SHS

Fundamentals of Accountancy,
Business and Management 1
Module 2
Fundamentals of Accountancy, Business and Management 1
Module 2
First Edition, 2021

Copyright © 2021
La Union Schools Division
Region I

All rights reserved. No part of this module may be reproduced in any form
without written permission from the copyright owners.

Development Team of the Module

Author: Mira Joy L. Delos Santos, T-I

Editor: SDO La Union, Learning Resource Quality Assurance Team
Illustrator: Ernesto F. Ramos Jr., P II

Management Team:
Atty. Donato D. Balderas, Jr.
Schools Division Superintendent

Vivian Luz S. Pagatpatan, Ph.D

Assistant Schools Division Superintendent

German E. Flora, Ph.D, CID Chief

Virgilio C. Boado, Ph.D, EPS in Charge of LRMS
Lorna O. Gaspar, EPS in Charge of FABM
Michael Jason D. Morales, PDO II
Claire P. Toluyen, Librarian II
 Target

From your previous module, you learned that recording and financial
transactions has been around for as long as people have been keeping track of
commerce. From writing on wet clay tablets to now logging into an online
spreadsheet, accounting has a long history with its origins in the earliest
transactions between people. Also, you learned the Fundamental Business
Model, Types of Business and Forms of Business Organizations.

In this module, you will be able to learn the Basic Accounting Concepts and
Principles which are sets of broad conventions that have been devised to provide
significant professional judgements by accountants.

After going through this module, you are expected to:

1. Explain the varied accounting concept and principles; (ABM_FABM11- lllb-c-

15)
2. Solve exercises on accounting principles as applied in various cases.
(ABM_FABM11- lllb-c-16)

Subtasks:

1. Define the accounting concepts underlie the accounting process.

2. List down what are the accountants need to consider in recording business
transaction.
3. Classify the three criteria of the general acceptance accounting principles.
4. Discuss generally accepted accounting principles which are detailed
accounting rules and guidelines.
5. Express the importance of applying these principles which results for better
understanding and decision- making of users.

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 Jumpstart
Directions: Read carefully the questions and choose the letter of the correct
answer and write it on a separate sheet of paper.

1. “The owner of a business takes goods from inventory for his personal use”.
The transaction here is an example of what accounting concept?
A. Accrual Concept B. Business Entity Concept
C. Going Concern Concept D. Substance over form Concept

2. Below are statements about Accounting Concepts. Which of the following

described the feature of consistency of presentation?
A. Firms in the same industry must account for similar items in the same way.
B. Firms may never change the way in which they prepare their accounts.
C. In preparing the accounts of a firm, one should normally account for similar
items in the same way from one accounting period to the next.
D. All of the above

3. A business transaction with an omission or misstating information which

can influence and affect the decision of the users of financial statements.
Which of the following accounting principle described the given situation?

A. Adequate Disclosure
B. Expense Recognition Principle
C. Historical Cost
D. Materiality Principles

4. Which of the following statements best explain the entity concept?

A. Accounts must be prepared for every firm.
B. Because a firm is separate and distinct from its owners, those owners
cannot have access to its assets unless the firm ceases to trade.
C. The financial affairs of a firm and its owner are always kept separate for
the purpose of preparing accounts.
D. All of the above.

5. Which of the following accounting concepts states that an accounting

transaction should be supported by sufficient evidence to allow two or more
qualified individuals to arrive at essentially similar conclusion?
A. Matching Concept
B. Objectivity Concept
C. Periodicity Concept
D. Stable Monetary Unit

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 Discover
As we start, let us be reminded that accounting is the language of
business. It communicates the financial condition and performance of a
business to interested users for decision-making purposes.

These are established principles by humans which has been developed

by the accounting professionals to guide preparers of financial statement in
recording and reporting financial information regarding a business enterprise.

Accounting practices follow certain guidelines that encompasses the

conventions, rules and procedures necessary to define accepted accounting
practice at a particular time, which stands for generally accepted accounting
principles (GAAP). It is exceedingly useful because it attempts to standardize
and regulate accounting definitions, assumptions, and methods. Because of
GAAP, we are able to assume that there is consistency from year to year in the
methods used to prepare a company’s financial statements.

The current set of principles that accountants use rest upon some
underlying assumptions. The basic assumptions and principles are considered
GAAP and apply to most financial statements. In addition to these concepts,
there are other, more technical standards accountants must follow when
preparing financial statements. The accounting standards used in the
Philippines are the Philippine Accounting Standards (PAS) and Philippine
Financial Reporting Standards (PFRS). They are adopted by the Financial
Reporting Standards Committee (FRSC).

Accounting standards are set by a nation’s financial authorities to

streamline the accounting process. This indeed helped many countries
understand the economic growth of any company in a structured manner.

Fundamental Concepts of Accounting

Accounting concepts, principles and assumptions serve as the

foundation of accounting of accounting in order to avoid misunderstanding and
enhance and enhance the understanding and enhance the understanding and
usefulness of the financial statements (Valix et. Al. 2013)

Accounting Concepts are important ideas which accountants

assume in recording business transactions. Examples of accounting concepts
are separate entity, going concern, time period, accrual, and monetary unit.
These serve as the bedrock of accounting and they are also known as
postulates or accounting assumptions, according to Valencia, E. and Roxas, GF.
(2014).

Business growth is measured by the financial aspect of an

organization that has achieved over a period. The revenue generated, the cost
reduced, the expenses incurred are all covered under one umbrella called
accounting.

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 The clarity in the maintenance of accounts gives clarity to the growth
of the organization. Maintaining accounting standards becomes inevitable under
the law too.

Accounting concepts are the guidelines or rules to be followed while

recording the data for accounting purposes. They may also be called postulates
which are to be followed during accounting processes.

Accounting concepts are similar throughout the nation. It helps;

1. The accounting information to be complete in all aspects

2. The accounting information to be available for the stakeholders on a
timely basis.
3. The accounting information to be understandable by anyone.
4. Also, in presenting the accounting information relevant to the analyzer.

There are many more aspects of following the accounting concepts. However, the
ab four stated accounting are the primary of all.

Accounting concepts are varied, and each element of it plays a vital role.

1. Entity Concept: Business and Owners are treated as separate entities

through this concept.

The most basic concept in accounting. An accounting entity is an organization

or a section of an organization that stands apart from other organizations and
individuals as a separate economic unit. The transactions of different entities
should not be accounted for together. Each entity should be evaluated
separately.

• The business is treated as a unit or entity separate from its owners.

• Amount invested by the proprietor is shown as liability.
• Amount paid for personal expenses of proprietor are shown as drawings
from capital or the proprietor.

2. Dual Aspect Concept: Every business transaction has two effects.

Investing One Million in business is treated in two ways, Capital Account and
Asset Account, Business’ asset is 1 Million while the company also owes the
person who invested 1 million is recorded separately.

Under this concept;

Every debit entry there is a credit entry. Briefly expressed under:
Assets + Liabilities = Capital

3. Periodicity Concept: An entity’s life can be meaningfully subdivided into

equal time periods for reporting purposes. It will be aimless to wait for the
actual last day of operations to perfectly measure the entity’s profit. This
concept allows the users to obtain timely information to serve as a basis on

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making decisions about future activities. For the purpose of reporting to
outsiders, one year is the usual accounting period.

It is necessary too know at frequent intervals “how things are going”.

Twelve month period is usually adopted for this purpose. This time period is
called Accounting Period.

4. Going Concern
This is an assumption made that the business shall run forever and the forced
sale value of assets is not valued. It will continue for indefinite period.

Financial statements are normally prepared on the assumption that the

reporting entity is a going concern and will continue in operation for the
foreseeable future. Hence, it is assumed that the entity has neither the
intention nor the need to enter liquidation or to cease trading. This assumption
underlies the depreciation of assets over their useful lives.

5. Money measurement concept

Every aspect of a business is recorded as money using this concept. Only those
transactions are recorded which can be expressed in monetary terms.

For Example:
An efficient dedicated manager is definitely an asset to the business, but since
the monetary measurement is not possible so it is not shown in the books of
account.

The Philippine peso is a reasonable unit of measure and that its purchasing
power is relatively stable. It allows accountants to add and subtract peso
amounts as though each peso has the same purchasing power as any other
peso at any time. This is the basis for ignoring the effects of inflation in the
accounting records.

6. Cost Concept: The cost is considered to be the same as what is paid in the
beginning and never its realizable value at a later point in time.

• Fixed Assets are recorded at cost price and are systematically reduced by
the process called depreciation.
• These assets will disappear from balance sheet at the end of their
economic life when they have been fully depreciated and sold as scrap.

7. Accrual Accounting

The fundamental idea of accrual accounting can be stated as follows:

“The effects of business transactions should be recognized in the period in
which they occurred. Income should be recognized in the period when it is
carried regardless of when payment is received. Expenses should be
recognized in the period when it is incurred regardless of when expenses are
earned.

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EXAMPLE:

Suppose Juana, a proprietress established a merchandising business that sells

readyto-eat foods to different fast foods and carinderia in the country. The
income from Juana’s business primarily comes from selling foods to customers,
it can be for cash or credit. If the business was able to sell goods for cash, this
will be recorded in the accounting records or book of accounts of her business.
On the other hand, if the goods were sold on credit, the transaction should still
be recorded in the accounting records as accounts receivable.

This is the essence of accrual accounting. An accountant does not have to wait
for a cash to be received or for cash to paid before he or she records a business
transaction. Because of accrual accounting, use of accounts such as accounts
receivable, accounts payable, prepaid expenses, deferred income, and accrued
income are possible.

8. Realisation Concept
• Revenue is considered earned of the day
• Transfer goods to customer in exchange of valuable consideration.
• This is of great importance in stopping business from inflating their profit.
• The accountant usually use dates

9. Matching Concept

• Profit is must important factor for the proprietor to keep the business
activities.
• Revenue and their related expense in the same accounting period.
• Purpose of matching concept is to avoid mis

Accounting standards are set by a nation’s financial authorities to streamline

the accounting process. This indeed helped many countries understand the
economic growth of any company in a structured manner.

Financial reporting is made easily understandable by these rules and regulations.

It is a surprise to note that, accounting standards have also assumptions
involved in it.

Financial reporting and accounting standards have their guidelines and

procedures. Unbiased, clear accounting is the order of the day, and it is
achieved following the strict guidelines.

On these lines, the two most prominent terms that revolve around the finance
department are Accounting concepts and Accounting principles.

They both are interrelated, however, there are certain critical differences in them
which help the standards of the data remain intact.

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Accounting Concepts VS Accounting Principles

The main difference between Accounting Concepts and Accounting

Principles is; Accounting concepts are the important conventions with which the
accounting data is recorded based on certain assumptions whereas Accounting
principles are the rules to be followed while reporting financial data. The former
is the data recorder while the latter is the data presenter.

1. The main purpose of accounting concepts is to record data by the

accountant while the accounting principles are to report the
financial data based on GAAP norms.
2. Accounting Principles are considered internal for the process it
follows to record the data, while accounting principles are also
internal but the report has to be presented externally as well.
3. Accounting concepts are to be followed first to record data while
accounting principles are followed later to report the finance data.
4. Accounting concepts help in giving complete clarity on the finance
data while accounting principles are required to be followed to
report the finance data for legal compliances.

Comparison Table Between Accounting Concepts and Accounting Principles (in

Tabular Form)

Parameter of Accounting Concept Accounting Principle

Comparison

Meaning/Definition Accounting concepts are Accounting Principles are

the assumptions upon
which the accounting data
is recorded.
Purpose The purpose is to record
data based on the
concepts.
Usage Accounting concepts are
purely internal as the
companies record data as
per the concepts.
Hierarchy of Accounting concepts
process precede accounting
principles.
Major Outcome Accounting concepts help
in giving clarity to the
data recorded for making
the financial statements.
the rules to be followed
while reporting the final
data.
The purpose is to report
financial data based on
regulatory norms.
Accounting principles are
internal aspects that need
to be presented to the
external bodies for
verification.
Accounting principles
succeed the accounting
concepts.
Accounting principles must
follow GAAP norms to even
avail for a bank loan and it
is legal

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Basic Principles of Accounting

• Objectivity Principle

The objectivity principle in accounting states that financial statements

should be objective i.e. the accounting information should be unbiased and
free from any external or internal influence. This helps financial statements
to be trustworthy and be useful for evaluation.

Accounting records and statements are based on the most reliable data
available so that they will be as accurate and as useful as possible. Reliable
data are verifiable when they can be confirmed by independent observers.
Ideally, this principle requires business transactions to have some form of
impartial supporting evidence or documentation. Accounting records are
based on information that flows from activities documented by objective
evidence. Without this principle, accounting records would be based on
whims and opinions and is therefore subject to disputes.

Falsifying accounting statements, such as entering fictitious orders and

then increasing accounts receivable, is a breach of the Objectivity Principle.
The accounts that you are entering in your books must be objective and
verifiable.

• Cost Principle/Historical Cost Principle

It requires that assets be recorded at the original purchase price, rather than
their current market value. It refers to the amount spent (cash or the cash
equivalent) when an item was originally obtained, whether that purchased
happened last year or ten years ago; amounts are not adjusted upward for
inflation.

When an asset you purchased a year ago may suddenly gain value for a variety
of reasons, the cost principle maintains that the asset value remains the same
as its original, or purchase, cost regardless of later changes in market value. It
has little impact

• Revenue Recognition Principle

Revenue is at the heart of all business performance. As a result, analyst

prefer that the revenue recognition policies for one company are also standard
for the entire industry.

Having this standard guideline helps to ensure that an apples-to-apples

comparison can be made between made between companies when reviewing
line items on the income statement. It should remain constant over time as well,
so historical financials can be analyzed and reviewed for seasonal trends or
inconsistencies.

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 Revenue is to be recognized and determines how to account for it in the
accounting period, when goods are delivered or services are rendered or
performed.

The revenue-generating activity must be fully or essentially complete for

it to be included in revenue during the respective accounting period. Also,
there must be a reasonable level of certainty that earned revenue payment will
be received.

Five Steps Needed To Satisfy The Updated Revenue Recognition

Principle:

1. Identify the contract with the customer.

2. Identify the contractual performance obligations.
3. Determine the amount of consideration/price for the transaction.
4. Allocate the determined amount of consideration/price to the contractual
obligations.
5. Recognize revenue when the performing party satisfies the performance
obligation.
• Expense Recognition Principle
Expenses should be recognized in the accounting period in which goods
and services are used up to produce revenue and not when the entity pays
for those goods and services.

• Adequate Disclosure or Full Disclosure Principle

Requires that all relevant information that would affect the user’s
understanding and assessment of the accounting entity disclosed in loothe
financial statements.

• Materiality Principle
Financial reporting is only concerned with the information that is
significant enough to affect evaluations and decisions. Materiality depends
on the size and nature of the item judged in the particular circumstances
of its omission. In deciding whether an item or an aggregate of the items is
material, the nature and the size of the item are evaluated together.
Depending the circumstances, either the nature or the size of the item
could be the determining factor.

• Consistency Principle
The consistency principle is the accounting principle that requires an
entity to apply the same accounting methods, policies, and standards for
preparing and reporting its financial statements. It should be followed
consistently in future accounting periods. Firms should use the same
accounting method from period to period to achieve comparability over
time within a single enterprise. However, changes are permitted if
justifiable and disclosed in the financial statements.

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 This principle is most frequently ignored when the managers of a business
are trying to report more revenue or profits than would be allowed
through a strict interpretation of the accounting standards.

The main objective of the consistency principle is to avoid any intention

from management using an inconsistency approach to manipulate the
financial information to ensure their financial statements look healthy.

Per revised Philippine Accounting Standards (PAS) No.1, Presentation of

Financial Statements, the presentation and classification of items in the
financial statements should be retained from one period to the next
unless:

It is apparent, following a significant change in the nature of the

entity’s operations or a review of its financial statement presentation,
that another presentation or classification would be more appropriate
having regard to the criteria for the selection and application of
accounting policies in Philippine
Standards (PAS) No.8, Accounting Policies, Changes in Accounting Estimates
and Errors; or a Philippine Financial Reporting Standards (PFRS) requires
a change in presentation.

Deepen

Check your Understanding

Activity 1 Concept Identification Exercise

Directions: Read the given transaction below. Analyze, which of the amounts
cited above do you think will be included in the business’ financial reports?
Why and what are reasons for including them?

Mr. Susano, a business owner of a Travel Agency invested 100 Million for
additional twenty Electric Jeepneys worth P2,000,000.00 which the owner only
paid half and avail the Auto Loan from Suzuki Motors worth P 1,000.000.00.
He acquired a 1 hectare lot worth 15 Million for his automobiles, construct a
small office spaces for his staff and installed solar panels and paid 10 Million
for the construction company including the labor and solar panel. Secured all
the Permit and Licenses worth P69,000.00.

During the first month of operation, he then paid the Salaries and Wages of his
three office staffs and twenty-five drivers worth P80,000. Paid Insurance for his
employees worth 29,000. The business consumed water worth P28,000.

For one month, the business generated P1,000,000.00 revenue.

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 Gauge

Multiple Choice. Read and understand the following problems, choose the letter
of the best answer. Write the chosen letter on a separate paper.
1. A company requires that expenses must be matched with revenues.
A. Accrual Concern Concept B. Going Concern Concept
C. Materiality Principle D. Matching Principle

2. Aling gempot sold a piece of cupcake to her neighbor. Apparently, her

customer is out cash so Aling gempot had to consider it as credit but still
recorded it in her books. What concept of accounting was observed?
A. Accrual Concern Concept B. Going Concern Concept
C. Materiality Principle D. Matching Principle

3. Gale started a business assuming that it will not enter into a liquidation and
the business will run forever.
A. Accrual Concern Concept B. Going Concern Concept
C. Materiality Principle D. Matching Principle
4. A professional judgement is needed to decide if an amount is insignificant or
immaterial.
A. Accrual Concern Concept B. Going Concern Concept
C. Materiality Principle D. Matching Principle
5. An entrepreneur considers the original amount of the item bought
regardless of the time of purchase to be shown in the financial statements.
A. Economic Entity Concept B. Historical Cost Principle
C. Monetary Unit Concept D. Time Period Concept

6. When creating a business, the entity of the owner must be separated from
the business. What concept is being identified in the statement given?
A. Economic Entity Concept B. Historical Cost Principle
C. Monetary Unit Concept D. Time Period Concept

7. A fundamental concept that uses a Philippine peso for economic activities

which allows the accountants to add and subtract peso amounts as though
each peso has the same purchasing power as any other peso at any time.
A. Economic Entity Concept B. Historical Cost Principle
C. Monetary Unit Concept D. Time Period Concept
8. The life of a business may be reported either monthly or yearly depending on
the period of the business.
A. Economic Entity Concept B. Historical Cost Principle
C. Monetary Unit Concept D. Time Period Concept
9. Sufficient information must be disclosed in the financial statements.
A. Full Disclosure B. Monetary Unit Concept C. Objectivity D. Time

10. In order to Bookkeeping must be free of bias and prejudice

A. Full Disclosure B. Monetary Unit Concept C. Objectivity D. Time

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11. One criteria for general acceptance of an accounting principle that the
results in information is meaningful and useful to those who need to know
certain organization.
A. Feasibility B. Relevance C. Objectivity D. All of the above

12. These criteria often conflict with on another, a principle that can be
implemented without undue complexity or cost.
A. Feasibility B. Relevance C. Objectivity D. All of the above

13. It is a widely accepted set of rules, concepts, and principles which governs
the application of accounting principles developed by the accounting
professionals to guide the recording and reporting financial information.
A. Philippine Accounting Standard (PAS)
B. Philippine Financial Reporting Standard (PFRS)
C. Generally Accepted Accounting Principles (GAAP)
D. Financial Reporting Standards Committee (FRSC)

14. A principle states that the recording of acquired properties and services
should be recorded at their actual cost and not at what management
thinks they are worth as at reporting date.
A. Historical Cost B. Relevance C. Cost Principle D. A and C

15. Which principle/guideline requires the company's financial statements to

have footnotes containing information that is important to users of the
financial statements?
A. Materiality B. Full Disclosure C. Cost Principle D. Objectivity Principle

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Answer Key
JUMPSTART
1. B
2. C
3. D
4. C
5. B

DEEPEN
From the given transaction, the amounts to be included in the business’
financial reports are as follows:

Assets
Current Assets
Cash P 100,000,000.00
Automobile (jeepneys) 1,000,000.00
Building 10,000,000.00
Properties (Lot-1 hec) 15,000,000.00
Liabilities

Current Liabilities
Accounts Payable (Suzuki Motors) 1,000,000.00
Owner’s Equity
Mr, Susano, Capital P 126,000,000.00

Revenue

Vehicle Income 1,000,000.00

Expenses
Permit and Licenses 69,000.00
Salaries and Wages Expense 80,000.00
Insurance Expenses 28,000.00

GAUGE

1. D (Matching Principle) 6. A (Economic Entity Concept)

2. A (Accrued Concept) 7. C (Monetary Unit Concept)
3. B (Going Concern) 8. D (Time Period Concept)
4. C (Materiality Principle) 9. A (Full Disclosure)
5. B (Historical Cost Principle) 10. C (Objectivity)

11. B (Relevance)
12. A (Feasibility)
13. C (GAAP)
14. A & C (Historical Cost/Cost Principle)
15. B (full Disclosure)

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References
Books
Ballada, W. & Ballada, S. 2019 Basic Financial Accounting and Reporting Made
Easy Enhanced Basic Accounting 22nd Edition DomDane Publishers, Sampaloc,
Manila

Tugas, F.C & Salendrez H.E & Rabo, J.S 2016 Fundamentals of Accountancy,
Business and Management 1 Vibal Group, Inc. Araneta Ave., Quezon City

(K-12 BASIC EDUCATION CURRICULUM SENIOR HIGH SCHOOLS- ACCOUNTANCY,

BUSINESS AND MANAGEMENT 1 (ABM) SPECIALIZED SUBJECT (May 2016)

Website:

• 10 Basic Accounting Principles & Key Assumptions - [ 2019 GAAP

Guide ](myaccountingcourse.com)
• Accounting Concepts & Principles | Accounting-Simplified.com
(accountingsimplified.com)
• https://accounting-simplified.com/financial/accounting-concepts-
andprinciples/
• Objectivity Principle in Accounting - Definition & Examples
(wallstreetmojo.com)
• Expense recognition principle — Accounting Tools
• Difference Between Accounting Concepts and Accounting Principles (With
Table) – Ask Any Difference matching principle - Bing

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