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CHAPTER 2 Accounting Concepts and Principles

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CHAPTER 2 Accounting Concepts and Principles

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kimmypark416
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Accounting Concepts

and Principles
ACCOUNTING 1 - CHAPTER 2 | MS. EARVINESS DY R. DUEÑAS, CPA
Introduction

 Accounting concepts and principles (assumptions or postulates)


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

 Separate Entity Concept – Under this concept, business is viewed as


a separate person, distinct from its owner(s).
 Historical Cost Concept (Cost Principle) – Under this concept,
assets are initially recorded at their acquisition cost.
 Going Concern Assumption – Under this concept, the business is
assumed to continue to exist for an indefinite period of time.
 Matching (or Association of cause and effect) – Under this
concept, some costs are initially recognized as assets and charged as
expenses only when the related revenue is recognized.
Basic Accounting Concepts

 Accrual Basis of Accounting – Under the accrual basis of accounting,


economic events are recorded in the period in which they occur rather
than at the point in time when they affect cash.
 Prudence (or Conservatism) – Under this concept, the accountant
observes some degree of caution when exercising judgments needed in
making accounting estimates under conditions of uncertainty.
 Time Period (Periodicity, Accounting period, or Reporting
Period concept) – Under this concept, the life of the business is
divided into series of reporting periods.
 Stable monetary unit - Under this concept, assets, liabilities, equity,
income, expenses are stated in terms of a common unit of measure,
which is the peso in the Philippines.
Basic Accounting Concepts

 Materiality Concept - This concept guides the accountant when applying


accounting principles. This is because accounting principles are applicable only to
material items.
 Cost-benefit (Cost constraint) – Under this concept, the costs of processing and
communicating information should not exceed the benefits to be derived from the
information’s use.
 Consistency concept – This concept requires a business to apply accounting
policies consistently, and present information consistently, from one period to
another.
 Full disclosure principle – This concept is related to both the concepts of
materiality and cost-benefit. Under this concept, information communicated to users
reflect a series of judgmental trade-offs that strive for:
 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
Accounting Standards

 Accounting concepts and principles are either explicit or implicit.


 Explicit – specifically mentioned in Conceptual Framework for Financial
Reporting and in the Philippine Financial Reporting Standards (PFRSs).
 Implicit – not specifically mentioned but are customarily used because of
their general and longtime acceptance within the accountancy profession.

Conceptual Framework, PFRS,


GAAP
PFRS

 The Philippine Financial Reporting Standards are standards and


interpretations adopted by the Financial Reporting Standards
Council (FRSC). They consist of the following:
 Philippine Financial Reporting Standards (PFRS)
 Philippine Accounting Standards (PAS)
 Interpretations
Relevant regulatory bodies

 Other than the Financial Reporting and Standards Council (FRSC), the
following also affect the accounting policies used by businesses and
their financial reporting:
 Securities and Exchange Commission (SEC) – tasked with regulating
corporations including partnerships.
 Bureau of Internal Revenue (BIR) – tasked in collecting national taxes
and administering the provisions of the Tax Code.
 Bangko Sentral ng Pilipinas (BSP) – tasked in regulating banks and other
entities performing banking functions.
 Cooperative Development Authority (CDA) – tasked in regulating
cooperatives.
The Conceptual Framework for
Financial Reporting

 Just like the Standards, the Conceptual Framework for


financial reporting also prescribes accounting
concepts that are relevant to the preparation of the
FS. However, the Conceptual Framework is not a
standard. Rather, it serves as a general frame of
reference in developing or applying the standards.
Qualitative Characteristics of useful
financial information

 Qualitative characteristics are traits that determine whether an item of


information is useful to users. Without these characteristics,
information may be deemed useless.

1. Fundamental qualitative characteristics – the characteristics that


make information useful to users.
2. Enhancing qualitative characteristics – support the fundamental
characteristics.
Fundamental qualitative
characteristics

 Relevance – information is relevant if it can affect the decisions of users.


 Predictive value – if it can help users to make predictions about future outcomes.
 Confirmatory value – related to predictive value; if it can help users confirm past
predictions
 Materiality – an “entity-specific” aspect of relevance, meaning it depends on the
facts a specific entity
 Faithful Representation – information is faithfully represented if it is
factual, meaning it represents the actual effects of events that have taken
place.
 Completeness – all information necessary for users to have a complete
understanding of FS is provided.
 Neutrality – information is selected or presented without bias
 Free from error – information is not materially misstated.
Enhancing qualitative characteristics

 Comparability – if it can help users identify similarities and


differences between different sets of information.
 Verifiability – if different users could reach a general
agreement as to what the information intend to represent.
 Timeliness – if it is available to users in time to be able to
influence their decisions.
 Understandability – if it is presented in a clear and concise
manner.

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