Unit II: Generally Accepted Accounting Principles

Generally Accepted Accounting Principles (GAAP) represent a unified structure composed of basic core principles, specialized rule frameworks issued by standard-setting boards, and industry-standard operational workflows. Publicly traded corporations are legally required to distribute financial statements that match GAAP, certified via independent third-party audits to ensure total baseline consistency and transparent market disclosures.

1. Economic Entity Assumption: The accounting workflows of a business must remain completely separate from the personal financial transactions of its underlying business owners. While a sole proprietorship is a single legal entity, it represents two distinct entities for transactional tracking.
2. Monetary Unit Assumption: Economic activities are measured exclusively in the local currency unit (e.g., Philippine Pesos), ignoring the long-term effects of inflation. Transaction amounts from different chronological eras are combined assuming a constant unit of purchasing power.
3. Time Period (Periodicity) Assumption: A business can meaningfully divide its ongoing, complex operational lifecycle into short, isolated time intervals (such as months, quarters, or years) for financial statement publication. Shorter intervals depend more heavily on estimated accounting values.
4. Cost Principle: Assets are consistently recorded and reported using their original historical transaction cost (the cash or cash equivalent spent to acquire them). Accountants do not adjust asset values upward to match current market conditions or inflationary pressures.
5. Full Disclosure Principle: Any critical financial information capable of altering an investor's or lender's operational judgment must be openly disclosed directly inside the financial reports or within the attached complementary footnotes. Significant accounting policies and pending corporate lawsuits are standard baseline disclosures.
6. Going Concern Principle: Financial statements are prepared assuming that an enterprise will continue its operational activities long enough to satisfy its long-term project commitments and structural objectives, avoiding imminent liquidation. This justifies deferring prepaid asset expenses across future periods.
7. Matching Principle: Mandates the use of the accrual basis of accounting. Expenses must be recognized and matched within the exact reporting period of the revenues they helped generate, regardless of when cash is paid out (e.g., logging employee wages during the week they worked rather than the week they are paid).
8. Revenue Recognition Principle: Revenues must be officially logged into the ledger the exact moment a product is sold or a service is fully performed, regardless of the chronological timing of the actual cash receipt.
9. Materiality Principle: An accountant is permitted to deviate from standard accounting principles if a transactional amount is small enough that it will not mislead the readers of the financial statements. For example, a multi-million-peso corporation can choose to immediately expense an entire asset purchase (like a computer printer) in year one rather than systematically depreciation it over five years.
10. Conservatism Principle: When choosing between two valid, acceptable accounting methodologies, an accountant must select the option that avoids overstating net income or asset values, ensuring potential operational losses are anticipated and disclosed while potential gains are ignored until they occur.

Standardized regulations prevent businesses from distributing misleading statements. The modern structural hierarchy of international and domestic accounting regulation functions through a system of oversight boards and advisory groups.

International Framework

• IFRS Foundation: An international non-profit organization responsible for governing the creation of a single set of global accounting regulations known as International Financial Reporting Standards (IFRS).
• International Accounting Standards Board (IASB): The independent technical body operating underneath the IFRS Foundation that develops, publishes, and updates IFRS standards and approves formal accounting interpretations.
• Monitoring Board: A group of capital market authorities that provides a direct link between public entities and the IFRS Trustees to enforce public accountability.
• Trustees of the IFRS Foundation: Ensure the proper governance, fundraising, and operational oversight of the IASB.
• IFRS Interpretations Committee: Reviews specific implementation issues to provide official interpretations on how IFRS should apply in unique commercial scenarios.
• IFRS Advisory Council & ASAF: Provide direct advisory support, prioritization strategies, and technical input from regional standard-setters directly to the IASB.

Domestic Framework (Philippines)

• Historical Baseline: Early domestic operations originally relied on US GAAP standards.
• Modern Standard Realignment: Current statements are governed by the Philippine Financial Reporting Standards (PFRS) and Philippine Accounting Standards (PAS). These frameworks are directly modeled after the revised international IFRS/IAS standards to promote global consistency, market transparency, and financial reporting stability.
• Regulatory Oversight: The PFRS Council issues these standards under the direct professional supervision of the Board of Accountancy (BOA). Central financial institutions, including the Bangko Sentral ng Pilipinas (BSP), mandate compliance for all supervised financial entities.