Accounting Concepts and Principles

[Music] hello everyone welcome back to our channel in our first video we've talked about the basic concepts and studying accounting in this episode we will learn about the different accounting concepts and principles it's a study of accounting concepts our assumptions are very important in the preparation of financial statements they are the foundation of generally accepted accounting principle without them there will be no uniformity and the practice of accounting and financial statements will be middle class so are you ready for another exciting episode if you are ladies and gentlemen please fasten your seat belts and make sure that you are mentally prepared for this episode let's start by discussing the accounting assumptions there are a number of assumptions you need to learn in the study of accounting they are considered to be the guides in the preparation of financial statements these are accounting entity GUI concern side period units of measure and accrual basis of accounting let's start with accounting entity concept it is also known as a separate entity concept or the business entity concept the essence of accounting entity is a separation of the business from the owner or the management it simply means that everything the owner or the management you is distinct and separate from the transactions of the business this is a reason why it is a separate entity since there are lot of interactions but the business and the management incur daily it is important to understand the those transactions need to be separated properly and that only business transactions are recorded in the books of business to make it short just remember this business is business personal is personal take for instance mr. Arjen cavada the owner of goki sweet a town in Wakanda when you started the business he invested in a lot of things too invested in landed building and of course a lot of money accounting and he tells us that all the investments of mr. or young kobato is no longer his but now belongs to the business with accounting under the assumption the business is therefore separate from the owner so personal and family expenses of the owner should be separate from the expenses of the business let's move on to our next accounting assumption which is the going concern concept are also called the continuty concept this assumption simply tells us that the businesses are assumed to continue operating over an indefinite period of time however if there is a concrete evidence that the business can no longer continue the continuty concept should be a bother let's take a look at the application of the continuty concept recorded mr. Arjun Kapoor the portions for 10 million should not be recorded as an outright expense rather we should allocate its cost by 10 years the life of the car why bigges like I said a while ago risk ingenuity concept we are assuming that the business will continue to operate for an indefinite period of time therefore it is right to allocate the cost of the vehicle over the period of its useful life the third accounting assumption is time period this simply means that the life of the business is divided into equal reporting periods we're in at the end of each period financial statements are prepared this time periods can either be monthly quarterly semi-annually or annually but we should always remember that financial statements should be prepared at least annually meaning at least once a year in time period Casa we also need to understand the difference between calendar year and fiscal year when you say calendar year it is the account period that starts from January 1 and ends on December 31 on the other hand fiscal period is a reporting period that starts with any month other than January 1 it may start on February 1 March 1 April 1 May 1 June 1 July 1 August 1 so on and so forth but not January 1 therefore if it doesn't start when January 1 the accounting period will not also end on December 31 our fourth accounting assumption is a stable monetary unit or otherwise known as the unit of measure the purchasing power of peso is steady regardless of inflation rates this also means that the function of accounting is to account for the peso only and not for the change in its purchasing power for example mr. Arjun Kapoor doc preaches a land worth 5 million a year ago even if the value of the land has already been 8 million it will still be recorded and a statement of financial position at 5 million it will not be affected by inflation our next accounting concept is a cruel basis this means that income is recognized when earned not when received meaning the company can already record an income once it delivers the product or perform the services even if it hasn't receive any cash yet expenses on the other hand are recognized by the third not when paid meaning the company has to record and expense once they are able to use up something or receive a service even if they haven't paid for it yet we also need to remember that accrual basis is the opposite of cash basis other cash basis companies only recognized income when money was already received and recognized expense when money was already paid to better understand this part let's meet mr. Joshua Smith kandala a big time customer up ok sweet for stated Wakanda for two months to study the police cutting-edge technology he promised to pay his a tolerant amounting to six million before you've got back to us the six million can now be recorded by okay sweeter towel as an income even though they haven't collected anything yet on the other hand mister Candela also has to recognize an expense even if he has not paid okie sweet at all yet because he already availed the company's services now let's talk about the generally accepted accounting principles or GAAP for short by definition God talks about the uniform set of accounting rules procedures practices and standards that are followed in preparing financial statements they serve as ground rules that guide accounting practitioners in recording measuring and reporting financial information of the business entity so when do we say that the principal is generally acceptable the principal simply needs to follow this criteria first the principal needs to be mollified meaning it should be useful in making a decision second the principal needs to be objective meaning it is not influenced by personal bias third the principal needs to be physical meaning it can be implemented without an jus complexity are cost the following are some of the generally accepted accounting principles that are followed and used today first cost principle this requires that assets should be recorded at the original or acquisition cost so if a company preaches a property for five million today and three years after the cost of their property is already at ten billion it will still be recorded as a cost of five million second objectivity principal this simply requires that accounting records should be based on reliable and verifiable data as evidence of transactions to attain real ability and verifiability every transaction needs to be with evidence for example preciouses should be evidence by official receipt third materiality principle this means that determining the valuation of an item should be practice upon for example if you are to leased assets you will not be reporting staplers separately the statement land building and equipment because of their materiality of the mountain land building and equipment would cost millions while staplers would only cost a hundred fort matching principle this requires that revenue and expense should be recognized in the same period this means that if you are going to recognize a revenue for that period you should also recognize the corresponding expense as a shaded with it so when you recognize sales revenue you should also recognize the corresponding cost of sales this consistency principle this means that accounting methods and procedures should be applied for you on a uniform basis from period to period so if you are applying straight-line depreciation last year for your fixed assets you should also use the same method this year last but not the least is the adequate disclosure principle this means that financial statements should be free from material misstatement therefore reports to be repaired should be completed before I end this episode please don't forget to Like and subscribe to this channel also if you have friends who need to know about this topic don't forget to share and hit the bell button so you will be notified when we upload new videos see you in our next video god

Channel: ABM Coach Philippines

Views: 19,258

Rating: 4.9511204 out of 5

Keywords: Accounting Concepts and Principles, Going Concern, Time Period, Cost Principle, Accounting Entity, Business Entity, Separate Entity, GAAP, Generally Accepted Accounting Principles

Id: XBFdjorUc8o

Length: 10min 49sec (649 seconds)

Published: Wed Apr 22 2020