Chapter 2 Accounting Concepts and Principles PDF

Chapter 2 Accounting Concepts and Principles Learning Objectives 1. Give examples of accounting concepts and principles. 2. Apply the concepts in solving accounting problems. Chapter 2: Accounting Concepts an d Principles (FAR by: Millan)  Basic Account...

Chapter 2 Accounting Concepts and Principles Learning Objectives 1. Give examples of accounting concepts and principles. 2. Apply the concepts in solving accounting problems. Chapter 2: Accounting Concepts an d Principles (FAR by: Millan)  Basic Accounting Concepts 1. Separate entity concept 7. Time Period 2. Historical cost concept 8. Stable monetary unit 3. Going concern assumption 9. Materiality concept 4. Matching 10. Cost- benefit 5. Accrual Basis 11. Full disclosure principle 6. Prudence (or Conservatism) 12. Consistency concept Chapter 2: Accounting Concepts and Principles (FAR by: Millan) Basic Accounting Concepts – (cont’n) Separate entity concept – The business is viewed as a separate entity, distinct from its owner(s). Only the transactions of the business are recorded in the books of accounts. The personal transactions of the business owner(s) are not recorded. Historical cost concept (Cost principle) – assets are initially recorded at their acquisition cost. Going concern assumption – The business is assumed to continue to exist for an indefinite period of time. Matching – Some costs are initially recognized as assets and charged as expenses only when the related revenue is recognized. Chapter 2: Accounting Concepts and Principles (FAR by: Millan) Basic Accounting Concepts – (cont’n) Accrual Basis of accounting – income is recorded in the period when it is earned rather than when it is collected, while expense is recorded in the period when it is incurred rather than when it is paid. Prudence – The observance of some degree of caution when exercising judgments under conditions of uncertainty. Such that, if there is a choice between a potentially unfavorable outcome and a potentially favorable outcome, the unfavorable one is chosen. This is necessary so that assets or income are not overstated and liabilities or expenses are not understated. Chapter 2: Accounting Concepts and Principles (FAR by: Millan) Basic Accounting Concepts – (cont’n) Reporting Period – The life of the business is divided into series of reporting periods. Stable monetary unit – Assets, liabilities, equity, income and expenses are stated in terms of a common unit of measure, which is the peso in the Philippines. Moreover, the purchasing power of the peso is regarded as stable. Therefore, changes in the purchasing power of the peso due to inflation are ignored. Chapter 2: Accounting Concepts and Principles (FAR by: Millan) Basic Accounting Concepts – (cont’n) Materiality concept – An item is considered material if its omission or misstatement could influence economic decisions. Materiality is a matter of professional judgment and is based on the size and nature of an item being judged. Cost-benefit – The costs of processing and communicating information should not exceed the benefits to be derived from the information’s use. Chapter 2: Accounting Concepts and Principles (FAR by: Millan) Basic Accounting Concepts – (cont’n) Full disclosure principle – Information communicated to users reflect a balance between detail and conciseness, keeping in mind the cost-benefit principle. Consistency concept – Like transactions are accounted for in like manner from period to period. Chapter 2: Accounting Concepts and Principles (FAR by: Millan)  Philippine Financial Reporting Standards (PFRSs) The PFRSs are Standards and Interpretations adopted by the FRSC. They consist of the following: 1. Philippine Financial Reporting Standards (PFRSs); 2. Philippine Accounting Standards (PASs); and 3. Interpretations Chapter 2: Accounting Concepts and Principles (FAR by: Millan)  Qualitative Characteristics I. Fundamental Qualitative Characteristics i. Relevance (Predictive Value, Confirmatory Value, Materiality) ii. Faithful Representation (Completeness, Neutrality, Free from error) II. Enhancing Qualitative Characteristics i. Comparability ii. Verifiability iii. Timeliness iv. Understandability Chapter 2: Accounting Concepts and Principles (FAR by: Millan) Fundamental vs. Enhancing The fundamental qualitative characteristics are the characteristics that make information useful to users. The enhancing qualitative characteristics are the characteristics that enhance the usefulness of information Chapter 2: Accounting Concepts and Principles (FAR by: Millan)  Relevance Information is relevant if it can affect the decisions of users. Relevant information has the following: a. Predictive value – the information can be used in making predictions b. Confirmatory value – the information can be used in confirming past predictions  Materiality – is an ‘entity-specific’ aspect of relevance. Chapter 2: Accounting Concepts and Principles (FAR by: Millan)  Faithful representation Faithful representation means the information provides a true, correct and complete depiction of what it purports to represent. Faithfully represented information has the following: a. Completeness – all information necessary for users to understand the phenomenon being depicted is provided. b. Neutrality – information is selected or presented without bias. c. Free from error – there are no errors in the description and in the process by which the information is selected and applied. Chapter 2: Accounting Concepts and Principles (FAR by: Millan) Enhancing Qualitative Characteristics 1. Comparability – the information helps users in identifying similarities and differences between different sets of information. 2. Verifiability – different users could reach consensus as to what the information purports to represent. 3. Timeliness – the information is available to users in time to be able to influence their decisions. 4. Understandability – users are expected to have: a. reasonable knowledge of business activities; and b. willingness to analyze the information diligently. Chapter 2: Accounting Concepts and Principles (FAR by: Millan)