Unit 4: Accounting Concepts and Principles

4.2. Application of Accounting Concepts and Principles

Questions to Ponder

1. What is the function of the Securities and Exchange Commission?

The Securities and Exchange Commission is the national government regulatory agency
tasked with overseeing the corporate sector, the capital market players, the securities
and investment instruments market, and the protection of the investing public.

2. What is the role of a Certified Public Accountant in performing the mandate of the
Securities and Exchange Commission?
Certified Public Accountants certify a corporation's annual report of its operations and
financial statements before submission to the Security and Exchange Commission.

3. How can the public benefit from the mandate of the Securities and Exchange
Commission?
Answers may vary. The SEC has the power to protect the public and their investments.
The agency has the absolute jurisdiction, supervision, and control over all corporations,
partnerships, or associations that are the grantees of the primary franchise and a license
or permit issued by the government to operate in the Philippines.

Check Your Progress

1. What is the difference between accrual accounting principle and revenue
recognition principle?
Accrual Accounting Principle states that a business must record an expense once
incurred and not upon payment. In contrast, the Revenue Recognition Principle states
that a company must recognize revenue once services have been performed and not
upon receipt of payment from a client.

4.2. Application of Accounting Concepts and Principles 1

 Unit 4: Accounting Concepts and Principles
Try This

True or False. Write true if the statement is correct; otherwise, write false.

True 1. Personal transactions made by the owner cannot be recorded in the

business’s accounting books.

True 2. Even if a company is in a financial crisis, it can still be considered a

going concern if it can ensure the continuity of its operations.

False 3. When a company buys equipment, the cost should be recorded at the
current market value.

False 4. A business may remove financial data that may affect the image of
the business among its users.

True 5. In case of doubt, expenses and liabilities should not be understated.

False 6. A company that received its electric bill should not record it until it is
paid.

True 7. A commission must be recorded along with the revenue on the

accounting year it was incurred.

True 8. An entity should record financial activities that can be recognized in

currency terms.

True 9. An asset that has a negligible impact on the business’s financial

statements can be reported as an expense.

False 10. A business that offers services to a client on credit must wait for its
customer to pay before recognizing it as a revenue.

True 11. In the objectivity principle, a business transaction is invalid if it is not

supported by any solid evidence.

False 12. A business purchased insurance that is good for one year should
record the expenses right away.

4.2. Application of Accounting Concepts and Principles 2

 Unit 4: Accounting Concepts and Principles
False 13. Asset and revenue can be overstated because it reflects a better
financial performance.

True 14. When a business paid rent in advance, the cost of rent that should be
recorded as an expense is equivalent to the worth of a prepaid rent
that expired.

True 15. A transaction that violates a principle or concept must not be

recognized.

Practice Your Skills

Correct the sentences to make them adhere to accounting concepts and principles and
make the transactions valid.
1. Luna Company performed consulting services to a client on credit amounting to
₱55,000.00. The company will recognize the revenue upon receipt of payment.
Luna Company performed consulting services to a client on credit amounting to
P55,000.00. The company will recognize the revenue upon fulfillment of services to the
client.

2. White Logistics suffered from losses due to low demand. Its cash flow is below
target, and all measures have been taken into consideration. There is enough
indication that the company will continue to suffer persistent losses. Under the
going concern assumption, the company must continue its operations indefinitely.
White Logistics suffered from losses due to low demand. Its cash flow is below target
and all measures have been taken into consideration. If there is evidence that the entity
would experience persistent losses or that the entity’s operations are to be terminated,
the going concern assumption is terminated.

3. Atty. James Barron lent money to his law firm to finance the expansion of the
business. No transaction was recorded since the money was provided by the
owner.
Atty. James Barron lent money to his law firm to finance the expansion of the business.
The business must record loans payable.

4.2. Application of Accounting Concepts and Principles 3

 Unit 4: Accounting Concepts and Principles

4. East Company hired an external auditor to audit its books. The auditor found out
that some transactions were not supported by documents but the auditor
continued its external audit and approved the company’s books.
East Company hired an external auditor to audit its books. The auditor found out that
some transactions were not supported by documents. The auditor must call the
attention of the accounting department and ask for supporting documents otherwise
the transaction will be invalid.

5. Bright Tutorial Service purchased land worth ₱560,000.00. It is estimated that the
price of the land two years from now will be ₱880,000.00. The business recorded
land as ₱880,000.00 since land is known to appreciate over time.
Bright Tutorial Service should record land as ₱560,000.00 even if the price of the land is
estimated to go up in the future.

Challenge Yourself
Answer the following questions:

1. What do you think are the challenges that businesses face when implementing the
rules and regulations in reporting financial data?
The challenge for a business when implementing the rules and regulations is
familiarizing every concept and principle as well as the ability to implement and apply
these concepts in every business activities.

2. Choose two accounting concepts or principles and explain it from your own
understanding.
Answers may vary. Business entity principle states that the owner and its business are
two different entities thus, transactions made by the owner must not be recorded in the
book of the business and vice versa.
Revenue recognition principle states that a business must recognize a revenue once
service has been made regardless of payment from the client.

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 Unit 4: Accounting Concepts and Principles

3. From your chosen accounting concept and principle in no. 2, provide a business
transaction related to them.
Business Entity - The owner purchased computers for the business using his personal
funds, the business will record it as an additional contribution of the owner to the
business.
Revenue Recognition - Carl Tutorial Service performed tutorial to a client and received a
promissory note. The business must record revenue since the services were already
provided.

4.2. Application of Accounting Concepts and Principles 5