AE13 - FAR - Accounting principles

Generally Accepted Accounting Principles

GAAP- comprises the accounting principles and processes, standards and underlying
assumptions that are used in preparing financial statements

Financial Reporting Standards Council

(FRSC)- official accounting standard setting body in the Philippines. The primary task of FRSC is
to improve and establish accounting standards that will be generally accepted in the Philippines

Philippine Financial Reporting Standards (PFRS)- The FRSC issued this and this constitutes
the generally accepted accounting standards observed in the Philippines -PFRS includes:

• Philippine Accounting Standards

• PFRS
• Philippine Interpretations developed by Philippine Interpretations Committee

Basic Accounting Concepts

1.Business entity principle: business is considered distinct and separate from the
owner(s) of the business
 Accounting entity- an organization accounted for as a separate economic unit
2.Dual-effect of business transactions: whenever a business transaction takes place, it is
assumed that the value receive
is equal to the value given up (for every value received, there is an equal value given up)
Debit-Credit
3.Matching principle: profit or loss is computed by deducting the expenses incurred from
the income earned during an accounting period. Income recorded and reported in one
accounting period should be matched against the expenses that directly or indirectly
contributed to the generation of the income
4.Accrual basis: income is recognized when it is earned, regardless of when cash is
received. Expenses are recognized when incurred, regardless of when cash is paid
• If services have already been rendered to a customer, income is recognized even
if cash has not been received from the customer
• If cash is received from customer before a service is rendered or goods are
delivered, income is not yet earned because there is no service or delivery of goods yet.
The cash received would be earned only upon rendering of service or delivery of the
goods
• If services have already been received by the business from its suppliers,
expenses are recognized even if these services have not yet been paid for by the
business
 • If cash has already been paid by the business to its suppliers, an expense is not
recorded until it is incurred
5. Cash basis of Accounting: income is recognized when cash is received, and expenses are
recognized when cash is paid (extra concept sometimes used by other businesses)
6. Stable monetary unit: it is concerned with information which can be quantified and
expressed in terms of money. For business transactions to be included in the accounting
records and financial statements of the enterprise, it must be
expressed in terms of a uniform means of measurement
7. Periodicity (Time Period Concept): operating life of an enterprise may be conveniently
divided into time periods of equal length called accounting periods.
Normal accounting period is equal to 12 months or 1 year
8. Going Concern (Continuity
Assumption): enterprise is a going concern and will continue operation for the foreseeable
future. It is assumed that the enterprise has neither the
4 principal qualitative characteristics

1. Relevance- when it influences the economic decisions of users by helping them

evaluate past, present or future events or confirming or correcting past evaluations
a) Predictive role- if it is used to make
predictions of future cash inflows or income in future periods
b) Confirmatory role- if it is used o confirm or correct the earlier expectations of a
financial statement user
c) Materiality- if its omission or misstatement could influence the
economic decisions of users taken on the basis of financial statements
2. Reliability- info should be free from material error and bias and can be
depended upon by users to respect faithfully that which it either purports to represent
or could reasonably be expected to represent
a) Faithful representation- information must represent faithfully the transactions
and other events it either purports to represent or could reasonably be expected to
represent. The actual effects of transactions should be properly accounted for and
reflected in the financial statements
b) Substance over form- transactions
and other accountable events are accounted for and presented in accordance with
their substance and economic reality and not merely their legal form
c) Neutrality- financial statements must be free from bias
d) Prudence (Conservatism)- inclusion of a degree of caution in the exercise of
judgement needed in making the estimates required under conditions of
uncertainty, such that asset or income are not overstated and liabilities and
expenses are not understated
e) Completeness- info must be
 complete within the bounds of materiality and cost
3. Understandability- words and other accounting terminology being used are those
expected to be known and understood by users of the financial statements
4. Comparability
a) Intra-comparability- users must be able to compare the financial statements of
an enterprise across accounting periods
b) Inter-comparability- users must be able to compare financial statements of
different enterprises in order to evaluate their relative financial position

Constraints on Relevant and Reliable Information

1. Timeliness- if there is undue delay in the reporting of information it may lose its
relevance
2. Cost-benefit- cost of providing financial information should not exceed the
benefits of having these information available for decision-makers
3. 3. Balance between Qualitative
4. characteristics- relevance and reliability are not present simultaneously as
desired

Common Examples of Account Titles Used

1. Asset Accounts
• Cash- medium of exchange for business transactions
• Held for trading securities- temporary investments of excess cash which are primarily
held for short-term gain
• Loans and receivables- trade receivables and non-trade receivables and are claim
against others which arise in the ordinary course of doing business
• Trade notes receivable- written promise from the customer to pay a fixed amount of
money on a certain future date
• Non-trade receivables- all other claims which are not trade
• Inventories- assets which are held for sale/ in the process of production/ in
the form of materials and supplies
• Prepaid expenses-expenses paid for by the business in advance. (e.g.
prepaid insurance and prepaid rent)
• Long-term investments- asset held by an enterprise for the accretion of wealth
through capital distribution for capital appreciation or for other
benefits to the investing enterprise
 Property, plant and equipment-
tangible assets used in the production or supply of goods or services
 Intangible assets- identifiable, nonmonetary assets without physical substance
2. Liability Accounts
• Accounts payable- opposite of accounts receivable
 • Notes payable- enterprise is the one who promises to pay
• Accrued liabilities- amounts owed to others for unpaid expenses
• Unearned revenues- enterprise receives payments before providing
its customers with goods or services
 Mortgage payable- used for
recording long-term debts of an enterprise
 Bonds payable- large sums of money are often required by a business for working capital
and expansion
purposes and is often obtained by floating bonds
3. Equity Accounts
• Equity- used to record the original and additional investments of the owner of
the business entity
• Withdrawals- when proprietor withdraws cash or other assets for
non-business use
 Income summary- temporary
account used to summarize all income
and expenses for a given period
4. Income Accounts
• Service income or fees income- revenues earned by performing services for
customers
• Sales- revenues earned as a result of sale of merchandise
5. Expense Accounts
 Cost of sales- cost incurred to purchase or to produce the products
sold to customers during the period

 Salaries and wage expense-

payments as a result of an employer employee relationship
• Utilities expense- expenses related to use of communication facilities, the
consumption of water and electricity
• Rent expense- expense for leased office space, equipment or other assets rented
from others
• Supplies expense- account used for recording the usage of supplies in the normal
course of business
• Insurance expense- portion of premiums paid on insurance coverage which has
expired
• Depreciation expense- the portion of the cost of a tangible asset allocated or
charged as expense
during as accounting period
 • Bad debts expense- amount of receivables estimated to be uncollectible and
charged as expense during an accounting period
• Interest expense- expense related to borrowed funds

END