Name: Gwyneth B.

Bunda
Course & Year: BS in Accountancy – 1st year

Financial Accounting and Reporting (Assignment #1)

FUNDAMENTAL CONCEPTS

Several fundamental concepts underlie the accounting process. In recording business transactions,
accountants should consider the following:

Entity Concept. The most basic concept in accounting is the entity concept. An accounting entity is an
organization or a section of an organization that stands apart from other organizations and individuals as
a separate economic unit. Simply put, the transactions of different entities should not be accounted for
together. Each entity should be evaluated separately.

Periodicity Concept. An entity’s life can be meaningfully subdivided into equal time periods for reporting
purposes. It will be aimless to wait for the actual last day of operations to perfectly measure the entity's
net income. This concept allows the users to obtain timely information to serve as a basis on making
decisions about future activities. For the purpose of reporting to outsiders, one year is the usual
accounting period.

Stable Monetary Unit Concept. The Philippine peso is a reasonable unit of measure and that its
purchasing power is relatively stable. It allows accountants to add and subtract peso amounts as though
each peso has the same purchasing power as any other peso at any time, this is the basis for ignoring the
effects of inflation in the accounting records.
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

Accounting practices follow certain guidelines. The set of guidelines and procedures that constitute
acceptable accounting practice at a given time is GAAP, which stands for generally accepted
accounting principles. In order to generate information that is useful to the users of financial statements,
accountants rely upon the following principles: (CREAM-OH)

Objectivity Principle. Accounting records and statements are based on the most reliable data available
so that they will be as accurate and as useful as possible. Reliable data are verifiable when they can be
confirmed by independent observers. Ideally, accounting records are based on information that flows from
activities documented by objective evidence. Without this principle, accounting records would be based
on whims and opinions and is therefore subject to disputes.

Historical Cost. This principle states that acquired assets should be recorded at their actual cost and not
at what management thinks they are worth as at reporting date.

Revenue Recognition Principle. Revenue is to be recognized in the accounting period when goods are
delivered or services are rendered or performed.

Expense Recognition Principle. Expenses should be recognized in the accounting period in which
goods and services are used up to produce revenue and not when the entity pays for those goods and
services.

Adequate Disclosure. Requires that all relevant information that would affect the user's understanding
and assessment of the accounting entity be disclosed in the financial statements.

Materiality. Financial reporting is only concerned with information that is significant enough to affect
evaluations and decisions. Materiality depends on the size and nature of the item judged in the particular
circumstances of its omission. in deciding whether an item or an aggregate of items is material, the nature
and size of the item are evaluated together. Depending on the circumstances, either the nature or the size
of the item could be the determining factor.

Consistency Principle. The firms should use the same accounting method from period to period to
achieve comparability over time within a single enterprise. However, 'changes are permitted if justifiable
and disclosed in the financial statements.

ELEMENTS OF FINANCIAL STATEMENTS

Financial Position
At regular intervals the business will review the status of the firm's assets, liabilities, and owner’s equity in
a formal report called a balance sheet, which is prepared to show the firm's financial position on a given
date.

Asset is a resource controlled by the enterprise as a result of past events and from which future
economic benefits are expected to flow to the enterprise (per IFRS Framework). In simple terms, assets
are valuable resources owned by the entity. Assets include cash, cash equivalents, notes receivable,
accounts receivable, inventories, prepaid expenses, property, plant and equipment, investments,
intangible assets and other assets.

Liability is a present obligation of the enterprise arising from past events, the settlement of which is
expected to result in an outflow from the enterprise of resources embodying economic benefits (per IFRS
Framework). A plain definition would be-- liabilities are obligations of the entity to outside parties who have
furnished resources. Liabilities include notes payable, accounts payable, accrued liabilities, unearned
revenues, mortgage payable, bonds payable and other debts of the enterprise.

Equity is the residual interest in the assets of the enterprise after deducting all its liabilities (per IFRS
Framework). Equity may pertain to any of the following depending on the form of business organization:
 In a sole proprietorship, there is only one owner's equity account because there is only one
owner.
 In a partnership, an owner’s equity account exists for each partner.
 In a corporation, owners' equity, or shareholders' or stockholders' equity, consists of share capital
or capital stock, retained earnings and reserves representing appropriations of retained earnings
among others.

Performance
If there is an excess of revenue over expenses, the excess represents a profit. Making a profit is the
reason that people risk their money by investing it in a business. A firm's accounting records show not
only increases and decreases in assets, liabilities, and owner’s equity but the detailed results of all
transactions involving revenue and expenses.

Income is increases in economic benefits during the accounting period in the form of inflows or
enhancements of assets or decreases of liabilities that result in increases in equity, other than those
relating to contributions from· equity participants (per IFRS Framework).

The definition of income encompasses both revenue and gains.

Revenue arises in the course of the ordinary activities of an enterprise and is referred to by a variety of
different names including sales, fees, interest, dividends, royalties, and rent.

Gains represent other items that meet the definition of income and may, or may not, arise in the course
of the ordinary activities of an enterprise. Gains represent increases in economic benefits and as such are
no different in nature from revenue. Hence, they are not regarded as constituting a separate element.
Expenses are decreases in economic benefits during the accounting period in the form of outflows or
depletions of assets or incurrence of liabilities that result in decreases in equity, other than those relating
to distributions· to equity participants (per IFRS Framework).

The definition of expenses encompasses losses as well as those expenses that arise in the course of the
ordinary activities of the enterprise. There are various classes of expenses but they are generally
classified as cost of services rendered or cost of goods sold, distribution costs or selling expenses,
administrative expenses or other operating expenses.

Losses represent other items that meet the definition of expense and may or may not, arise in the course
of the· ordinary activities of an enterprise. Losses represent decreases in economic benefits and as such
are no different in nature from other expenses. Hence, they are not regarded as a separate element.

THE ACCOUNT
The basic summary device of accounting is the account: A separate account is maintained for each
element that appears in the balance sheet (assets, liabilities and equity and in the income statement
(income and expenses). Thus, an account may be defined as a detailed record of the increases,
decreases and balance of each element that appears in an entity's financial statements. The simplest
form of the account is known as the "T" account because of its similarity to the letter "T". The account has
three parts:

THE ACCOUNTING EQUATION

Financial statements tell us how a business is performing. They are the final products of the accounting
process. But how do we arrive at the items and amounts that make up the financial statements? The most
basic tool of accounting is the accounting equation. This equation presents the resources controlled by
the enterprise, the present obligations of the enterprise and the residual interest in the assets. It states
that assets must always equal liabilities and owner's equity.

The basic accounting model is:

Note that the assets are on the left side of the equation opposite the liabilities and owner's equity. This
explains why increases and decreases in assets are recorded in the opposite manner ("mirror image") as
liabilities and owner's equity are recorded. The equation also explains why liabilities and owner's equity
follow the same rules of debit and credit.
The logic of debiting and crediting is related to the accounting equation. Transactions may require
additions to both sides (left and right sides), subtractions from both sides (left and right sides), or an
addition and subtraction on the same side (left or right side), but in all cases the equality must be
maintained as shown below:
 ELEMENTS OF ACCOUNTING INFORMATION
SYSTEMS

An information system is a formal process for collecting data, processing the data into information, and
distributing that information to users. The purpose of an accounting information system (AIS) is to collect,
store, and process financial and accounting data and produce informational reports that managers or
other interested parties can use to make business decisions. Although an AIS can be a manual system,
today most accounting information systems are computer-based .

Accounting information systems have three basic functions:

1. The first function of an AIS is the efficient and effective collection and storage of data concerning
an organization’s financial activities, including getting the transaction data from source
documents, recording the transactions in journals, and posting data from journals to ledgers.

2. The second function of an AIS is to supply information useful for making decisions, including
producing managerial reports and financial statements.

3. The third function of an AIS is to make sure controls are in place to accurately record and process
data.

An accounting information system typically has six basic elements:

1. People who use the system, including accountants, managers, and business analysts

2. Procedure and instructions are the ways that data are collected, stored, retrieved, and processed

3. Data including all the information that goes into an AIS

4. Software consists of computer programs used for processing data

5. Information technology infrastructure includes all the hardware used to operate the AIS

6. Internal controls are the security measures used to protect data

Sources:
 grade 12 handouts
 https://www.accountingedu.org/accounting-information-systems.html