FUNDAMENTAL

ACCOUNTING CONCEPTS AND

PRINCIPLES; THE ACCOUNTING
EQUATION
TOPIC 3
CONCEPTUAL FRAMEWORK

• Objectives – to provide information useful to investors, creditors and others

• Qualitative Characteristics – to require relevant, reliable and comparable information
• Elements – to define items that financial statements can contain
• Recognition and Measurement – to set criteria for an item to be recognized as an element,
and how to measure it
ACCOUNTING PRINCIPLES

• Measurement Principle (Cost Principle) – prescribes that accounting information is based on

actual cost.
• Revenue Recognition Principle – prescribes that revenue is recognized (1) when goods or
services are provided to customers (2) at the amount expected to be received from the
customer.
• Expense Recognition Principle – prescribes that a company record the expenses it incurred to
generate the revenue reported
• Full Disclosure Principle – prescribes that a company report the details behind financial
statements that would impact user’s decision.
ACCOUNTING ASSUMPTION

• Going concern assumption – means that accounting information reflects a presumption that
the business will continue operating instead of being closed or sold
• Monetary unit assumption – means that we can express transactions and events in monetary
units.
• Time period assumption – presumes that the life of a company can be divided into time
periods, such as months and years, and that useful reports can be prepared for those periods.
• Business entity assumption – means that a business is accounted for separately from other
business entities, including its owner
ACCOUNTING CONSTRAINTS

• Materiality constraints – prescribes that only information that influences decisions need to
be disclosed.
• Cost-benefit constraints – prescribes that only information with benefits of disclosure
greater than the costs of providing it need to be disclosed
Conservatism and industry practices are also sometimes listed as accounting constraints
QUALITATIVE CHARACTERISTICS OF
ACCOUNTING INFORMATION
• Relevance – accounting information should be relevant and can influence the decision of
users.
• Faithful representation – accounting information should present numbers and descriptions
that really existed or happened.
The Accounting Equation
ACCOUNTING EQUATION

• Expresses the constant relationship among the assets, liabilities and owners’ equity. This
is expressed as:

Assets = Liabilities + Owners’ Equity

ASSETS

• Are present economic resources controlled by the entity as a result of past events. An
economic resource is a right that has the potential to produce economic benefits.
Examples:
Cash, receivables, inventory, equipment, etc
LIABILITIES

• Are present obligation of the entity to transfer an economic resources as a result of past
events. An obligation is a duty or responsibility that the entity has no practical ability to
avoid.
Examples: amounts owed to suppliers or other creditors, mortgages, etc
EQUITY

• Is the owner’s residual interest in the assets of an entity that remains after liabilities are
deducted.
Revenues – are the assets earned from a company’s earnings activities.
Expenses – are the cost of assets or services used to earn revenues.
 IDENTIFY IF INCREASE/DECREASE IN ASSETS,
LIABILITIES, OWNER’S EQUITY
• Mr. Yi invests P100,000 cash in his new business and deposits this amount in the bank in a new separate account,
Milk Yi Tea Shop.
• Mr. Yi buys Snow ice machine, fructose dispenser, sealing machine, automatic tapioca pearl machine worth P50,000
for the Tea shop for cash.
• Mr. Yi buys, tapioca pearls, sugar, whole milk, and other flavorings worth P10,000 for its storeroom payable to
suppliers.
• Mr. Yi sold in cash P10,000 worth of refreshments for one week.
• The cost of the items sold above is P5,000.
• Mr. Yi pays 2 crew the amount of P1,000 representing their wages for one week.
• Mr. Yi pays P5,000 to the supplier he owed above.