Generally Accepted Accounting

Principles (GAAP)

- standardize and regulate accounting definitions, assumptions, and methods. Because of GAAP, we are able to
assume that there is consistency from year to year in the methods used to prepare a company’s financial
statements.

- basic assumptions and principles are considered GAAP and apply to most financial statements.

The accounting standards used in the Philippines are the Philippine Accounting Standards (PAS) and Philippine Financial
Reporting Standards (PFRS). They are adopted by the Financial Reporting Standards Committee (FRSC).

Accounting Concepts, Principles and Assumptions

- serve as the foundation of accounting in order to avoid misunderstanding and enhance the understanding and
usefulness of the financial statements.

Accounting Concepts

1. Entity Concept - Business and Owners are treated as separate entities through this concept.

Example 1:

1. If the owner has a barber shop, the cash of the barber shop should be reported separately from personal cash.

2. Dual Aspect Concept - Every business transaction has two effects. Investing One Million in business is treated in two
ways, Capital Account and Asset Account.

3. Periodicity Concept - This concept allows the users to obtain timely information to serve as a basis on making
decisions about future activities. For the purpose of reporting to outsiders, one year is the usual accounting period. This
time period is called Accounting Period.

Two Accounting Period:

1. Calendar Year

2. Fiscal Year

4. Going Concern - This is an assumption made that the business shall run forever.

Financial statements are normally prepared on the assumption that the reporting entity is a going concern and will
continue in operation for the foreseeable future.

5. Money measurement concept

- Only those transactions are recorded which can be expressed in monetary terms.

- Amounts are stated into a single monetary unit.

6. Cost Concept - The cost is considered to be the same as what is paid in the beginning and never its realizable value at
a later point in time.

• Fixed Assets are recorded at cost price and are systematically reduced by the process called depreciation.

• These assets will disappear from balance sheet at the end of their economic life when they have been fully
depreciated and sold as scrap.

7. Accrual Accounting - The fundamental idea of accrual accounting can be stated as follows:

“The effects of business transactions should be recognized in the period in which they occurred. Income should be
recognized in the period when it is carried regardless of when payment is received. Expenses should be recognized in the
period when it is incurred regardless of when expenses are earned.”

8. Realisation Concept - states that revenue is realized at the time when goods or services are actually delivered.

Accounting Principles

1. Objectivity principle – financial statements must be presented with supporting evidence.

2. Cost Principle/Historical Cost Principle – It requires that assets be recorded at the original purchase price, rather than
their current market value. It refers to the amount spent (cash or the cash equivalent) when an item was originally
obtained, whether that purchased happened last year or ten years ago; amounts are not adjusted upward for inflation.

3. Revenue Recognition Principle – revenue recognition policies for one company are standard for the entire industry.

Having this standard guideline helps to ensure that an apples-to-apples comparison can be made between made
between companies when reviewing line items on the income statement.

4. Expense Recognition Principle - Expenses should be recognized in the accounting period in which goods and services
are used up to produce revenue and not when the entity pays for those goods and services.

5. Adequate Disclosure or Full Disclosure Principle - requires that all relevant information that would affect the user’s
understanding and assessment of the accounting entity disclosed in financial statements.

6. Materiality Principle - also called the materiality constraint, states that financial information is material to the
financial statements if it would change the opinion or view of a reasonable person. In other words, all important
financial information that would sway the opinion of a financial statement user should be included in the financial
statements.

7. Consistency Principle - The consistency principle is the accounting principle that requires an entity to apply the same
accounting methods, policies, and standards for preparing and reporting its financial statements. It should be followed
consistently in future accounting periods. However, changes are permitted if justifiable and disclosed in the financial
statements.

8. Matching Principles - cost should be matched with the revenue generated.

Example:

When you provide tutorial services to a customer and there is a transportation cost incurred related to the tutorial
services, it should be recorded as an expense for that period.