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Basic Accounting Concepts

This document defines accounting and outlines its basic purpose of providing economic information to allow for informed decision making. It describes the key activities of identifying, measuring, and communicating transactions and events. It also discusses important accounting concepts like the double entry system, matching principle, and accrual basis. Finally, it outlines the common branches of accounting and stresses the importance of a uniform set of standards like the Philippine Financial Reporting Standards.

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Treesh Marie Menor
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106 views

Basic Accounting Concepts

This document defines accounting and outlines its basic purpose of providing economic information to allow for informed decision making. It describes the key activities of identifying, measuring, and communicating transactions and events. It also discusses important accounting concepts like the double entry system, matching principle, and accrual basis. Finally, it outlines the common branches of accounting and stresses the importance of a uniform set of standards like the Philippine Financial Reporting Standards.

Uploaded by

Treesh Marie Menor
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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CONCEPTUAL FRAMEWORK &

ACCOUNTING STANDARD
Overview of Accounting
Learning Objectives
 Define accounting and state its basic purpose.
 Explain the basic concepts applied in accounting.
 State the branches of accounting.
 Explain the importance of a uniform set of financial
reporting standards.

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Definition of
ACCOUNTING
Accounting is “the process of identifying,
measuring, and communicating economic
information to permit informed judgment and
decisions by users of information.”
(American Association of Accountants)

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THREE IMPORTANT ACTIVITIES

1. Identifying - the process of analyzing events and transactions


to determine whether or not they will be recognized. Only
accountable events are recognized.
2. Measuring - involves assigning numbers, normally in
monetary terms, to the economic transactions and events.
3. Communicating - the process of transforming economic data
into useful accounting information, such as financial
statements and other accounting reports, for dissemination to
users.

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MEASUREMENT

◦ The several measurement bases used in accounting include, but not limited to, the
following:
1. historical cost,
2. fair value,
3. present value,
4. realizable value,
5. current cost, and
6. sometimes inflation-adjusted costs.

◦ The most commonly used is historical cost. This is usually combined with the other
measurement bases. Accordingly, financial statements are said to be prepared using a
mixture of costs and values.

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BASIC PURPOSE OF ACCOUNTING

The basic purpose of accounting is to provide


information about economic activities intended to be
useful in making economic decisions.

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TYPES OF ACCOUNTING INFORMATION CLASSIFIED AS TO
USERS’ NEEDS

 General purpose accounting information - designed to meet


the common needs of most statement users. This information
is governed by the Philippine Financial Reporting Standards
(PFRSs).

 Special purpose accounting information - designed to meet


the specific needs of particular statement users. This
information is provided by other types of accounting, e.g.,
managerial accounting, tax basis accounting, etc.
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BASIC ACCOUNTING CONCEPTS
◦ Double-entry system – each accountable event is recorded in two parts – debit and
credit.
◦ Going concern - the entity is assumed to carry on its operations for an indefinite period
of time.
◦ Separate entity – the entity is treated separately from its owners.
◦ Stable monetary unit - amounts in the financial statements are stated in terms of a
common unit of measure; changes in purchasing power are ignored.
◦ Time Period – the life of the business is divided into series of reporting periods.
◦ Materiality concept – information is material if its omission or misstatement could
influence economic decisions.
◦ Cost-benefit – the cost of processing and communicating information should not
exceed the benefits to be derived from it.

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BASIC ACCOUNTING CONCEPTS - Continuation
◦ Accrual Basis of accounting – effects of transactions are recognized when they occur
(and not as cash is received or paid) and they are recognized in the accounting periods
to which they relate.
◦  Historical cost concept – the value of an asset is determined on the basis of acquisition
cost.
◦ Concept of Articulation – all of the components of a complete set of financial
statements are interrelated.
◦ Full disclosure principle – financial statements provide sufficient detail to disclose
matters that make a difference to users, yet sufficient condensation to make the
information understandable, keeping in mind the costs of preparing and using it.
◦ Consistency concept – financial statements are prepared on the basis of accounting
policies which are applied consistently from one period to the next.

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BASIC ACCOUNTING CONCEPTS - Continuation
◦ Matching – costs are recognized as expenses when the related revenue is recognized.
◦ Residual equity theory – this theory is applicable where there are two classes of shares
issued, ordinary and preferred. The equation is:
“Assets – Liabilities – Preferred Shareholders’ Equity = Ordinary Shareholders’ Equity.”

◦ Fund theory – the accounting objective is the custody and administration of funds.
◦ Realization – the process of converting non-cash assets into cash or claims for cash.
◦ Prudence (Conservatism) – the inclusion of a degree of caution in the exercise of the
judgments needed in making the estimates required under conditions of uncertainty ,
such that assets or income are not overstated and liabilities or expenses are not
understated.

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COMMON BRANCHES OF ACCOUNTING

◦ Financial accounting - focuses on general purpose financial statements.


◦ Management accounting – focuses on special purpose financial reports for use by an
entity’s management.
◦ Cost accounting - the systematic recording and analysis of the costs of materials, labor,
and overhead incident to production.
◦ Auditing - the process of evaluating the correspondence of certain assertions with
established criteria and expressing an opinion thereon.
◦ Tax accounting - the preparation of tax returns and rendering of tax advice, such as the
determination of tax consequences of certain proposed business endeavors.
◦ Government accounting - refers to the accounting for the government and its
instrumentalities, placing emphasis on the custody of public funds, the purposes for
which those funds are committed, and the responsibility and accountability of the
individuals entrusted with those funds.

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ACCOUNTING STANDARDS IN THE PHILIPPINES

◦ Philippine Financial Reporting Standards (PFRSs) are Standards


and Interpretations adopted by the Financial Reporting Standards
Council (FRSC).

◦ They comprise:

1. Philippine Financial Reporting Standards (PFRSs);


2. Philippine Accounting Standards (PASs); and
3. Interpretations

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THE NEED FOR REPORTING STANDARDS

◦ Entities should follow a uniform set of generally acceptable reporting standards when
preparing and presenting financial statements; otherwise, financial statements would be
misleading.
◦ The term “generally acceptable” means that either:
a) the standard has been established by an authoritative accounting rule-making
body; or
b) the principle has gained general acceptance due to practice over time and has
been proven to be most useful.
◦ The process of establishing financial accounting standards is a democratic process in
that a majority of practicing accountants must agree with a standard before it becomes
implemented.

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