Message: Sorry if it takes two days before I post this lesson. I'm kind of busy these past few days. :D
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Generally Accepted Accounting Principles (GAAP) pertains to the collection of accounting treatment in a particular country. I would like to emphasize that varies in different countries. The GAAPs that I will present to you are Philippine GAAP. But worry not! Because the Philippines is patterning its GAAPs from the International Financial Reporting System (IFRS) [this is the basis of majority of the countries in the world].
Below is the list of the most common GAAPs that you must know.
1. Monetary Unit Concept - it simply states that all of the information presented in any accounting products must be in the unit of money. The unit of money is the currency used in a country. Say you're from Korea, all of the amounts must be in Korean Won. If your company has a dollar account, you must convert it into Korean Won when you have to prepare the Financial Statements.
2. Periodicity Concept - this states that the indefinite life [see the next GAAP] of an entity is divided into accounting periods. The end of each accounting period shall determine when financial statements are to be made.
If an entity chooses to have a calendar year (i.e., the period that starts from January 1-December 1 of the same year), it must prepare financial statements at the end of the year. On the other hand, if an entity falls under the fiscal year, this means that its accounting period is good for one year. There are other accounting periods to choose from like quarterly (every three months), monthly and bi-monthly.
3. Going Concern - it states that unless otherwise there is an evidence to the contrary, the entity will continue for an indefinite period.
4. Accrual Basis of Accounting - it states that revenues and expenses shall be recorded and recognized at the time when they are earned and are incurred respectively regardless when the actual payment is made. Say Mr. James purchased a car from Toyota in an installment basis, even though Mr. James has not yet paid the car in whole amount, Toyota shall recognize a revenue equal to the car purchased. Another example: today is November 2013 and an interest expense is scheduled to be paid in January 2015. Even though that the entity has not yet paid the interest, it must still record the accrual of the expense.
5. Cash Basis of Accounting - this is the opposite of the former. It recognizes expenses and revenues when they are paid. This treatment is only used for tax-purposes of accounting.
6. Business Entity Concept - this means that an entity is considered to be separate and distinct from its owner/s and other related businesses. Example: Mr. Ng owns a business and he wants to buy an iPad for personal purposes, he cannot recognize the cost of his iPad as an expense of the company.
Other things that you must know:
What are the three basic forms of the business? They are single proprietorship (owned by only one proprietor), partnership (owned by two or more owners) and a corporation (owned by stockholders). You will learn them soon. :D
What are the different types of business? Service, Merchandising, and Manufacturing. They are self-explanatory, I assume.
Who are the users of financial information? The major user of the financial information from the statements is the management. This shall help them to evaluate whether the business is expanding or not. Creditors and suppliers also need to know how liquid and financially stable the entity is to decide whether they are going to approve their credits. Government must know also how the company gains profits or realizes losses for the computation of taxes. Some government agencies include Securities and Exchange Commission, Bureau of Internal Revenue and Department of Trade and Industry. Employees might also want to know the profitability of the company so they can evaluate whether it is capable of giving better remuneration. Investors are also one of the users of financial information so they can determine whether to invest their grants in the business or not.
This ends our discussion
oOo
ASSESSMENT
Self-evaluation (just pm me if you want to know your score)
1. If Ms. Julie rendered service to Mr John in March and she received the payment in May, when shall Ms. Julie record the revenue from the service?
2. Mr. Josquine, an auditor hired from Isla Lipana, returned the Financial Statements (FS) in of Brown Company in Renminbi. It is a Chinese company which is currently operating in the Philippines. Why did Mr. Josquine reject Brown Company's FS? Support your answer.
3. Consider the following:
- You had rendered your service for Php 500.00 then you received the payment three days after.
- Reik Company paid you its balance from its past transaction. You received Php 1,000 cash.
QUESTION: How much is your revenue for the day? Support your answer.
4. Can we consider a calendar year as a fiscal year?
5. Imagine you are the company messenger. You are asked to go to a bank to deposit the earnings of the company for the day. On your way to the bank, you ran out of fuel and this compelled you to purchased three liters of diesel for your motorcycle. Can the company record your expense for your motorcycle? Why or why not?
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next topic: the components of financial statements. One lesson to go, and we're already on the rules of debit and credit a.k.a. the double-entry system.
Sorry guys if I wasn't able to make the definition of terms. ^___^v
xoxo
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