Basic Accounting Concepts

Activities performed by the business
Service companies perform services for a fee.

Merchandising companies purchase goods
that are ready for sale and then sell it to
customers.
Manufacturing companies buy raw materials,
convert them and then sell them to other
companies or consumers.
Phases of Accounting
Measuring - it must be expressed in common
financial denominator.
Recording Classifying - reduces the effects of numerous
transactions into useful groups or categories.
Summarizing is through the preparation of
financial statements or reports.
Interpreting is to evaluate the liquidity,
profitability or solvency of the business.
Basic Concepts
Entity Concept accounting entity is an
organization that stands apart from other
organizations and individuals as a separate
economic unit.
Periodic Concept allows users to obtain
timely information to serve as a basis on making
decisions about future activities.
Calendar Yr starts from Jan Dec.
Fiscal Yr 12 consecutive months.
Stable Monetary Unit Concept assumption
that Philippine peso is stable and does not
consider inflation.
GAAP Criteria
Relevance results in informations that is
meaningful and useful.
Objectivity - not influenced by the personal bias
or judgment of those who furnish it. /Accurate
Feasibility implemented without undue
complexity or cost.
Basic Principles
Objectivity Principle accounting records and
statement are based on the most reliable data
available so that they will be as accurate as
possible.
Historical Cost asset should be recorded at
their actual cost and not at what the management
thinks that they worth as at the reporting date.
Revenue Recognition revenue is to be
recognized in the accounting period when goods
are delivered or services are rendered or
performed.
Expense Recognition expenses should be
recognized when goods and services are used up
to produce revenue and not when the entity pays
for it.
Adequate Disclosure requires relevant info to
be disclosed in the Financial Statements.
Materiality infos significant enough to affect
decisions, determined through its size and
nature.
Consistency Principle is the use of same
accounting method from period to period to
achieve comparability over time.
Frame Work deals with the objective of the
financial statements.
Objective of FS - is to provide informations
about the financial position, performance, and
changes in financial position of an enterprise
that is useful to a wide range of users.
Accrual Basis recognizes revenue as they are
earned and expenses as they are incurred. The
timing of cash flow is immaterial.
Cash Basis cash receipts are treated as
revenue and disbursements as expenses.
Going Concern underlies the depreciation of
assets over their useful life. If and entity expects
to liquidate in the near future, its assets are
valued at their worth at liquidation rather than
the original cost.
Qualitative Characteristics of FS
Content
Relevance
Confirmatory role when used to
confirm the decision makers earlier expectation.
Predicative role is to make predictions,
for instance Future cash flow or income.
Reliability
Faithful Representation represent
faithfully the transactions.
Substance over form presented in
accordance with their substance and economic
reality and not merely their legal form.
Neutrality free from bias.
Prudence/Conservatism is to anticipate
no profits and provide for all probable and
estimable losses. It is the degree of caution in
making estimates required under uncertainty.
Completeness must be complete
within the bounds of materiality and cost.
Presentation
Comparability must be able to compare FS
over time to identify trends to its performance.
Understandability readily understandable to
the users, assumed to have knowledge.
Constraints on Relevant and Reliable Info
Timeliness there is balance of timely
report and provision of reliable information.
Balance between Benefit and Cost The benefit
derived should exceed the cost of providing it.
Balance between Qualitative Characteristics
matter of professional judgment.
Fair Presentation is the presenting fairly of
financial position and performance.
Recognition and Measurement of the Elements
of Financial Statements
Recognition satisfies criteria.
1. Probable future economic benefit.
2. Can be measured reliably.
Measurement is the process of determining
the monetary amounts that are to be recognized.
Capital and Capital Maintenance

Financial concept capital is invested
money, purchasing power, equity of the
enterprise.
Physical concept capital is regarded as
productive capacity of the enterprise.
Elements of FS
Financial Position
1. Asset resource controlled by the enterprise
as a result of past events and from which
future economic benefits are expected to
flow to the enterprise.
2. Liabilities Present obligation of the
enterprise arising from past event, the
settlement of which is expected to result in
an outflow of resources embodying
economic benefits.
3. Equity residual interest in the assets of the
enterprise after deducting all its liabilities.
Financial Performance
1. Income increases in economic benefits
during the accounting period in the form of
enhancement of assets or decreases of
liabilities that result in an increase in
equity.
2. Expense decreases in economic benefits
during the accounting period in the form of
outflow or depletions of assets or incurring
of liabilities that result in a decrease in
equity.
3. Gain and Losses
Business Transaction is the occurrence of an
event or condition that affects the financial
position and can be reliably recorded.
Accounting Equation is the tool for analyzing
the effects of business transaction.
A = L + OE
Account is the summary device of accounting.
T-account is the simplest form of account.
Double Declining Balance dual effects of a
transaction.
Journal is the chronological record of the
entitys transactions.
Ledger grouping of the entitys accounts or

the book of final entries.
Trial Balance List of all accounts with their
respective debit and credit balances.
Compounded entry is when three or more
accounts are required in the journal entry.
General Ledger reference book of the
accounting system and is used to classify and
summarize transactions and prepare data for FS.
Permanent Accounts A, L, OE
Temporary Accounts I, E.
Normal Balance of an Account refers to the
side of the account (debit or credit) which
increases the account.
Users of Accounting Information
External Users groups or individuals who are
not directly concerned with the day to day
operations of the entity but are indirectly related.
Ex. Creditors, investors, government and public.
Internal Users are management personnel in
all levels within the entity who are responsible
for the planning and control of the operations.
Accounting Cycle refers to a series of
sequential steps or procedures performed to
accomplish accounting process.
1. Gathering source documents
2. Journalizing
3. Posting
4. Preparation of trial balance
5. Worksheet
6. Adjusting and Posting of Adjustment
7. Preparation of financial statement
8. Journalizing and posting of closing

entries
9. Preparation of post closing trial balance
10. Reversing Entries
Deferral postponement of recognition of
revenue or expense.
-Expenses already paid but not yet
incurred.
-Revenue already collected but not yet
earned.
Accrual recognition of:
-Expense already incurred but unpaid.
-Revenue earned but uncollected.
Depreciation systematic allocation of cost.
Worksheet simplifies the adjusting and closing
process and summary device used by accountant
for his convenience.
Financial Statements
1. Statement of Financial Position
2. Statement of Comprehensive Income
3. Statement of Changes in Equity
4. Statements of Cash Flows
5. Notes to Financial Statement
Post Closing Trial Balance contains only
balance sheet items such as asset, liabilities and
capital.
Reversing Entries journal entry which is the
exact opposite of a related adjusting entry made
at the end of the period.

Basic Accounting Concepts

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Basic Accounting Concepts

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Activities performed by the business

Service companies perform services for a fee.

Capital and Capital Maintenance

Ledger grouping of the entitys accounts or

8. Journalizing and posting of closing

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