Full-disclosure Principle

The full-disclosure principle means that the financial reports must include any information that could affect the decisions to be made by external users.

Supplemental information is disclosed as follows:

1.Parenthetical comments or modifying comments
   - these comments are placed on the face of the financial statements.

2.Disclosure notes
   - convey additional undertakings regarding company operations.

3.Supplemental financial statements
   - report more information than is shown in the primary financial statements.


Researched by:

Matching Principle

Matching principle gives guidance as to when expenses are recognized.

Matching principle states that expenses are recognized in the same period as the related revenues are recognized.  Meaning, expenses recognition is driven by a matching process.

There’s a relationship between the realization principle and matching principle.  When revenue is recognized in a particular period, all the expenses incurred in generating such revenue must also be recognized.

Note that not all expenses are directly caused by generating revenues. There are expenses which are incurred but indirectly associated to generate revenue.

Approaches in recognizing expenses are as follows:

1. Some expenses are recognized based on the exact cause-and-effect between revenue and expense event. 

There is a cause-and-effect relationship or direct relationship between revenues and expenses.
Such expenses pertain to the cost to sell or cost to produce goods and services. 

These are the cost of service or cost of goods sold or cost of sales. 

Another example for this approach is the sales commission paid for obtaining revenues.

2.  By associating the expenses with the revenues recognized in a particular period. 

There are expenses which are not directly cause by a revenue event.  However, some expenses can be related to the time period during which the revenue is earned.

For example, the monthly salary paid to employees is not directly associated to any revenue event. Employees render services during the month and indirectly relate to the recognized revenue in that period.

3.  By systematic and rational allocations to specific time periods. 

Some expenses are recognized or allocated to a specific time period.  There are costs which are incurred to acquire assets that benefit more than one reporting period.  Such costs are systematically and rationally allocated periodically. 

Examples are the systematic and rational allocations of some prepaid expenses, depreciation and amortization expenses.

4.  In the period incurred, without regard to related revenues.  

This approach is called for in situations when costs are incurred but it is not possible to determine in which time periods to recognize.   

Example is the marketing and advertising expenses.  It is difficult to determine how much is expended in generating incremental revenues.  Because of this, such marketing and advertising expenditures are recognized at the period they are incurred.

Researched by:

Realization Principle

Realization principle is also known as the Revenue Recognition principle.

Realization principle guides when to recognize the revenue.

GAAP requires that two criteria must be satisfied in recognizing revenue:

1.The earnings process is judged to be completed or virtually complete.
2.There is reasonable certainty as to the collectability of the asset (usually cash) to be received.

In short, Revenue must be recognized the earnings process is virtually complete and collection is reasonably assured.

The primary earning activity which triggers revenue recognition is known as the critical event.  The critical event for many organizations occurs at the point of sale.  This usually happened when the goods are delivered or title and ownership is transferred to the buyer, or the services is already rendered or performed.

The timing of revenue recognition is a key element in the measurement of earnings.  In preparation of financial statements, the income must be reported at the proper time period otherwise, this may result to overstatement or understatement of revenue and net income. Hence, the revenue recognition criteria helps ensure that proper recording is made.

Note that the revenue recognition allows the implementation of the accrual accounting model, where revenue must be reported in the period when it is earned, not necessarily when the cash is actually received.

Researched by:

Historical Cost Principle

Historical Cost Principle

PAS and GAAP recognized that elements of Assets and Liabilities are measured based on their original transaction value.  And, this is their historical cost.

For asset, this is the exchange or transaction value given for the asset at the point of acquisition.

For liabilities, it is the current cash equivalent received at the time when assuming the liability.

In other words, historical cost principle states that the measurement of asset or liability must be based on the amount given or received in the exchange transaction.

Researched by:

Accounting Principles (Introduction to GAAP)

ACCOUNTING PRINCIPLES

When we look at a dictionary to know what is meant by principles, we’ll encounter words like doctrines, beliefs, dogmas, philosophies, creeds and similar words.

In Accounting, there is the so-called Generally Accepted Accounting Principles or GAAP.  These GAAPs are the doctrines, creeds, dogmas we apply and follow in the accounting practice.

The GAAP guides the bookkeepers and accountants in the recording, measuring and reporting the transactions, events and activities of the organization.

Accounting data are recorded and measured, and Financial Statements are presented fairly in accordance with GAAP.  That’s why auditors when expressing an opinion, they state “to fairly present the financial statements … in conformity with generally accepted accounting principles.”

GAAP are developed and continues to evolve thru experiences, occurrences or happenings in the business world, and careful study and research of those in the accounting profession especially by authoritative bodies.  Its development and evolution are influenced by changes in economic conditions, business practices, needs of the users of the accounting information, and many more.

The GAAP in the Philippines are embodied in our Philippine Accounting Standards (PAS) and Philippine Financial Reporting Standards (PFRS). The authoritative body which oversees GAAP in the Philippines is the FRSC.  They adopted the PAS and PFRS from the IASs and IFRSs of IASB.

Researched by:

Basic Accounting Concepts and Principles

ACCOUNTING CONCEPTS

According to dictionary “concepts” means ideas; or generalized notions or views or impressions.  

Applying to Accounting, Accounting Concepts would refer to abstract ideas or assumptions which sets, governs, regulates and standardizes practices in the accounting world. 

ACCOUNTING PRINCIPLES (Introduction to GAAP)

When we look at a dictionary to know what is meant by principles, we’ll encounter words like doctrines, beliefs, dogmas, philosophies, creeds and similar words. 

In Accounting, there is the so-called Generally Accepted Accounting Principles or GAAP.  These GAAPs are the doctrines, creeds, dogmas we apply and follow in the accounting practice... read more 

FRAMEWORK 

Financial Reporting Standards (IFRS-PFRS) are based on a Framework, which addresses the concepts underlying the information presented in general purpose financial statements. 

The Framework also provides a basis for the use of judgement in resolving accounting issues. 

Financial Reporting Standards sets out recognition, measurement, presentation and disclosure requirements dealing with transactions and events that are important in general purpose financial statements.

However, it is important to note that the framework provides structure and direction to financial accounting and reporting and does not directly prescribe GAAP. It provides underlying foundation for accounting standards.

Although the Framework sets out the concepts that underlie the preparation and presentation of financial statements for external users, the Framework is not an International Financial Reporting Standards and hence does not define standards for any particular measurement or disclosure issue.

Be reminded that IASB recognizes that there may be a conflict between the Framework and IFRS.  In those cases where there is conflict, the requirements of the IFRS prevail over those of the Framework.  

Take note that the Framework is being introduced here for us to learn and study the basic concepts of financial accounting and reporting which are basically the fundamentals of accounting.

Scope of the Framework

The Framework deals with the following:

• Basic Set of Financial Statements  

• Objective of Financial Statements

• Financial or Accounting Elements 

• Definition, Recognition and Measurement of the elements of Financial Statements   

• Basic Accounting Assumptions

• Qualitative Characteristics 

• Constraints on Relevant and Reliable information 

Concern of the Framework

The framework is concerned with general purpose financial statements.

Such financial statements are prepared and presented at least annually and are directed towards the common information needs of a wide range of users.   

Many users have to rely on the financial statements should, therefore, be prepared and presented with their needs in view. 

        DIAGRAM OF CONCEPTUAL FRAMEWORK 



Researched by: