FABM1 Week 2 Grade 11 - Accounting Concepts and Principles

Summary

The video discusses key accounting principles essential for financial reporting. Topics include the business entity principle, separating business transactions from personal ones; the going concern principle, assuming business continuity; and the time period principle, dividing financial statements into intervals. It covers the monetary unit principle for recording transactions in a single currency, the historical cost principle for asset valuation, and the matching principle for aligning expenses with revenues. Other principles include conservatism, consistency, objectivity, revenue recognition, accrual accounting, disclosure, cost, and materiality. Additionally, it highlights qualitative characteristics of financial information: relevance, reliability, and comparability.

Takeaways

• 🏢 The business entity principle emphasizes that a business is separate from its owner, with personal transactions not recorded in business accounts unless they involve business resources.
• 🚶‍♂️ Personal expenses are distinct from business expenses; only those incurred for business purposes should be accounted for in the business's financial statements.
• 🌐 The going concern principle assumes a business will operate indefinitely, influencing how assets are recorded and expenses are anticipated.
• 📊 The time period principle requires financial statements to be divided into specific intervals, such as monthly or annually, aligning with the fiscal or calendar year.
• 💵 The monetary unit principle stipulates that financial transactions must be recorded in a single currency, reflecting the business's primary operating currency.
• 📝 The historical cost principle dictates that assets should be recorded at their original cost, not market or estimated future value, except in cases of liquidation.
• ⏱ The matching principle ensures that expenses are recognized in the same period as the revenue they generate, providing a true reflection of profit.
• 🚸 The accounting period principle completes the accounting process over a specific time, with the choice between calendar or fiscal year affecting reporting.
• 🛡️ The conservatism principle, also known as the prudence principle, advises caution in financial reporting, preferring to overstate expenses and liabilities rather than assets and income.
• 🔄 The consistency principle requires that a company uses the same accounting methods for similar transactions over time, unless there is a justifiable reason for change.
• 📋 The objectivity principle demands that financial statements are supported by unbiased evidence and are not merely based on the preparers' opinions.

Q & A

What is the business entity principle?

The business entity principle states that a business is separate and distinct from its owner or investor. Personal transactions of the owner should not be recorded in the business's accounting books unless they involve adding or withdrawing resources from the business.

Can you give an example of the business entity principle?

If you own a computer shop, the shop's cash should be reported separately from your personal cash. If the owner pays for gas for personal use, it should not be included as part of the company's expenses.

What does the going concern principle imply?

The going concern principle implies that a business is expected to continue operating indefinitely. Based on this, assets are recorded at their original cost, not market value, as they are assumed to be held and used over an indefinite period.

How are financial statements divided according to the time period principle?

Financial statements are divided into specific time intervals such as monthly, quarterly, or annually. For example, Philippine companies are required to report financial statements annually, covering the period from January to December.

What is the monetary unit principle?

The monetary unit principle states that business financial transactions should be recorded and reported in a single monetary unit, such as Philippine Pesos, US Dollar, or Euro. Non-financial or non-monetary information is not recorded in the accounting books.

When should an asset be recorded according to the historical cost principle?

According to the historical cost principle, all business resources acquired should be valued and recorded based on the actual cash equivalent or the original cost of acquisition, not the prevailing market or future value.

What is the matching principle in accounting?

The matching principle requires that revenue recorded in a given accounting period should have an equivalent expense recorded to show the true profit of the business. For example, expenses incurred in generating revenue should be recorded when the revenue is earned.

What does the conservatism principle entail?

The conservatism principle, also known as prudence, states that in case of doubt, assets and income should not be overstated while liabilities and expenses should not be understated. This means recording uncertain losses or expenses and not recording uncertain or estimated gains.

What does the consistency principle require?

The consistency principle requires companies to use the same accounting treatment for similar events and transactions over time. Although companies can change accounting methods, they must be consistent and justify the reason for the change.

What is the objectivity principle?

The objectivity principle states that accounting information and financial reporting should be independent and supported with unbiased evidence. Financial statements must be based on research and facts, not merely the preparer's opinion.

When should revenue be recognized according to the revenue recognition principle?

Revenue should be recognized and recorded when it is realized or realizable and when it is earned. For example, if a pool table is sold but not delivered until the following month, the sale should not be recorded until the pool table is delivered.

What is the difference between accrual accounting and cash basis accounting?

In accrual accounting, revenue is recognized when earned regardless of collection, and expenses are recognized when incurred regardless of payment. In cash basis accounting, revenue is recorded when collected, and expenses are recorded when paid. Cash basis is not generally accepted.

What is the disclosure principle?

The disclosure principle states that all relevant and material information should be reported in the financial statements. This ensures that interested users have access to all necessary information to make informed decisions.

What is the cost principle?

The cost principle states that accounts should be recorded initially at cost. For example, when a company purchases a laptop, it should be recorded at the price it was purchased, including all expenditures made to prepare the asset for its intended use.

What is the materiality principle?

The materiality principle states that financial information is material if it would change the opinion or view of a reasonable person. Immaterial assets can be recorded as expenses. For example, an eraser with a useful life of three years should be recorded as an expense if it is immaterial relative to other assets.

What are the qualitative characteristics of financial information?

The qualitative characteristics of financial information include relevance, reliability, and comparability. Relevant information has predictive and feedback value, reliable information can be verified and represents reality, and comparable information is prepared using the same measurement techniques.