Discusses the different principles and assumptions that entail the GAAP.

1. Generally Accepted Accounting
Principles

2. Generally Accepted Accounting
Principle (GAAP)
• Rules that govern how accountants measure,
process and communicate financial
information
• Ensures that consistent accounting procedures
are followed in recording the events created
by business transactions and in preparing
financial statements

3. Generally Accepted Accounting
Principle (GAAP)
• The Business Entity
Concept
• The Continuing Concern
Concept
• The Time Period Concept
• The Consistency Principle
• The Principle of
Conservatism
• The Objectivity Principle
• The Materiality Principle
• The Monetary-unit
Concept
• The Full Disclosure
Principle
• The Cost Principle
• The Revenue Recognition
Convention
• The Matching Principle

4. The Business Entity Concept
• From an accounting standpoint, the business firm is
treated as a separate economic entity
• Only the business entity’s activities and transactions
should be recorded and reported
• The personal activities of the owner(s) and other
business entities are accounted for separately, unless
the activities have direct impact upon the business firm

5. The Continuing Concern Concept
• Recognizes that a firm will remain in operation
for the foreseeable future
• The firm is expected to continue to operate
long enough to meet its obligations and fulfill
its plans

6. The Time Period Concept
• Recognizes that timely financial reports must
be made to those who need the information
in these reports
• Can be monthly, quarterly or annually
• The year is the basic time unit

7. The Consistency Principle
• States that once an accounting method has
been adopted, it should be consistently
followed from period to period in order for
accounting information to be comparable

8. The Principle of Conservatism
• Holds that when equally correct accounting
alternatives are available for recording or reporting a
transaction, the accountant should select the
alternative that will result in least favorable outcome
for the business in the current period
• Minimize any overstatement of assets and income and
understatement of liabilities

9. The Objectivity Principle
• States that all business transactions must be
supported by objective evidence proving that the
transaction did in fact occur
• When independent evidence is not available to
document the results of a business transaction,
estimates must be made

10. The Materiality Principle
• States that material events must be accounted
for according to accounting rules

11. The Monetary-unit Concept
• Holds that business transactions must be
recorded and reported in terms of money
• Peso is the monetary unit in the Philippines

12. The Full Disclosure Principle
• Requires that the financial statements of a
business should be complete and should report
sufficient economic information relating to the
business entity to make the statements
understandable
• Information may be: financial statements or
supplementary attachments

13. The Cost Principle
• Holds that most assets and liabilities are
recorded at their transaction cost
• Provides an objective and verifiable basis for
the initial recording of assets and liabilities

14. The Revenue Recognition Convention
• States that revenue resulting from business
transactions should be recorded only when a
sale has been made or earned

15. The Matching Principle
• Requires that the entity’s operational efforts
(expenses) be matched to the entity’s
operational accomplishments (revenues)
• States that all expenses must be recorded in
the accounting period as the revenue which
they helped to generate

16. The Matching Principle
2 Accounting Methods for determining where to
record the result of a business transaction:
– Cash Accounting
• Records the result of business transactions only when
cash is received or paid out
– Accrual Accounting
• Adjusts the accounting records by recording expenses
which re incurred during an accounting period but
which are not actually paid until the following period;
already earned but not yet collected

17. Reference/s
• Accounting for Hotels and Restaurants: A User
Perspective (2007) by Ma. Elenita Balatbat
Cabrera, pages 50-54