CHAPTER VI

ACCOUNTING CONCEPTS AND PRINCIPLES

ACCOUNTING CONCEPTS,
PRINCIPLES and ASSUMPTIONS
Accrual Basis of Accounting
Matching Principle
Going Concern Assumption
Accounting Entity Assumption
Time Period Assumption/
Periodicity Assumption
Prudence/ Conservatism
Use of Judgment and
Estimates
Substance over form
FUNDAMENTAL IDEA
“Revenue or income is recognized when
earned regardless of collection. Expenses are
recognized when incurred regardless of
payment.”
There should be a simultaneous recognition
of income and the corresponding expenses
that are directly or indirectly contributory to
the earnings of such income.
“The business is a continuing concern or has
an indefinite existence.”
“The business is treated as a person separate
and distinct from the owner or investor.”
The indefinite life of a company can be
divided into periods of equal length for the
preparation of financial reports.
“In case of doubt, record any loss (expense)
and do not record any gain (income).”
Accounting estimates are approximations
made by accountants or the management in
the preparation of financial statements.
Information presented in the financial
statements should truthfully and faithfully
represent the financial condition and financial
performance of the company.
OTHER NOTES
-It results to a more accurate and more reliable
financial statements.
-Cash basis accounting: income is recognized
when cash is received; expense is recognized
when cash is paid
-Closely related to accrual accounting
-Revenues always come with expenses
-The operations of a business will not stop in
the near future and it will not be forced to
liquidate its assets to off its liabilities
(Liquidating Concern)
-Personal transactions of an owner should not
affect the financial statements of his business.
-Normally, periods span for one year
-Calendar year: January 1 – December 31
-Fiscal year: a period of 12 successive calendar
months ending with the last day of any month
other than December 31
Example: April 1 – March 31

ACCOUNTING STANDARDS
1. Generally Accepted Accounting Principles (GAAP)
- Consists of accounting principles, standards, rules and guidelines that companies follow to achieve consistency and
comparability in their financial statements.
- Helps external users and the management
- Helps management in understanding trends persistent in the company. Management can compare past and current
performance to check the strong and weak points of company operations.
- Since the accountancy profession is continuously evolving, standards should adapt with such changes. Thus, GAAP is
being developed and improved continuously.
- It is created by individual in the accountancy profession and goes through a rigid process involving professional
judgment and research.

2. International Financial Reporting Standards (IFRS)

- Pronouncements issued by the International Accounting Standards Board (IASB) that intend to enhance the
comparability of the financial statements of all companies worldwide.
- Because of globalization, IFRS provided a way for users of accounting information to easily understand the results of
operations of companies all around the globe.
- Additional notes:
• International Accounting Standards Committee (IASC) – formerly performed the function of IASB
• International Accounting Standards (IAS) – pronouncements of IASC
• IASB adheres to IAS in addition to IFRS

3. Philippine Financial Reporting Standards (PFRS)

- Issued by Philippine Financial Reporting Standards Council (FRSC)
- It includes the following
a. PFRS which corresponds to the IFRS
b. Philippine Accounting Standards (PAS) which corresponds to IAS
c. Interpretations of accounting standards
- Issued by the Philippine Interpretations Committee (PIC) in accordance with the interpretations of the
International Financial Reporting Interpretations Committee (IFRIC) and the Standing Interpretation
Committee (SIC)