Accounting Concepts

and Principles

EASTER A. LUMANG
Teacher
1
 ACCOUNTING

Business

Organization Operations

Sole
Partn Merc Manu
Propri Corpo Servi
ershi handi factur
etors ration ce
p sing ing
hip

ACCOUNTING PRINCIPLES
2
 The purpose of our lesson for
this session is for you to be able
to identify the different concepts
and principles of accounting and
identify if a specific situation
follows or violates an accounting
principles.

Introduction
3
 Actually there are a number of accounting
concepts and principles based on which
we prepare our accounts and several
fundamental concepts underlie the
accounting process.
 Accounting practices follow certain
guidelines. These GAAP, which stands for
generally accepted accounting principles
lay down accepted assumptions and
guidelines and are commonly referred to
as accounting concepts.
Introduction
4
 GAAP encompass the conventions, rules
and procedures necessary to define
accepted accounting practice at a
particular time.The GAAP usually depends
on how well it meets three criteria:
relevance, objectivity and feasibility.
 A principle has relevance to the extent
that it results in information that is
meaningful and useful to those who need
to know something about a certain
organization.
Introduction
5
 A principle has objectivity to the extent
that the resulting information is not
influenced by the personal bias or
judgment of those who furnish it.

 A principle has feasibility to the extent

that it can be implemented without undue
complexity or cost. These criteria often
conflict with one another. In some cases,
the most relevant solution may be the
least objective and the least feasible.
Introduction
6
Accounting Concepts
 Business entity
 Going Concern
 Time period
 Accruals
 Matching
 Objectivity
 Monetary Unit
 Cost
 Disclosure
 Conservatism/Prudence
 Materiality
 Consistency
 Uniformity
 Relevance

7
Business Entity/ Entity Concepts
 Meaning
◦ The business and its owner(s) are two separate
existence entity
◦ Any private and personal incomes and
expenses of the owner(s) should not be treated
as the incomes and expenses of the business
◦ The affairs of the business are distinct from the
personal affairs of its owner. The business is an
independent ENTITY.

8
  Examples
◦ If the owner has a barber shop, the cash of
the barber shop should be reported
separately from personal cash.
◦ The owner had a business meeting with a
prospective client. The expenses that come
with the meeting should be part of the
company’s expenses. If the owner paid gas
for his personal use, it should not be
included as part of the company’s expenses.

Business Entity
9
Going Concern
 Meaning
◦ Business is expected to continue indefinitely
◦ The business will continue in operational
existence for the foreseeable future
◦ Financial statements should be prepared on a
going concern basis unless management either
intends to liquidate the enterprise or to cease
trading, or has no realistic alternative but to do
so
◦ The business is assumed to have a continuing
and indefinite life. The business IS NOT on the
verge of extinction.

10
  Example
◦ When preparing financial statements, you
should assume that the entity will continue
indefinitely.
◦ Possible losses form the closure of business
will not be anticipated in the accounts
◦ Prepayments, depreciation provisions may
be carried forward in the expectation of
proper matching against the revenues of
future periods
◦ Fixed assets are recorded at historical cost

Going Concern
11
Time period
 Meaning
◦ Financial statement are to be divided into
specific time intervals

 Example
◦ Philippine companies required to report
financial statements annually.
◦ The salary expenses from January to
December 2015 should only be reported in
2015.

12
Accrual Accounting
 Meaning
◦ Revenue should be recognized when earned of
collection and expenses should be recognized
when incurred regardless of payment.
◦ Revenues are recognized when they are earned,
but not when cash is received
◦ Expenses are recognized as they are incurred,
but not when cash is paid
◦ The net income for the period is determined by
subtracting expenses incurred from revenues
earned

13
  Example
◦ When a barber finishes performing his
services he should record it as revenue.
When the barber shop receives an electric
bill, it should record it as an expenses even
if it is unpaid.

Accruals
14
Monetary Unit Concept
 Meaning
◦ All transactions of the business are recorded
in terms of money. The Philippine peso is a
reasonable unit of measure and that its
purchasing power is relatively stable.
◦ Amounts should be stated into single
monetary unit.
 Examples
◦ Jolibee should report financial statements in
pesos even if they have a store in the
United States.
◦ IHOP should report financial statements in
dollars even if they have a branch here in
the Philippines

15
Matching
 Meaning
◦ Cost should be matched with the revenue
generated.

 Example
◦ When you provide tutorial services to a
customer and there is a transportation cost
incurred related to the tutorial services, it
should be recorded as an expense for that
period.

16
Historical Cost Principle/
 Meaning
◦ Accounts should be recorded initially at cost
◦ Assets should be shown on the balance
sheet at the cost of purchase instead of
current value

 Example
◦ When Jollibee buys a cash register, it should
record the cash register at its price when
they bought it.
◦ When a company purchases a laptop, it
should be recorded at the price it was
purchased.

17
Prudence/Conservatism
 Meaning
◦ In case of doubt, assets and income should
not be overstated while liabilities and
expenses should not be understated.

 (1) The accountant should not anticipate profit, and

should provide for all possible losses;
 (2) Faced with several methods of valuing an asset, the
accountant should choose that which leads to the lesser
value.

18
 Example
◦ In case of doubts, expenses should be
recorded at a higher amount . Revenue
should be recorded at a lower amount.
◦ Fixed assets must be depreciated over their
useful economic lives

Prudence/Conservatism
19
Objectivity
 Meaning
◦ Financial statements must be presented with
supporting evidence.
◦ The accounting information should be free from
bias and capable of independent verification
◦ The information should be based upon
verifiable evidence such as invoices or
contracts.
◦ Accounting records and statements are based
on the most reliable data available so that they
will be as accurate and as useful as possible

20
  Example
◦ When the customer paid Jolibee for their
order, Jolibee should have a copy of the
receipt to represent as evidence.
◦ The recognition of revenue should be based
on verifiable evidence such as the delivery
of goods or the issue of invoices

Objectivity
21
Consistency
 Meaning
◦ Companies should choose the most suitable
accounting methods and treatments, and
consistently apply them in every period
◦ Changes are permitted only when the new
method is considered better and can reflect
the true and fair view of the financial
position of the company
◦ The change and its effect on profits should
be disclosed in the financial statements

22
 Examples
◦ If a company adopts straight line method
and should not be changed to adopt
reducing balance method in other period
◦ If a company adopts weight-average
method as stock valuation and should not
be changed to other method e.g. first-in-
first-out method

Consistency
23
Disclosure
 Meaning
◦ All relevant and material information should be
reported.
◦ Financial statements should be prepared to
reflect a true and fair view of the financial
position and performance of the enterprise
◦ All material and relevant information must be
disclosed in the financial statements
 Example
◦ The company should report all relevant
information

24
Uniformity

 Meaning
◦ Different companies within the same industry
should adopt the same accounting methods
and treatments for like transactions
◦ The practice enables inter-company
comparisons of their financial positions

25
Relevance
 Meaning
◦ Financial statements should be prepared to
meet the objectives of the users
◦ Relevant information which can satisfy the
needs of most users is selected and
recorded in the financial statement

26
Materiality
 Meaning
◦ In case of assets that are immaterial to
make a difference in the financial
statements, the company should instead
record it as expenses.
◦ Immaterial amounts may be aggregated
with the amounts of a similar nature or
function and need not be presented
separately
◦ Materiality depends on the size and nature
of the item judged in the particular
circumstances.

27
  Example
◦ A school purchased an eraser with an
estimated usefu life of three years. Since an
eraser is immaterial relative to assets, it
should be recorded as an expense.
◦ The cost of small-valued assets such as
pencil sharpeners and paper clips should be
written off to the profit and loss account as
revenue expenditures, although they can
last for more than one accounting period

Materiality
28
29
Multiple Choice. Read and understand the following
problems, and choose the letter of the best answer. Write
your answer on a ¼ sheet of 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

30
2. Aling Sweet sold a piece of a cupcake to
her neighbor. Apparently, her customer is
out of cash so Aling Sweet 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

31
3. Gale started a business assuming that it
will not enter into liquidation and the
business will run forever.
A. Accrual Concern Concept
B. Going Concern Concept
C. Materiality Principle
D. Matching Principle

32
4. A professional judgment 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

33
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. Business Entity Concept
B. Historical Cost Principle
C. Monetary Unit Concept
D. Time Period Concept

34
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. Business Entity Concept
B. Historical Cost Principle
C. Monetary Unit Concept
D. Time Period Concept

35
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. Business Entity Concept
B. Historical Cost Principle
C. Monetary Unit Concept
D. Time Period Concept
36
8. The life of a business may be reported
either monthly or yearly depending on the
period of the business.
A. Business Entity Concept
B. Historical Cost Principle
C. Monetary Unit Concept
D. Time Period Concept

37
9. Sufficient information must be disclosed
in the financial statements.
A. Monetary Unit Concept
B. Full Disclosure
C. Time Period
D. Objectivity

38
10. In order to Bookkeeping must be free of
bias and prejudice.
A. Monetary Unit Concept
B. Full Disclosure
C. Time Period
D. Objectivity

39
11. One criterion for general acceptance of
an accounting principle is that the results in
information are meaningful and useful to
those who need to know the certain
organization.
A. Feasibility
B. Relevance
C. Objectivity
D. All of the above

40
12. These criteria often conflict with one
another, a principle that can be
implemented without undue complexity or
cost.
A. Feasibility
B. Relevance
C. Objectivity
D. All of the above

41
13. It is a widely accepted set of rules, concepts, and
principles which governs the application of
accounting principles developed by accounting
professionals to guide the recording and reporting of
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)

42
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. Cost Principle
C. Relevance
D. A and B

43
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. Cost Principle
C. Full Disclosure
D. Objectivity Principle

44
45
46
47
48
THANK YOU

49