Basic Accounting Principles and Definitions

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Questions and Answers

Accounting has been given various definitions, which of the following is not one of those definitions?

  • Accounting is the process of identifying, measuring, and communicating economic information to permit informed judgment and decisions by users of information.
  • Accounting is a service activity. Its function is to provide quantitative information, primarily financial in nature, about economic entities that is intended to be useful in making economic decisions.
  • Accounting is a systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between these assertions and established criteria and communicating the results to interested users. (correct)
  • Accounting is the art of recording, classifying, and summarizing in a significant manner and in terms of money, transactions and events which are, in part of atleast, of a financial character and interpreting the results thereof.

Which of the following statements is true?

  • The accounting process of assigning numbers, commonly in monetary terms, to the economic transactions and events is referred to as classifying.
  • The basic purpose of accounting is to provide information about economic activities intended to be useful in making economic decisions. (correct)
  • All events and transactions of an entity are recognized in the books of accounts.
  • General purpose financial statements are those statements that cater to the common and specific needs of a wide range of external users.

The accounting standards used in the Philippines are adapted from the standards issued by the

  • International Accounting Standards Board (IASB) (correct)
  • Democratic People's Republic of Korea Accounting Standards Committee (DPKRASC)
  • Philippine Institute of Certified Public Accountants (PICPA)
  • Federal Accounting Standards Board (FASB)

Which of the following statements is incorrect regarding the basic accounting concepts?

<p>The time period concept means that financial statements are prepared only at the end of the life of a business (A)</p> Signup and view all the answers

It is the branch of accounting that focuses on the preparation of general purpose financial statements.

<p>Financial accounting (C)</p> Signup and view all the answers

These are events that do not involve an external party.

<p>internal events (D)</p> Signup and view all the answers

Entity A computes for its profit or loss periodically instead of waiting until the end of the life of the business before doing so. This is an application of which of the following accounting concepts?

<p>time period or reporting period (C)</p> Signup and view all the answers

This refers to the use of caution in the exercise of judgments needed in making estimates required under conditions of uncertainty, such that assets on income are no overstated and liabilities or expenses are not understated.

<p>prudence (D)</p> Signup and view all the answers

This concept defines the area of interest of the accountant. It determines which transactions are recognized in the books of accounts and which are not.

<p>Separate entity (B)</p> Signup and view all the answers

A CPA employed as an accountant in a government agency is considered to be in

<p>private practice (B)</p> Signup and view all the answers

Which of the following statements is correct?

<p>Accounting provides qualitative information, financial information, and quantitative information. (F)</p> Signup and view all the answers

The process of identifying, measuring, analyzing and communicating financial information needed by management to plan, evaluate, and control an organization's operations is called

<p>managerial accounting (B)</p> Signup and view all the answers

It is the official accounting standard-setting body in the Philippines. It is composed of a chairperson and 14 members.

<p>Financial Reporting Standards Council (FRSC) (B)</p> Signup and view all the answers

Accounting is often called the "language of business" because

<p>it is fundamental to the communication of financial information. (C)</p> Signup and view all the answers

All of the following statements incorrectly refer to the concepts in the Conceptual Framework except

<p>The objective of general purpose financial statements is similar to the objective of general purpose financial reporting. (A)</p> Signup and view all the answers

What is the authoritative status of the Conceptual Framework?

<p>If there is a Standard that applies to a transaction, that Standard overrides the Conceptual Framework. In the absence of such a Standard, the entity's management should consider the applicability of the Conceptual Framework in developing and applying an accounting policy that will result in useful information. (D)</p> Signup and view all the answers

The foundation of the Conceptual Framework is formed from

<p>the objective of general purpose financial reporting. (C)</p> Signup and view all the answers

What is the objective of general purpose financial statements according to the Conceptual Framework?

<p>To provide information about the financial position, financial performance, and changes in financial position of an entity that is useful to primary users in making economic decisions. (B)</p> Signup and view all the answers

The primary users of financial statements under the Conceptual Framework include

<p>Customers (A), Governments and their agencies (B), Existing and potential investors (C), Employees (D), Suppliers and other trade creditors (E), Public (F), Professional accountants, including auditors (G), Lenders and other creditors (H)</p> Signup and view all the answers

The Conceptual Framework broadly classifies the qualitative characteristics into

<p>fundamental and enhancing qualitative characteristics (A)</p> Signup and view all the answers

Identify the fundamental qualitative characteristics under the Conceptual Framework.

<p>Relevance and Reliability (A), Relevance and Faithful representation (C)</p> Signup and view all the answers

Identify the qualitative characteristics that enhance the usefulness of financial information.

<p>Verifiability and Timeliness (A), Understandability and Timeliness (C), Comparability and Verifiability (E)</p> Signup and view all the answers

Which of the following are considered aspects of the qualitative characteristic of relevance under the Conceptual Framework?

<p>Predictive value and Confirmatory value (C)</p> Signup and view all the answers

Under this qualitative characteristic, users are assumed to have a reasonable knowledge of business activities and willingness to study the information with reasonable diligence.

<p>Understandability (B)</p> Signup and view all the answers

Which of the following statements is incorrect concerning materiality?

<p>Materiality is a quantitative matter. It should never be assessed qualitatively. (B)</p> Signup and view all the answers

Which of the following may result to an expense?

<p>Increase in liability (C)</p> Signup and view all the answers

Entity A is making a materiality judgment. Entity A considers an item to be material, and therefore included in the financial statements, if it pertains to a related party transaction. What type of materiality assessment is Entity A using?

<p>Qualitative (D)</p> Signup and view all the answers

Which of the following events is considered as an internal event?

<p>conversion of raw materials into finished goods (C)</p> Signup and view all the answers

All of the following events is considered as an external event, EXCEPT?

<p>production (A)</p> Signup and view all the answers

Flashcards

Accounting definition (service activity)

Accounting provides financial information about economic entities to help with decision-making.

Accounting definition (recording, classifying, summarizing)

Accounting involves recording, categorizing, and summarizing financial transactions and events.

Accounting definition (identifying, measuring, communicating)

Accounting involves identifying, measuring, and sharing financial information for informed decisions.

Basic purpose of accounting

To provide information about economic activities for useful decisions.

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General purpose financial statements

Statements that meet the needs of many external users.

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Accounting standards (Philippines)

Adapted from International Accounting Standards Board (IASB) standards.

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Time period concept

Financial statements are prepared periodically, not just at the end of the business's life.

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Consistency concept

Financial statements use the same accounting principles consistently.

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Entity theory

A business is treated as separate from its owners.

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Prudence/Conservatism concept

Be cautious when making estimates; do not overstate assets or understate liabilities.

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Financial accounting

Branch of accounting focused on general purpose financial statements.

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Internal events

Events that don't involve an external party.

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Time period or reporting period

Computing profit or loss periodically, not just at the end of the business.

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Prudence

Careful judgment in estimating uncertain situations, avoiding overstating assets and understating liabilities.

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Separate entity concept

A business is seen as separate from its owners.

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Private Practice (CPA)

Independent practice of a certified public accountant.

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Qualitative information in accounting

Non-numerical information that complements quantitative financial data.

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Quantitative information in accounting

Numerical information about a business's finances.

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Accounting as an art

Involves skill and judgment in applying accounting principles.

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Accounting as a science

Based on an organized body of knowledge.

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Measurement in accounting

Assigning numbers to economic objects and events.

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Identification in accounting

Determining which financial transactions are relevant for recording.

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Study Notes

Accounting Definitions

  • Accounting is a service activity providing quantitative information (mostly financial) about economic entities. This information aids economic decisions.
  • Accounting involves recording, classifying, summarizing financial transactions. This includes interpreting the results of these transactions.
  • Accounting is a systematic process to gather, evaluate, and communicate evidence about economic activities. It ensures the evidence matches established criteria.

Basic Accounting Concepts

  • The primary aim of accounting is to provide information about economic activities to aid decision making.
  • Not all entity events are recorded in accounts.
  • General-purpose financial statements target common and specific needs of external users.
  • Classifying involves assigning monetary values to economic transactions.
  • Philippine accounting standards are adapted from IASB standards.

Accounting Concepts and Principles (Cont'd)

  • Time-period concept: financial statements are prepared regularly (e.g., annually).
  • Consistency concept: financial statements use consistent accounting principles.
  • Entity theory: a business is treated as separate from its owners.
  • Prudence or conservatism concept: recognize liabilities and potential losses when certain risks exist.
  • Financial accounting: focuses on preparing general-purpose financial statements.

Internal vs. External Events

  • Internal events do not involve external parties.
  • External events involve external parties.

Accounting Concepts (Cont'd)

  • Time period concept: reporting income and expenses over a specific period.
  • Accrual basis: recording transactions when they occur, not when cash changes hands.
  • Stable monetary unit: assuming the peso's purchasing power is constant.

Accounting Qualitative Characteristics

  • Relevance: information useful in making decisions.
  • Faithful representation: information accurately reflects economic events.
  • Understandability: information easy for users to understand.
  • Comparability: information is consistent across different periods and entities.
  • Verifiability: ensures different knowledgeable parties agree on the information.

Qualitative Characteristics: Enhancing Understandability

  • Timeliness: information is available in time to be useful.
  • Materiality: an item is material when its omission or misstatement could influence the decisions of users.

Materiality

  • Materiality is a qualitative (and sometimes quantitative) characteristic.
  • There is no specific materiality threshold.

Accounting Measurement Concept

  • Measurement: assigning numbers to economic events, such as inventory or plant assets.
  • All quantitative information is not necessarily financial but could be relevant to objects.

Accounting Standards

  • The Financial Reporting Standards Council (FRSC) are the official Philippine accounting standards setters.

Purpose of Financial Statements

  • To provide information about the financial position, performance, and changes in financial position of the entity

Primary Users of Financial Statements

  • Investors, creditors, employees, suppliers, customers, governments, professional accountants.

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