I.

BASIC
CONCEPTS
and
PRINCIPLES
December 17, 2020
Actg. 1.2 BC3
Introduction

These generally accepted

There are a number number accounting principles lay
of accounting concepts and down accepted
principles based on which assumptions and guidelines
we prepare our accounts. and are commonly referred
to as accounting concepts.
Users of Financial Statements

Investors Lenders Management Suppliers and trade creditors

Government Customers Employees Public

Objective of Financial Statement

Provide information
about financial position, To meet the needs of
performance and common user.
changes in equity.

Who is responsible for It is the enterprise or

the preparation of companies’
financial statement? management
Underlying Assumptions

Accrual Basis - the effects of transactions and other events

are recognized when they occur and not as cash is received or
paid. This means that the accountant records revenue as they
are earned and expenses as they are incurred. GAAP require
that a business use the accrual basis. In contrary is the cash
basis accounting.

Going concern - FS are normally prepared on the

assumption that an enterprise is a going concern and
will continue in operation for the foreseeable future.
This assumption underlies the depreciation of assets
over their useful lives. If an entity expects to liquidate
in the near future, its assets are valued at their worth
at liquidation rather original cost.
 • Comparability – Users must be able to
compare the financial statements of an
enterprise over time in order to identify
trends in its financial position and
performance.
Qualitative • Understandability – readily available and
Characteristics understandable to users. One of the
essential quality of the information
of Financial provided in FS.
Statements • Constraints on Relevant and Reliable
Information - timeliness, balance between
and cost, balance between Qualitative
Characteristics
• Fair presentation
 • Materiality - (cut off point) . Information
that is not material cannot be useful.
• Relevance - it influences the economic
decisions of users by helping them
Qualitative evaluate past, present or future events,
Characteristics or confirming, or correcting, their past
of Financial evaluations.
Statements • Reliability (free from material error and
bias) - faithful presentation, substance
over form, neutrality,
prudence/conservatism, completeness
Elements of Balance Sheet or Statement of Financial Position

Financial 1) assets

Statements 2) liabilities

3) equity

Income Statement or Statement of Financial Performance

1) Income

2) Expenses
 Statement in Changes in Equity

Cash Flow Statement

Elements of
Financial 1) Investing Activities
Statements
2) Financing Activities

3) Operating Activities
Recognition of the Elements of Financial Statements

Recognition is the process of incorporating in the balance sheet or income

statement an item that meets the definition of an element and satisfies the criteria
for recognition. An item that meets the definition of an element should be
recognized if:

It is probable that any future economic benefit associated with item will flow to or
from the enterprise; and

The item has a cost or value that can be measured with reliability.
 • Historical Cost - assets are recorded at the amount of
cash or cash equivalent paid or the fair value of the
consideration given to acquire them at the time of their
acquisition. Liabilities are recorded at the amount of
proceeds received in exchange for the obligation, or in
Measurement some circumstances (example, income taxes), at the
amounts of cash or cash equivalent expected to be paid
of the to satisfy liability in the normal course of business.
• Current Cost
Elements of • Realizable (Settlement) Value

Financial • Realizable value. Assets are carried at the amount of

cash or cash equivalents that could currently be

Statements
obtained by selling an asset in an orderly disposal
• Settlement Value. Liabilities are carried at the
undiscounted amounts of cash or cash equivalents
expected to be paid to satisfy the liabilities in the
normal course of business.
• Present Value
Thank you!
Merry Christmas
& Happy New
Year!