Gonzales, Patrisha Jeane A.

AT1A

1. What are the accounting concepts, conventions and principles?

a. CONCEPTS
Accrual Basis revenue and expenses are taken account of when they
occur and not when the cash is received or paid out.
Going Concern it is assumed that the business entity for which
accounts are being prepared is solvent and viable, and will continue to be
in business in the foreseeable future.
Prudence (Conservatism) revenue and profits are included in the
balance sheet only when they are realized (or there is reasonable
certainty of realizing them) but liabilities are include when there is a
reasonable possibility of incurring them. Also called conservation
concept.
Accounting Equation total assets of an entity equals total liabilities plus
owners equity.
Accounting Period financial records pertaining only to a specific period
are to be considered in preparing accounts for that period.
b. CONVENTIONS
Historical Costs
Monetary Measurement
Separate Entity
Realisation
Materiality
c. PRINCIPLES
Understandability
Relevance
Consistency
Comparability
Objectivity
2. What is GAAP?
Generally accepted accounting principles (GAAP) are the standard framework of
guidelines for financial accounting used in any given jurisdiction; generally known
as accounting standards or standard accounting practice. These include the
standards, conventions and rules that accountants follow in recording and
summarizing and in the preparation of financial statements.
3. What are the accounting consumptions and concepts?
The Economic (Business) Entity Concept. The accountant keeps all of the
business transaction of a sole proprietorship separated from the business
owners personal transaction.
The Monetary Unit Assumption. The business should have one money unit to
record its transactions.
The Going Concern (Continuing Concern) Concept. The business is going to be
operated for non-predefined period, or in other words, there is no ending for
business life.
The Time Period Concept. This accounting principle assumes that it is possible to
report the complex and ongoing activities of a business in relatively short, distinct
time intervals.
4. What are the basic financial statements?

Financial statements represent a formal record of the financial activities of an

entity.
a. Statement of Financial Position known also as Balance Sheet, presents the
financial position of an entity at a given date. It is comprised of the following three
elements:
Assets: Something a business owns or controls (e.g. cash, inventory,
plant and machinery, etc)
Liabilities: Something a business owes to someone (e.g. creditors, bank
loans, etc)
Equity: What the business owes to its owner. This represents the amount
of capital that remains in the business after assets are used to pay off its
outstanding liabilities. Equity therefore represents the difference between
the assets and liabilities.
b. Income Statement known as the Profit and Loss Statement, reports the
companys financial performance in terms of net profit or loss over a specified
period. Income Statement has the following elements:
Income: What the business has earned over a period (e.g. sales revenue,
dividend income, etc)
Expense: The cost incurred by the business over a period (e.g. salary and
wages, depreciation, rental charges, etc)
c. Cash Flow Statement presents the movement in cash and bank balances over
a period. The movement in cash is classified into the following segments:
Operating Activities: Represents the cash flow from primary activities of a
business.
Investing Activities: Represents the cash flow from the purchase and sale
of assets other than inventories (e.g. purchase of a factory land)
Financing Activities: Represents cash flow generated or spent on raising
and repaying share capital and debt together with the payments of
interest and dividends.
d. Statement of Changes in Equity also known as the Statement of Retained
Earnings, details the movement in owners equity over a period. The movement
in owners equity is derived from the following components:
Net Profit or loss during the period as reported in the income statement
Share capital issued or repaid during the period
Dividend payments
Gains or losses recognized directly in equity (e.g. revaluation surpluses)
Effects of a change in accounting policy or correction of accounting error