ACCOUNTING CONCEPTS & PRINCIPLES

Accounting Concepts and Principles (assumptions or postulates)

- set of logical ideas and procedures on which the accounting process is based
- general frame of reference by which accounting practice can be evaluated
- guide in the development of new practices and procedures

1) Separate Entity (Accounting Entity) Concept – The business is viewed as a separate person, distinct
from its owners. Only the transactions of the business are recorded in the books of accounts.

2) Cost Principle – Under this concept, assets are initially recorded at cost.

3) Going Concern (Continuity) – The accounting entity is viewed as continuing in operation indefinitely
in the absence of evidence to the contrary. Going concern is the foundation of cost principle.

4) Matching – Some costs are initially recognized as assets and charged as expenses only when the
related revenue is recognized.

5) Accrual Basis of Accounting – Economic events are recorded in the period in which they occur rather
than at the point in time when they affect cash. Income is recognized when it is earned rather than
when it is collected, while expense is recognized in the period when it is incurred rather than when it is
paid.

6) Conservatism – Some degree of caution should be observed when exercising judgments needed in
making accounting estimates under conditions of uncertainty. This is necessary so that assets or income
are not overstated, and liabilities or expenses are not understated.

7) Time Period (Periodicity) – This is based on the Going Concern Principle. The life of the entity is
divided into series of reporting periods. An accounting period is usually 12 months and may either be
calendar year or fiscal year.

8) Stable Monetary Unit – Accounting information to be useful should be stated in a common

measurement basis, which in the Philippines is the peso. This concept assumes that the purchasing
power of peso is constant.

9) Materiality – Accounting principles are applicable only to material items. An item is considered
material if its omission or misstatement could influence economic decisions. Materiality is a matter of
professional judgment and is based on the size and nature of an item being judged.

10) Cost – Benefit Consideration – The costs of processing and communication information should not
exceed the benefits to be derived from the information’s use.

11) Full Disclosure – This concept is related to both materiality and cost-benefit. Information
communicated to users reflect a series of judgmental tradeoffs that strive for:

a. Sufficient detail to disclose matters that make a difference to users, yet

b. Sufficient condensation to make the information understandable, keeping in mind the costs of
preparing and using it.
12) Consistency – This requires a business to apply accounting policies and present information
consistently from one period to another. Accounting policies can be changed if it is required by a
standard or the change would result in more relevant and reliable information. Any change in
accounting policy must be disclosed.

FINANCIAL REPORTING STANDARDS

IFRS/PFRS/GAAP – are “laws in accounting”, used as a guide in the preparation of FS; principle-based
rather than rule-based

PFRS apply to all profit-oriented entities preparing general purpose financial statements.

(1) PFRS – Philippine Reporting Financial Standards (FRSC)

(2) PAS – Philippine Accounting Standards (ASC)
(3) Philippine Interpretations (PIC)

CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING

Conceptual Framework – summary of the terms and concepts that underlie the preparation and
presentation of financial statements. Special purpose reports are outside the scope of the framework

- guide in developing future PFRSs and in resolving accounting issues not directly addressed
by existing PFRS

 The Conceptual Framework is not a standard.

 In case where there is conflict, the requirements of PFRS shall prevail over the Conceptual
Framework.
 In the absence of a PFRS, management shall consider the applicability of the Conceptual Framework
in developing and applying an accounting policy that results in information that is relevant and
reliable.

I. Objectives of Financial Reporting

Overall Objective: To provide financial information about the reporting entity that is useful to existing
and potential investors, lenders, and other creditors in making decisions about providing resources in
the entity

Specific Objectives:

a. To provide information useful in making decisions about providing resources to the entity
b. To provide information useful in assessing the prospects of future net cash flows to the entity and
management stewardship of the entity’s economic resources
c. To provide information about entity resources, claims, and changes I resources and claims

II. Qualitative Characteristics of Useful Information

A. Fundamental Qualitative Characteristics
1. Relevance – Predictive Value & Confirmatory Value
2. Faithful Representation - Completeness, Neutrality, Free from Error
B. Enhancing Qualitative Characteristics
1. Verifiability
2. Comparability
3. Understandability
4. Timeliness

III. The Financial Statements and The Reporting Entity

IV. Elements of FS

- Asset
- Liability
- Equity
- Income
- Expense

V. Recognition and Derecognition

VI. Measurement

VII. Presentation and Disclosure

Effective communication makes information more useful. Effective communication requires:

(1) Focusing on presentation and disclosure objectives and principles rather than on rules
(2) Classifying information by grouping similar items and separating dissimilar items
(3) Aggregating information in a manner that it is not obscured either by excessive detail or by excessive
summarization

VIII. Concepts of Capital and Capital Maintenance

The Capital Maintenance Approach or Net Assets Approach means that net income occurs only after
the capital used from the beginning of the period is maintained.

Financial Capital Concept – Net Income occurs when the financial or nominal amount of the net assets
at the end of the year exceeds the financial or nominal amount of the net assets at the beginning of the
period, after excluding distributions to and contributions by owners during the period.

Physical Capital Concept – Net Income occurs when the physical productive capital of the entity at the
end of the year exceeds the physical productive capital at the beginning of the period, also after
excluding distributions to and contributions from owners during the period.