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Accounting Principles – February 9, 2018

Accounting Principles
 Rules, procedures, practice, and standards
 Based on:
o Experience
o Reason
o Custom
o Usage practical necessity
 Not deduced from axioms nor can be verified by observation and experiment
 Not eternal truths
 Have evolved
Criteria for the general acceptability of an accounting principle
 Relevance
o Meaningful information
o Useful information
 Objectivity
o Information is not influenced by personal bias or judgment of those who furnish it
 Feasibility
o Can be implemented without undue complexity or cost
Statements of Financial Accounting Concepts (by FASB)
 Money measurement
 Entity
 Going concern
 Cost
 Dual aspect – debits and credits
 Accounting period
 Conservatism
 Realization
 Matching – for every revenue the company earns, there is a matched expense
o You cannot earn revenue without an expense
 Consistency - use the same method for every report
 Materiality – report only transactions that are material
Accounting Assumptions
 Fundamental premises on which the accounting process is based
 Accrual – used to be an underlying assumption, now no longer as underlying assumption
o What is accrual?
 For revenue, you report that you already earned it/rendered the service even though you
have not been paid (ex. Patient fee)
 For expenses, you already used the service, but you have not paid for it (ex. Bills)
 If you do not do accrual accounting for expenses, you overstate your revenue. 
misstatement of the financial statement
 Cash basis accounting – report as is, allowed for small companies
 Going concern or continuity – the only underlying assumption under the new conceptual framework
o The assumption is that you are a safe company, you are not closing in the future
o Entity is viewed as continuing in operation indefinitely, thus assets are normally recorded at cost
(foundation of cost principle)
 At cost – report at the amount at which you bought it
 Accounting entity
o Business enterprise is separate from the owners, managers, and employees who constitute the
firm
o Personal transactions of the owners should not be merged with the transaction of the owners
o Personal finances are separate from the company’s

 Time Period
o Indefinite life of an enterprise is subdivided into time periods or accounting periods which are
usually of equal length for the purpose of preparing financial reports on financial position,
performance, and cash flows (usually one year, maybe calendar year or fiscal year)
 Monetary unit
o Accounting information are stated in terms of a unit of measure which is the peso in the PH.
Conceptual Framework
 Summary of terms and concepts that underlie the preparation and presentation of financial statements
 Underlying theory for the development of accounting standards and revision of previously issued
accounting standards
 Attempt to provide an overall theoretical foundation for accounting which will guide standard-setters,
and preparers and users of financial information in the preparation and presentation of statements
 Concerned with the general purpose financial statements
The New Conceptual Framework
 Objective of FS
o Provide information about:
 Financial position
 Performance – what happened this year? Did we earn? Loss?
 Cash flows – are we capable of paying our currently maturing cash obligations?
o Always for economic decision making
 Qualitative characteristics of FS
o Relevance
 Information is related or pertinent to the economic decision
 Ingredients of relevance
 Predictive value – forecast outcome of events
 Feedback value – users can confirm or correct earlier expectations
 Materiality – you can do away with reporting the immaterial aspects
o Faithful representation
 Substance over form – ex. boy, girl
 Neutrality – no bias; no more, no less
 Completeness – take into consideration, the accrual
 Free from error
o Conservatism or prudence
 If you are confronted with estimates or judgments
 E.g. Understate/overstate revenue
 Enhancing qualitative characteristics
o Understandability
 Expressed in terminology (e.g. cash vs money)
o Comparability
 Within the entity
 Between and across entities
 How to ensure comparability?
 Consistent application of methods and practices from period to period
 If you use first in first out method, use it consistently throughout the years so you
can compare between different years.
o Verifiability
 You have a basis for making the FS
 People can verify what you made by looking at documentations
o Timeliness
 Based on situation

 Definition, recognition, and measurement of the elements of FS


o Elements
 Assets
 Economic resource

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o You can use it to earn revenue
 Controlled by the entity
o It is the entity who owns the resource
 Recognized when it is probable that future economic benefits will flow to the
entity
o When you can use the asset to earn revenue
o E.g. useless machines are not assets
 Cost or fair value at the time of acquisition could be objectively measured
 Liabilities
 Obligation to transfer asset or provide services
 Result of past transaction
o Has to have occurred to be in the account book
o If you fear a future transaction, not counted
 Claims against entities’ assets
o Your creditor has a claim on the assets
 Recognized when it is probable that an outflow of resources will be required for
the settlement of a present obligation
o E.g. warranty – add it to the book because there is a probability that you
will pay; the customer can claim or NOT claim the warranty, but you still
measure
 Can be measured reliably
 Equity or Net Worth
 Residual interest in the asset of the entity (after deducting liability)
Balance Sheet
 Date – only true as of that specific date
 Account form – assets on the left, liabilities on the right
 Report form – assets on the top, liabilities on the right
 Current assets – you can turn the assets into cash (liquid)
o Cash is the easiest, so it is first
o Marketable securities – short-term investments in stocks
 You are not assured if you will earn or not
o Accounts receivable
o Inventories – lower than accounts receivable because you have to sell it first
o Prepaid expenses – ex. office supplies and materials
 Noncurrent assets – longer than one year, liquidates during its life, usefulness extends beyond 1 year
o Property, plant, and equipment
o Others
 Intangible assets (rights)
 Investments
 Current liabilities
o Accounts payable
o Taxes payable
o Accrued expenses
o Deferred revenues – flip side of accrual; you received the payment but you have not rendered the
service yet
o Current portion of long-term debt
 Noncurrent liabilities – due to the following year
Accounting Equation
 Assets = liabilities + equity (shareholders and retained earnings)
o You funded your assets, through your shareholders and retained earnings
o Increases in assets are debited
o Assets have normal balances of debits
 When the assets decrease, you debit it
 Assets – liabilities = equity
o What will be shared has to be minus the liabilities