FINANCIAL ACCOUNTING AND REPORT

ELLYZA SHEEN C. BACARISAS, BSA-1

ACCTNG131 – A2

CHAPTER 2: 5. ACCRUAL BASIS OF ACCOUNTING

➢ economic events are recorded in the
ACCOUNTING CONCEPTS AND period in which they occur rather
PRINCIPLES than at the point in time when they
affect cash.
➢ Assumption or postulates ➢ Income is recorded in the period
➢ Set of logical ideas and procedures that when it is earned rather than when it
guide the accountant in recording and is collected
communicating economic information ➢ Expense is recognized in the period
➢ Provide a general frame of reference by when it is incurred rather than when it
which accounting practice can be is paid.
evaluated and they serve as guide in the
development of new practices and 6. PRUDENCE (Conservatism)
procedures ➢ the accountant observes some
➢ Practices and procedures degree of caution when exercising
judgements needed in making
BASIC ACCOUNTING CONCEPTS accounting estimates under
conditions of uncertainty.
1. SEPARATE ENTITY CONCEPT ➢ If the accountant needs to choose
➢ The business is viewed as a separate between a potentially unfavorable
person, distinct form its owner(s) outcome versus a potentially
➢ Only the transaction of the business favorable outcome, the accountant
are recorded in the books of chooses the potentially unfavorable
accounts. The personal transactions one.
of the business owner(s) are not ➢ This is necessary so that assets or
recorded income are not overstated and
➢ By applying this, you can objectively liabilities or expenses are not
know if the business is really earning understated.
profits or if it has the ability to do so
7. TIME PERIOD (Periodicity or Accounting period
2. HISTORICAL COST CONCEPT (Cost Principle) concept)
➢ Assets are initially recorded at their ➢ The life of the business is divided into
acquisition cost series of reporting periods.

3. GOING CONCERN ASSUMPTION Managers need periodic information on the results of

➢ The business is assumed to continue operations from them to properly perform their
to exist for an indefinite period of time functions. For example, managers may need to know
➢ Measured at net selling price rather the following:
than at historical cost
✓ Which product or services are selling well and
o Liquidating Concern which are not?
- The opposite of going concern ✓ Is the business spending too much on
- This is the case if the business intends expenses? Does the business need to cut
to end its operations or if it has no down costs?
other choice to do so. (e.g., the ✓ Is the business generating enough cash from
business is bankrupt) its operating activities?

➢ Going concern – good; Liquidating External users may need to know the following:
concern – bad ✓ For creditors: is the business generating
enough cash needing to pay maturing
4. MATCHING (Association of cause and effect) liabilities.
➢ under this concept, some costs are ✓ For investors: is the business earning enough
initially recognized as assets and profits to ensure future growth?
charged as expenses only when the ✓ For the government: is the business paying the
related revenue is recognized as right taxes?
assets and charged as expenses only
when the related revenue is Maturing – due
recognized
 FINANCIAL ACCOUNTING AND REPORT
ELLYZA SHEEN C. BACARISAS, BSA-1
ACCTNG131 – A2

Reporting Periods (Accounting Periods) a. Sufficient detail to disclose matters

- the series of equal short periods that the that make a difference to users, yet
business is divided into, instead of waiting until b. Sufficient consideration to make the
the life of the business ends before profit is information understandable, keeping
determined in mind the costs of preparing and
using it.
8. STABLE MONETARY UNIT
➢ assets, liabilities, equity, income and 12. CONSISTENCY CONCEPT
expenses are stated in terms of a ➢ A business shall apply accounting
common unit of measure, which is the policies consistently, and present
peso in the Philippines. information consistently, from one
➢ The purchasing power of the peso is period to another.
regarded as stable ➢ Transactions must be accounted for
➢ Changes in the purchasing power of in like manner.
the peso due to inflation are ignored. ➢ Accounting policies used this year
shall be the same accounting
9. MATERIALITY CONCEPT policies sued last year
➢ Guides the accountant when ➢ However, does not mean that a
applying accounting principle business cannot change its
➢ This is because accounting principles accounting policies.
are applicable only to material items. ➢ Accounting policies can be
➢ An item is considered material if its changed if it is required by a
omission or misstatement could standard or the change would result
influence economic decisions. in more relevant and more reliable
➢ It is a matter a matter of professional information. Any change in
judgement and is based on the size accounting policy must be disclosed.
and nature of an item being judged
QUALITATIVE CHARACTERISTICS OF A USEFUL
For example:
FINANCIAL INFORMATION
✓ Material items are communicated to users in
a more detailed manner as compared to
immaterial items. Qualitative characteristics are the traits that make
✓ Big company often round-off amounts in their information useful to users. Without these
financial reports. An account with a balance characteristics, information may be deemed useless
of P323,487,679,621.21 may be reported as
P323,488 with indication of the level of The qualitative characteristics are broadly classified
rounding-off as in (‘000,000s), meaning “in into two, namely:
millions”.
✓ Since the company is big (nature), the 1. Fundamental qualitative characteristics
amount of P679,621.21 (size) is considered a. Relevance
immaterial. b. Faithful representation
✓ Rounding-off this amount would not affect
the decision making of the users. 2. Enhancing Qualitative Characteristics
a. Comparability
Accounting principles do not specify a certain b. Verifiability
amount that is considered material. Again, this is a c. Timeliness
matter of professional judgement. d. Understandability

FUNDAMENTAL QUALITATIVE CHARACTERISTICS

10. COST-BENEFIT (cost constraint)
➢ The cost of processing and ➢ Shares concept with accounting
communicating information should ➢ Essential characteristics that information must
not exceed the benefits to be have before it can be included in the
derived from it financial statements.

11. FULL DISCLOSURE PRINCIPLE • RELEVANCE

➢ Related to both the concepts of ➢ the ability to affect the decision making of the
materiality and cost benefit users. Without this ability, information is
➢ Information communicated to users deemed irrelevant and useless.
reflect a series of judgmental trade-
offs. The trade-offs strive for:
 FINANCIAL ACCOUNTING AND REPORT
ELLYZA SHEEN C. BACARISAS, BSA-1
ACCTNG131 – A2

Elements of Relevance: ➢ Requires two items

a. Predictive Value
➢ A predictive value if users can use it as an • VERIFIABILITY
input in making predictions or forecasting ➢ Enables different and independent users to
outcomes of events reach a general agreement about what the
information intends to depict
b. Confirmatory Value (or Feedback Value)
➢ Related to the predictive value • TIMELINESS
➢ Confirmatory value if users can use it to ➢ Information must be provided to users on time
confirm their past predictions. to be capable of influencing their decisions.
➢ “Aanhin pa ang ang damo kung patay na
c. Materiality ang kabayo”
➢ Based on judgment
➢ An entity specific aspect of relevance, • UNDERSTANDABILITY
meaning it depends on the facts and ➢ Must be presented clearly and concisely in
circumstances surrounding specific entity. order for users to understand them
➢ Information is material omitting it or misstating ➢ Expected to have a reasonable knowledge
it could influence the decision making of the of business and economic activities and to
use review and analyze the information diligently,
sufficient for them to understand the
information contained in the financial
• FAITHFUL REPRESENTATION statements.
➢ Information is fruitfully represented if it is
factual, meaning it represents the actual
effects of events that have take place

Elements of Faithful Representation:

a) Completeness
➢ Information must be presented with sufficient
detail necessary for users to understand them.
Important information must not be omitted.

b) Neutrality
➢ Information are selected or presented without
bias. Information must not be manipulated to
increase the probability that it will be received
favorably or unfavorably by the users.

c) Free from error

➢ Information presented in the financial
statements must not be materially misstated.
not necessarily perfect in all aspects because
some accounting information needs to be
estimated.
➢ There are no errors in the description and in
the process by which the information is
selected and applied.

ENHANCING QUALITATIVE CHARACTERISTICS

➢ These characteristics supports the

fundamental characteristics.
➢ They enhance the useful information and
must be maximized.

• COMPARABILITY
➢ If it enables users to make comparison to
identify and understand the similarities in, the
differences among items