Accounting framework part 2

Underlying assumptions (MAGAT):

• ·         Fundamental or basic notions of accounting process.

1.       Accrual-incomes or expenses are recognized when earned regardless of when received or paid.

2.       Going concern/continuity-accounting entity is viewed as continuing in operations indefinitely.

3.       Accounting entity-transactions of the accounting entity are separate from those of the owner.

4.       Time period-the indefinite life of the accounting entity are subdivided into accounting periods that is usually 12 months.

a.       Calendar year- 12 month period that ends in December 31

b.      Fiscal/natural year-12 month period that ends in any month when the business entity is at its lowest season.

5.       Monetary unit-

a.       Quanitfiability-accounting elements should be stated in common denomination (which is peso in the Philippines)

b.      Stability-some accounting elements should be stated at current purchasing power (specifically if you are using revaluation model).

Conceptual framework

• ·         Summary of term and concept that is being used in preparation of FS.

• ·         Theoretical foundation of accounting standards.

• ·         Conceptual framework is more technical than underlying assumptions.

·         Basic purpose:

o   Assist FRSC in developing accounting standards that is the basis of Philippine GAAP.

o   Assist FS preparers in applying accounting standards.

o   Assist FRSC in reviewing and adopting IFRS.

o   Assist users in interpreting information contained in a FS.

o   Assist auditors in forming opinion that FS conforms to GAAP.

• ·         Conceptual framework IS NOT ACCOUNTING STANDARDS, therefore, PFRS PREVAILS over conceptual framework.

·         Scope of Conceptual framework:

o   Objectives of FS-provide information about FINANCIAL POSITION, FINANCIAL PERFORMANCE and CASH FLOWS of an entity that is useful in making economic decisions.

§  Financial position-assets, liabilities and equities of an entity

·         Economic resources

·         Liquidity

·         Solvency

·         Financial structure

·         Capacity for adaptation-financial flexibility

§  Financial performance-revenue, expense and net income or loss of an entity. It is the result of the operation.

§  Cash flows

·         Operating activities

·         Investing activities

·         Financing activities

§  Accounting concepts

·         Entity theory

o   Asset=liabilities+capital

·         Proprietary theory

o   Asset-libilities=Capital

·         Residual Equity theory

o   Asset-liability-preference share=ordinary share

·         Fund theory

o   Fund=cash inflow-cash outflow