MODULE (FABM 22) FUNDAMENTAL OF ACCOUNTANCY, BUSINESS AND MANAGEMENT 1

CHAPTER 4- ACCOUNTING CONCEPTS AND PRINCIPLES, IFRS FRAMEWORK

Objectives:

1. Explain the fundamental of accounting concepts and

principles
2. State the purpose of conceptual framework
3. Explain the qualitative characteristics of useful financial
information
4.

FUNDAMENTAL CONCEPTS

 Entity Concepts. The most basic concept in accounting is the entity concept. An
accounting entity is am organization or a section of an organization that stands
apart from other organizations and individuals as a separate economic unit.

 Periodicity Concept. An entity’s life can be meaningfully subdivided into equal

time periods for reporting purposes. It will be aimless to wait for the actual last day
of operations to perfectly measure the entity’s net income.

 Stable Monetary Unit Concept. The Philippine peso is a reasonable unit of

measure and that its purchasing power is relatively stable.
 Accrual Basis. Accrual accounting depicts the effect of transactions and other
events and circumstances on a reporting entity’s economic resources and claims
in the periods in which those effects occur, even if the resulting cash receipts and
payments occur in a different period.

NEED FOR GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

In a sole proprietorship, adherence to proper accounting rules is important even

though the owner is usually deeply involved in the firm’s activities and is the person
primarily interested in its financial affairs.
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DEVELOPMENT OF GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

Many of today’s accounting principles were developed over a period of years in

response to the changing needs for business reports. The process has worked very much
like this: A particular procedure is devised by an accountant as a solution to a specific
problem.

CRITERIA FOR GENERAL ACCEPTANCE OF AN ACCOUNTING PRINCIPLE

 RELEVANCE- to the extent that in information that is meaningful and useful to
those who need to know something about a certain organization.
 OBJECTIVITY- to the extent that the resulting information is not influenced by the
personal bias or judgment of those who furnish it.
 FEASIBILITY- to the extent that it can be implemented without undue complexity
or cost.

BASIC PRINCIPLES

OBJECTIVE PRINCIPLE- accounting records and statements are based on the most
reliable data available so that they will be as accurate and as useful as possible.

HISTORICAL COST- this principle states that acquired assets should be recorded at their
actual cost and not at what management thinks they are worth as at reporting date.

REVENUE RECOGNITION PRINCIPLE- revenue is to be recognized in the accounting

period when goods are delivered or services are rendered or performed.

EXPENSES RECOGNITION PRINCIPLE- expenses should be recognized in the

accounting period in which goods and se4rvices are used up to produce revenue and not
when the entity pays for those goods and services.
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ADEQUATE DISCLOSURE- requires that all relevant information that would affect the
user’s understanding and assessment of the accounting entity be disclosed in the
financial statements.

MATERIALITY- financial reporting is only concerned with information that is significant

enough to affect evaluations and decisions. Materiality depends on the size and nature
of the item judged in the particular circumstances of its omission.

CONSISTENCY PRINCIPLE- the firms should use the same accounting method from
period to period to achieve comparability over time within a single enterprise.

CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING (IFRS FRAMEWORK)

Purpose and Scope- the New IFRS frameworks describes the basic concepts that
underlie the preparation and presentation of financial statements for external users.

Objective of General-Purposes Financial Reporting- to provide financial information about

the reporting entity that is useful to present and potential investors, lenders and other
creditors, who use that information to make decisions about buying, selling or holding
equity or debt instruments and providing or settling loans or other forms of credit.

QUALITATIVE CHARACTERISTICS OF USEFUL FINANCIAL INFORMATION

 Fundamental Qualitative Characteristics

 Enhancing Qualitative Characteristics

Fundamental Qualitative Characteristics

RELEVANCE- relevant financial information is “capable of making a difference in the
decisions made by users.”
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MATERIALITY- is also part of relevance. Information is material “if omitting it or misstating

it could influence decisions that users make on the basis financial information about a
specific reporting entity.”

FAITHFUL REPRESENTATION- general-purpose financial reports economic

phenomena in words and numbers. To be useful, financial information must not only be
relevant, it must also represent faithfully the phenomena it purports to represent.

COMPLETENESS- a complete depiction includes “all information necessary for a user to

understand the phenomenon being depicted, including all necessary descriptions and
explanations.”

NEUTRALITY- fee from bias or “unbiased in the selection or presentation of financial

information.”

FREEDOM FROM ERROR- simply put, “there are no errors or omissions for the reported
information.”

Enhancing Qualitative Characteristics

COMPARABILITY- enables users to identify and understand similarities in, and

differences among items.

VERIFIABILITY—helps assure users that information represents faithfully the economic

phenomena it purports to represents.

TIMELINESS- means that information is available to decisions-makers in time to be

capable of influencing their decisions.

UNDERTANDABILITY- “classifying, characterizing and presenting information clearly

and concisely” makes it understandable.
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For further discussion please refer to the link provided: Adequate disclosure
https://www.youtube.com/watch?v=83BCzI5zZl8
For further discussion please refer to the link provided:Fundamental QualitativeCharacteristics
https://www.youtube.com/watch?v=ssLcIEYt0Jc

Reference:
Fundamentals Of Accountancy Business Management 1
Win Ballada,CPA,CBE,MBA Top 2,CPA Board, Author, Basic
accounting 20th Edition
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