SENIOR HIGH SCHOOL

Fundamentals of Accountancy,
Business and Management 1
Week 2 – Module 2
Accounting Concepts and Principles

LA CASTELLANA NATIONAL HIGH SCHOOL

- Senior High
LOUELL E. BODIOS
 Guide Card

Welcome back! On our previous lesson we discussed the different

users of accounting information. Now, you know who are our
internal and external users of accounting information. Unto which
both needs accounting information in decision-making.
This learning module is all about the accounting concepts and
principles. This can also be used by anyone as a self-study exercise
to learn more about the various generally accepted accounting
principles.
The module has only one lesson, namely:

▪ Explaining the varied accounting concepts and

principles.

After going through this module, you are expected to:

• Explain the varied accounting concepts and principles.

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

Motivation
Read and analyze the situation below. Use a separate answer sheet.

LM Photocopying Center is owned by Lou Mercado. Mr. Mercado

invested PhP10,000 and borrowed PhP50,000 to start his business.
He purchased a photocopying machine for PhP30,000 and supplies
for PhP10,000. He paid two months’ rent for PhP10,000, salary for
PhP4,000 and business permit for PhP2,000. The business
consumed electricity for PhP2,500 payable for the following month.
During the first month of operations, the photocopying service
generated PhP10,000 revenue.
Questions:
1. Which of the amounts cited above do you think will be included in
the business; financial reports?
2. What is your reason for including said amounts?
 Lesson Explaining the Varied
1 Accounting Concepts and
Principles
Accounting is called the language of the business. It communicates the financial condition and
performance of a business to interested users for decision-making purposes.

A widely-accepted set of rules, concepts and principles referred to as the Generally Accepted
Accounting Principles (GAAP) governs the application of accounting procedures. The GAAP has
been developed by the accounting professionals to guide preparers of financial statements in
recording and reporting financial information regarding a business enterprise, hence aiding in the
effective execution of the accounting procedure and in communicating the financial condition of
the business.

The accounting standard standards used in the Philippines are the Philippine Accounting
Standard (PAS) and Philippine Financial Reporting Standards (PFRS). They are adopted by the
Financial Reporting Standards Committee (FRSC).

GAAP 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.

UNDERLYING ACCOUNTING ASSUMPTIONS

The following are the basic assumptions underlie the financial accounting structure:

1. Economic Entity Assumption.

It assumes that all of the business transactions are separate from the business’ owner’s personal
transactions. A business is considered a distinct entity from the owner and therefore the two
should be treated separately. Any personal transaction of the owner should not be recorded in
the company’s accounting book, and vice versa unless the owner’s personal transaction involves
investing or withdrawing resources from the business. Also, accounting records of the business
must not include the personal assets or liabilities of the owner. Also known as business entity
principle

For example, Mr. Michael Cruz, the owner of Waswas Serbisyo Repair Shop, bought supplies for
the school project of his son using his own money. This is a personal transaction of the owner
and should not be recorded in the accounting books of the business.

2. Accrual Basis Assumption.

It requires all business transactions and other events are recognized in the accounting records
when they occur, rather than when the cash or equivalent is received or paid.

It is assumed that revenue is recorded in the period it is earned, regardless of the time the cash
is received or collected. The same is true for expenses. Expense is recognized and recorded at
the time it is incurred, regardless of the time that the cash is paid. This assumption adheres to
the revenue recognition, matching and cost principles.

3. Going-Concern Assumption.
In the absence of contrary information, a business entity is assumed to remain in existence for an
indeterminate period of time. The current relevance of the historical cast principle is dependent
on the going concern assumption.
This assumes that the company will continue to exist long enough to carry out its objectives and
commitments and will not liquidate in the foreseeable future. Because of this assumption assets
are recorded at their original acquisition costs and not based on their market values. Assets are
assumed to be used for an indefinite period of time and not intended to be sold immediately. It
allows the company to defer some of its prepaid expenses until future accounting periods.

4. Monetary Unit Assumption

Economic activities of a Philippine entity are measured and reported in the Philippine peso. The
peso is assumed to remain relatively stable over years in terms of purchasing power. It disregards
any inflation in the economy in which the entity operates.

It assumes that only transactions that an be expressed in terms of money are recorded. Hence,
any non-financial or non-monetary information that cannot be measured in terms of money are
not recorded in the accounting books. A memorandum entry will be prepared instead.

5. Time-Period Assumption.
The life of an economic entity can be divided into two time periods for the purpose of providing
periodic reports on the economic activities of the entity. It means that financial statements are
prepared at equal intervals.

This assumption requires a business to complete the whole accounting process of a business
over a specific time period. It may be monthly, quarterly, or annually. A calendar year is a 12-
month period that ends on December 31. It is the accounting period a company follows for tax
purposes. It may follow a calendar or fiscal year.

The time interval is shown on the heading of every financial statement to indicate whether it covers
a day, week, moth, quarter, year or any specific period and the date marks the last day of such
period.

BASIC ACCOUNTING PRINCIPLES

The basic accounting principles are detailed accounting rules and guidelines that entities must
follow when measuring, recording and reporting financial data. Applying these principles
enhances reliability, relevance and consistency of financial information which results to better
understanding and decision-making of users.

1. Cost Principle. Cost refers to the amount spent (cash or the cash equivalent) when an item
was originally obtained, whether that purchase happened last year or ten years ago; amounts are
not adjusted upward for inflation. The amounts shown in financial statements are referred to as
historical cost amounts. Acquisition cost is the most objective and verifiable basis upon which to
account for assets and liabilities of a business enterprise. In short, cost principle suggests the
“accounts should be recor ded initially at cost.”
Example:
Waswas Serbisyo Reapair Shop bought one (1) unit computer for PhP42,000, but it could
have been purchased at PhP40,000 from another vendor. The shop should record the
transaction at PhP42,000 because that is the amount given in the exchange for computer
unit.

2. Full Disclosure Principle. In the preparation of the financial statements, the accountant
should include sufficient information to permit the stakeholders to make an informed judgement
about the financial condition of the enterprise.
3. Matching Principle. This principle requires that expenses be matched with revenues. It means
that in a given accounting period, the revenue recorded should have its corresponding expense
recorded, in order to show the true profit of the business. The use of accrual accounting
procedures assists the accountant in allocating revenues and expenses properly among the
accounting periods that compose the life of a business enterprise.
Example:
Waswas Serbisyo Repair Shop earned revenues on December 2014, along with it is a
consumption of electricity amounting and paid on January 7, 2015 should be reported as
utility expense in 2014 income statement. Since the expenses incurred on the same
period where the revenue was earned.
In short, matching principle means “cost should be matched with the revenue generated.”

4. Accrual Accounting Principle.

a. Revenue Recognition Principle. Revenues are recognized as soon as goods have been sold
(delivered to the consumers) or a service has been rendered, regardless of when the earning
process is virtually complete and exchange transaction has occurred.
Example:
On June25, Waswas Serbisyo Repair Shop rendered service to a client for PhP15,000.
The service fee was collected on July 4. The entity should record the revenue of
PhP15,000 in June, the time service was rendered to the customer, and not the time cash
was received.

b. Expense Recognition Principle. Expenses (cost) should be recorded from the time it was
incurred either paid or not. Example when Waswas Serbisyo Repair Shop received its electric
bill on December 29, 2014 and will be paid on January 5, 2015, the utilities expenses will be
recorded on the date it was incurred, and that is on 2014 books of the entity.

5. Materiality Principle. Business transactions that may affect the decision of a user of financial
information are considered important or material and thus must be reported properly.
Example:
A purchased paper puncher worth PhP300 is obviously an immaterial item. The matching
principle directs the accountant to expense the cost over the five-year period. The
materiality guideline allows the company to violate the matching principle and to expense
the entire cost of PhP300 in the year it is purchased. The justification is that no one would
consider misleading if PhP300 is expensed in the first year instead of PhP60 being
expensed in each of the five years that it is used.

Take note that materiality principle suggests that, “in case of assets that are immaterial to
make a difference in the financial statements, the company should instead record it as an
expense.”

6. Conservatism or Prudence Principle. This principle states that given two options in the
valuation of business transactions, the amount recorded should be the lower rather than the
higher value. If a situation arises where there are tow acceptable alternatives for reporting an
item, conservatism directs the accountant to choose the alternative that will result to less effect
on the net income and/or less asset amount. In short, in case of doubt, assets and income
should not be overstated while liabilities and expenses should not be understated.

7. Objectivity Principle. This principle requires business transactions to have some form of
impartial supporting evidence or documentation. Also, it entails that bookkeeping ad financial
recording be performed with independence, the is free of bias and prejudice.
Example:
The purchase of merchandise from a vendor requires an invoice to support the transaction. This
invoice should be approved by the Bureau of Internal Revenue (BIR) and should state the name
of the supplier, the description, quantity and the value of the goods purchased. Utility expense
must be supported by statements of account from utility companies like NOCECO and La
Castellana Water District.
In short, objectivity principle suggests that “financial statements should be presented with
supporting evidence.”

Activity 1

Concept Check.
Multiple Choice. Choose the letter of the best answer. Use a separate answer sheet.

1. GAAP refers to ________.

a. Guidelines for Accountants, Accounting Procedures
b. General Association of Accounting Practitioners
c. General Accounting and Auditing Principles
d. Generally Accepted Accounting Principles

2. The requirement that only transaction data capable of being expressed in terms of
money be included in the accounting records relates to the _______.
a. economic entity assumption
b. monetary unit assumption
c. cost principle
d. both b and c

3. Financial statements combining the operations of Mike Cruz and K. Cruz Plumbing
Services would violate the ________.
a. Economic entity assumption
b. Monetary unit assumption
c. Ownership assumption
d. Cost principle

4. The assumed continuation of a business entity in the absence of evidence to the

contrary is an example of the accounting principle concept of _______.
a. Going-concern
b. Comparability
c. Consistency
d. Accrual

5. Recording the purchase price of a pencil sharpener (with an estimated useful life of ten
years) as an expense of the current period id justified by the _________.
a. Going concern assumption
b. Comparability principle
c. Materiality principle
d. Matching principle

6. Conservatism is best described as selecting an accounting alternative that ________.

a. Is lest likely to mislead users of financial information.
b. Has the least favourable impact on owner’s equity
c. Overstates, as opposed to understates liabilities
d. Understates assets and/or net income
 7. The financial statements prepared for the business are separate and distinct from the
owners. This is in accordance with the ________.
a. Economic entity principle
b. Going concern principle
c. Full disclosure principle
d. Matching principle

8. The accrual basis of accounting is based primarily on ________.

a. Conservatism and revenue realization
b. Revenue realization and matching
c. Conservatism and matching
d. Consistency and matching

9. Accountants prepare financial statements at arbitrary points in time during a company’s

lifetime in accordance with the accounting concept of ________.
a. Time- periods
b. Going-concern
c. Materiality
d. Matching

10. The accounting guideline that requires financial statement information to be supported by
independent, unbiased evidence other than someone’s belief or opinion is the ________.
a. Conservatism principle
b. Business entity principle
c. Objectivity principle
d. Full disclosure principle

Activity 2

Let’s apply the basic accounting concepts and principles. Kindly identify the concept or
principle that corresponds to each statement. Use a separate answer sheet.

1. A corporation pays its annual property tax bill of approximately PHP12,000 in one payment
each December 28, 2015 and was paid in January 3, 2016. The accountant included
property tax expense in 2015 books.

2. The business acquired a printing machine. The regular selling price is Php 100,000.00;
however, it was acquired at a discounted price of Php 90,000.00. You will record the
machine at its acquisition cost of Php 90,000.00.

3. Louie bought computer unit for his kids at PhP35,000 using his personal savings account.
He also bought another unit for his business LouTong Bahay Cuisine. His accountant
only recorded the amount of computer intended for business use.

4. Myca Torres the owner of Myca Tea House bought supplies worth PhP200 with
estimated useful life of 5 years. She recorded it as expenses of the business in the
current period.

5. On May 21, 2015, Luis Trading sold 200 pieces of plastic pots to a customer. The
customer will pay the full amount on June 21, 2015. The accountant recorded the sale of
pots on May and not on the day the cash was collected.
 Activity 3

Indicate which principles are VIOLATED. Discuss why the said principle was violated. Use
a separate answer sheet.
1. The owner-manager of Nature’s Deck Café bought furniture for personal use. The invoice
was given to the accountant who recorded it as an asset of the business.

2. The statement of financial position of a company included an equipment purchased from

Japan for 350,000 yen. It was reported at that amount in the statement of the financial
position while all the other assets were reported in Philippine peso.

3. Secret Garden a flower shop in La Carlota City is not preparing its financial statement.
The owner explained that she will prepare the statements when he closes the business,
which she predicts to take place after 10 years.

4. Engr. Dexter Demafelis, the owner of Dex Construction Supplies purchased a bond paper
amounting to PhP500. His accountant recorded it as an asset and expense to decrease
its value by PhP10 per year for 5 years.

5. A food company owned by Anchor Ligason, ordered a machine needed in the assembly
line of its production department. Upon order, the machine was immediately listed as one
of its assets.

Application

Answer the following questions. Use a separate answer sheet.

1. As a student, what is your principle in life and what is its role in reaching your goals in life?
2. Why is it important to have guiding concepts/principles in dealing with acconting records
of the business?

Assessment

Briefly explain by discussing the following accounting assumptions and concepts. Use a
separate answer sheet.
1. Business Entity Assumption 5. Objectivity Principle
2. Accrual Assumption 6. Materiality Principle
3. Monetary unit Assumption 7. Business entity Principle
4. Time-period Assumption 8. Matching Principle

Rubric for Grading:

✓ Content = 15 pts.
✓ Understanding/Application =5 points
✓ Original Thinking = 5 points
✓ Structure = 3 points
✓ Grammar = 2 points
 ✓

Enrichment

Recall a specific industry in your community that you’ve visited previously. Cite a least 2 situations
that encountered in which accounting concepts and principles were properly applied or in some
cases, were violated in your community.

Rubric for Grading:

✓ Content = 15 pts.
✓ Understanding/Application =5 points
✓ Original Thinking = 5 points
✓ Structure = 3 points
✓ Grammar = 2 points

CONGRATULATIONS!!!!
I am glad that you have reached this far. Now, you have learned to
concepts and principles of accounting. Remember, accounting
concepts and principles are set of broad conventions that have
been devised to provide a basic framework for financial reporting.
As financial reporting involves significant professional judgments by
accountants, these concepts and principles ensure that the users
of financial information are not mislead by the adoption of
accounting policies and practices that go against the spirit of the
accountancy profession. Users must therefore actively consider
whether the accounting treatments adopted are consistent with the
accounting concepts and principles.

So, what have you learned so far?

References

Online References:
• https://www.netclipart.com/. Retrieved July 2, 2020.

Book References:
• Teaching Guide for Senior High School Fundamentals of Acountancy, Business and
Management 1 – Published by Commission on Higher Education, 2016 ©, Chairperson:
P.B. Licuanan, Ph. D.
• Tugas, F., Salendrez, H. and Rabo, J. (2016). Fundamentals of Accountancy, Business
and Management 1, Lexicon Press, Inc.
 Senior High Department
ACCOUNTANCY, BUSINESS AND MANAGEMENT