Chapter 2 Flashcards
We follow certain standards.
ACCOUNTING CONCEPTS AND PRINCIPLES
serves as a guide
ACCOUNTING CONCEPTS AND PRINCIPLES
Set of logical ideas and procedures that guide the accountant in recording and communicating
economic information.
ACCOUNTING CONCEPTS AND PRINCIPLES
They provide a general framework by which accounting practice can be evaluated and they serve as guide in development of new practices and procedures.
ACCOUNTING CONCEPTS AND PRINCIPLES
BASIC ACCOUNTING CONCEPTS
- Separate Entity Concept
- Historical Concept Principle
- Going Concern
- Matching Concept
- Accrual basis of Accounting
- Time Period
- Stable Monetary Unit
- Materiality and Aggregation
- Cost- Benefit (Cost Constraint)
- Full Disclosure Principle
Separate Entity Concept is also called as ___________
Business entity principle
the business is viewed as a separate person, distinct from its
owners. Only the transactions of the business are recorded in the books of accounts. The
personal transactions of the business owner(s) are not recorded
Separate Entity Concept
assets are initially recorded at their
acquisition cost.
Historical Concept Principle
Going concern is also known as __________
Continuity assumption
continuous flow of the business
Going Concern
it means that the accounting entity is viewed as continuing in operation indefinitely in the absence of evidence to the contrary.
Going Concern
financial statements are prepared normally on the assumption that the entity shall continue in operation for the foreseeable future.
Continuity assumption
The opposite of going concern is ____________
Liquidating Concern
If the business intends to end its
operations or if it has no other choice but to do so
Liquidating Concern
For every expense, has __________________
Matching Concept
* cost revenue
some costs are initially recorded as assets and
charged as expenses only when the related revenue is recognized.
Matching Concept
PAS 1 requires that an entity prepares its financial statements,
except for cash flow information, using the accrual basis of accounting.
Accrual basis of Accounting
economic events are recorded in the period in which
they occur rather than at the point in time when they affect cash.
Accrual basis of Accounting
__________ is recognized in the period when it is ________ rather than when it is ________,
- income
- earned
- collected
_______ is recognized in the period when it is __________ rather than when it is _______.
- expense
- incurred
- paid
Time period is also known as ___________
Periodicity Principle
It requires that the indefinite life of an entity is subdivided into time periods or accounting periods which are usually of equal length for the purpose of preparing financial reports on financial position, financial performance and cash flows.
Time Period
is a twelve month period that starts on January 1 and ends on December 31.
calendar year
is a twelve month period that starts on a date other than
January 1 and ends on any month.
natural year or fiscal year
An accounting period that is shorter than 12 months
Interim Period
can be a month or quarter (3 months) or a semiannual period (6 months).
Interim Period
the monetary unit assumption has two aspects, namely _________ & ________
Stable Monetary Unit
- Quantifiability
- stability of the peso,
means that the assets, liabilities, equity, income and expenses
should be stated in terms of a unit of measure which is the peso in the Philippines
Quantifiability aspect
means that the purchasing power of the peso is stable
or constant and that its instability is insignificant and therefore may be ignored.
Stability of the peso assumption
guides the accountant when applying accounting
principles. This is because accounting principles are applicable only to material items.
Materiality and Aggregation
is a matter of professional judgment and is based on the size and
nature of an item being judged.
Materiality
Materiality of an item depends on __________ rather than _________, what is material
for one entity may be immaterial for another.
- relative size
- absolute size
is dependent on good judgment, professional expertise and common
sense.
materiality
the costs of processing and
communication information should not exceed the benefits to be derived from the
information’s use.
Cost- Benefit (Cost Constraint)
cost should not exceed ________
benefit
every cost has benefit
Cost- Benefit (Cost Constraint)
the concept is related to both the concepts of materiality and cost benefit.
Full Disclosure Principle
Sufficient detail to disclose matters that make a difference to users
Full Disclosure Principle
Sufficient condensation to make the information understandable, keeping in mind the costs of preparing and using it
Full Disclosure Principle
Are the qualities or attributes that make financial accounting information useful to the users
Qualitative Characteristics
Qualitative Characteristics are classified into:
a. Fundamental Qualitative Characteristics
b. Enhancing Qualitative Characteristics
Characteristics that relate to the content or substance of financial information.
Information must be both relevant and faithfully represented if it is to be useful.
Fundamental Qualitative Characteristics
The fundamental qualitative characteristics are _________ and __________
- Relevance
- Faithful Representation
“Timeliness”
Relevance
It means the capacity of information to make a difference in a decision made by users
Relevance
is the capacity of the information to influence a decision
Relevance
financial information should be related or pertinent to
economic decision
Relevance
The ingredients of relevance are _____ and ________
- predictive value
- confirmatory value
when it can help users increase the likelihood of correctly
predicting or forecasting outcome of events
predictive value
if it provides feedback about previous
evaluations. In other words, financial information has confirmatory value when it enables
users to confirm or correct earlier expectations.
confirmatory value
The predictive and confirmatory roles of information are _________
interrelated
the term faithful representation is
used instead of the term _________.
reliability
means that the financial reports represent economic phenomena or
transactions in words and numbers. The descriptions and figures match what really existed
or happened.
Faithful Representation
means that the actual effects of the transactions shall
be properly accounted for and reported in the financial statements.
Faithful representation
Ingredients of Faithful Representation
B.1 Completeness
B.2 Neutrality
B.3 Free from Error
It requires the relevant information should be presented in a way that facilitates
understanding and avoids erroneous implication.
Completeness
is the result of adequate disclosure standard or the principle of full disclosure
Completeness
To be complete, the financial statements shall be accompanied by _______________
Notes to Financial Statements
The purpose of the notes is to provide the necessary disclosures required by _____________
Philippine
Financial Reporting Standards
It means that the financial statements should not be prepared so as to favour one party to
the detriment of another party
Neutrality
the information contained in the financial statements must be free from bias.
Neutrality
Neutrality is synonymous with the all- encompassing _____________. To be neutral
is to be____.
“Principle of Fairness”
* fair
unintentional
Free from Error
when you make mistake
adjustment entry
intentional
Fraud
It means there are no errors or omissions in the description of the phenomenon and the
process used to produce the reported information has been selected and applied with no
errors in the process.
Free from Error
free from error does not mean ________________ in all respects
perfectly accurate
Intended to increase the usefulness of the financial information that is relevant and faithfully
represented.
Enhancing Qualitative Characteristics
relate to the presentation or form of financial statements
Enhancing Qualitative Characteristics
Enhancing Qualitative Characteristics
a. Understandability
b. Comparability
c. Verifiability
d. Timeliness
Requires that financial information must be comprehensible or intelligible if it is to be
useful
Understandability
The information should be presented in a form and expressed in terminology that a user
understands
Understandability
Classifying, characterizing and presenting information _________________ make it
understandable
“clearly and concisely”
It means the ability to bring together for the purpose of noting points of likeness and
difference.
Comparability
It enables users to identify and understand similarities and dissimilarities among items
Comparability
Comparability may be made _______ an entity or between and ______ entities
- within
- across
it is the quality of information that allows comparisons
within a single entity through time or from one accounting period to the next.
Comparability within an entity
Comparability within an entity is also known as
Horizontal Comparability or
Intracomparability
it is the quality of information that allows comparison
between two or more entities engaged in the same industry.
Comparability across entities
This comparability is also known as
intercomparability or dimensional comparability
Verify
Verifiability
It means that different knowledgeable and independent observers could reach consensus
that a particular depiction is a faithful representation
Verifiability
The information is verifiable in the sense that is supported by evidence so that an
accountant that would look into the same evidence would arrive at the same decision or
conclusion
Verifiability
It means having information available to decision makers in time to influence their
decisions
Timeliness
requires that financial information must be available or communicated early
enough when a decision is to be made.
Timeliness
relevant information may lose relevance if there is undue delay in the reporting.
Timeliness
