Accounting Principles – Quick Revision

Business Entity Concept

  • Business is separate from owner; personal transactions excluded.

Time Period (Accounting Period) Concept

  • Reports are prepared for specific periods: calendar, fiscal, or interim.
  • Facilitates periodic performance evaluation.

Going Concern (Continuity) Assumption

  • Presumes the entity will continue operating.
  • Assets recorded at historical cost when viable; at liquidation value if collapse expected.

Objectivity (Reliability) Principle

  • Every transaction must be backed by verifiable evidence (e.g., invoices, receipts).

Historical Cost (Cost) Principle

  • Record assets at purchase price, not current market value.
  • Example: building bought for 1,000,0001{,}000{,}000 remains at 1,000,0001{,}000{,}000 on the books even if worth 3,000,0003{,}000{,}000.

Monetary Unit Concept

  • Only events measurable in money are recorded.
  • Philippine entities use the peso.

Matching Principle

  • Recognize revenues when earned; match related expenses in the same period.
  • Aligns performance measurement (income vs. costs) within a single period.

Full Disclosure Principle

  • Provide all information that affects users’ decisions—either in statements or notes.
  • Footnotes disclose contingencies (e.g., lawsuits, debt covenants).

Materiality Principle

  • Record only information significant enough to influence decisions; trivial items may be expensed immediately.
  • Materiality threshold varies by entity size (e.g., 10,00010{,}000 may be immaterial to a multinational, material to an SME).

Consistency Principle

  • Once an accounting method is chosen, apply it consistently across periods to ensure comparability (e.g., straight-line depreciation used every year).

GAAP (Generally Accepted Accounting Principles)

  • Collective framework guiding recognition, measurement, and presentation of financial information.