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ACCOUNTING CONCEPT AND PRINCIPLES

Accounting practices rest on certain guidelines or rules. The rules

that govern how accountant measure, process, and communicate
financial information are the GAAP, which stands for Generally
Accepted Accounting Principles. GAAP includes not only principle, but
also concept and method that identify the proper way to produce
accounting information. GAAP are very much like the law, a set of
rules for conducting behavior in a way acceptable, to the majority of
people. Some of the most important accounting concepts in financial
reporting are as follows:

The Entity Concept. The most basic concept in accounting is that of

the entity. An accounting entity is an organization or a section of an
organization that stands apart from its owners or other organization
as a separate economic unit. From the accounting perspective, sharp
boundaries are drawn around each entity so as not to confuse its
affairs with those of other entities. If this assumption were not made,
personal activities of the owner would be merge with the transaction
of their businesses, thus combining the affairs of two separate and
distinct unit. The resulting financial statement constructed to report
the business’s financial health and profitability, therefore, would not
be meaningful.

The entity assumption also notes that a firm should be viewed aside
and apart from other firms. If a company has three subsidiaries, the
three subsidiaries should considered separate economic units with
their own financial reports.

The Reliability (or Objective) Principle. Accounting records and

statements are based on the most reliable fact available so that they
will as accurate and useful as possible. Reliable data are verifiable.
They may confirmed by any independent observer. Ideally, then,
accounting record based on information that are documented by
objective evidence. Evidence of the cost, of the goods, services and
resources normally exits in the form of contracts, accounting
documents and canceled check. Without the reliability principle, also
called objective principle, accounting record would be based on
whims and opinions and would be subject to dispute.

Suppose you start a stereo shop, and have a place for operation, you
transfer a small building to the business. You believe the building is
worth $35,000, to confirm its value; two real estate professionals are
hired and appreciate the building of $35,000. Which is the more
reliable to estimate of the building’s value, $35,000 or $33,000? The
real estate appraisal of $33,000 is, because it is supported by
external, independent, objective observation.

The cost Principle. This principle holds that asset and service that are
acquired should be recorded at their actual cost; the acquisition or
historical cost. Even though the purchaser may believe the price paid
is bargain, the item is recorded at the price paid in the transaction.
The cost principle also holds that the accounting should maintain this
historical cost of an asset for as long as the business holds the asset.
Why? Because cost is a reliable measure.

(Adapted from Accounting 2nd by Hongren & Harrison P. 11-12)