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STUDY GUIDE FOR MODULE NO. 2

Accounting Concepts and Principles

MODULE OVERVIEW

This chapter introduces the basic accounting concepts and principles, basic assumptions in
accounting, the fundamental qualities of accounting and enhancing fundamental qualities of
accounting.

MODULE LEARNING OBJECTIVES

At the end of this module, the learners should be able to identify and differentiate the different
accounting concepts and principles, determine the fundamental qualities of accounting and how to
enhance these fundamental qualities, and solve exercises on accounting principles as applied in
various cases.

LEARNING CONTENTS (ACCOUNTING CONCEPTS AND PRINCIPLES)

Accounting Concepts are important ideas that accountants take into account when recording
business transactions.

Accounting principles are those of primary importance, which broadly define actions that will best
achieve the objectives of accounting.

Basic Assumption in Accounting

Accounting assumptions provide the basis for the rational and systematic formulation of principles
and for the development of procedures and methods for the performance of accounting services.

Five basic assumptions form the basis of the financial accounting structure, namely: (1) economic
entity (2) going forward (3) monetary unit (4) periodicity (5) accrual basis.

1. Economic Entity Accountants regard a business enterprise as a separate and distinct entity
from the person or persons who own and operate it.

2. Going Concern Assumption is a concept that assumes the business entity will continue to
operate indefinitely for a period of time sufficient to meet its intended objectives, plans,
contracts and obligations, unless liquidation of the entity is imminent.

3. Monetary Unit Assumption. This accounting concept assumes that money is the common
denominator for measuring economic activity

4. Periodicity Assumption. Time period assumes that the company's life is divided into several
periods.

a. A time period is usually referred to as the accounting period. This is classified as (a)
calendar year, (b) fiscal year, or (c) interim year.

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b. The calendar year shall be a twelve-month period beginning on 1 January and ending on
31 December of the financial year.

c. A fiscal year starts from any month other than January and complete the 12 months
period.

d. The interim period shall be the business period within the accounting period. When
financial reports are prepared at any date, even if the twelve-month period is not yet due,
they shall be referred to as interim reports because they are prepared within an interim
period.

5. Accrual-Base Assuming that the net profit of a business enterprise differs between revenue
and expenditure for the accounting period and not between cash receipts and cash
disbursements.

Basic Principles of Accounting

There are four basic accounting principles that are used to record and report business transactions,
namely: (1) (2) recognition of revenue (3) recognition of expenditure and (4) full disclosure.

Measurement Principles guide accountants on how assets and liabilities are valued. Accounting
uses two principles of measurement:

1. Principle of cost (also known as historical cost principle). As required by IFRS, business
entities are expected to account for and report many assets and liabilities on the basis of the
acquisition price.

2. The principle of fair value is defined as 'the amount for which the asset could be exchanged,
the liability could be settled, or the equity instrument granted could be exchanged between
knowledgeable and willing parties in an arm's length transaction.

Revenue Recognition Principle this is when goods are delivered or services are rendered or
performed and should be recognized in the accounting period

Expense Recognition The expenditure principle should be recognized in the accounting period in
which goods and services are used up to produce income and not when the entity pays for those
goods and services.

Full-Disclosure Principle requires the financial statements to report all relevant information
relating to the economic affairs of a business undertaking, including subsequent events.
LEARNING ACTIVITY 1

LEARNING CONTENTS (FUNDAMENTAL QUALITIES OF ACCOUNTING)

Fundamental Qualities of Accounting

1. Relevance. Accounting information must be relevant to be able to influence or make a

difference in economic decisions. Information is of relevance when it influences the

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economic decisions of users by helping them to evaluate past, present or future events or to
adjust or correct their past assessments.

2. Faithful representation. Main objective of reliable representation is to build public trust and
confidence in the financial statements. It means accounting information must be complete,
neutral and free from material error.

Enhancing Qualities of Accounting

1. Understandability. A comprehensible accounting information. Accountants must provide

understandable financial accounting information by presenting data that can be understood
by different users of the information.

2. Verifiability. It occurs when independent measures use the same accounting methods and
still could arrive with the same results. The information proved their faithful representation as
shown in the financial reports through double-checking and corroboration

3. Timeliness. Accounting information must be available on time when needed. Timeliness is

crucial in making decisions. Lack of timeliness reduces relevance.

4. Comparability. It Enables users to identify similarities and differences of accounting

information between two, or more sets of economic circumstances.

LEARNING ACTIVITY

Multiple Choice. Encircle the correct answer.

1. Accounting is a service activity. Its function is to provide

a. Quantitative information

b. Qualitative information

c. Quantitative and qualitative information

d. None of the above.

2. The basic purpose of accounting is

a. To provide the information that the managers of an economic entity need to control its
operations

b. To provide information that the creditors of an economic entity can use in deciding
whether to make additional loans to the entity.

c. To measure the periodic income of the economic entity.

d. To provide quantitative financial information about a business enterprise that is useful in

making rational economic decision.

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3. The main function is to establish and improve accounting standards that will be generally
accepted in the Philippines.

a. Accounting Standards Council

b. Professional Regulation Commission

c. Philippine Institute of CPAs

d. Board of Accountancy

4. The principle of objectivity includes the concept of

a. Summarization

b. Verifiability

c. Classification

d. Conservatism

5. The measurement phase of accounting is accomplished by

a. Storing data

b. Reporting to decision makers

c. Recording data

d. Processing data

6. Accounting changes are often made and the monetary impact is reflected in the financial
statements of a company even though, in theory, this may be a violation of the accounting
concept of

a. Materiality

b. Objectivity

c. Conservatism

d. Consistency

7. This principle requires relevant information to form part of financial statements for decision-
making purposes.

a. Objectivity

b. Materiality

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c. Adequate disclosure

d. Accounting entity

8. The records of properties acquired and services availed of by a business are maintained in
accordance with the

a. Business entity concept

b. Cost principle

c. Proprietorship principle

d. Matching principle

9. Proponents of historical costs maintain that in comparison with all other valuation
alternatives for general purpose financial reporting, statements prepared using historical
costs are more

a. Objective

b. Relevant

c. Indicative of the entity’s purchasing power

d. Conservative

10. Objectivity is assumed to be achieved when an accounting transaction

a. Is recorded in a fixed amount of pesos

b. Involves the payment or receipt of cash

c. Allocates revenue or expenses in a rational and systematic manner

d. Involves an arm’s-length transaction between two independent parties.

SUMMARY

A set of logical ideas and procedures that guide the accountant in recording and
communicating economic information is called Accounting Concepts and principles (assumptions
and postulates).

Examples of basic accounting concepts are:

1. Separate entity concept
2. Historical cost concept
3. Going concern assumption
4. Matching
5. Accrual basis of accounting
7. Time Period
8. Stable monetary unit
9. Materiality Concept
10. Cost-benefit
11. Full disclosure principle

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6. Prudence or conservatism 12. Consistency Concept

The accounting standards in the Philippines are represented by the Philippine Financial
Reporting Standards (PFRSs). These standards are patterned from the International Financial
Reporting Standards (IFRSs)

REFERENCES

Books:
Ferrer, Rodiel C. Millan, Zeus Vernon B.(2017). Fundamentals of Accountancy, Business and
Management Part 1
Ferrer, Rodiel C. Millan, Zeus Vernon B. (2017). Fundamentals of Accountancy, Business and
Management Part 2
Frias, Solita A. Pefianco, Erlinda C. (2016). Fundamentals of Accountancy, Business, and
Management: A Textbook in Basic Accounting 2
Ballada, Win (2010) Basic Accounting
Aliling, Leonardo E., MBA,CPA.2013. Fundamentals of Basic Accounting.

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