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Module 2 Accounting Concepts and Principles
Module 2 Accounting Concepts and Principles
Module 2 Accounting Concepts and Principles
and Principles
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SENIOR HIGHSCHOOL FABM 1
Unit 1
INTRODUCTION
TOPIC OR
Module 2: Accounting Concepts and Principles
LESSON NAME
COVERAGE
WEEK 1: Jan. 3 - 7, 2022
DATES
LESSON OUTLINE
A B C
INTRODUCTION TO
ENRICHMENT TITLE AND MATERIALS
ACCOUNTING
D E F
ENRICHMENT
Define accounting.
1. Is my business earning?
2. How much daily or monthly sales do I need in order to recover my fixed cost?
3. Do I need to hire additional workers to help me with my production?
4. Can I afford to set up a new store in another place? Where do I get the funds?
5. Can I afford to pay a bank loan?
Illustration:
ABC Proprietorship purchased an equipment with a purchase cost of ₱100,000. The equipment can be sold for
₱70,000 if the company is liquidated.
The equipment shall be presented as ₱100,000 in the accounting books if the business expects to continue in
operation and recovers or realizes the value of the equipment through use in the normal course of business
without the need of recovering the same through sale.
If the business is expected to terminate, it shall forgo the ₱100,000 valuation and re-state its equipment to a
₱70,000 valuation because it is the most relevant mode of realization of the asset.
Illustration:
A businessman sets-up a merchandising business by investing
₱100,000 cash to the business. He used the ₱80,000 cash to
purchase goods for sale, and used the rest to pay ₱10,000 rent
of the business premises, ₱10,000 for local business taxes. He also paid ₱5,000 tuition fee of his children,
₱10,000 salaries of his household help and sold his car for ₱150,000 earning him ₱15,000 gain.
In reporting for the business entity, only transactions pertaining to the business shall be recorded, such as the
following:
a. Purchase of ₱80,000 goods
b. Payments for ₱10,000 rent
c. Payment for ₱10,000 local business taxes
The following are non-business related transactions (i.e. personal transactions) and are not to be recorded in
the accounting records of the business:
a. Payment of ₱5,000 tuition fees
b. Payment for ₱10,000 household salaries
c. Sale of personal car
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SENIOR HIGHSCHOOL FABM 1
The periodicity assumption is an offshoot of the going concern assumption. The presumed indefinite life of the
business is broken into distinct equal time periods called “accounting period” over which the financial
performance and financial condition of the business are accounted and reported to users of the financial
statements.
Income is not measured from the start-up of business to its dissolution but is rather reported every accounting
period.
ACCRUAL BASIS
The concept of accrual is also an offshoot of the accounting
period assumption. Under the accrual method, income are
recorded in the accounting period they are earned regardless of
when they are collected whereas expenses are recorded in the
period incurred regardless of when they are paid.
Under the accrual basis, ₱20,000 shall be recognized (recorded) as rental income in the Year 2019, not in the
year 2020, because the same is earned in 2019. This is called accrued income.
At December 31, 2019, the ₱120,000 advanced rental shall be split as income as follows:
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SENIOR HIGHSCHOOL FABM 1
Expense Days Computation Amount
For the Year 2019 Oct. 1 to Dec. 31, 2019 3 mons. / 12 mons. x ₱120,000 ₱ 30,000
For the Year 2020 Jan. 1 to Sept. 30, 2020 9 mons. / 12 mons. x ₱120,000 90,000
₱ 120,000
Only ₱30,000 shall be recognized as rental income in Year 2019 because the same is earned in 2019. The
₱90,000 portion of the advanced income shall be considered as a liability or debt (i.e. unearned income)
because it is not yet earned.
At December 31, 2019, the ₱15,000 payment must be analyzed for its expired (expense) and unexpired
component.
Only the ₱6,250 expired portion of the ₱15,000 prepaid expense is an expense in 2019. The unexpired
balance of ₱8,750 is still an asset (i.e. Prepaid Insurance) in 2019.
Illustration:
The business paid ₱10,000 for business licenses. 3 days later, the business registration was complete. The
business then executed a contract to lease a commercial space for ₱20,000 a month. Two days later, the
business paid ₱40,000 advanced rental deposit.
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SENIOR HIGHSCHOOL FABM 1
OTHER ACCOUNTING CONCEPTS
1. Realization concept
2. Matching concept
3. Duality concept
REALIZATION CONCEPT
Income is recognized when it is realized or earned. Income is said to
be realized when one of the contracting party performed his obligation
on the contract, thus have established a right to demand from the
party.
MATCHING CONCEPT
The matching concept related to the timing of recognition of an expense. It
postulates that expenditures shall be expensed (i.e. matched with income) in
the accounting period the benefits of the expenditure are realized by the entity.
An expenditure is an outflow of resources or an obligation requiring future
outflow of resources.
Types of expenditure:
1. Capital expenditures – these are expenditures that benefits future accounting periods. These are
recorded in accounting as assets.
2. Period expenditures – these are expenditures that benefits only the current period. These are recorded
as expense.
Recognition of expenses
Expenses are recognized in the income statement when a decrease in future economic benefits related to a
decrease in an asset or an increase of a liability has arisen that can be measured reliably. This means, in
effect, that recognition of expenses occurs simultaneously with the recognition of an increase in liabilities or a
decrease in assets (for example, the accrual of employee entitlements or the depreciation of equipment).
Properties held for use by the business such as building, machineries, equipment and improvements
are initially recorded as assets upon acquisition. These assets are usually used over long periods of
time, In accounting, the cost of these assets is spread over as expense over the period they are
expected to be used.
c. Immediate recognition – expenditures that cannot be associated to a particular income and has no
expected future economic benefits are recognized outright as expense in the year incurred.
Illustration: Direct association or matching of cost against the revenues or Cause and effect association
Examples:
1. Goods purchased are expensed as “cost of sales” in the period the sales income is recognized.
2. Sales agent’s commission expense is recognized when the related sales is reported as income.
,
Illustration: Systematic and rational allocation
The depreciable cost shall be spread as expense called “depreciation expense” over the expected useful life of
an asset. The annual expense shall be ₱6,000 computed as (₱30,000/5 years). The remaining unexpensed
portion of the depreciable cost is an asset.
Example 2 – Supplies
In July 1, 2019, ABC paid worth ₱30,000 supplies. Supplies worth ₱8,000 was used in 2019 while the rest was
used in 2020.
The ₱8,000 supplies shall be recognized as “supplies expense” in 2019 while the ₱22,000 shall be recognized
as “supplies expense” in 2020.
Examples:
1. Cost of administering the business such as salaries and advertising
2. Interest expense and utilities expense
3. Loss on the destruction of an asset
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SENIOR HIGHSCHOOL FABM 1
Cash Basis of Accounting
There is also another accounting method for income and expense called
the CASH BASIS OF ACCOUNTING. Under this method, income is
recorded when collected regardless of when earned while expense is
recorded when paid regardless of when it is incurred.
DUALITY CONCEPT – In accounting, each transaction is portrayed as a two-fold effect on at least two
elements of financial statements. This is one of the most important basic accounting concepts you must
appreciate.
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SENIOR HIGHSCHOOL FABM 1
This two-fold effect is recorded in the accounting books as a debit and a credit entry in the accounting books.
PRACTICE EXERCISE
Match the terms below with their correct definition:
a. Accounting assumptions
b. Going concern
c. Accounting entity
d. Periodicity assumption
e. Accrual
f. Monetary unit
g. Fiscal period
h. Period expenditures
i. Cash Basis of Accounting
j. Capital expenditures
k.Duality concept
l. Calendar period
1. Financial statements are prepared on the assumption that the entity will continue in operation
into the foreseeable future without the need or intention to stop operation.
2. Each transaction is portrayed as a two-fold effect on at least two elements of financial
statements.
3. The owner and the business are two separate and distinct parties.
4. These are concepts or principles in the preparation of financial statements.
5. The presumed indefinite life of the business is broken into distinct equal time periods called
“accounting period” over which the financial performance and financial condition of the business
are accounted and reported to users of the financial statements.
6. It requires recognition of income when it is earned rather than when it is collected.
7. Financial transactions are recorded and reported in terms of money such as the Peso.
8. It requires recognition of income when cash is collected rather than when it is earned or
expense when it is paid rather than when it is incurred.
9. These are expenditures that benefits only the accounting periods. These are recorded in
accounting as assets.
10. These are expenditures that benefits only the current accounting periods. These are recorded
as expense.
LESSON RECAP
Basic Accounting Principles
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SENIOR HIGHSCHOOL FABM 1
Accounting assumptions and principles provide the bases in preparing, presenting and interpreting general-
purpose financial statements.
1. Accrual – Income is recognized when earned regardless of when collected, and expenses are recognized
when incurred regardless of when paid.
2. Going Concern – Also known as continuing concern concept or continuity assumption, it means that a
business entity will continue to operate indefinitely.
3. Accounting Entity Concept – A specific business enterprise is treated as one accounting entity, separate
and distinct from its owners.
4. Time Period Assumption – The indefinite life of an enterprise is subdivided into time periods or accounting
periods which are usually of equal length for the purpose of preparing financial reports.
5. Monetary Unit Assumption – Transactions are recorded in terms of money (quantifiability). The currency
used has a stable purchasing power (stability).
SOLVING PROBLEMS
The business enterprise subject to accounting is Marky Flower Shop owned and operated by Mark Ngina.
Indicate whether the following transactions are business transactions (recordable) or personal transactions
(non-recordable) by the business:
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SENIOR HIGHSCHOOL FABM 1