FABM 1.4

Chapter One: The Accounting Concepts and Principles

Generally Accepted Accounting Principles (GAAP)

  • Consists of broad general statements or rules and procedures that guide accounting practices.

  • Internationally aligned standards for preparing financial statements.

  • Measurement techniques and standards for financial reporting.

Accounting System

  • It includes methods for recording financial activities and summarizing accounts in periodic reports.

Transactions

  • Actions expressed in monetary terms.

Fundamental Concepts

A. Entity Concept

  • The business is treated as separate from its owners and other enterprises. Importance of separating personal and business expenses.

    • Example: Dr. Teng's skin clinic and spa are distinct entities.

B. Periodicity

  • Financial information is reported for specified time periods, typically one year. Accounting periods can be classified as calendar or fiscal years.


  • Calendar year: January 1 to December 31.

  • Fiscal year: Any 12-month period starting from any month.

C. Going Concern

  • Assumes that a business will continue to operate indefinitely.

Basic Accounting Principles

A. Objectivity Principle

  • Transactions must be supported by verifiable evidence.

    • Examples: Payments supported by receipts and bank deposits.

B. Historical Cost

  • Properties and services are recorded at their original acquisition cost.

    • Example: Land bought for 2 million pesos in 2001 is recorded at that price, regardless of current market value.

C. Accrual Principle

  • Income is recognized when earned, and expenses when incurred, not when cash is exchanged.

    • Example: No Service = No Income

D. Adequate Disclosure

  • All material facts affecting financial statements must be disclosed.

    • Example: Historical cost and current market value should be recorded in the form of footnote or parenthetical note.

E. Materiality

  • The concept that all the material items should be reported properly in the financial statements. Financial reporting focuses on significant information that affects decision-making.

F. Consistency

  • Accounting methods must be uniformly applied across periods for comparability.

    • Example: If using the straight-line method of depreciation, it should be consistently applied each year.