether an


item of information is useful to users. Without this characteristics,
information may be deemed useless.
1. Fundamental qualitative characteristics - these are the
characteristics that make information useful to others. They consist
of the following:
i. Relevance
ii. Faithful representation
2. Enhancing qualitative characteristics - these characteristics
support the fundamental characteristics. They enhance the

CARD-MRI Development Institute, Inc. Modular Learning


Financial Accounting and Reporting 1 || Chapter 2 || Week 2

usefulness of information. As such, they must be maximized. The


enhancing qualitative characteristics consist of the following:
a) Comparability
b) Verifiability
c) Timeliness
d) Understandability

Fundamental vs. Enhancing

• The fundamental qualitative characteristics are the


characteristics that make information useful to users.

• The enhancing qualitative characteristics are the


characteristics that enhance the usefulness of information

Relevance

• Information is relevant if it can affect the decisions of users.

• Relevant information has the following:

a. Predictive value – the information can be used in making


predictions

b. Confirmatory value – the information can be used in


confirming past predictions

 Materiality – is an ‘entity-specific’ aspect of relevance.

Faithful representation

• Faithful representation means the information provides a true,


correct and complete depiction of what it purports to represent.

• Faithfully represented information has the following:

a. Completeness – all information necessary for users to


understand the phenomenon being depicted is provided.

b. Neutrality – information is selected or presented without


bias.

c. Free from error – there are no errors in the description and


in the process by which the information is selected and
applied.

CARD-MRI Development Institute, Inc. Modular Learning


Financial Accounting and Reporting 1 || Chapter 2 || Week 2

ENHANCING QUALITATIVE CHARACTERISTICS

1. Comparability – the information helps users in identifying


similarities and differences between different sets of information.

2. Verifiability – different users could reach consensus as to what the


information purports to represent.

3. Timeliness – the information is available to users in time to be able


to influence their decisions.

4. Understandability – users are expected to have:

a. reasonable knowledge of business activities; and

b. willingness to analyze the information diligently.

Application
Essay - Imagine you are a business owner. Discuss how you can apply
the basic accounting concepts listed below to grow your business:

 Separate entity concept


 Time Period
 Historical cost concept
 Materiality Concept
 Matching
 Accrual Basis of Accounting
 Going Concern

CARD-MRI Development Institute, Inc. Modular Learning

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