Fundamental Concepts of Accounting PDF

FUNDAMENTAL CONCEPT OF ACCOUNTING ENTITY CONCEPT The most basic concept in accounting is the entity concept. An accounting entity is an organization or a section of an organization that stands apart from other organizations and individuals as a separate economic...

FUNDAMENTAL CONCEPT OF ACCOUNTING ENTITY CONCEPT The most basic concept in accounting is the entity concept. An accounting entity is an organization or a section of an organization that stands apart from other organizations and individuals as a separate economic unit. Simply put, the transactions of different entities should not be accounted for together. Each entity should be evaluated separately is the entity concept. 2  PERIODICITY CONCEPT An entity’s life can be meaningfully subdivided into equal time periods for reporting purposes. It will be aimless to wait for the actual last day of operations to perfectly measure the entity’s profit. 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. 3 STABLE MONETARY CONCEPT The Philippine peso is a reasonable unit of measure and that its purchasing power is relatively stable. It allows accountants to add and subtract peso amounts as though each peso has the same purchasing power as any other peso at any time. This is the basis for ignoring the effects of inflations in accounting records. 4  GOING CONCERN Financial are normally prepared on the assumption that the reporting entity is a going concern and will continue in operation for the foreseeable future. Hence, it is assumed that the entity has neither the intention nor the need to enter liquidations or to cease trading. This assumption underlies the depreciation of assets over their useful lives. 5 BASIC PRINCIPLE OF ACCOUNTING  1. OBJECTIVE PRINCIPLE - Accounting records and statements are based on the most reliable data available so that they will be as accurate and as useful as possible. Reliable are verified when they can be confirmed by independent observers. Ideally, accounting records are based on information that flows from activities documented by objective evidence. Without this principle, accounting records would be based on whims and opinions and are therefore subject to disputes. 2. HISTORICAL COST PRINCIPLE - This principle states that acquired assets should be recorded at their actual cost and not at what management thinks they are worth as at reporting date. 7  3. REVENUE RECOGNITION PRINCIPLE - Revenue is to be recognized in the accounting period when goods are delivered, or services are rendered or performed regardless when cash is received or not. 4. EXPENSE RECOGNITION PRINCIPLE - Expenses should be recognized in the accounting period in which goods and services are up to produce revenue and not when the entity pays for those goods and services. 8 5. MATERIALITY- The financial reporting is concerned to the information that is significant enough to affect evaluations and decisions. Materiality depends on the size and nature of the item judged in the particular circumstances of its omission. In deciding whether an item or an aggregate of items is material, the nature and size of the item are evaluated together. Depending on the circumstances, either the nature or the size of the item could be the determining factor. 9 6. CONSISTENCY PRINCIPLE- The firm should use the same accounting method from period to period to achieve comparability over time within a single enterprise. 10 ELEMENTS OF FINANCIAL STATEMENT STATEMENT OF FINANCIAL POSITION (BALANCE SHEET) Asset- present economic resource controlled by entity as a result of past events. An economic resource is a right that has the potential to produce economic benefits. An economic resource is a right that has potential to produce economic benefits. 12  STATEMENT OF FINANCIAL POSITION (BALANCE SHEET) Liability- present obligation of the entity to transfer an economic resource as a result of past events. For a liability to exist, three criteria must all be satisfied(a)the entity has an obligation (b)the obligation is to transfer an economic resource and (c)the obligation is a present obligation that exists as a result of past events. 13  STATEMENT OF FINANCIAL POSITION (BALANCE SHEET) Equity- is the residual interest in the assets of the enterprises after deducting all its liabilities. In other words, they are claims against the entity that do not meet the definition of a liability. Equity may pertain to any of the following depending on the form of business organization: In a Sole proprietorship, there is only owner’s equity account because there is only one owner. In partnership, an owner’s equity account exists for each partner. In corporation, owner’s equity or stockholders’ equity consists of share capital, retained and reserves representing appropriations of retained earning among others. 14 STATEMENT OF FINANCIAL PERFORMANCE (INCOME STATEMENT) Income- Increase in assets or decrease in liabilities, that result in an increase in equity, other that those relating to contributions from holders of equity claims. Expenses- decrease in asset or increase in liabilities, that result in decrease in decrease in equity, other that those relating to distributions to holders of equity claims. 15