Fundamentals of Accountancy, Business, and Management 1 MI Accounting Concepts and Principles ‘(Onnonero) ‘Accounting is referred to as “the language of business’ because it ‘communicates the financial condition and performance of a business to interested users. In order to become effective in carrying out the accounting procedure, as ‘well as in communication, there is a widely accepted set of rules, conoepts and principles that govern the application of the accounting. These concepts and principles are referred to as the Generally Accepted Accounting Principles of GMP. Leeming and familiarization of accounting principles and concents are relevant in the performance of accounting procedures. It is a necessity to leam stand these concepts and principles before their application or during the Guidelines on Basic Accounting Principles and Concepts GAAP is the framework purpose is to standard account 45Fundamentals of Accountancy, Business, and Management 1 Basie Accounting Principles and Concepts: 1. Business Entity ‘A business is considered separate ently from the owner(s) and should be treated should not bbe recorded in the business accounting book 's personal the business, ‘transaction involves adding andlor wi Examoles: 4. Insurance premiums or expense for the over's house should be excluded from the expense of the business. 2. The owner's property should not be included in the premises account of the business. 3. Any payment for the owner's personal expenses by the business will be treated as drawings and reduced the owner's capital contribution in the business. Unt scennmeconcersuarancaies 2. Going Concom inlended to be sold immediately Examples: 1. Possible loeses from the closure of business cannot be anticipated in the accounts, 2. Prepayments, depreciation provisions may be carried forward in the expectation of proper matching against the revenuas of future periods. 3. Fixed assets are recorded at historical costs.48 | Fundamentals of Accountancy, Business, and Management 1 Wt szomme concer eeu cial transactions recorded and reported should be ‘as Philippines Pesos, US Dollar, Canadian Dollar, Euro, etc. Thi rnon-inancial ot non-monetary information that cannot be measured in a monetary units is not recorded in the acocunting books, but instead, memorandum will be used. Example: from offents can be the Philippines. |. Historical Cost ‘All business resources acquired should be valued and recorded based en the actual cash equivalent or original cost of the prevalig is recorded at the date of acquison cost. The expenditure made to prepare the asset for is invoice price of the assets freight charges, costs if any.50 | Fundamentals of Accountancy, Business, and Management VaR secon cocerrsmormertES 5. Matching ‘This principle requires that revenue recorded, in @ given accounting peri, should have an equivalent expense recorded, in order to show the true prft ofthe business. Examples: 41. Recording of doubtful account expense should be done when the revenue was eamed 2. Advance payment from clients must be recorded in the month when the serves were rendered. 3. Eapenses incurred in generating revenues should be recorded at the time when revenue was eamed. 6. Accounting Period ‘This principle entails a business 10 complete the whole accounting process over a specific operating time perio. ‘Accounting period may be monthly, quarterly accounting period, it may follow a Calendar or Fiscal Example: For annval ‘The owner can monitor the results of the business operations periodically either monthly, quarterly, or annually to chack whether itis profitable or not52 Fundamentals of Accountancy, Business, and Management { Unk. soar concer we maces 7. Conservatism of a patent lawsuit, ilicipates winning settlement. Since the settlement is not certain, GGI does not record the gain 8. Consistency ‘events. and transactions 0 to the fist accounting method the day after that bbe accounted by using the same accounting 3. This creates consistency in the financial information given investors. nciple'does not slate that businesses always have ‘method forever. Companies are allowed to switch jong with the effect of the change, date when sifieation for the accounting method change. Bob's Computers, a computer valuing its inventory. In the last few years, ‘and Bob's accountant suggests that {o the LIFO inventory system to minimize taxable income. According to the consistency principle, Bob's can change accounting methods for a justifiable reason. Minimizing taxes as a justifiable reason is debatable.Fundamentals of Accountancy, UW. secon comes erences 9. Materiality ‘The materiality concept, also called the materially constraint, states ‘material to the financial statements if reasonable person. in other relative in size and importance. teal to one company but might be pany because of its size and revenue. The main question tha th ty concept addresses do the financial information make a difference to financial statement users. Wot, the company doesn't have to worry about including it in ther fnancial slatements because itis immaterial Example ‘A large company has a building in the typhoon area during Yolanda ‘Storm. The company building is destroyed and after a lengthy battle with the insurance company, the company reports an extraordinary loss of P10,000,00. The company fas net income of P10,000,000.00 The materially concept slates that this loss is immaterial because the average financial statement user would not be concemed with something that is only 1% of net income. 10. Objectivity The objectivity principle states that accounting information and financial reporting should be independent and supported with unbiased evidence. This ‘means that accounting information must be based on rasearch and facts, rot metely @ preparers opinion. The objectivity principle is aimed at making fivancial statements more relevant and reliable, Example: ‘A company is trying to get financing for an extra plant expansion, but the company’s bank wants to see a copy of its financial statements before it wil allow a loan to the Wy any money. The company’s bookkeeper prints out an income statement from its accounting system and mals it to the bank. Most likely the reject this financial statement because an independent party did not prepare it In other words, ths income statement Violates the objectivity principe.Fundamentals of Accountancy, Business, and Management 1 it secommns cones wo rncruEs 411, Revenue Recognition Principle the business has eamed the revenue. This is a key concept in the accrual basis of accounting because revenue can be recorded without actually being received This principle requtes that revenue should be recorded inthe period it 1s eamed, regardless of the time the cash is received. The same is true for the expense. Expense should be recognized and recorded at the time it is incurred, regardless ofthe time thet cash is pald. This fs to show the true Picture ofthe business {nancial performance, Example: Bob's Billiaris, in. sells a pool table to a bar company on December 34 for P85,000.00 The pool table was not paid for unt January 1th and it was not delivered to the bar until January 31. According to the revenue Tecognition principle, Bob's should not record the sale in December. Even ‘though the sale was realizable in thatthe sale for PBS,000.00 was initiated, it ‘was not eared until January when the pool table was delivered Qualitative Characteristics of Financial Information 41, Relevance ‘The concept of relevance implies that financial statements can have predictive value and lue. This means the financial statements ‘are accurate and can be used to predict future company performance, There are three main characteristics of relevant accounting information: predictive value, feedback, and timeliness. Financial information must have all of these characteristics in order to be ‘considered relevant. Predictive Value Predictive value refers to the fact that quality nancial information can be used to base predictions, forecasts, and projections on, Financial annalysts and investors can use past financial statements to chart performance tends and ‘make predictions about future performance and proftabily, Feedback Value Quality information has a feedback value when it can confer or correctFundamentals of Accountancy, Business, nd Management 1 atv, commecocers wo rnces 3. Reliability ‘The concept of reliability implies that financial information can be Verified by many sources with evidence and that all financial information is presented. In other words, the favorable and unfavorable Snancial information ae presented in the financial statements, The tree attributes that al reliable financial information has: veifabilly, representational fathfuness, and neutrality. Verifiabilty Financial information is verifiable when multiple, independent measures are used to come up with the same result. In other words, auditors and other third partes can measure and evaluate the company’s financial statement ‘accounts and end up with the same resul auditors can't verily financial information, the auditors can't issue an unqualified opinion, Representational Faithfulness Representational faithfulness simply means that the financial statements represent reality or what actually happened during the year. For example, if a ‘company reported the cost of goods sold of P100,000 when the cost was actually 159,000, the financial statements wouldn't accurately reflect reality or what ‘actually happened. In realy, this company incurred P159,000 of costs and must ‘show that on their financial statements. Neutrality Finally, in order for financial statements to be reliable they must be neutral. By definition, financial statements that are prepared by company management are somewhat biased because the management want to see the company improve. This means they are more likely to report increased performance and neglect to report. unfavorable events. Neutrality requires that ‘management prepare completely unbiased financial statements. For example, a company with information about a probable lawsuit must ‘eport it on their financial statement notes. Withholding this information would ‘make the financial statements unreliable to outside investors and creditors, Example ‘Assume that Company A uses the ‘company B uses the LIFO inventory method being equal, company B's financial stateme income because of a higher cost of goods sold. Company Aveul conversely have a lower income but higher inventory. These two companies don't have ‘comparable financial statements. They use different methods of accounting {In order to compare these statemants properly, there is @ need to convert one Of their inventory inethods to match the other.