MODULE IN BASIC ACCOUNTING

2015
MBA 101 FINANCIAL ACCOUNTING

June

FUNDAMENTAL CONCEPTS
1. 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. The transactions of different entities should not be
accounted for together. Each entity should be evaluated separately.
2. Periodicity Concept An entitys 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 entitys net income.
This concept allows the users to obtain timely information to serve as a basis
on making decisions about future activities.
3. 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.
CRITERIA FOR GENERAL ACCEPTANCE OF AN ACCOUNTING PRINCIPLE
The general acceptance of an accounting principle usually depends on how well it
meets 3 criteria: relevance, objectivity and feasibility.
A principle has relevance to the extent that it results in information that is
meaningful and useful to those who need to know something about a certain
organization.
A principle has objectivity to the extent that the resulting information is not
influenced by the personal bias or judgment of those who furnish it. Objectivity
connotes reliability and trustworthiness. It also connotes verifiability, which means
that there is some way of finding out whether the information is correct.
A principle has feasibility to the extent that it can be implemented without undue
complexity or cost.
Conclusion: These criteria often conflict with one another. In some cases, the most
relevant solution may be the least objective and the least feasible.
BASIC PRINCIPLES
1. 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
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principle, accounting records would be based on whims and opinions and is

therefore subject to disputes.
2. Historical Cost Acquired assets should be recorded at their actual cost
and not at what management thinks they are worth as at reporting date.

3. Revenue Recognition Principle Revenue is to be recognized in the

accounting period when goods are delivered or services are rendered or
performed.
4. 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.
5. Adequate Disclosure Requires that all relevant information that would
affect the users understanding and assessment of the accounting entity be
disclosed in the financial statements.
6. 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.
7. 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.
UNDERLYING ASSUMPTIONS
1. Accrual Basis The effects of transactions and other events are recognized
when they occur and not as cash is received or paid. This means that the
accountant records revenues as they are earned and expenses as they are
incurred. The timing of cash flows (inflows/outflows) is relatively immaterial
for determining when to recognize revenues and expenses.
Financial statements prepared on the accrual basis inform users not only of
past transactions involving the payment and receipt of cash but also of
obligations to pay cash in the future and of resources that represent cash to
be received in the future.
Generally Accepted Accounting Principles (GAAP) require that a business
use the accrual basis.

In Cash Basis Accounting, the accountant does not record a transaction

until cash is received or paid. Generally, cash receipts are treated as
revenues and cash payments as expenses. Cash basis income is the
difference between operating cash receipts and disbursements. These cash
flows necessarily exclude investments by and distributions to the owner in
the computation of income.
Illustration. A client paid the Club Panoly Resort in Boracay Island
Php7,000 on April 8, 2013 for a one-day super deluxe accommodation on
May 13, 2013.
Analysis:
Under Accrual Basis, the receipt of Php7,000 will be considered as
revenues when the business has rendered its services on May 13. Suppose a
financial report is prepared at the end of April, no revenue or expense will
be reported.
Under Cash Basis, the hotel will recognize revenues on April 8. Expenses
related to this revenue transaction will be incurred on May 13. Suppose a
financial report is prepared at the end of April, revenues of Php7,000 will be
reported but the related expenses will be recognized when incurred on May
13.
Observation: The accrual basis provides a better measure of the
results of transactions.
2. Going Concern The financial statements are normally prepared on the
assumption that an enterprise is a going concern and will continue in
operation for the foreseeable future. Hence, it is assumed that the
enterprise has neither the intention nor the need to liquidate or curtail
materially the scale of its operations.
This assumption underlies the depreciation of assets over their useful lives.
If an entity expects to liquidate in the near future, its assets are valued at
their worth at liquidation rather than original cost.
A CLOSER LOOK AT THE BALANCE SHEET
STATEMENT OF FINANCIAL POSITION

What is an asset?
An 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.
The future economic benefits embodied in an asset may flow to the enterprise in a
number of ways.

Controlled by the Enterprise Control is the ability to obtain the economic

benefits and to restrict the access of others.
Past Events The event must be past before an asset can arise. For
example, equipment will only become an asset when there is the right to
demand delivery or access to the assets potential. Dependent on the terms
of the contract, this may be on acceptance of the order or on delivery.
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Future Economic Benefits These are evidenced by the prospective

receipt of cash. This could be cash itself, an account receivable or any item
which may be sold.

In simple terms, assets are valuable resources owned by the entity.

Assets include: (1) Cash (2) Receivables (3) Inventories (4) Prepaid Expenses (5)
Property, Plant and Equipment (6) Investments (7) Intangible Assets
What is a liability?
A 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.

Obligations These may be legal or not.

Transfer economic benefits This could be a transfer of cash or other
property, or the provision of a service.
Past transactions or events refer to the discussion in assets.

In simple terms, a liability is an obligation of the entity to outside parties who have
furnished resources.
Liabilities include (1) Payables (2) Accrued liabilities (3) Unearned revenues
What is equity?
Equity is the residual interest in the assets of the enterprise after deducting all its
liabilities.

Source: Basic Accounting Made Easy by Win Ballada, CPA

B. Un, CPA, MBA, REB

Prepared by: Joselito