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.

Outlines

00:00

🏪 Business Entity and Accounting Principles

This paragraph discusses the concept of a business entity being separate from its owner, emphasizing that personal transactions of the owner are not recorded in the business's accounting books unless they involve direct business transactions. The principle of going concern is introduced, which assumes the business will operate indefinitely, thus assets are recorded at original cost rather than market value. The time period principle is also explained, requiring financial statements to be divided into specific intervals such as monthly or annually. The monetary unit principle mandates that financial transactions be recorded in a single monetary unit, excluding non-monetary information from the accounting books unless documented in a memorandum.

05:02

📊 Fundamental Accounting Principles and Their Applications

The paragraph delves into various accounting principles including the historical cost, matching, and accounting period principles. The historical cost principle values business resources at the original acquisition cost. The matching principle ensures that expenses are recorded in the same period as the revenue they generate. The accounting period principle outlines the completion of the accounting process over a specific operating time period, such as monthly or annually. The paragraph also introduces the concept of conservatism, advocating for cautious estimation in uncertain events, and the consistency principle, which requires the use of the same accounting treatment for similar events over time. The objectivity principle is emphasized, demanding unbiased evidence to support financial reporting.

10:02

📈 Revenue Recognition and Accrual Accounting Principles

This section explains the revenue recognition principle, which states that revenue should be recorded when it is realized or realizable and earned. It provides an example of a sale that should not be recorded until the product is delivered and payment is received. The accrual accounting principle is contrasted with the cash basis principle, with the former recognizing revenue and expenses when earned or incurred, irrespective of payment or collection. The disclosure principle is also mentioned, highlighting the need for all relevant and material information to be reported. The cost principle and materiality principle are briefly introduced, with the former requiring initial recording of accounts at cost and the latter emphasizing the inclusion of only material financial information in the financial statements.

15:04

📘 Qualitative Characteristics of Financial Information

The final paragraph focuses on the qualitative characteristics of financial information, starting with relevance, which includes predictive value, feedback value, and timeliness. It explains how financial information should be accurate and current to be useful for predictions and decision-making. Reliability is the next characteristic, which implies that financial information should be verifiable, represent reality (representational faithfulness), and be neutral, not favoring any particular interest. Comparability is the third main qualitative characteristic, which is about the equality of accounting information, allowing for judgment and comparison of similar financial information. The paragraph concludes by emphasizing the importance of these characteristics for the usability and reliability of financial statements.

Keywords

💡Business Entity

A business entity refers to a company or organization that is legally separate from its owner or investor. In the script, it is emphasized that the business entity's financial transactions should be distinct from the personal transactions of its owner, highlighting the importance of maintaining separate accounting records for business and personal finances.

💡Going Concern Principle

The going concern principle assumes that a business will continue to operate indefinitely. As explained in the script, this principle influences how assets are recorded, typically at their original cost rather than market value, reflecting the expectation that they will be used over their estimated useful life rather than being sold off immediately.

💡Time Period Principle

The time period principle dictates that financial statements should be divided into specific intervals, such as monthly, quarterly, or annually. The script provides the example of Philippine companies being required to report financial statements annually, emphasizing the importance of time-bound reporting for accurate financial analysis.

💡Monetary Unit Principle

This principle states that all financial transactions and reports should be stated in a single monetary unit, such as the Philippine Peso or the US Dollar. The script illustrates this with examples of companies like Jollibee and IHOP, which must report their financial statements in the currency of their primary operations, regardless of having branches in different countries.

💡Historical Cost

Historical cost is the original cost of acquiring a business resource. The script explains that assets should be valued and recorded based on this original cost, not their current market value, except in cases of liquidation. This principle ensures consistency and comparability in financial reporting.

💡Matching Principle

The matching principle requires that expenses be recognized in the same period as the revenue they helped generate. The script uses the example of recording doubtful account expenses when revenue is earned, ensuring that the true profit of a business is accurately reflected in its financial statements.

💡Conservatism Principle

Also known as the prudence principle, conservatism suggests that when in doubt, assets and income should not be overstated, while liabilities and expenses should not be understated. The script explains that this principle guides the recording of uncertain events and estimates, such as assuming losses rather than gains, to avoid overestimating profits.

💡Consistency Principle

The consistency principle requires that a company uses the same accounting treatment for similar events and transactions over time. The script provides an example of Bob's Computers, which historically used FIFO for inventory valuation, but could switch to LIFO for tax minimization purposes, provided the change is justified.

💡Objectivity Principle

The objectivity principle demands that financial statements be presented with unbiased evidence and be independent of personal opinions. The script illustrates this with examples of transactions that should be supported by receipts or other forms of evidence to ensure the reliability and credibility of financial reporting.

💡Revenue Recognition Principle

This principle dictates that revenue should be recognized when it is earned and realizable, not necessarily when payment is received. The script uses the example of Bob's Billiards selling a pool table, which should not be recorded as revenue until it is delivered and the sale is complete, even if the payment is received later.

💡Accrual Accounting Principle

The accrual accounting principle states that revenue should be recognized when earned, and expenses when incurred, regardless of when cash is exchanged. The script contrasts this with the cash basis principle, where transactions are only recorded upon cash receipt or payment, and explains that accrual accounting is the generally accepted method for recognizing financial events.

Highlights

Business entities are separate from their owners or investors, with personal transactions not recorded in business accounting books unless they involve business resources.

The going concern principle assumes a business will continue indefinitely, with assets recorded at original cost rather than market value.

Time period principle divides financial statements into specific intervals such as monthly, quarterly, and annually.

Monetary unit principle requires financial transactions to be recorded in a single monetary unit, disregarding non-monetary information.

Historical cost principle values business resources based on the original cost of acquisition, not market or future value.

Matching principle ensures that costs are matched with the revenue they generate in the same accounting period.

Accounting period principle completes the accounting process over a specific operating time period, aligning with calendar or fiscal year.

Prudence or conservatism principle advises not to overstate assets and income, and not to understate liabilities and expenses in case of doubt.

Consistency principle requires the use of the same accounting treatment for similar events and transactions over time, allowing changes for justifiable reasons.

Objectivity principle demands that financial statements be presented with unbiased evidence, ensuring reliability and relevance.

Revenue recognition principle states that revenue should be recognized when it is realized or realizable and earned.

Accrual accounting principle recognizes revenue when earned and expenses when incurred, irrespective of payment or collection.

Disclosure principle mandates that all relevant and material information must be reported for the benefit of interested users.

Cost principle records accounts initially at cost, reflecting the actual price of purchase.

Materiality principle includes financial information in statements if it would change the opinion of a reasonable person.

Qualitative characteristics of financial information include relevance, reliability, and comparability, ensuring the information's value and usability.

Relevance of financial statements provides predictive and feedback value, with timeliness being a key factor.

Reliability in financial reporting requires verifiability, representational faithfulness, and neutrality, ensuring unbiased presentation.

Comparability allows for the side-by-side judgment of similar financial information, enhancing the usability of financial statements.

Transcripts

so first we have here business entity

principle so a business entity or the

business Enterprise is separate from

the owner or investor so separate and

distinct so any personal transactions of

its owner should not be recorded in the

business accounting book unless the

owner's personal transaction involves

adding or drawing withdrawing resources

from the business so for example

if you own a computer shop so the cash

of the computer shop should be reported

separately from your personal cash or

another example is

the owner had a business meeting with a

prospective client okay so the expenses

that come with that meeting should be

part of the company's expenses if the

owner paid for gas for his personal use

so it should not be included as part of

the company's expenses okay so personal

expenses is distinct and different and

separate from the company's expenses

next we have going concern principle so

the business expected to continue

indefinitely so on this basis

um generally assets are recorded based

on the original cost and not on market

value so assets are assumed to be held

and used for an indefinite period of

time or during its estimated useful life

so those assets are not intended to be

sold immediately or liquidated to

examples

possible losses from the closure of

business cannot be anticipated in the

accounts right and repayments

depreciation Provisions may be carried

forward in the expectation of proper

matching against the revenues of future

periods so fixed assets are recorded at

historical costs next we have time

period principle so for time period

principle so the financial statements

are to be divided into specific time

intervals so you have monthly quarterly

and only semi annually so examples

are

um first we have Philippine companies

are required to report financial

statements and Wally

so the time period there is annual the

salary expenses from January to December

2015 should only be reported in 2015.

so the time there is from January to

December

2015. so

um

calendar and fiscal year is different so

for calendar you start with January 1

and end with December 31 for fiscal year

you can start at February 1 or March 1

and end at the next year that is

February

28th okay

next is monetary unit principle so for

this principle

um these are amounts stated into a

single monetary unit so the Business

Financial transactions recorded and

reported should be in the monetary units

such as Philippine Pesos US dollar euro

or Etc so any non-financial or

non-monetary information that cannot be

measured in a monetary units are not

recorded in the accounting books but

instead a memorandum will be used so

examples

Jollibee should report financial

statements in pesos even if they have a

store in the United States or any

foreign countries

another example is the IHOP IHOP should

report financial statement in dollars

even if they have a branch here in the

Philippines so

either you use Philippine peso or you

use dollar okay

next is the historical cost so all

business resources acquired should be

valued and recorded based on the actual

cash equivalent or the original cost of

acquisition so not the prevailing market

value of or the future value

it should be the

original cost of acquisition so the

exception to the rule is

when the business is in the process of

closure and liquidation so example the

cost of the fixed assets is recorded at

the date of acquisition cost

so the acquisition cost there includes

all expenditures made to prepare the

asset for its intended use it includes

the invoice price of the assets the

freight charges the insurance and the

isolation cost if any

next we have here the matching principle

so

the cost here should be much with the

revenue generated so this principle

um requires that Revenue recorded in a

given accounting period should have an

equivalent expense recorded in order to

show the true profit as a business

examples the recording of doubtful

account expense

should be done when the revenue was

earned

another example is the advance payment

okay the advance payment from clients

must be recorded in the month when the

services where rendered okay next is for

example the expenses incurred in

generating revenues should be recorded

at a time when the revenue was earned so

that is matching principle

next we have here the accounting period

so this principle entails and this is

complete the whole accounting process

over a specific operating time period so

as what I have said

accounting period may be monthly

quarterly or annually so for annual

accounting period it may follow a

calendar or fiscal year

next we have vehicle servatism principle

so this is also known as Prudence so in

case of doubt assets and income should

not be overstated while liabilities and

expenses should not be understated so

the principle of conservatism gives

guidance on how to record uncertain

events and estimates so the principle

this principle conservatism states that

one should always consider an error on

the most conservative side of a

transaction so this means

minimizing profits by recording

uncertain losses or expenses and not

recording uncertain or estimated gain so

assume losses rather than gains next is

the consistency principle so

from the word consistency so it states

that companies should use the same

accounting treatment for similar events

and transactions over time so

this does not state that business always

have to use the same same accounting

method forever so you can change but you

have to be consistent okay for example

Bob's computers a computer retailer has

historically used

fifo or first in and first out for

valuing its inventory so in the last few

years the business has become quite

profitable in Bob's accountant suggests

that Bob switches to the life for the

last in first outscenes they have been

using the first and first out

so again the accountant suggests that

Pub switches to life for last in first

out inventory system to minimize taxable

income according to the consistency

principle Bob's computers can change

accounting methods for a justifiable

reason so minimizing taxes as a

justifiable reason is debatable

okay

next is we have here objectivity

principle so

financial statements must be presented

with the supporting evidence

so the objectivity principle states that

accounting information and financial

reporting should be independent and

supported with unbiased evidence so this

means that

accounting information must be based on

research and facts

principles is aimed at making financial

statements more relevant and reliable so

not just merely preparers opinion so it

should be

what based on research and facts for

example

when the customers pay Jollibee for

their order Jollibee should have a copy

of the receipt to represent as evidence

of the transaction another example is

a company is trying to get financing for

an extra plant expansion so but the

company's Bank want to see a copy of its

financial statement before it will allow

a loan to the company

any money

so the company's bookkeeper prints out

an income statement from its accounting

system and mails it to the bank most

likely the bank will reject this

financial statement because an

independent party is not the one who

prepares in other words this income

statement violates the objectivity

principle okay

next we have

Revenue recognition principle

so the revenue

um Revenue recognition principle states

that Revenue should be recognized and

recorded when it is realized or

realizable and when it is

earned so for example

Bob's Billiards incorporation sells a

pool table to a bar company on December

31 for the amount of let's say 85 000

pesos

so the pool table was not paid for until

January 15 and it was not delivered to

the bar until January 31. according to

the revenue recognition principle Bob

should not record the sale in December

so even though the sale was realizable

in that the sale for

85 000 was initiated it was not earned

until January when the pool table was

delivered okay next is for the accrual

accounting principle so the revenue

should be recognized when earned

regardless of collection and expenses

should be recognized when incurred

regardless of

payment

again

Revenue in accrual accounting principle

the revenue should not be recognized

when earned regardless of collection and

expenses should be recognized when

incurred regardless of payment so on the

other hand the cash basis principle in

which revenue is recorded when collected

and expenses should be recorded when

paid so cash basis is not the generally

accepted principle today so example

when a barber finishes performing his

services

he should record it as Revenue

when the barbershop receives an

electricity bill it should record it as

an expense even if it is

unpaid okay next we have disclosure

principle so all the relevant and

material information should be

reported you should disclose all

relevant information so

for example the company should report

all relevant information to the

interested

users

another

important principles we have the cost

principle so I haven't listed it here

I'm sorry so for cost principle accounts

should be recorded initially at cost

so for example when a company purchases

a laptop

it should be recorded at the price it

was purchased

another important principle that I have

it listed easy materiality principle so

in case of assets that are immaterial to

make a difference in the financial

statements the company should record

um it as an expense so the materiality

um the materiality concepts is also

called the materiality constraint so so

it states that the

financial information is material to the

financial statement if it would change

the opinion or view of a reasonable

person so in other words all important

financial information that would sway

the opinion of a financial statement

user should be included in the financial

statement so

the concept of materiality is relative

in size and importance for example

a school purchase an eraser with an

estimated useful life of three years

since an eraser is immaterial relative

to assets it should be recorded as an

expense okay so another example for

materiality principle is

a large company has a building in the

typhoon area during Yolanda storm so the

company building is destroyed and after

a lengthy battle with the insurance

company the company reports an

extraordinary loss of 10 000 pesos

so the company has net income of 10

million pesos the materiality concept

States

that this loss is immaterial because the

average financial statement user would

not be concerned with something that is

only one percent of net income okay

so the last topic for this video

discussion is the qualitative

characteristics of financial information

first

relevanso the concept of relevance

implies that financial statements can

have predictive value and feedback value

this means that

the financial statements are accurate

and can be used to predict future

company performance okay so the

um three main characteristics of

relevant account information is here

this one

predictive value

feedback value

and

the last one is a Timeless so these

three are the

main characteristics of relevance So

when you say predictive value

it refers to the fact that quality

financial information can be used based

on Productions forecast in

um

projections so financial analysis and

investors can use past financial

statements to chart performance trends

and make predictions about future

performance and profitability next is

the feedback value so the quality

information has a feedback value when it

can confirm or correct previous

expectations in other words users can

examine financial information and

confirm or

adjust their predictions made on

previous performance Trends So based on

the feedback

users can make future decisions so okay

so this relevance

next we have really reliability so these

three are not included as qualitative

characteristics but

a main characteristics of relevance so

for Timeless Timeless is um one of the

most important factors in relevant

information out of date information does

not do investors or creditors any good

when they are trying to make current a

future decisions so financial reporting

must be timely in current in order to be

used by investors and creditors next

qualitative characteristics so this is

number one

so let's just clarify it here

this is one and this is

two

so next is reliability

so the concept of reliability is it

implies that financial information can

be verified

by many source with evidence and that

all financial information is presented

so in other words the favorable and

unfavorable unfavorable financial

information are presented in the

financial statement it always on the

financial statement so

there are three main attributes that all

reliable financial information has first

you have

here

verifiability

representational representational

faithfulness and

neutrality so first qualitative

characteristics we have really one

second reliability and for the

reliability you have here the main

attributes first verify verifiability

I'm sorry verifiability so financial

information is

verifiable win multiple independent

measures are used to come up with the

same result right do you agree next you

have here representational

representational faithfulness so this

simply means that the financial

statements represent reality or what

actually happened during the year and

for the neutrality

um in order for the fs or the financial

statements to be reliable they must be

neutral so by definition of course

financial statements that are prepared

by company management are somewhat

biased because the management want to

see the company improve okay next is

comparability so this is number three

okay comparability

so

comparability is equality of accounting

information that addresses the usability

of financial information so information

that is prepared using the same

measurement techniques and reported in a

similar and can be judged side by side

other similar financial information so

this is extremely extremely important to

the end users of financial

statements okay that's all for this

video discussion for you module 2 or

with the topic of your Fab in one

subject thank you