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ABMFABM1 q3 Mod2 Accounting-Guidelines v2
ABMFABM1 q3 Mod2 Accounting-Guidelines v2
Lesson
1 Accounting Guidelines
You have learned that Accounting is considered the language of business. It
is with the help of accounting that business owners are able to know the
performance of their business through a financial report. In preparing these
financial reports, companies follow certain concepts, principles, assumptions, and
constraints. Collectively, these are referred to as the Accounting Guidelines.
What’s In
In the previous lesson you have learned the different users of financial
statements. Financial statements are prepared because they communicate financial
information about the business which is of great importance to the users listed
below. Let us check how much you have learned about them.
Write TRUE if the underlined word makes the statement about users of
financial statements correct; otherwise write the correct word to make the
statement true. Write your answers on a separate sheet of paper.
What’s New
All our lives, we are subjected to rules. At home, at school, at work, and even
at play, we are bound to follow and adhere to rules. The same is true with
accounting. Just like all other fields of study, accounting also has standards of
approaches which serve as guide in its study and practice. These are stated in the
Accounting Guidelines, which you are about to learn from this module.
What is It
The basis of developing the conceptual framework of accounting is the
Generally Accepted Accounting Principles or the GAAP.
GAAP is a set of standards and rules that are recognized as a general guide
for financial reporting. Generally accepted means that these principles must have
substantial authoritative support. This support usually comes from the Financial
Accounting Standards Board (FASB) and Securities and Exchange Commission
(SEC). The FASB has the responsibility for developing the accounting principles.
The Conceptual Framework developed by the FASB serves as the basis for
resolving accounting and reporting problems. It consists of
ASSUMPTIONS
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1. Monetary Unit. It states that only transaction data that can be expressed in
terms of money can be included in the accounting records. It also assumes
that a specific currency ( Philippine peso ) must be consistently used by a
business in recording its transactions. It further assumes that the peso is
stable over time; no adjustments are made for inflation or deflation ( stability
of peso).
Example: Employee satisfaction and percent of international employees are
not transactions that should be included in the financial records.
2. Economic Entity/Accounting Entity. The economic entity assumption
states that the activities of the entity must be kept separate and distinct
from the activities of the owner of all other economic entities.
Example: The owner has a business meeting with a prospective client. The
expenses that come with that meeting should be part of the company’s
expenses. If the owner pays for gas for his personal use, it should not be
included as part of the company’s expenses.
3. Time Period/Periodicity. This assumption describes the time intervals with
which financial statements are prepared. The indefinite life of a business is
divided into time periods for reporting purposes which is ordinarily twelve
months. Further, the annual time period may either be:
a.) Calendar year, which starts on January 1 to December 31; and,
b.) Fiscal year, which starts at any month of the year other than January
and ends twelve months after.
The time period assumption states that the economic life of a business can
be divided into artificial time periods.
Example: The economic life of a business may be divided into months,
quarters, and years.
4. Going Concern. This assumption dictates that the business is treated as
continuing in its operation indefinitely and will continue in operation to
carry out its existing objectives.
4. Historical Cost Principle. The historical cost principle dictates that assets
be recorded at their cost. Cost is used because it is both relevant and
reliable.
Cost is relevant because it represents
a) the price paid;
b) the assets sacrificed; and
c) the commitment made at the date of acquisition.
Cost is reliable because it is
a) objectively measurable;
b) factual; and
c) verifiable.
CONSTRAINTS
2. Conservatism dictates that when in doubt, choose the method that will be
the least likely to overstate assets and income. It is also known as prudence.
ADDITIONAL CONCEPTS
1. Use of Estimates and Judgements. It allows accountants and management
to use approximations in the preparation of financial statements.
What’s More
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The following situations describe an accounting guideline. Determine what
concept, principle, assumption, or constraint is being referred in each situation.
Write your answers on a separate sheet of paper.
1. A Filipino company like Jollibee having store branches even in the United
States should report financial statements in pesos.
2. The personal assets of the owner of a company will not appear on the
company's balance sheet.
3. The company reports in its balance sheet the value of the land at the cost
when the company acquires it even if the land could be sold today at a
significantly higher amount.
4. The company is planning to continue its operations indefinitely.
5. When the accountant has to choose between two acceptable alternatives, the
accountant should select the alternative that will report less profit, less asset
amount, or a greater liability amount.
ASSUMPTIONSPRINCIPLESCONSTRAINTSCONCEPTSMonetary unit
Economic entity
Time period
Going concern
Revenue recognition
Matching
Full disclosure
Historical Cost
Materiality
ConservatismUse of Estimates and Judgement
Objectivity
Substance over form
What I Can Do
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Match the accounting concepts, principles, assumptions, and constraints
listed under column A to their correct description found under column B. Write
only the letter of your choice on a separate answer sheet.
A B
Assessment
Write your thoughts! From the list of accounting guidelines listed below,
choose only three (3) and write a brief explanation about it. Use a separate sheet
of paper for your answer.
1. Monetary Unit
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2. Economic Entity/Accounting Entity
3. Time Period Assumption/Periodicity
4. Going Concern
5. Revenue Recognition
6. Matching Principle
7. Full Disclosure
8. Historical Cost
9. Materiality
10. Conservatism
11. Objectivity
12. Use of Estimates and Judgements
13. Substance Over Form
Additional Activities
Connect the following words to the correct accounting concepts and principles they
are associated with. Write your answers on a separate sheet of paper.
Answer Key
What I Know
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The following cases apply the different accounting guidelines. Identify the
accounting concept, principle, assumption, or constraint that is applicable to each
case and write a brief explanation to support your answer. Write them on a
separate sheet of paper.
2. Near the end of the current year, a company required a customer to pay
₱200,000 as a deposit for work that is to begin in the following year. At the end
of the current year the company reported the ₱200,000 as a liability on its
balance sheet. Which accounting guideline prevented the company from
reporting the ₱200,000 on its income statement for the current year? Why?
3. A company borrowed ₱100,000 on December 1 and will make its only payment
for interest when the note comes due six months later. The total interest for six
months will be ₱3,600. On December 31, the accountant reports an Interest
Expense of ₱600 in its income statement. This action is the result of which
accounting guideline? Explain your answer.
Lesson
Accounting Guidelines as Applied
2 in Various Cases
Previously, you have learned that the foundation of accounting includes the
operating guidelines or the rules that guide accountants and managers in their
accounting records. After learning the different guidelines followed by businesses for
their accounting system, you can now identify the guidelines applied or violated in
different situations. You will then be able to know whether the accounting transaction
is relevant and correct by ensuring that it is in conformity with the Accounting
Guidelines that we have discussed.
What’s In
From the choices given on the table, choose the correct accounting concept,
principle, assumption, and constraint being described in each number.
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2. This principle justifies a company violating an accounting principle because
the amounts are immaterial.
3. This principle directs a company to show all the expenses related to its
revenues of a specified period even if the expenses are not paid in that period.
4. The accounting concept which states that companies and owners should be
accounted for separately.
5. The accounting principle which dictates that assets should be recorded at
their cost because it is both relevant and reliable.
What’s New
Mr. Matt Tiaga owns a sari-sari store in Brgy. San Miguel, Guimaras. He believes
that his sari-sari store will soon become a grocery store. He also envisioned that
after few years, the grocery store will expand having new branches in other
Municipalities in Guimaras. Which accounting assumption do you think is applied
by Mr. Matt Tiaga? Why do you think so? If you are an owner of a sari-sari store
now, will you envision your business to be like that of Mr. Matt Tiaga?
What is It
To better understand the application of the accounting guidelines, let us study the
following cases.
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statements report Property relevant to generating such
Tax Expense of ₱1,000. This revenue. Since the property is
is an example of which used by the business year-
Accounting Guideline? round and it has contributed
to generating the revenue
every month, it is proper to
reflect the Property Tax
Expense on a monthly basis.
Case 4. Jane, a retailer, Historical Cost Jane will violate the Historical
wishes to report her Principle Cost Principle if she wishes to
merchandise inventory on its record her inventory at retail
balance sheet at its retail value. The Historical Cost
value. This will violate which Principle states that assets
Accounting Guideline? should be recorded at is cost
or acquisition price since it is
more relevant and reliable. The
retail value or fair value is only
an estimate or approximation,
thus it may not reflect the true
value of the merchandise.
Case 5. In the early 2000s, Going Concern Since the existence of the
General Motors was Assumption government is indefinite and it
experiencing great financial has provided guarantee to
difficulties and was ready to General Motors, the latter’s
declare bankruptcy and close stakeholders can be confident
operations all over the world. that the business will continue
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The Federal government to operate in the future. The
stepped in and gave the going concern assumption
company a bailout as well as implies that the business will
a guarantee. The intervention be able to operate long enough
of the Federal government to accomplish its objectives.
indicated that General Motors
will still operate in the
In solving cases such as these, there are no uniform rules and steps. It will
take analytical skills and good comprehension to understand and identify the
operating guideline/s applied in each of the case. Thus, it is a must that you
understand the key concepts of all the accounting assumptions, principles,
concepts, and constraints in order for you to apply them to various cases.
What’s More
In the following situations, identify the accounting guideline that is applicable.
Furthermore, indicate whether the Accounting Guideline is correctly applied or
violated and give a justification for your answer.
1. The owner-manager bought a computer for personal use. The invoice was
given to the accountant who recorded it as an asset of the business.
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2. The statement of financial position of a company included equipment
purchased from Japan for 350,000 yen. It was reported at that amount in
the statement of financial position while all the other assets were reported in
Philippine pesos.
3. There are no financial statements that are prepared by Michael Go for his
business. He explained that he will prepare the statements when he closes
the business, which he predicts to take place after 20 years.
4. Aside from owning a shoe store, Albert operates a canteen. The assets of the
canteen are reported in the statement of financial position of the shoe store.
5. A bus company having a total asset of P300,000,000 purchased a tool kit
amounting to P12,000. The company bookkeeper recorded the purchase as
an outright expense and did not include it to assets for depreciation.
What I Have Learned
Tips!
There are no uniform rules and steps in solving cases involving the
application of the Accounting Guidelines. Thus, you must understand these
principles in order for you to apply them appropriately.
What I Can Do /
Read and analyze the following cases and determine the accounting
assumptions, principles, concepts, and constraints that will be used to resolve
them. Write your answers on a separate sheet of paper.
1. Jinky, the accountant of XYZ Company, recorded the sales of ₱2,000,000 for
the month of October. On the same month, she also recorded salaries of
employees worth ₱250,000 and bonuses amounting to 3% of the total sales.
These expenses were related to the ₱2M sales. Which Accounting Guideline
did Jinky apply? Justify your answer.
2. One of the big company’s famous endorsers is caught in a scandal and many
people stop buying the company’s products in protest of the said endorser.
The company does not report any loss at all on its financial statements
because of which Accounting Guideline. Why?
3. Mr. G is the owner of the EFG Power Corporation. He bought a brand new
car and used it in all his business- related transactions of EFG Corporation.
The company surely benefited from the car used by Mr. G but this was not
included in the Company’s Assets. Which accounting principle/guideline
prevents the corporation from reporting the car as an asset? Why?
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Assessment
Using a separate sheet of paper, solve the following cases by identifying the
accounting concept, principle, assumption or constraint applied or violated. Justify
your answer.
1. Jim, an owner of a pizza shop, decides to buy a new delivery car. Since the
company is low on cash, Jim decides to pay for the car himself out of his
personal bank account. Jim intends to add the car to the balance sheet of
the pizza shop. Which accounting guideline is violated? Why?
2. Pam’s Restaurant purchased a land at a cost of ₱500,000. After a year
the land was appraised at a value of ₱700,000. In the company’s book,
the land was recorded by at its purchased amount. . Which Accounting
Guideline did Pam’s Restaurant apply? Explain your answer.
3. Guimaras Steel Inc. buys a new piece of equipment for ₱100,000 in 2015.
This machine has a useful life span of 10 years. This means that the
machine will produce products for at least 10 years in the future. The
machine is depreciated over its 10-year useful life instead of being fully
expensed in 2015. Which Accounting Guideline support the company’s
treatment for equipment? Justify your answer.
4. Chicken Pinoy Co., a Filipino company, opened its first international branch
in Hongkong. On its first year of operations, the company reported a net
income of HK$2.5M. The company reported this earning in Philippine peso.
Is the company right in reporting the income from its Hongkong branch in
Philippine peso?
5. Assume Gold Guitar, Inc. (GGI) is in the middle of a patent lawsuit. GGI
sues Blue Guitar, Inc. for patent infringement and anticipates winning a
large settlement. Since the settlement is not certain, GGI does not record the
gain on the financial statements. Is GGI’s action right for not recording a
gain? Which Accounting Guideline will support GGI’s action?
Additional Activities
Which of the accounting guidelines listed in Column B is applied in the
cases found under column A? Write only the letter of your choice and in one sentence,
support your answer.
A B
1. ABM Company recorded the land purchased at A. Economic Entity
its acquisition cost amounting to ₱1,200,000
even if appraised value of the land now is
₱1,800,000.
2. Ms. Ann Tukin, owner of Kape Mo Coffee Shop, B. Going Concern
owns a brand new car purchased at
₱1,400,000. The car was not reported as asset
of Kape Mo Coffe Shop.
3. Guimaras Island Traders’ normal operating C. Objectivity
cycle ends every December 31 of the year, thus
its financial statements are prepared on this
basis.
4. Manong Tinapay and Namit Bread Store will D. Time Period
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surely operate until the year 2050 and beyond.
5. Medsure Drug Store issues official receipt to E. Historical Cost
its clients for every sales transaction made.
Answer Key
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