Fundamentals of accountancy business and management 1 LESSON 4.2.pptx

application of accountancy concepts and principles

1. Application of Accounting Concepts and Principles Lesson 4 . 2 1 Fundamentals of Accountancy, Business, and Management 1 Accountancy, Business, and Management

2. Despite the famous adage “ignorance is no excuse,” an individual may still violate these rules and regulations if they are not aware of it. 2

3. The same is true in the business world. One wrong move may compromise the operations of a business or affect the company’s position in the market. 3

4. 4 The Securities and Exchange Commission (SEC) is a government agency mandated to regulate corporations and financial institutions. It is also established to protect the public from investing in scams and other related fraudulent business activities. Securities and Exchange Commission

5. 5 To uphold its mandate, one of SEC’s tasks is to assess all the financial statements submitted by corporations. The Securities Regulation Code (SRC) ensures that financial reports are audited by independent Certified Public Accountant (CPA). Moreover, the SRC Implementing Rules and Regulations (IRR) contains conditions for internal record keeping and accounting controls for businesses to follow. Securities and Exchange Commission

6. What is the function of the Securities and Exchange Commission? What is the role of a Certified Public Accountant in performing the mandate of the Securities and Exchange Commission? How can the public benefit from the mandate of the Securities and Exchange Commission? 6 Questions to Ponder

7. Solve exercises on accounting principles as applied in various cases (ABM_FABM11-IIIb-c-16). 7

8. 8 At the end of this lesson, you should be able to do the following: Give examples of transactions applying accounting concepts and principles. Differentiate accounting concepts and principles. Analyze violations of accounting concepts and principles in business transactions.

9. 9 How do accounting concepts and principles affect a business’ economic activities?

10. sets of rules and guidelines that a business follows when preparing financial reports ensure that a company’s reports are valid, reliable, consistent, and comparable Application of Accounting Concepts and Principles 10

11. Application of Accounting Concepts and Principles 11

12. Application of Accounting Concepts and Principles Business Entity Concept Financial transactions must be recorded separately from those of its owners and other businesses. Mr. Wilkins owns an electronic company and drives a personal luxury car. According to the business entity concept, Mr. Wilkin’s luxury car should not be counted as part of his company’s assets. 12

13. Application of Accounting Concepts and Principles Monetary Unit Concept Record only the transactions that can be expressed in terms of a currency. Mr. Nagoya, the CEO of Tokyo Builders, invested additional capital in the form of 20 hectares of land. Under the monetary unit principle, the said investment can not be recorded unless there is a statement of value in terms of a common monetary unit. 13

14. Application of Accounting Concepts and Principles Going Concern Principle Assume that a business entity will operate indefinitely. One of the branches of Star Company will close because of financial instability. Shutting down one of its branches does not harm the capacity of the other branches to operate. 14

15. Application of Accounting Concepts and Principles Time Period Principle Financial transactions must be reported in a standard period of time. Gamma Company rendered services to Meta Company in the second quarter; this transaction must be reflected in Gamma Company’s income statement for the said quarter. 15

16. Application of Accounting Concepts and Principles Objectivity Principle Financial reports must be based on solid evidence. Company NYZ was audited by an external auditor and was asked to provide customers' receipts to validate its financial statements. 16

17. Application of Accounting Concepts and Principles Cost Principle Acquired assets, liabilities, and equity investments should be recorded at their original cost. Roma Cleaning Services bought equipment for ₱60,000 and is estimated to be worth ₱30,000 in four years. The business should record the equipment at ₱60,000 despite the price adjustment in the future. 17

18. Application of Accounting Concepts and Principles Accrual Accounting Principle recording revenues when earned and expenses as incurred JM Builders received an electricity bill on December 26 and intended to pay it on January 15. The bill should be recorded as an expense at year-end even if it is not yet paid. 18

19. Application of Accounting Concepts and Principles Revenue Recognition Principle guides businesses on how and when revenue is to be recognized Mexico Auditing performed services for Best Retails on credit. Mexico Auditing should recognize this transaction as revenue even if it is not yet paid. 19

20. What is the difference between accrual accounting principle and revenue recognition principle? 20 1 Answer area

21. Application of Accounting Concepts and Principles Matching Principle Revenues are reported together with related expenses in the same reporting period. Monday Company gives bonuses to its employees every year, paid in the following year. The business should record the bonus as an expense in the same year that the employees earned it. 21

22. Application of Accounting Concepts and Principles Full Disclosure Principle should include all relevant and necessary information relevant to the understanding of the financial statements O Company is involved in a lawsuit. The business should disclose that it has a pending lawsuit that could affect its financial situation. 22

23. Application of Accounting Concepts and Principles Conservatism Principle assets and revenue should not be overstated liabilities and expenses should not be understated Red Residences is in a lawsuit against its competitor. The business should not report possible gains from the lawsuit because the case hasn’t been decided on yet. Therefore, the gain is not yet final. 23

24. Application of Accounting Concepts and Principles Materiality Principle Companies can ignore some misstatements if the impact is immaterial. Grace Company may not depreciate an asset worth ₱200.00 over its useful life of five years and may outright record it as an expense. 24

25. Businesses in the Philippines follow the Philippine Financial Reporting Standards (PFRS) when preparing financial reports. Most of the PFRS are adopted from the International Financial Reporting Standards (IFRS), but some with modifications and amendments. These standards are based on the Generally Accepted Accounting Principles (GAAP). Philippine Financial Reporting Standards 25

26. The trading of shares of PAL Holdings in the Philippine Stock Exchange was suspended last June 18, 2021 because its auditor, SyCip Gorres Velayo & Co. (SGV & Co.), was not able to give an opinion on PAL’s audited financial statements. Suspension of Trading of Shares of PAL Holdings in the PSE 26 Keren Concepcion Valmonte, “PAL share trading halted on audit disclaimer,” BusinessWorld, June 18, 2021, https://www.bworldonline.com/pal-share-trading-halted-on-audit-disclaimer/ , last accessed on March 11, 2022.

27. The failure to give an opinion violates Rule 68 of the Securities Regulation Code (SRC). Rule 68 requires all companies to submit audited financial statements with an unqualified opinion from their respective auditor. Suspension of Trading of Shares of PAL Holdings in the PSE 27 Keren Concepcion Valmonte, “PAL share trading halted on audit disclaimer,” BusinessWorld, June 18, 2021, https://www.bworldonline.com/pal-share-trading-halted-on-audit-disclaimer/ , last accessed on March 11, 2022.

28. An unqualified opinion from an auditor means that the financial reports submitted to them were accurate and fair. To cite SGV & Co., the auditing firm was “unable to obtain sufficient appropriate audit evidence” for an opinion on PAL’s financial statement. Suspension of Trading of Shares of PAL Holdings in the PSE 28 Keren Concepcion Valmonte, “PAL share trading halted on audit disclaimer,” BusinessWorld, June 18, 2021, https://www.bworldonline.com/pal-share-trading-halted-on-audit-disclaimer/ , last accessed on March 11, 2022.

29. The role of auditors and the Securities and Exchange Commission is important because they ensure that companies present their financial reports accurately and fairly. Suspension of Trading of Shares of PAL Holdings in the PSE 29 Keren Concepcion Valmonte, “PAL share trading halted on audit disclaimer,” BusinessWorld, June 18, 2021, https://www.bworldonline.com/pal-share-trading-halted-on-audit-disclaimer/ , last accessed on March 11, 2022.

30. 30 Accounting is driven by various concepts and principles that businesses must adhere to when dealing with financial information. These guidelines are essential to guarantee that statements are comprehensive and constant.

31. 31

32. 32 Accounting concepts and principles guide businesses in analyzing economic events and when preparing financial reports. They help companies track errors and avoid fraudulent activities.

33. True or False. Personal transactions made by the owner cannot be recorded in the business’s accounting books. 33 True False

34. True or False. A business may remove financial data that may affect the image of the business among its users. 34 True False

35. True or False. An asset that has a negligible impact on the business’s financial statements can be reported as an expense. 35 True False

36. True or False. A business purchased insurance that is good for one year and recorded expenses right away. 36 True False

37. True or False. When a business paid rent in advance, the cost of rent that should be recorded as an expense is equivalent to the worth of a prepaid rent that expired. 37 True False

38. Correct the sentences to make them adhere to accounting concepts and principles and make the transactions valid. White Logistics suffered from losses due to low demand. Its cash flow is below target and all measures have been taken into consideration. The owner took the advice of the financial manager to permanently suspend operations. 38 Answer area

39. Correct the sentences to make them adhere to accounting concepts and principles and make the transactions valid. Bright Tutorial Service purchased land worth ₱560,000.00. It is estimated that the price of the land two years from now will be ₱880,000.00. The business recorded land as ₱880,000.00 since land is known to appreciate over time. 39 Answer area

40. Answer the following questions. What do you think are the challenges that businesses face when implementing the rules and regulations in reporting financial data? 40 Answer area

41. Answer the following questions. Choose an accounting concept or principle and provide a business transaction where it should be applied. 41 Answer area

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