ACCOUNTING: Its Nature and concepts

ACCOUNTING: Its Nature and Concepts1Learning Objectives At the end of the Chapter, the class shall be able to:define accounting;identify the steps in accounting cycle;describe the framework for financial statement preparation;describe the concept of underlying assumptions; state the qualitative characteristics of the financial statements;identify the accounting constraints;discuss the elements of financial statements;describe the measurements procedures of financial elements; anddiscuss the meaning of concept of capital. Definitions - AICPAAccounting is the art of recording, classifying, and summarizing in a significant manner and in terms of money, transactions and events which are in part, at least of a financial character and interpreting the results thereof. Definitions - FRSCAccounting is a service activity. Its function is to provide quantitative information, primarily financial in nature, about economic entities, that is intended to be useful in making economic decision. Common DenominatorsAccounting is a service activity. The main objective is to provide quantitative information. The information is financial in character about the economic entities. The information is intended in making economic decision.

Financial StatementsUnderlying Assumption: Accrual

Accrual assumption means that the effects of transactions and other events are recognized when they occur and not as cash or its equivalent is received or paid.

Underlying Assumption: Going ConcernGoing concern assumption means the financial statements are prepared on the assumption that an entity will continue in operation for the foreseeable future.

Elements of RELIABLE informationFaithful representationSubstance over formNeutralityPrudenceCompletenessAccounting ConstraintsElements of Financial Statements

Recognition of Elements of FSREQUISITESPRINCIPLESMeets the definition of an element, andSatisfies the criteria for recognition:Future economic benefitCost/value measured with reliabilityAsset recognition principleLiability recognition principleIncome recognition principleExpense recognition principle

Expense Recognition Procedures

Matching of cost with revenuesSystematic and rational allocationImmediate recognitionNon-matching principleMeasurement of the ElementsHistorical CostCurrent CostRealizable value

Concept of Capital

Capital Maintenance Approach Financial CapitalPhysical Capital