Basic accounting Concepts, Assumptions and PrinciplesGAAP (Generally Accepted

Accounting Principles) - the rules that govern how accountants measure, process
and communicate financial information-the application of GAAP ensures that
consistent accounting procedures are followed in recording the events created by
business transactions and in preparing financial statementsBasic Accounting
Concepts and Assumptions
1. Entity ConceptsFrom an accounting standpoint, the business firm is treated as a
separate economic entity. Thus, only the business entity’s activities and transactions
should be recorded and reported.
2. Going Concern (continuity) assumptionThis Assumption recognizes that a firm
will remain in operation for the foreseeable future. The firm is expected to continue
to operate long enough to meet its obligations and fulfill its plan.
3. Time Period or Periodicity assumptionThis assumption recognizes that timely
financial reports must be made to those who need the information in these reports.
In other words, although the true financial position of a business cannot be precisely
determined until its liquidation, interim financial statements are essential to making
ongoing decisions during the operation of the business.
4. Monetary-unit assumption This assumption holds that business transactions
must be recorded and reported in terms of money. In the Philippines, this monetary
unit is peso.
Basic Accounting Principles
1. Historical CostThis principle holds that most asset and liabilities are recorded at
their transaction cost. For example, land purchased by a hotel ten years ago for
P200,000 may be worth P450,000 today. Nonetheless, the land would appear on the
balance sheet as an asset valued at P200,000.
2. Conservatism Principle This principle holds that when equally correct
accounting alternatives are available for recording or reporting a transaction, the
accountant should select the alternative that will result in the least favorable
outcome for business in the current period. The intent of this principle is to minimize
any overstatement of asset and income and understatement of liabilities.
3. Objectivity Principle The principle of objectivity states that all business
transactions must be supported by objective evidence proving that the transaction
did in fact occur. For example, vendor’s invoice for the purchase of kitchen wares for
a restaurant is necessary to prove that a purchase transaction has occurred and it
will be the basis in recording such activity in the records of the firm
.4. Realization PrincipleThis principle states that revenue resulting from business
transactions should be recorded only when a sale has been made and earned.
5. Matching PrincipleThe matching principle requires that, where possible, the
entity’s operational efforts (expenses) be matched to the entity’s operational
accomplishments (revenues).
This principle sates that all expenses must be recorded in the accounting period as
the revenue which they helped to generate was also recorded.
Accounting Methods:
Cash Accounting
This method records the result of business transactions only when cash is received
or paid out.
Accrual Accounting To conform to the matching principle, most hospitality operations
use the accrual method of accounting. Recording of revenue in the accounting
period it is earned and recording of expenses at the period it is incurred, not
necessarily the time of the inflow and outflow of cash.
6. Materiality
The generally accepted accounting principle of materiality states that material events
must be accounted for according to accounting rules. An item or amount that would
not change a user’s decision may be considered immaterial and therefore need not
be recorded.
7. Consistency principle
Consistency principle states that once an accounting method has been adopted, it
should be consistently followed from period to period to order for accounting
information to be comparable. Should circumstances warrant a change in the
method of accounting for a specific kind of transaction, the change, must be
reported along with an explanation of how this change affects other items shown on
the operation’s financial statements.
8. Full disclosure principle
This principle requires that the financial statement of a business should be complete
and should report sufficient economic information relating to the business entity to
make the statement understandable. Information may be on the financial statement
themselves or in supplementary attachment.