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Accounting Definitions

The document provides definitions of accounting and financial statements, detailing their components and purposes. It outlines key elements of financial statements, recognition principles, accounting assumptions, and qualitative characteristics necessary for useful financial reporting. Additionally, it discusses the role of the Financial Reporting Standards Council and identifies various users of financial information, emphasizing the importance of the Conceptual Framework in standardizing accounting practices.

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2 views5 pages

Accounting Definitions

The document provides definitions of accounting and financial statements, detailing their components and purposes. It outlines key elements of financial statements, recognition principles, accounting assumptions, and qualitative characteristics necessary for useful financial reporting. Additionally, it discusses the role of the Financial Reporting Standards Council and identifies various users of financial information, emphasizing the importance of the Conceptual Framework in standardizing accounting practices.

Uploaded by

Sheryll Dionela Pedregosa
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Accounting Definitions

Authorities in Accounting (AAA) defined accounting as “the process of identifying,


measuring, and communicating economic information to permit informed judgments
and decisions by users of information.”
American Institute of Certified Public Accountant (AICPA) also gave accounting a
definition– “an art of recording, classifying, and summarizing, in a significant manner
and in terms of money, transactions and events which are, in part at least, of a
financial character, and interpreting the results thereof.”

Financial Statements
According to the book of Lopez, financial statements are structured representation of
financial position and performance of an entity. In simple terms, financial statements
are the “end products” of the accounting process. These refer to the accountant’s
reports based on data gathered, accumulated, and processed in financial accounting
that are periodically communicated to various users.
(a) Statement of Financial Position (Balance Sheet)– shows the financial position of
an enterprise as of a particular date. It contains 3 sections which are Assets,
Liabilities, and Owner’s Equity.
(b) Statement of Comprehensive Income (Income Statement)– shows the
performance of the company of the enterprise for a given period of time. It primarily
consists of revenues and expenses.
(c) Statement of Changes in Equity– summarizes the changes in equity for a given
period of time. It is where the capital (investments of the owner) and withdrawals
are depicted.

Elements of Financial Statements


The elements that are directly related to measurement of financial condition in the
balance sheet are assets, liabilities, and owner’s equity while the elements that are
directly related to measurement of performance in the income statement are income
and expenses.
(a) Assets– resources controlled by the business as a result of past transactions
and events and from which future economic benefits are expected to flow into
the enterprise.
(b) Liabilities– present obligations of an enterprise arising from past transactions or
events and the settlement of which is expected to result in an outflow from
the enterprise resources embodying economic benefits.
(c) Owner’s Equity or Capital– residual interest in the assets of the enterprise after
deducting all its liabilities.
(d) Income or Revenue– gross inflow of economic benefits during the period arising
in the course of ordinary activities of an enterprise, when those inflows result in
increase in equity, other than those relating to contributions from owners.
(e) Expenses– gross outflow of economic benefits during the period arising in the
course of ordinary activities of an enterprise, when those outflow result in decrease
in equity, other than those relating to distribution to owners.

Recognition Principles
The combined concept of Revenue Recognition and Expense Recognition Principles
is called Matching Principle. Revenue should be recognized when earned and
corresponding expense should be recognized when incurred during the same period
as revenue is earned.

Accounting Assumptions
Accounting assumptions refers to a set of rules that ensures the business operations
of an organization are conducted efficiently and as per the standards defined by the
Financial Accounting Standards Board.
(a) Accounting Entity– the business is considered separate and distinct entity from
the owner. There is clear distinction between business transactions and personal
affairs.
(b) Going concern– an entity will remain in business for the foreseeable future
(c) Time-period assumptions– the business should report their financial statements
appropriate to a specific time period.
(d) Unit of Measure– Only those events and transactions are recorded in books of
accounts of the business which can be measured and expressed in monetary terms.
(e) Accrual basis assumptions– Income is recognized when earned regardless of
when received and expenses is recognized when incurred regardless of when paid.

Qualitative Characteristics
There are five qualities that financial reports should posses to be more useful;
(a) Understandability– this indicates that financial statements should be prepared
and presented in a way that it can be understood by the users.
(b) Reliability– financial information should carry the degree of "confidence" when
used by interested parties. To be reliable, it must be "free from material error" that
will lead to material misstatement, it must be fairly presented and must be free from
bias.
(c) Relevance– this means that financial statements are prepared intended to help
users make informed economic decisions.
(d) Comparability– this means that the financial statements prepared are worth
comparing for with other companies of the same line of business by pointing out
similarities and differences.
(e) Consistency– this refers to the use of the same methods for the same items
either from period to period within a reporting entity or in a single period across
entities.

FRSC
Financial Reporting Standards Council (FRSC) was established by the Board of
Accountancy (BOA) in 2006 under the Implementing Rules and Regulations of the
Philippine Accountancy of Act of 2004 to assist the Board in carrying out its
power and function to promulgate accounting standards in the Philippines. Its main
function is to establish generally accepted accounting principles in the Philippines. In
achieving this objective, the FRSC considers Standards issued by the IASB.

Users of Financial Information


(a) Investors– The company's owners, comprising investors and shareholders, rely
on financial statements to assess the business's profitability and overall financial
health. This allows them to evaluate the returns on their investment in the company.
(b) Lenders– Financial institutions, serving as lenders, provide funds to companies.
Before extending these funds, lenders scrutinize the financial standing of the
company to ensure it is capable of timely repayment of the borrowed funds and
associated financing costs.
(c) Customers– The individual purchasing the company's finished goods is the
customer. Customers, particularly those acquiring materials crucial for their business
operations, have an interest in the financial statements of the company from which
they make purchases. Larger companies typically prefer to engage in long-term
partnerships with suppliers, and therefore, before entering into contracts, they
assess the stability of potential partners. Additionally, customers seek companies
offering favorable credit terms, a factor they evaluate by examining the financial
statements.
(d) Employees– Employees, individuals hired by companies who receive salaries in
return, have a vested interest in understanding the financial status of the business.
They seek assurance that their future with the company is secure and that salaries,
along with bonuses and performance appraisal amounts, will be paid punctually.
(e) Government– Government entities, particularly those overseeing the income tax
department, show a keen interest in a business's financial condition for taxation and
regulatory reasons. Each company is obligated to remit taxes to the government
authorities at a specified rate. The determination of the payable tax amount occurs
subsequent to the preparation of financial statements.
(f) Suppliers and other trade creditors– Like lenders, trade creditors or suppliers are
interested in the company’s ability to pay obligations when they become due. They
are nonetheless especially interested in the company's liquidity – its ability to
pay short-term obligations.
(g) Public– Enterprises impact the general public in diverse ways. For instance, they
significantly contribute to the local economy through factors such as employment
opportunities and support for local suppliers. Financial statements can benefit the
public by offering insights into the enterprise's prosperity trends, recent
developments, and the extent of its activities.

Scope of Conceptual Framework


The Conceptual Framework deals with the following:
(a) Objective of financial reporting.
(b) Qualitative characteristics of useful financial information.
(c) Definition, recognition and measurement of the elements from which financial
statements are constructed.
(e) Concepts of capital and capital maintenance.

Purpose of Conceptual Framework


Its purpose is to facilitate the formulation of future IFRS and the examination of
current standards by outlining fundamental principles. Encourage the uniformity of
accounting regulations and standards by minimizing the variety of acceptable
alternative accounting approaches.

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