WEEK 2
Cost Concept - The cost is considered to be the same
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.
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.