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What is accounting?
1. 1. Principle of Relevance- that the resulting
Accounting is often called the language of business information is meaningful and useful to those who
because it is used in describing all types of business need to know something about the status of a
activities. certain organization.
2. 2. Principle of objectivity- that the resulting
BASIC ACCOUNTING EQUATION information is not influence by the personal bias or
Assets= Liabilities+ Owner’s Equity judgment of those who finish it.
3. 3. Principle of Feasibility- that it can implemented
Expanded Accounting Equation: without undue complexity or cost.
Assets= Liabilities+ Owner’s Equity (+ Revenues- 4. 4. Cost Principle- this principle requires assets
Expenses) should be recorded at original or acquisition cost.
5. 5. Objectivity Principle- this principle requires that
Users of Financial Statements accounting records should be based on reliable and
verifiable data as evidence of transactions.
Investors
6. 6. Materiality Principle- this principle dictates
Employees
practicability to rule over theory in determining the
Lenders
valuation of an item.
Suppliers and other trade creditors
7. 7. Matching Principle- this is the combined concept
Customers of revenue recognition & expenses
Government and their agencies 8. 8. Recognition Principle- Revenue should be
Public recognized when earned and corresponding
Nature of Business expense should be recognized when incurred during
the same period as revenue is earned.
Service concern- the business derived its 9. 9. Consistency Principle- this principle requires that
income from services rendered to clients accounting methods and procedures should be
Merchandising- engaged in buying goods or applied on a uniform basis from period to period to
commodities or any form of finished achieve comparability in the FS.
products and sell these at a profit. 10. 10. Adequate Disclosure Principle- this principle
Manufacturing- engaged in buying of raw requires that financial statement should be free
materials and supplies to be processed or from any material misstatement.
manufactured.
Forms of Business Organizations o Revenues are recognized when they are
earned, but not when cash is received
1. Sole proprietorship- Owner’s Equity o Expenses are recognized as they are
2. Partnership- Partner’s Equity incurred, but not when cash is paid.
3. Corporation or Hybrid company- o Depreciation should be changed as part of
Stockholder’s Equity or Shareholder’s Equity the cost of a fixed asset consumed during
4. Cooperatives- Member’s Equity the period of use.
ACCOUNTING CONCEPTS AND ASSUMPTIONS THREE MAJOR FINANCIAL STATEMENTS
Business Entity- the business is considered 1. Balance Sheet
as an entity that is separate and distinct - Also called statement of financial
from the owner of the management. position or statement of financial
- To measure the actual performance of condition that shows the financial
the business position at a certain date or a specific
Money Measurement- all transactions of date
the business are recorded in terms of - As of ( particular date)
money
- It provides a common unit of Three sections
measurement - Assets
Historical Cost- assets should be shown in - Liabilities and owner’s equity
the balance sheet at the cost of purchase
instead of current value
Materiality- immaterial amounts may be
aggregated w/ amounts of a similar
function and needed not be presented
separately
- The beginning equity of the owner is
increased by the additional investment
and profit, and it is decreased by
withdrawal and loss.
- For the (month, year, quarter) ended