FABM-1-Module-by-L.-Dimatalo

Lesson 3: Accounting Concepts and Principles

• At the end of this lesson, learners must be able to:

  • Explain generally accepted accounting principles (GAAP)

  • Explain the varied accounting concepts and principles

Generally Accepted Accounting Principles (GAAP)

• GAAP are rules and procedures defining "accepted" accounting practices.

• These principles ensure consistency and reliability in financial reporting.

• Developed based on day-to-day experience and practical necessity.

• In the Philippines, the Accounting Standards Council (ASC) oversees GAAP development.

• Financial statements must comply with Philippine Accounting Standards (PAS) and Philippine Financial Reporting Standards (PFRS) to ensure information is understandable and useful to users.

Underlying Assumptions in Accounting

• Going Concern Assumption:

  • The business will continue its operations indefinitely.

  • Acquisition of assets is recorded at cost as financial statements assume ongoing operations.

• Accounting Entity / Entity Concept:

  • The business is separate from its owners and employees.

  • Personal transactions should not be mixed with business transactions.

• Time Period / Periodicity:

  • The indefinite life of a business is divided into "accounting periods" for reporting.

  • Accounting periods are usually twelve months:

    • Calendar Year: January 1 to December 31.

    • Fiscal Year: Begins in any month and ends twelve months later.

  • Only transactions within the same accounting period should be included in financial statements.

Qualitative Characteristics / Basic Accounting Principles

• Accrual Principle:

  • Income is recognized when earned, and expenses when incurred, irrespective of cash flow.

  • Example: Recognizing utility expenses incurred in April on May 1, despite receiving the bill in July.

  • Journal Entry Example:

    • May 1 Utility Expense P***

    • Utility Payable P***

• Objectivity Principle:

  • Financial statements must be verifiable and supported by evidence to ensure reliability.

• Materiality:

  • Information is material if its omission or misstatement could influence users' economic decisions.

  • Strict adherence to GAAP may not be necessary for insignificant items.

    • Example: Missing one realm of bond paper can be expensed immediately for convenience.

• Adequate Disclosure:

  • All relevant information must be reported clearly in financial statements to prevent misleading users.

• Consistency:

  • Accounting methods must be consistently applied from period to period.

  • Changes in accounting methods are acceptable if disclosed and justified.

Lesson 4: The Accounting Equation

• At the end of this lesson, learners must be able to:

  • Know the basic elements of Accounting.

  • Perform operations using the accounting equation.

  • Learn the effects of business transactions on the accounting equation.

• Accounting Equation:

  • Assets (A) = Liabilities (L) + Owner's Equity (E)

• Basic Elements:

  • Assets: Resources owned by the business.

  • Liabilities: Amounts owed by the business.

  • Owner's Equity: Net worth or residual interest in the business.

  • Example:

    • Cash investment results in an increase in both assets (cash) and equity.

Lesson 5: Assets

• At the end of this lesson, learners must be able to:

  • Define what assets are.

  • Identify current and non-current assets and provide examples.

• Definition of Assets:

  • Resources controlled by the business that are expected to provide future economic benefits.

  • Examples of school assets include land, buildings, cash, furniture, and equipment.

  • Economic Benefit: Assets can produce cash flows for the business, either directly or indirectly.

• Classification of Assets:

  • Current Assets: Easily converted to cash within one year.

    • Includes cash, trade receivables, inventories, and prepaid expenses.

  • Non-Current Assets: Not intended for quick conversion to cash.

    • Includes long-term investments, property, plant, and equipment, intangible assets.

Lesson 6: Liabilities and Owner’s Equity

• At the end of this lesson, learners must be able to:

  • Define liabilities and owner’s equity.

  • Identify current and non-current liabilities and provide examples.

• Definition of Liabilities:

  • Present obligations arising from past transactions expected to require outflows of resources.

  • Classification of Liabilities:

    • Current Liabilities: Obligation to be settled within a year (e.g., accounts payable, notes payable).

    • Non-current Liabilities: Long-term obligations (e.g., mortgages, bonds payable).

• Owner’s Equity:

  • The residual interest of the owner in the net assets of the business.

  • Increases with additional investments or profitability and decreases with withdrawals or losses.

Lesson 7: Income Statement

• At the end of this lesson, learners will be able to:

  • Classify income and expenses.

  • Identify sources of income and prepare a single-step income statement.

• Definition of Income Statement: Displays the financial performance of a business over a specific period.

• Sources of Income:

  • Revenue generated from sales or services rendered, identifiable as sales for merchandising and service fees for service industries.

• Expenses: Outflows representing the costs of doing business that are deducted from revenues.

• Single-Step Income Statement:

  • Groups all income and expenses together to show net income.

Lesson 8: Effects of Various Transactions in the Accounting Equation

• At the end of this lesson, learners must be able to illustrate various accounting transactions’ effects on the accounting equation.

• Debit and Credit Rules Summary:

  • Increases in assets are debited; decreases are credited.

  • Increases in liabilities and owner’s equity are credited; decreases are debited.

• Each transaction will affect at least two components of the accounting equation, maintaining balance.

• Example transactions illustrating cash investment and asset purchases on account, showing changes in asset, liability, and equity.