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Fundamentals of
Accountancy Business
and Management 1
RUBY JANE V. TAUNAN
Subject Teacher 2
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What are accounting Principles?
Accounting principles are the rules to
be followed by a company while
reporting the financial data. Generally
accepted accounting principles
(GAAP) are issued by the Financial
Accounting Standards Board in the
United States. 4
Generally Accepted Accounting Principles
(GAAP)
These are rules that specify
acceptable accounting
practices. GAAP aims to make
information in financial
statements relevant, reliable,
and comparable. 5
Two main groups establish GAAP in the US:

a. Financial Accounting Standards

Board (FASB) - Private group that sets
both broad and specific principles.
b. Securities and Exchange
Commission (SEC) - Government group
that establishes reporting requirements
for companies that issue stock to the
public. 6
 International Accounting Standards
Board (IASB)
it issues International Financial
Reporting Standards (IFRS) that identify
preferred accounting practices, for
example, when companies wish to
raise money from lenders and investors
in different countries.
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 ACCOUNTING CONCEPTS
(ASSUMPTIONS)

Accounting concepts are the

important conventions with
which the accounting data is
recorded based on certain
assumptions. (data recorder) 8
 ACCOUNTING CONCEPTS
(ASSUMPTIONS)
1. Economic or Business Entity Concept
Business and Owners are treated as separate entities
through this concept. The most basic concept in
accounting. An accounting entity is an organization or a
section of an organization that stands apart from other
organizations and individuals as a separate economic unit.
The transactions of different entities should not be
accounted for together. Each entity should be evaluated
separately. The business is treated as a unit or entity
separate from its owners. 9
 ACCOUNTING CONCEPTS
(ASSUMPTIONS)
2. Time Period Concept (Periodicity)
An entity’s life can be meaningfully subdivided into equal
time periods for reporting purposes. It will be aimless to wait
for the actual last day of operations to perfectly measure the
entity’s profit. This concept allows the users to obtain timely
information to serve as a basis on making decisions about
future activities. For the purpose of reporting to outsiders, one
year is the usual accounting period. It is necessary to know at
frequent intervals “how things are going”. Twelve month
period is usually adopted for this purpose. This time period is
called Accounting Period. 10
 ACCOUNTING CONCEPTS
(ASSUMPTIONS)
3. Going Concern Concept
This is an assumption made that the business shall run
forever and the forced sale value of assets is not valued. It
will continue for indefinite period. Financial statements are
normally prepared on the assumption that the reporting
entity is a going concern and will continue in operation for
the foreseeable future. Hence, it is assumed that the entity
has neither the intention nor the need to enter liquidation
or to cease trading. This assumption underlies the
depreciation of assets over their useful lives. 11
 ACCOUNTING CONCEPTS
(ASSUMPTIONS)
4. Monetary Unit Priciple Concept (Money measurement)
Every aspect of a business is recorded as money using this concept. Only
those transactions are recorded which can be expressed in monetary
terms.
For Example:
An efficient dedicated manager is definitely an asset to the business, but
since the monetary measurement is not possible so it is not shown in the
books of account.
The Philippine peso is a reasonable unit of measure and that its
purchasing power is relatively stable. It allows accountants to add and
subtract peso amounts as though each peso has the same purchasing
power as any other peso at any time. This is the basis for ignoring the
effects of inflation in the accounting records. 12
 ACCOUNTING CONCEPTS
(ASSUMPTIONS)
5. Accrual Accounting Concept
The fundamental idea of accrual accounting can be stated as follows:
“The effects of business transactions should be recognized in the period in
which they occurred. Income should be recognized in the period when it is
carried regardless of when payment is received.
Expenses should be recognized in the period when it is incurred regardless of
when expenses are earned.
EXAMPLE:
Suppose Juana, a proprietress established a merchandising business that sells
ready to-eat foods to different fast foods and carinderia in the country. The
income from Juana’s business primarily comes from selling foods to customers,
it can be for cash or credit. If the business was able to sell goods for cash, this
will be recorded in the accounting records or book of accounts of her
business. On the other hand, if the goods were sold on credit, the transaction13
 ACCOUNTING PRINCIPLES

Accounting principles are the

rules to be followed while
reporting financial data.
(data presenter)
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 ACCOUNTING PRINCIPLES
6.Cost Principle/Historical Cost Principle
It requires that assets be recorded at the original purchase price, rather than their
current market value. It refers to the amount spent (cash or the cash equivalent)
when an item was originally obtained, whether that purchased happened last year
or ten years ago; amounts are not adjusted upward for inflation. When an asset
you purchased a year ago may suddenly gain value for a variety of reasons, the
cost principle maintains that the asset value remains the same as its original, or
purchase, cost regardless of later changes in market value.
The cost is considered to be the same as what is paid in the beginning and never its
realizable value at a later point in time.
• Fixed Assets are recorded at cost price and are systematically reduced by the
process called depreciation.
• These assets will disappear from balance sheet at the end of their economic life
when they have been fully depreciated and sold as scrap.
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 ACCOUNTING PRINCIPLES
7. Matching Principle
• Profit is must important factor for the proprietor to keep the business activities.
• Revenue and their related expense in the same accounting period.
• Purpose of matching concept is to avoid misAccounting standards are set by a
nation’s financial authorities to streamline the accounting process. This indeed
helped many countries understand the economic growth of any company in a
structured manner. Financial reporting is made easily understandable by these rules
and regulations.
It is a surprise to note that, accounting standards have also assumptions involved in
it. Financial reporting and accounting standards have their guidelines and
procedures. Unbiased, clear accounting is the order of the day, and it is achieved
following the strict guidelines. On these lines, the two most prominent terms that
revolve around the finance department are Accounting concepts and Accounting
principles. They both are interrelated, however, there are certain critical differences
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in them which help the standards of the data remain intact.
 ACCOUNTING PRINCIPLES
8.Objectivity Principle
The objectivity principle in accounting states that financial statements should be
objective i.e. the accounting information should be unbiased and free from any
external or internal influence. This helps financial statements to be trustworthy and
be useful for evaluation. Accounting records and statements are based on the
most reliable data available so that they will be as accurate and as useful as
possible. Reliable data are verifiable when they can be confirmed by independent
observers. Ideally, this principle requires business transactions to have some form of
impartial supporting evidence or documentation. Accounting records are based
on information that flows from activities documented by objective evidence.
Without this principle, accounting records would be based on whims and opinions
and is therefore subject to disputes. Falsifying accounting statements, such as
entering fictitious orders and then increasing accounts receivable, is a breach of
the Objectivity Principle. The accounts that you are entering in your books must be
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objective and verifiable.
 ACCOUNTING PRINCIPLES

9. Disclosure Principle
Requires that all relevant information that
would affect the user’s understanding and
assessment of the accounting entity be
disclosed in the financial statements.
All necessary, relevant, and material
information should be reported in this
principle for transparency. 18
 ACCOUNTING PRINCIPLES

10. Conservatism Principle

This is also known as prudence. Assets and
income should not be overstated while
liabilities and expenses should not be
understated. In case of doubt, expenses
should be recorded at a higher amount.
Revenue should be recorded at a lower
amount. 19
 ACCOUNTING PRINCIPLES

11.Materiality Principle
Financial reporting is only concerned with the information
that is significant enough to affect evaluations and
decisions. Materiality depends on the size and nature of
the item judged in the particular circumstances of its
omission. In deciding whether an item or an aggregate of
the items is material, the nature and the size of the item are
evaluated together. Depending the circumstances, either
the nature or the size of the item could be the determining
factor.
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 ACCOUNTING PRINCIPLES

12. Revenue Recognition Principle

Revenue is at the heart of all business performance. As a result,
analysts prefer that the revenue recognition policies for one
company are also standard for the entire industry. Revenue is to
be recognized and determines how to account for it in the
accounting period when goods are delivered or services are
rendered or performed. The revenue-generating activity must
be fully or essentially complete for it to be included in revenue
during the respective accounting period. Also, there must be a
reasonable level of certainty that earned revenue payment will
be received. 21
 Accounting Concepts VS
Accounting Principles
1. The main purpose of accounting concepts is to record
data by the accountant while the accounting principles are
to report the financial data based on GAAP norms.
2. Accounting concepts are considered internal for the
process it follows to record the data, while accounting
principles are also internal but the report has to be presented
externally as well.
3. Accounting concepts are to be followed first to record
data while accounting principles are followed later to report
the finance data. 22
Accounting Concepts VS
Accounting Principles

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