Overview of Accounting Concepts
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Which of the following is NOT a core aspect of communicating economic data into useful accounting information?

  • Summarizing
  • Recording
  • Classifying
  • Analyzing (correct)

    • The 'Going Concern' concept assumes that a business will operate for an indefinite period of time.

    True (A)

    What is the basic purpose of accounting?

    To provide information useful for making economic decisions.

    The ______ concept states that information is material if its omission or misstatement could influence economic decisions.

    <p>Materiality</p> Signup and view all the answers

    Match the following accounting concepts with their descriptions:

    <p>Double-entry system = Each accountable event is recorded in two parts, debit and credit. Separate entity = The entity is treated separately from its owners. Stable monetary unit = Amounts in the financial statements are stated in a common unit of measure; changes in purchasing power are ignored. Time Period = The life of the business is divided into series of reporting periods.</p> Signup and view all the answers

    Which of the following accounting information is designed to cater to the specific needs of particular users?

    <p>Special purpose accounting information (C)</p> Signup and view all the answers

    General purpose accounting information is governed by the International Financial Reporting Standards (IFRSs).

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

    What are the two main types of accounting information classified based on users' needs?

    <p>General purpose accounting information and Special purpose accounting information.</p> Signup and view all the answers

    Accounting is the process of identifying, measuring, and communicating economic information to permit informed judgments and decisions by users of ______.

    <p>information</p> Signup and view all the answers

    Match the following measurement bases with their descriptions:

    <p>Historical cost = The price paid for an asset when it was originally acquired. Fair value = The amount that an asset could be sold for in an orderly transaction between willing parties. Present value = The discounted value of future cash flows. Realizable value = The estimated amount that an asset is expected to be sold for in the normal course of business. Current cost = The cost of replacing an asset at the current time. Inflation-adjusted costs = Costs that have been adjusted for the effects of inflation.</p> Signup and view all the answers

    Which of these activities is NOT considered part of the accounting process?

    <p>Predicting future economic events (D)</p> Signup and view all the answers

    External events are the only events recognized in accounting.

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

    What is the most commonly used measurement basis in accounting?

    <p>Historical cost</p> Signup and view all the answers

    Which of the following is an example of an external event that involves a non-reciprocal transfer?

    <p>Receiving a donation from a charity (B)</p> Signup and view all the answers

    The process of transforming economic data into useful accounting information is known as ______.

    <p>communication</p> Signup and view all the answers

    Inflation-adjusted costs are the most commonly used measurement basis in accounting.

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

    Which of the following is NOT a sector in the practice of accountancy?

    <p>Practice in Private Sector (A)</p> Signup and view all the answers

    Tax accounting involves only the preparation of tax returns.

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

    What is the primary focus of government accounting?

    <p>The custody of public funds, the purposes for which those funds are committed, and the responsibility and accountability of individuals entrusted with those funds.</p> Signup and view all the answers

    The ______ are Standards and Interpretations adopted by the Financial Reporting Standards Council (FRSC).

    <p>Philippine Financial Reporting Standards (PFRSs)</p> Signup and view all the answers

    Match the following terms with their corresponding definitions:

    <p>Auditing = The preparation of tax returns and rendering of tax advice. Tax accounting = The process of evaluating the correspondence of assertions with established criteria and expressing an opinion thereon. Government accounting = Refers to the accounting for the government and its instrumentalities, emphasizing the custody of public funds, their purpose, and individual accountability.</p> Signup and view all the answers

    What is the main reason for having uniform reporting standards in financial statements?

    <p>To ensure consistency and avoid misleading information. (D)</p> Signup and view all the answers

    Which accounting concept emphasizes recognizing the value of an asset based on its original purchase price?

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

    The Philippine Financial Reporting Standards (PFRSs) only include Philippine Financial Reporting Standards (PFRSs).

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

    What is a key characteristic of the practice of Public Accountancy?

    <p>Rendering audit or accounting-related services to multiple clients on a fee basis.</p> Signup and view all the answers

    The prudence concept dictates that assets and income should be understated while liabilities and expenses should be overstated.

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

    What is the primary focus of management accounting?

    <p>Providing special purpose financial reports for internal use by an entity's management.</p> Signup and view all the answers

    The principle of ______ requires that accounting policies are consistently applied from one period to the next.

    <p>consistency</p> Signup and view all the answers

    Match the accounting concept with its corresponding description:

    <p>Accrual Basis = Recognizes revenue and expenses when they occur, not when cash is exchanged. Matching = Recognizes expenses in the same period as the related revenue is earned. Realization = The process of converting non-cash assets into cash or claims for cash. Prudence = Incorporates caution in estimations, ensuring assets and income are not overstated and liabilities and expenses are not understated.</p> Signup and view all the answers

    Which accounting concept ensures that all financial statements are interrelated and work together to present a complete picture of an entity's financial position?

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

    Costs that are not directly related to revenue generation are immediately recognized as expenses under the systematic and rational allocation concept.

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

    Explain the fundamental difference between financial accounting and management accounting.

    <p>Financial accounting focuses on general purpose financial statements, while management accounting provides special purpose reports for internal use by management.</p> Signup and view all the answers

    The process of establishing financial accounting standards is a democratic process where a majority of practicing accountants must agree with a standard before it becomes implemented.

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

    What are the two main ways a standard can become 'generally acceptable' in accounting?

    <p>A standard can become 'generally acceptable' by either being established by an authoritative accounting rule-making body or by gaining general acceptance due to practice over time and being proven to be most useful.</p> Signup and view all the answers

    The focus of financial accounting is the preparation of ______ financial statements.

    <p>general-purpose</p> Signup and view all the answers

    Match the following accounting terms with their respective definitions:

    <p>Generally Acceptable = Standards established by an authoritative accounting rule-making body, or widely accepted due to practice over time Identifying = Assigning values to economic transactions or events General-purpose financial statements = Financial statements that cater to the needs of a wide range of users Fiscal Year = A 12-month period used for accounting purposes that can begin on any date</p> Signup and view all the answers

    Study Notes

    Overview of Accounting

    • Accounting defines as the process of identifying, measuring, and communicating economic information to permit informed judgment and decisions by users of information.
    • The basic purpose of accounting is to provide information about economic activities intended to be useful in making economic decisions.
    • Learning objectives include defining accounting and stating its purpose, explaining basic accounting concepts, stating branches of accounting and the sectors in accountancy practice, and explaining the importance of a uniform set of financial reporting standards.

    Definition of Accounting

    • Accounting is "the process of identifying, measuring, and communicating economic information to permit informed judgment and decisions by users of information."

    Three Important Activities

    • Identifying: Analyzing events and transactions to determine if they should be recognized; only accountable events are recognized.
    • Measuring: Assigning numbers, usually monetary amounts, to economic transactions and events.
    • Communicating: Transforming economic data into useful accounting information, such as financial statements, for dissemination to users.

    Types of Events

    • External Events: Involve external parties, categorized into exchange (reciprocal transfer), non-reciprocal transfer, and other external events.
    • Internal Events: Do not involve external parties, such as production (transforming resources into goods), and casualty (unanticipated loss).

    Measurement

    • Measurement bases typically used include historical cost, fair value, present value, realizable value, current cost, and sometimes inflation-adjusted costs.
    • Historical cost is commonly used with other bases, resulting in financial statements using a mixture of costs and values.

    Valuation by Fact or Opinion

    • Valued by opinion when measurements are affected by estimates.
    • Valued by fact when measurements are unaffected by estimates.

    Communicating (Three Aspects)

    • Recording: Recording identified and measured accountable events through journal entries.
    • Classifying: Grouping similar and interrelated items into their respective classes using a ledger.
    • Summarizing: Putting together or expressing recorded and classified transactions/events in condensed form for financial statements and other reports.

    Basic Accounting Concepts

    • Double-entry system: Each accountable event is recorded in two parts (debit and credit).
    • Going concern: The entity is assumed to operate indefinitely.
    • Separate entity: The entity is treated separately from its owners.
    • Stable monetary unit: Amounts are stated in a common unit of measure, disregarding changes in purchasing power.
    • Time period: The business life is divided into reporting periods.
    • Materiality concept: Information is material if its omission or misstatement could influence economic decisions.
    • Cost-benefit: The cost of processign and communicating information should not exceed the derived benefits.

    Basic Accounting Concepts (Continued)

    • Accrual basis of accounting: Effects of transactions are recognized when they occur, not when cash is exchanged, and related to the accounting periods to which they relate.
    • Historical cost concept: The value of an asset is determined based on its acquisition cost.
    • Concept of articulation: All components of complete financial statements are interconnected.
    • Full disclosure principle: Financial statements provide sufficient detail and condensation, considering the costs of preparation and use.
    • Consistency concept: Financial statements are prepared consistently across periods using the same accounting policies.

    Basic Accounting Concepts (Continued)

    • Matching: Costs are recognized as expenses when related revenue is recognized.
    • Systematic and rational allocation: Costs not directly related to revenue are initially recognized as assets and allocated over their economic benefits.
    • Immediate or outright recognition: Do not meet the definition of an asset.
    • Residual equity theory: Applicable where there are two classes of shares (ordinary and preferred). Assets − Liabilities − Preferred Shareholders' Equity = Ordinary Shareholders' Equity.
    • Fund theory: Accounting's objective is the custody and administration of funds.
    • Realization: The process of converting non-cash assets into cash or cash equivalents.
    • Prudence (Conservatism): Making cautious judgments in uncertain situations to ensure assets, income, liabilities, and expenses are not over or understated.

    Common Branches of Accounting

    • Financial accounting: Focuses on general purpose financial statements.
    • Management accounting: Focuses on special purpose financial reports for internal use.
    • Cost accounting: Records and analyzes costs of materials, labour, and overhead related to production.
    • Auditing: Evaluates whether assertions meet established criteria; expresses an opinion.
    • Tax accounting: Prepares tax returns and provides tax advice.
    • Government accounting: Focuses on the custody, use, and responsibility of funds in government entities.

    Four Sectors in the Practice of Accountancy

    • Practice of Public Accountancy: Renders audit or accounting services to multiple clients.
    • Practice in Commerce and Industry: Employment in the private sector, requiring decision-making knowledge in accounting.
    • Practice in Education/Academe: Teaching accounting, auditing, management advisory services, finance, business law, etc. in educational institutions.
    • Practice in the Government: Employment or appointment in government entities, requiring accounting knowledge.

    Accounting Standards in the Philippines

    • Philippine Financial Reporting Standards (PFRSs): Standards and Interpretations adopted by the Financial Reporting Standards Council (FRSC).

    The Need for Reporting Standards

    • Entities need a uniform set of generally accepted reporting standards to ensure financial statements are not misleading. Standards are either established by a rule-making body or gained general acceptance over time.
    • The process of establishing accounting standards is democratic; most practicing accountants must agree before implementation.

    True or False Statements (from the provided document)

    • (1) only transactions that affect assets, liabilities, equity, income, or expenses are recognized.
    • (2) Identifying involves assigning values to economic transactions or events.
    • (3) The focus of financial accounting is the preparation of general-purpose financial statements.
    • (4) General-purpose financial statements meet the needs of all users.
    • (5) Financial statements are among the many information sources.

    Additional Information from the Document (page 19)

    • Information in financial statements is sourced from accounting records.
    • Fiscal year starting May 1 ends on May 31 of the following year.
    • Bookkeeping and accountancy are not the same.
    • Accounting standards are routinely adjusted based on evolving user needs.
    • The responsibility of selecting accounting policies rests primarily with the entity's accountant.

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    Description

    This quiz covers the fundamental concepts of accounting, including its definition, purpose, and key activities such as identifying, measuring, and communicating economic information. Participants will gain insights into the branches of accounting and the importance of uniform financial reporting standards.

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