FUNDAMENTALS OF ACCOUNTANCY

GAAP

 Cost Principle- assets should be recorded at original or acquisition cost.

 Objectivity Principle – data must be reliable and verifiable.
 Materiality Principle – practicality over theory.
 Matching Principle- revenue and expense recognition.
 Recognition Principle- recognize revenue when earned and expense when incurred.
 Consistency Principle- uniform basis from period to period.
 Adequate Principle- free from misstatements if there is any properly disclose.

Basic Accounting Assumptions

Accounting entity Assumption

Going-concern Assumption
Time-period Assumption
Unit of measure
Accrual Basis Assumption

Financial Statements – structured representation of financial position and financial performance of an entity.

1. Statement of financial position ( balance sheet )

2. Statement of comprehensive income ( income statement )
3. Statement of changes in owner’s equity
4. Statement of cash flows
5. Notes
6. Statement of financial position as at the beginning of the earliest comparative period when entity applies an
accounting policy..

Annual Accounting Periods

o Calendar year - jan to dec

o Fiscal year – any month except jan
o Natural business year – lowest to peak season.

Accounting Cycle ( steps )

1. Journalizing
2. Posting
3. Trial Balance
4. Adjusting Entries
5. Work Sheet
6. Financial Statements
7. Closing Entries
8. Post-Closing Trial Balance
Reversing Entries
 ADJUSTING ENTRIES
Reasons:
To bring records or balances updated
Match revenues and expenses

Types

Accruals a. Accrued income ( A/R) income earned but not yet collected when period ends.
b. Accrued Expense (A/P) expense incurred but not yet paid.

Deferrals a. Pre-collected Income ( Unearned income)

Two methods:
1. income method- nominal accounts
2. liability method- real accounts

b. Prepaid Expense

Two Methods:
1. Expense Method- nominal
2. Asset Method- real

Provision for Depreciation of Property and Equipment or Fixed Asset

Depreciation

Kinds
Physical Depreciation
Functional Depreciation

Factors:
 Acquisition Cost
 Scrap Value
 Estimated Economic or Useful Life

Cost of the Asset−Salvage Value

Straight Line Method: ANNUAL DEPRECIATTION =
Estimated life of the asset ∈ years

Amortization of Intangible Assets

AcquisitionCost of Intangible Asset

ANNUAL AMMORTIZATION EXPENSE =
legal∨useful life