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acceaatlaç ceaceµts

To ensure uniformity in preparation of accounts across entities, the following concepts are applied
when recording accounting transactions:

1) Business Entity Concept: The business for which accounts are maintained is treated as an entity
distinct from its owners and managers.
2) Money Measurement Concept: All transactions affecting the business are stated in money terms
and recorded in the Books of Account.
3) DuaI Aspect Concept: Every transaction has two aspects ÷ a 'debit' and a 'credit' ÷ and the sum of all
debits will equal the sum of all credits. For example, when an asset is acquired, one of the following
events will also take place:
·another asset is forgone
·a liability (obligation to pay) is undertaken
·a profit has been earned
4) Cost Concept: Transactions are recorded at the actual cost.
5) Going Concern Concept: At the time of recording the transactions, it is assumed that the entity
will continue to remain in business for as long as can be foreseen.
6) AccruaI Concept: Ìncome is recorded when goods are supplied or a service is rendered, even though
the money may be received later; expenditure is recorded when goods are procured or aservice is
availed, even though the money may be paid later.
7) ReaIisation Concept: Transactions are recorded only when they occur and not in anticipation of
their occurrence.
8) Matching Concept: Ìncome and expenses for a period are correlated to ensure that the accounts
project an accurate picture.Therefore:
·when an income is recorded, all expenses incurred to earn that income must be recorded.
·related income and expenditure must be recorded during the same reporting period.


acceaatlaç assamµtleas

Assumption 1: Accounting Entity

A company is considered a separate "living¨ enterprise, apart from its owners. Ìn other words, a
corporation is a "fictional¨ being:
Ìt has a name.
Ìt has a birthdate and birthplace (referred to as incorporation date and place, respectively).
Ìt is engaged in clearly defined activities.
Ìt regularly reports its financial health (through financial reports) to the general public.
Ìt pays taxes.
Ìt can file lawsuits.

Assumption 2: Going Concern

A company is considered viable and a "going concern¨ for the foreseeable future. Ìn other words, a
corporation is assumed to remain in existence for an indefinitely long time. Exxon Mobil, for example, has
existed since 1882, and General Electric has been around since 1892; both of these companies are
expected to continue to operate in the future. To assume that an entity will continue to remain in business
is fundamental to accounting for publicly held companies.
Assumption 3: Measurement and Units of Measure

Financial statements have limitations; they show only measurable activities of a corporation such as its
quantifiable resources, its liabilities (money owed by it), amount of taxes facing it, and so forth. For
example, financial statements exclude:
Ìnternally developed trademarks and patents (think of Coke, Microsoft, General Electric)÷the value of
these brands cannot be quantified or recorded.
Employee and customer loyalty÷their value is undeterminable. Since financial statements show only
measurable activities of a company, they must be reported in the national monetary unit: U.S. financial
statements are reported in U.S. dollars (Exhibit 2.2); European financial statements now use the euro as
a standard monetary unit.

Assumption 4: Periodicity

A continuous life of an entity can be divided into measured periods of time, for which financial statements
are prepared. U.S. companies are required to file quarterly (10-Q) and annual (10-K) financial reports.
Typically one calendar year represents one accounting year (usually referred to as a fiscal year) for a
company. Be aware that while many corporations align their fiscal years with calendar years, others do
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acceaatlaç erlaclµies

PrincipIe 1: HistoricaI Cost

Financial statements report companies' resources at an initial historical or acquisition cost. Let's assume
a company purchased a piece of land for $1 million 10 years ago. Under GAAP, it will continue to record
this original purchase price (typically called book value) even though the market value (referred to as fair
value) of this land has risen to $10 million.
PrincipIes 2 and 3: AccruaI Basis

Accrual basis of accounting is one of the most important concepts in accounting, and governs the
company's timing in recording its revenues (i.e., sales) and associated expenses.
PrincipIe 2: #0;0nu0#0cognition. Accrual basis of accounting dictates that revenues must be recorded
when earned and measurable.
PrincipIe 3: atching!7incipl0. Under the matching principle, costs associated with making a product
must be recorded ("matched¨ to) the revenue generated from that product during the same period.

PrincipIe 4: FuII DiscIosure

Under the full disclosure principle, companies must reveal all relevant economic information that they
determine to make a difference to their users. Such disclosure should be accomplished in the following
sections of companies' reports:
Financial statements
Notes to financial statements
Supplementary information


"aailtatlve caaracterlstlcs et acceaatlaç
O Reliable accounting information is free from bias or opinion from business owners, managers or
professional accountants. Business stakeholders need reliable information so they have assurance that
all information is accurate and valid. Business owners can manipulate accounting information to present a
more positive picture of the company's financial health. The absence of reliability may lead business
stakeholders to make decisions that limit or prohibit financial returns.

O Accounting information is relevant when it contains timely information. Business stakeholders cannot
make solid decisions using old information. Many companies use calendar months as their accounting
periods to record financial transactions. Relevant information includes transactions only included in
specific accounting periods. This allows business stakeholders to develop a trend analysis to review the
company's accounting information.
O Consistency ensures that accounting information is prepared the same way each month or accounting
period. Accounting policies and procedures often help companies present their accounting information in
a consistent manner. Publicly held companies often disclose their accounting policies and procedures in
their quarterly or annual report. This information helps business stakeholders understand the accounting
system in place and how the company maintains consistency.

O Comparability is the ability to compare one company's accounting information to another company's
information. This characteristic can relate to the presentation of a company's accounting information on
financial statements and reports. While companies can use different accounting methods to record their
information, business stakeholders must be able to compare the information. Assets, liabilities and other
information is often listed in the same format for a comparative analysis.


r|aaac|a| statemeats
Cheska's Design Corporation
BaIance Sheet
August 11, 2011


Cash Php 80,000

Accounts PayabIe Php 25,000
Inventories 50,000

Long term LiabiIities 175,000
Prepaid Expenses 15,000

TotaI LiabiIities: Php200,000
TotaI Current Assets: Php 145,000

Non Current Assets: Php 480,000

Owner's Equity

Cheska's, CapitaI Php425,000
TotaI Assets Php 625,000.00

TotaI LiabiIities & Owner's Equity Php625,000.00

Cheska's Design Corporation
Income Sheet
For the Eight months ending August 11 2011

Gross SaIes Php 200,000

Less: Cost of Sales 100,000
Gross Profit Php 100,000
Less: Operating Expenses 43,000
Operating Income


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