UNIVERSITY OF MAKATI
J. P. Rizal Ext., West Rembo, Makati City
HIGHER SCHOOL NG UMAK
ABM AND LANGUAGE DEPARTMENT
Course Title Title
Fundamentals of Module
4
Accountancy, Business & No. Accounting Concepts and Principles
Management 1
Learning Objectives 1. explain the varied accounting concepts and principles.
At the end of the lesson, the 2. applies each accounting concept and principles to various cases.
students should be able to: 3. solve exercises on accounting concepts and principles.
I
Accounting concepts and principles (assumptions or postulates) are a set of logical ideas and procedures
N that guide the accountant in recording and communicating economic information. They provide a general
T frame of reference by which accounting practices can be evaluated and they serve as guide in the
R development of new practices and procedures.
O Accounting concepts and principles provides reasonable assurance that information communicated to
D users is prepared in a proper way. For example, doctors have a proper way of performing surgery on a
U patient; engineers have a proper way of constructing a bridge; accountants too have proper way of
recording and communicating economic information. This is to maximize the usefulness of accounting
C information to the users.
T
I Examples of basic accounting concepts are as follows: (1) Separate entity concept, (2) Historical cost
concept, (3) Going concern assumption, (4) Matching principle, (5) Accrual basis of accounting, (6)
O Prudence or conservatism, (7) Time Period, (8) Stable monetary unit, (9) Materiality concept, (10) Cost-
N benefit, (11) Full disclosure principle and (12) Consistency concept.
● Forms of business organizations
There are numerous concepts and principles used in accounting. These are sourced from the “standards”
(PFRSs), the Conceptual Framework of Financial Reporting or general acceptance in the profession due
to long time use.
1. Separate entity concept – under this concept, the business is viewed as a separate person, distinct form
its owner(s). Only the transactions of the business are recorded in the books of accounts. The personal
transactions of the business owner(s) are not recorded.
The application of this concept is necessary so that the financial information can be measured properly.
By applying the separate entity concept, you can objectively know if the business is really earning profits,
or if it has the ability to do so.
2. Historical cost concept – also called “cost principle”. Under this concept, assets are initially recorded at
C their acquisition cost. Historical cost is important to people reading a balance sheet or analyzing the books
O (records) of a company. Historical cost is:
- Reliable. The process of showing historical cost on a business balance sheet is always the same. It
N does not change; it is reliable. This is important because anyone looking at a balance sheet can get a
T reliable picture of the assets of the business.
E - Comparable. It is easy to compare the cost of one asset with another using the historical cost principle.
This is important when making decisions about assets.
N - Verifiable. It is also easy to verify historical cost because there are records underlying what is showing
T on the balance sheet.
The fact that everyone is using the same system makes it easier for everyone to know the exact value of a
business and its assets.
3. Going concern assumption – under this concept, the business is assumed to continue to exist for an
indefinite period of time. This is necessary for accounting measurements to be meaningful. For example,
measuring assets at historical cost (historical cost concept) is appropriate only when the business is a going
concern.
The opposite of going concern is liquidating concern. This is the case if the business intends to end its
operations or if it has no other choice but to do so. The assets of a liquidating concern are measured at net
selling price rather than at a historical cost.
4. Matching (or association of cause and effect) – under this concept, some costs are initially recognized
as assets and charged as expense “only” when the related revenue is recognized.
5. Accrual basis of accounting – under this concept, economic events are recorded in the period in which
they occur rather than at the point in time when they affect cash. Thus, income is recorded in the period
when it is earned rather than when it is collected, while expense is recognized in the period when it is
incurred rather than when it is paid.
6. Prudence (or conservatism) – Under this concept, the accountant observe some degree of caution when
exercising judgement needed in making accounting estimates under conditions of uncertainty. Such that,
if the accountant needs to choose between a potentially unfavorable outcome versus potentially favorable
outcome, the accountant chooses the unfavorable one. This is necessary so that assets or income are not
overstated and liabilities and expenses are not understated.
7. Time period (periodicity, accounting period or reporting period concept) – under this concept, the life
of the business is divided into series of “reporting periods”. A reporting period is usually 12 months,
although it can be longer or shorter. A 12-month accounting period is either a calendar period or a fiscal
period.
- A calendar period starts on January 1 and ends on December 31 of the same year.
- A fiscal period also covers 12 months but starts on a date other than January 1, e.g., July 1, 2019 to
June 30, 2020
An accounting period that is shorter than 12 months is called an “interim period”. An interim period can
be a month, a quarter (3 months) or a semi-annual (6 months) period.
8. Stable monetary unit – under this concept, assets, liabilities, equity, income and expenses are stated in
terms of a common unit of measure, which is the “peso” in the Philippines. Moreover, the purchasing
power of the peso is regarded as “stable”. Therefore, changes in the purchasing power of peso due to
inflation are ignored.
9. Materiality Concept – this concept guides the accountant when applying accounting principles. This is
because accounting principles are applicable only to material items.
An item is considered material if its omission or misstatement could influence economic decisions.
Materiality is a matter of professional judgement and is based on the size and nature of an item being
judged.
It should be noted though that rounding off amounts is acceptable only when preparing financial reports.
The accountant does not omit any amounts (even centavos) when recording in the books of accounts.
Accounting principles do not specify a certain amount that is considered material – this is a matter of
professional judgement and depends on the facts and circumstances surrounding the entity.
10. Cost benefit (Cost Constraint) – under this concept, the cost of processing and communicating
information should not exceed the benefits to be derived from it.
11. Full disclosure principle – this concept is related to both the concept of materiality and cost-benefit.
Under the full disclosure principle, information communicated to users reflect a series of judgmental
trade-offs that strive for:
a. Sufficient detail to disclose matter that makes a difference to users, yet
b. Sufficient condensation to make the information understandable keeping in mind the cost of
preparing and using it.
12. Consistency Concept – this concept requires a business to apply accounting policies consistently, and
present information consistently, from one period to another. This means that like transactions must be
accounted for in like manner.
Accounting Policies used this year shall be the same accounting policies used last year. This, however,
does not mean that a business cannot change accounting policies. Accounting policies can be change if it
is required by standard or the change would result in more relevant and more reliable information. Any
change in accounting Policy must be disclosed.
● Accounting Standards
Accounting concepts and principles are either explicit or implicit. Explicit concepts and principles are those
that are specifically mentioned in the Conceptual Framework of Financial Reporting and in the Philippine
Financial Reporting Standards (PFRSs). Implicit concept and principles are those that are not specifically
mentioned in the foregoing but are customarily used because of their general and long-term acceptance
within the accountancy profession.
The terms “concepts”, “principles”, “standards” “assumptions” and “postulates” are used interchangeably
in practice. However, the term “standards” is used to specifically refer to the Philippine Financial
Reporting Standards (PFRSs).Traditionally, accounting standards were referred to as the generally
accepted accounting principles (GAAP).
● Philippine Financial Reporting Standards (PFRSs)
The Philippine Financial Reporting Standards (PFRSs) are Standards and Interpretations adopted by
Financial Reporting Standards Council (FRSC). They consist of the following:
a. Philippine Financial Reporting Standards (PFRSs);
b. Philippine Accounting Standards (PASs); and
c. Interpretations
● Qualitative Characteristics of useful financial information
Qualitative characteristics are the traits that determine whether an information is useful to users. Without
these characteristics, information may be deemed useless. In general, there are two classifications of
qualitative characteristics: Fundamental and Enhancing.
1. Fundamental Qualitative Characteristics - these characteristics make information useful to users.
They consist of the following:
a. Relevance – Information is relevant if it can affect the decision of users. Without these traits,
information is deemed irrelevant. Relevant information has the following aspects:
➢ Predictive value – information has a predictive value if it can help users to make predictions
about future outcomes.
➢ Confirmatory value (or feedback value) – This concept is related to the predictive value.
Information has a confirmatory value if it can help users confirm their past predictions.
➢ Materiality – is an “entity-specific” aspect of relevance, meaning it depends on the facts and
circumstances surrounding a specific entity. For example, an item may be considered by one
business as material but is considered by another as immaterial. Information is material if
omitting it or misstating it could influence the decisions of users.
b. Faithful representation – information is faithfully represented if it is factual, meaning it represents
the actual effect of events that have taken place.
➢ Free from error – means that information is not materially misstated. This does not mean,
however, that accounting information must be perfectly accurate in all respects because some
accounting information necessarily needs to be estimated.
➢ Completeness – all information necessary for users to have a complete understanding of the
financial statement is provided.
➢ Neutrality – Information is selected or presented without bias. Information is not manipulated
to increase its favorability or decrease its unfavorability.
2. Enhancing Qualitative Characteristics - these characteristics support the fundamental
characteristics. They enhance the usefulness of information. It is consist of the following:
a. Comparability – Information is comparable if it can help users identify similarities and differences
between different set of information. Unlike the other qualitative characteristics, comparability
does not relate to only one item because a comparison requires at least two items.
b. Verifiability – Information is verifiable if different users could reach a general agreement as to
what the information intends to represent.
c. Timeliness – Information is timely if it is available to users in time to be able to influence their
decisions.
d. Understandability – Information is under stable if it is presented in a clear and concise manner.
On the other hand, users are expected to have a reasonable knowledge of business activities and a
willingness to analyze the information diligently.
Identify each statement if it is true or not. If the statement is true, write “TRUE” in the space provided before
A the number. If not, write the word(s) in the sentence that makes the sentence incorrect.
S _____________1. Accounting concepts and principles, in the basic sense, are guidelines that accountants follow
S when recording and communicating accounting information.
_____________2. The application of separate entity concept is necessary so that the financial position and
E performance of a business can be measured objectively.
S _____________3. The opposite of going concern is coming concern.
S _____________4. According to the accrual basis of accounting, a business should record a sale only when the
sale price is collected.
M _____________5. Financial statements are prepared at least annually because of the matching concept.
E _____________6. A reporting or accounting period that starts on October 1 of the current year and ends on
N September 30 of the following year is called a calendar year period.
T _____________7. The government ordered the shutting down of Ellen’s factory because of noncompliance with
regulations. Ellen’s Factory is a going concern.
_____________8. The accountant of Banana Inc., a big corporation, rounded off amounts in the financial
statements into nearest millions. This is an acceptable method of reporting because of the concept of stable
monetary unit.
_____________9. Consistency means like transactions must be accounted for in like manner.
_____________10. The information’s cost of processing and communication should exceed the benefits
expected to be derived from it.
_____________11. Information is considered material if its omission or misstatement could influence the
decision of financial statement users.
_____________12. Preparing financial statements at least annually is an application of time period concept.
_____________13. Enhancing qualitative characteristics consist of the following: Verifiability, Completeness,
Understandability and Timeliness.
_____________14. The other term for cost-benefit is cost constraint
_____________15. PFRS stands for Philippine Financial Regulatory Standards.
Directions: Fill up each blank in every paragraph with the applied basic accounting concepts.
During 2021, you started a business of selling personalized mugs and T-shirts. You opened a separate
bank account and deposited your initial investment of P300,000 to this account.
(_______________________________________)
The business acquired a printing machine. The regular selling price is P100,000.: however, you were
able to acquire it at a discounted price of P95,000. You will record the machine at its acquisition cost of P95,000
rather than the regular selling price. (_______________________________________)
The business acquired initial inventory of mugs and t-shirts for a total cost of P40,000. You will record
the cost as an asset (i.e., inventory) rather than as an expense.
(_______________________________________)
All the inventory was sold on credit for P250,000. You will immediately record the credit sales as an
account receivable rather than waiting for them to be collected.
(_______________________________________)
A Also you will now record the P40,000 cost of inventory as expense.
(________________________________)
S
S You collected P245,000 out of the P250,000 total credit sales. You will deposit the collections to the
I bank account of the business rather than to your personal account. (________________________________)
G
The debtor for the remaining P5,000 is in financial difficulty. This has raised doubts on whether he
N can pay his accounts. You will immediately recognize the doubtful account as expense.
M (___________________________)
E
You withdrew cash of P70,000 from the business for your personal use. You will record this
N transaction as a withdrawal of your investment from the business rather than a business expense.
T (___________________________)
At the end of the year, you prepared the financial statements of your business to determine, among
others, whether the business had earned profit. (___________________________)
When preparing the financial statements, you discovered that the business has 10$ (dollars). You
will translate this to Philippine peso using the current exchange rate. The amount that you will report in the
financial statement is the translated amount. (___________________________)
Also you have found out that the regular selling price of a new printing machine increased form
P100,000 to P125,000. You will ignore this information (______________________________) and report the
printing machine at acquisition cost of P95,000 in the financial statements (_____________________________)
This is because you don’t intend to close your business in the foreseeable time
(_____________________________).
During the year, the business bought a trash bin for P85. You expect to use this over several years.
However because you deemed the cost as immaterial, you will record this as an expense rather than as asset
(_____________________________).
Moreover, when you prepared the financial statements, you decided to include the cost of the
trash bin in a “Miscellaneous Expense” account together with other immaterial expenses. You do not expect
users of the financial statements to benefit from reporting the immaterial costs separately.
(_____________________________).
You will make a brief description of the “Miscellaneous Expenses” account in the notes to financial
statement, sufficient for users to understand the nature of this account. (_____________________________)
You then adopted an accounting policy of expensing outright all acquisitions of equipment costing
P1,000 and below. You will apply this policy consistently in the future periods.
(_____________________________)
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R Millan and Ferrer, Fundamentals of Accountancy, Business & Management 1 (3rd edition), Philippines:
E Bandolin Enterprise
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