Prepared by: Lord Gen A.

Rilloraza, CPA, MBA

BASIC ACCOUNTING CONCEPTS AND PRINCIPLES

ACCOUNTING CONCEPTS
 Important assumptions or ideas accountants observe in recording business transactions in the books of accounts
 May refer to an assumption, or an abstract idea that governs accounting practice

Going Concern Assumption

 The only assumption as mentioned in the Conceptual Framework for Financial Reporting
 Assumes that the business entity will continue operating indefinitely – for a period of time sufficient to carry out
its objectives, plans, contracts, and commitments, unless the liquidation of the entity is imminent
 In the preparation of financial statements, accountants assume that the business has no intention to liquidate or
curtail the material scale of its operations
 Values of the accounting elements are based on objectivity and historical cost
o Objectivity – accounting measurement must be both definite and verifiable; all documents used in
record-keeping must be evidenced by a source document
o Historical cost – the value of an element, once recorded, remains unchanged

Accounting Entity Concept

 The business enterprise is a separate and distinct entity from the person or people who own and run it.
 The transactions of the business are recorded in the books of the business; the personal transactions of the
owner/s are NOT recorded in the books of the business.
 The main purpose is to properly account the real transactions of the business in order to report the true and fair
picture of the business financial affairs
 Other terms: separate entity concept; entity concept; business entity concept

Monetary Unit Assumption

 Only record business transactions that can be expressed in terms of a currency
 Includes the concepts of quantifiability and peso stability
o Quantifiability – accountants use a common unit of measurement/currency (e.g., Philippine Peso)
o Peso Stability – accountants assume that the purchasing power of the monetary unit being used will not
change regardless of fluctuation in money value

Time Period
 The economic life of the business is divided into relatively short periods of time, normally of equal lengths, such
as quarterly, semi-annually, or annually
 The preparation of financial statements is required annually
 A time period is usually called an accounting period, classified as:
o Calendar year – a twelve-month period starting January 1 and ending December 31
o Fiscal year – a twelve-month period that starts from any other month other than January; consequently,
a fiscal year does not end in December
o Interim period – a business period within an accounting period (e.g., three-month period ending March
31)

Accrual Basis of Accounting

 The basis of recognizing income and expenses
 Income is recognized when earned, regardless of collection
 Expense is recognized when incurred, regardless of payment

ACCOUNTING PRINCIPLES
 These define broadly the actions that will best accomplish the objectives of accounting
 The authoritative body of accountancy formulated standard principles, assumptions, and procedures called
“Generally Accepted Accounting Principles (GAAP)” that guide accountants in measuring, recording, and
reporting financial activities

GAAP
 The objective is to fairly present the financial statements
 In the Philippines, GAAP is comprised of the following:
o Philippine Financial Reporting Standards (PFRS);
o Philippine Accounting Standards (PAS);
o Interpretations by the Philippine Interpretations Committee (PIC)