Accounting Principles PDF

Mathematics of Investment BU College of Education Daraga, Albay  Accounting Principles   Definition: Accounting principles are the rules and guidelines that companies and other bodies must follow when reporting financial data.  International Financia...

Mathematics of Investment BU College of Education Daraga, Albay  Accounting Principles   Definition: Accounting principles are the rules and guidelines that companies and other bodies must follow when reporting financial data.  International Financial Reporting Standards (IFRS) - a set of accounting rules for the financial statements of public companies that are intended to make them consistent, transparent, and easily comparable around the world.  issued by the International Accounting Standards Board (IASB)  The United States uses a separate set of accounting principles, known as ”Generally Accepted Accounting Principles (GAAP)”.  The Philippine Financial Reporting Frameworks   1) Philippine Financial Reporting Standards (PFRSs)  2) Philippine Financial Reporting Standard for Small and Medium-Sized Entities (PFRS for SMEs)  3) Philippine Financial Reporting Standard for Small Entities (PFRS for SEs)  The Securities and Exchange Commission (SEC) has the authority to prescribe the financial reporting framework to be used by corporations in the Philippines. These general financial reporting requirements are set out in the Revised Securities Regulation Code (SRC) Rule 68  The Philippine Financial Reporting Frameworks   GAAP - Generally Accepted Accounting Principle - a set of rules for financial reporting. - It helps make sure financial info is the same across different groups. - These rules come from the Financial Accounting Standards Board (FASB). They help everyone understand financial info better. - The core concepts include essential principles like revenue recognition, the matching principle, and full disclosure. - It ensures that income is recognized when earned and expenses are matched to corresponding revenues, providing a clear view of financial performance  Basic Accounting Principles   - Ensure that financial reports are consistent and standardized. They provide clear guidelines for recording financial data, making it easier to compare businesses and assess performance across industries.  - Not only enhance transparency but also play a key role in preventing financial fraud.  - By establishing a reliable framework for financial reporting, they create a trustworthy environment where stakeholders can have confidence in the information provided.  Basic Accounting Principles  1. Going Concern Principle  assumes a business will continue operating into the future without plans to liquidate.  allows for the accrual and cost principles to function smoothly by enabling long-term asset depreciation and deferred expense recognition.  essential for financial stability and investor confidence. Basic Accounting Principles  2. Accrual Principle  -records income and expenses when they occur, not when cash is exchanged.  - This approach matches revenues with related expenses, ensuring accurate financial tracking.  - Recording COGS in the same period as sales revenue reflects true profitability, offering a realistic view of financial health.  Basic Accounting Principles  3. Consistency Principle  Insists on using the same accounting methods consistently across periods.  This consistency aids in comparing financial results over time, enhancing the reliability of financial analysis, while ensuring that methods like accrual accounting are applied uniformly.  Basic Accounting Principles  4. Historical Cost Principle  records assets at their original purchase price, not their current value.  This keeps records objective and verifiable, providing stability in financial reporting, even if the asset’s market value changes over time.  Basic Accounting Principles  5. Materiality Principle  Dictates reporting all significant financial events that could influence decision-making.  It ensures transparency by highlighting important transactions while filtering out trivial details, making reports clear and aligned with accrual and cost principles.  Basic Accounting Principles  6. Conservatism Principle  Suggests being careful with financial reports.  It means recording expenses and debts right away but waiting for sure revenue.  This careful way avoids overestimating financial health.  It gives a true look at money and follows the economic entity principle.  Accounting and Bookkeeping  Bookkeeping records routine transactions like sales and expenses, focusing on straightforward data entry. Accounting interprets and analyzes this data, applying principles to provide a comprehensive view of a business’s financial health.  Importance of Applying Generally Accepted Accounting Principles   Understanding and applying GAAP, IFRS, and PFRS is crucial for ensuring transparent and accurate financial reporting in the Philippines.  These standards not only help businesses stay compliant but also manage their financial processes more efficiently.  However, the complexities of adhering to these standards can be challenging, especially for companies striving to remain competitive and transparent  ASSETS AND LIABILITIES   Balance Sheet - This financial statement gives a view of a business financial position at the end of its financial period - The view highlights the accounting equation (balance sheet equation) relationship Assets = Capital (Equity)+Liabilities - Details given in the balance sheet are Assets Liabilities Capital (Equity)  ASSETS AND LIABILITIES   Assets are resources owned by the business - Examples: Cash in hand (notes and coins) Cash in bank Equipment Fixtures and fittings Inventory (known as stock) Land Premises Accounts receivables (known as debtors or trade receivables) Vehicles  ASSETS AND LIABILITIES   Assets are what a company owns or something that's owed to the company.  They include tangible items such as buildings, machinery, and equipment as well as intangibles such as accounts receivable, interest owed, patents, or intellectual property  ASSETS AND LIABILITIES  Liabilities are the amounts owed by the business to other individuals or firms - Examples: Bank loans Bank overdraft Accounts payable (known as creditors and trade payables) Mortgage loans Expenses owing (amounts unpaid for goods or services)  ASSETS AND LIABILITIES  Liabilities are listed on a company's balance sheet and expenses are listed on a company's income statement  It is anything that's borrowed from, owed to, or obligated to someone else.  It can be real like a bill that must be paid or potential such as a possible lawsuit.  ASSETS AND LIABILITIES   Liability is not necessarily a bad thing. A company might take out debt to expand and grow its business or an individual may take out a mortgage to purchase a home.  They can include a future service owed to others such as short- or long-term borrowing from banks, individuals, or other entities or a previous transaction that's created an unsettled obligation.  The outstanding money that the restaurant owes to its wine supplier is considered a liability.  The wine supplier considers the money it is owed to be an asset  ASSETS AND LIABILITIES   Liabilities are categorized as current or non- current depending on their temporality.  Current liabilities are usually considered short- term. They're expected to be concluded within 12 months or less. Non-current liabilities are long-term. They're expected to last 12 months or longer.  ASSETS AND LIABILITIES   Some examples of short-term liabilities: payroll expenses accounts payable which can include money owed to vendors, monthly utilities, and similar expenses  It's a long-term liability if a business takes out a mortgage that's payable over a 15-year period  ASSETS AND LIABILITIES   Capital (known as Equity) represents the investment made by the owner, partners or other individuals in his or her business  It is considered as the net value (worth) of the business 