Lesson 008 - Accounting Concepts and Principles

Summary

This video lesson discusses key accounting concepts and principles essential for accurate financial reporting. The instructor introduces the Generally Accepted Accounting Principles (GAAP) and how they guide recording transactions. Key concepts like the economic entity principle, accrual basis, and going concern are explained, alongside principles such as historical cost, full disclosure, and matching. The video also covers qualitative characteristics of useful financial information, such as relevance, faithful representation, and timeliness, emphasizing their importance in creating reliable financial statements.

Takeaways

• 📚 The lesson focuses on accounting concepts and principles essential for recording and reporting transactions.
• 📜 Generally Accepted Accounting Principles (GAAP) provide guidelines for consistency and uniformity in financial reporting.
• 🏢 The Economic Entity Concept separates personal transactions of the owner from the business transactions.
• 💰 The Accrual Basis of Accounting requires recording revenue when earned and expenses when incurred, regardless of cash flow.
• 🏢 The Going Concern Concept assumes that a company will continue operating indefinitely, and its closure is not imminent.
• 💵 The Monetary Unit Concept states that transactions should be recorded in the currency of the country in which the business operates.
• 📅 The Time Period Concept requires that transactions be reported in regular intervals, such as annually.
• 💼 The Cost Principle mandates that assets should be recorded at their historical cost at the time of acquisition.
• 📊 The Full Disclosure Principle requires that all necessary information is disclosed in financial statements to make informed judgments.
• 🔄 The Matching Principle ensures that revenues and expenses are matched in the period in which they are incurred to determine profit accurately.

Q & A

What are the Generally Accepted Accounting Principles (GAAP)?

The Generally Accepted Accounting Principles (GAAP) refer to a common set of accounting principles, standards, and procedures issued by the Financial Accounting Standards Board (FASB). In the Philippines, these principles are adapted into the Philippine Financial Reporting Standards (PFRS) and the Philippine Accounting Standards (PAS), which are based on the International Financial Reporting Standards (IFRS) and the International Accounting Standards (IAS).

What is the Economic Entity or Accounting Entity Principle?

The Economic Entity or Accounting Entity Principle is a concept that separates the personal transactions of the business owner from the transactions of the business itself. Personal expenses, such as spending money on a birthday party, should not be recorded as business transactions.

What is the Accrual Basis of Accounting?

The Accrual Basis of Accounting records revenue when it is earned and expenses when they are incurred, regardless of when cash is actually received or paid. For example, if a revenue event occurs in January but payment is received in February, the revenue is still recorded in January.

What does the Going Concern Principle entail?

The Going Concern Principle assumes that a business will continue to operate indefinitely into the foreseeable future and that there is no intention or need to liquidate the company. This principle influences how transactions are recorded, assuming the business will remain in operation.

What is the Cost Principle in accounting?

The Cost Principle states that amounts shown in financial reports are based on historical cost, meaning the original amount paid for an asset is recorded. These amounts are not adjusted for inflation unless there is hyperinflation, and the historical cost remains as recorded at the time of the transaction.

Can you explain the Full Disclosure Principle?

The Full Disclosure Principle requires accountants to include all information necessary for users of the financial statements to make informed judgments. This means all relevant information must be disclosed in the financial statements.

What is the Matching Principle?

The Matching Principle involves matching revenues with related expenses within the same period to determine the net profit. This ensures that all income and related costs are recorded in the same accounting period, providing a clear view of profitability.

What does the Revenue Recognition Principle dictate?

The Revenue Recognition Principle dictates that revenue should be recognized when goods are sold or services are rendered, not necessarily when cash is received. This is in line with the accrual basis of accounting.

What is the concept of Materiality in accounting?

Materiality refers to the significance of an omission or misstatement of information in financial statements. If the omission or error could influence the decision-making of users, the item is considered material. The importance of materiality varies depending on the size and context of the company.

What is Conservatism in accounting?

Conservatism in accounting means that when there are two acceptable alternatives for reporting an item, the accountant should choose the option that will not overstate assets or income. It leans towards caution, ensuring that financial statements are not overly optimistic.