FABM 01 - Lesson 2
Accounting Principles
& Concepts
GAAP
Generally Accepted Accounting Principles
GAAP refers to a common set of accounting
principles, standards, and procedures issued by
the Financial Accounting Standards Board
(FASB). As applied in the Philippines, the GAAP is
the Phil. Financial Reporting Standards (PFRS)
and the Phil. Accounting Standards (PAS).
1. Economic Entity Principle
states that the personal transactions of the owner are
separate from that of the business he/she owns.
2. Accrual Basis or Accrual Principle
The accrual method in accounting means that "revenue
or income is recognized when earned regardless of
when received and expenses are recognized when
incurred regardless of when paid".
3. Going Concern
The going concern concept assumes that an organization
would continue its business operations indefinitely. It
means that it is assumed that the business will run for a
long period of time, and will not liquidate in the
foreseeable future.
4. Monetary Unit
It is a GAAP principle where transactions are expressed
in currency forms such as dollars, pound sterling, euros,
etc., and must be recorded at cost and NOT adjusted in
inflation.
5. Time Period Concept
The time period principle is an accounting principle that
assumes all companies and organizations can divide activities
into time periods. These time periods are often called
accounting and reporting time periods and can be weekly,
monthly, semi-annually, annually, or any other time interval.
Calendar Year January 01 – December 31
Fiscal Year Any starting point + 12 months
6. Cost Principle (Historical Cost Prin.)
It is also known as the historical cost principle. The cost
principle requires that assets be recorded at the cash amount (or
the equivalent) at the time that an asset is acquired.
7. Full Disclosure Principle
This principle requires a company to provide the necessary
information so that people who are accustomed to reading
financial information are able to make informed decisions
regarding the company.
8. Matching Principle
The matching principle requires that revenues and any related
expenses be recognized together in the same reporting period.
Simply put, it is matching revenue with expenses to know the
profit of the business.
9. Revenue-recognition Principle
It states that you should only record revenue when it has been
earned, not when the related cash is collected.
10. Materiality Principle
The materiality concept suggests that an organization should
focus on material facts only. In simple words, an
organization should not waste its time on immaterial facts that
do not help in determining its income for the period.
11. Conservatism Principle
In accounting, the conservatism principle (or accounting
constraint) directs an accountant, who is faced with doubt
between two possible alternatives, to choose the alternative
that will result in one or more of the following:
• Less profit
• Less asset amount
• Greater liability amount
12. Objectivity Principle
This principle states that financial and accounting information
needs to be independent and free from bias. This means that
financial reporting, like a company’s financial statements need
to be based on evidence and not opinions.
Thank you…
