Accounting Concepts and

Principles
 Accounting concepts and
principles
Accounting practices rest on certain
guidelines. The rules that govern how
accountants measure, process and
communicate financial information fall under
the heading GAAP, which stands for Generally
Accepted Accounting Principles. GAAP may
be described as broad rules adopted by the
accounting profession as guide in measuring,
recording, and reporting financial affairs and
activities of the business.
 Underlying Assumptions
1. Accrual Basis-in order to meet their objective,
financial statements and prepared on the
accrual basis of accounting. Under the basis,
the effect of transaction and other events are
recognized when they occur(and not as cash
or its equivalent is received or paid) and they
are recorded in the accounting records and
reported in the financial statements of the
period to which they relate.
2. Going Concern- the financial
statement normally prepared on
assumption that an entity is going
concern and will continue in
operation for the foreseeable future.
Hence, it is assumed that the entity
has neither the intention nor the need
to liquidate or curtail materially the
scale of operation for the forseeable
future.
 Qualitative Characteristics of
Financial Statement
1. Understandability- An essential quality of
the information provided in financial
statement is that it is readily
understandable by the users. For this
purpose, users are assumed to have
reasonable knowledge of business and
economic activities and accounting and
willingness to study the information with
reasonable diligence.
2. Relevance- To be useful, information must be
relevant to the decisions making needs of users.
Information has the quality of relevance when
it influences the economic decisions of users
helping them evaluate the past, present or
future events or confirming, or correcting, their
past evaluations.
3. Reliability- To be useful, information must
reliable. Information has the quality of reliability
when it is free from material error and bias and
can be depended upon by users to represent
or count reasonably be expected to represent.
4 Comparability-Users must be able to compare
. the financial statements of an entity through
time in order to identify trends in its financial
position an performance. Users must also be
able to compare the financial statement of
different entities in order to evaluate their
relative financial position, performance and
changes in financial position.
 Financial Statements of Business
Organization
Financial Statements are structured financial
representation of the financial position of and the
transactions undertaken by an enterprise. The objective of
general-purpose financial statements is to provide
information about the final position, performance and
cash flows of an enterprise that is useful to a wide range of
users in making economic decisions.

1. s
1. Assets 4. Income and
expenses, including gains
2. Liabilities and losses
3. Owner’s equality 5. Cash flow
1.Balance sheets- sometimes called the
“statements of financial position”, is the
list of assets, liabilities and owner’s equity
of a business entity as a specific date,
usually the end of a month or a year.
2.Income statements- sometimes called
earnings’ statements, is the summary of
the revenue and expenses of a business
entity as of a specific period of time.
3. Statements of changes in owners
equity- presents a summary of a
changes that occurred in the owners
equity of an entity during a specific
time period.
4. Statement of cash flow- reports cash
receipts and cash disbursement classified
according to the entity’s major activities;
operating, investing, and financing. The
statement reports a net cash flow or a net
cash outflow for each activity and for the
business overall.
5.
 .
5 Statements of comprehensive
income- comprehensive income is
the company’s change in the total
stockholders equity from sources
other that its owners.
6. Notes, comprising a summary of
significant accounting policies and
other explanatory notes.
 RELATIONSHIP AMONG THE FINANCIAL
STATEMENTS
THE FOLLOWING ILLUSTRATE THE FINANCIAL STATEMENTS OF
JOHN DELA CRUZ, CPA;

John Dela Cruz. CPA Revenues:

Income Statement Service
revenue P42,000
For the month ended April 30, 20X1 Expenses:
Salary
expense P6,000
 John Dela Cruz. CPA
Income Statement
For the Month Ended April 30 20X1

John Dela Cruz, Capital, April 1, 20X1 P

0
Add: Investment by owner
100,000
Net income for the month
29,000
 John Dela Cruz, CPA
Balance Sheet
April 30, 20X1

Assets
Liabilities
Cash P36,500 Accounts
payable P 500
Accounts receivable 10,000
Office supplies 2,500 Owner’s
Equity
 Elements of Financial Statements
Financial statements portray the financial effects
of transaction and other events by grouping
them into broad classes according to their
economic characteristic. The elements directly
related to the measurement of financial position
in the balance sheets are assets, liabilities and
owner’s equity. The elements directly related to
the measurement of performance in the income
statement are income and expenses. The
statement of changes in financial position usually
reflects income statements elements and
changes in balance sheet elements.
Financial Position
-Assets are things of value owned by the business.
They are also called the “resources acquired by a firm
as a result of past transaction or events and from
which future economic benefits are expected to flow
to the enterprise.” The most common assets including
the ff:
A. Cash is any medium of exchange that the bank will
accept at face value, includes coins and currencies,
checks, money orders, bank drafts, and bank deposits.
B. Accounts Receivable are claims against debtors or
customers arising from the sale of merchandise or
service on account.
C. Notes Receivable are claims against
debtors by a written promise
to pay.
D. Merchandise Inventories are good held for
sale.
E. Supplies are good used in the operations of
the business. They are
normally classified as office supplies and
store supplies.
F. Prepaid expenses are expenses paid in
advance, like rent, insurance
I. Automobiles
J. Truck
K. Building
L. Land
-Liabilities are the equities of the creditors, or
the debts of the business. Liabilities are also
defined as “present obligations of the
enterprise arising from the past transaction or
events the settlement of which is expected to
result in an outflow from the enterprise of
A. Accounts payable are amounts due to
creditors arising from the purchase of
merchandise or service on account.
B. Notes payable are amounts due to creditors
evidenced by a written promise to pay.
C. Salaries payable are unpaid salaries due to
the employees.
D. Taxes payable are unpaid taxes due to the
government.
E. Interest payable represent interest on
-Owner’s Equity or capital represents the
equity of the owner, or the right of the owner
on the assets of the business. It is the “residual
interest in the assets of the enterprise after
deducting all its abilities.” For a sole
proprietorship, the owners equity is shown on
the balance sheet by listing the owners name,
followed by the Capital, and then the amount
of equity. In a partnership, there are as many
capital accounts as there are owner’s,
Performance
Revenue or Income is the inflow if assets
resulting from the sale of goods or rendering of
services to customers. Revenue may be also
be defined as the “gross inflow of economic
benefits during the period arising in the course
of ordinary activities of an enterprise when
these inflows result in increase in equity other
than those relating to contributions from the
owners.” For a service company, revenues
may be as service sales, service income, fees
Expenses are costs incurred to produce
revenue. Expenses may be also be defined as
the “gross outflow of economic benefits during
the period in the course of ordinary activities
when those outflows result in decrease in
equity, other than those relating to distribution
to owner.” A number of expenses usually
incurred by an ordinary business are salaries
and wages, rent, utilities, taxes, supplies,
insurance, advertising, and miscellaneous
expense.
The Accounting Profession: Career
Accountants are employed in four broad fields:
Opportunities
1 in public accounting, 2 in private
accounting, 3 in the government and 4 in
education.
Public Accounting
-offers accounting and related services for a
fee to companies, other organizations, and the
general public. Certified Public Accountants
(CPA’s) are the licensed professionals
engaged in the practice of public accounting.
1. Auditing , examines accounting records and
the financial statements of companies and
presents an opinion as to the fairness and
accuracy of the accounting data. The
purpose of the audit is to lend credibility to a
company’s financial statements.
2. Management advisory services, employs
both historical and estimated data in assisting
management with day to day problems and
planning for the future.
3. Tax services – involves the preparation of tax
Tax services includes not only the
preparation and filing of tax
returns but also advice clients as
to how transactions may be
completed so as to incur the
smallest tax,
PRIVATE ACCOUNTING
-Provides services to a particular type of
business firm. Some companies employ
only one private accountant, while
other companies employ many. In a
company with many accountants, the
controller is the executive officer in
charge of the accounting activity.
Copy this in your notes for
lecture number 4
Be ready for checking
tomorrow or when we have
meeting. STUDY THIS VERY
WELL