Chapter 2

Accounting
Concepts &
Principles
by: Zeus Vernon B. Millan

Rosario M. Perez
Accounting Concepts &
Principles
• Set of logical ideas and procedures that
guide the accountant in recording and
communicating economic information
• Provide reasonable assurance that
information communicated to users is
prepared in a proper way.
• Accounting practices standard way of
recording such as use of peso signs,
indenting for credit entry, etc.
Separate Entity Concept

• The business is viewed as a separate

person, distinct from its owner.
• The personal transaction of the owner are
not recorded, only transactions of the
business.
• This application is necessary so that
financial position and performance of the
business can be measured properly.
Historical Cost Concept

• Assets are initially recorded at

their acquisition cost.
Going Concern Assumption

• Under this concept, the business is

assumed to continue to exist for an
indefinite period of time.
• The opposite of going concern is
liquidating concern
 Matching

• Some cost are initially recognized as

assets and charged as expenses only
when the related revenue is
recognized.
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.
• Thus, income is recorded when it is
earned rather then when it is collected,
while expense is recognized in the period
when it is incurred rather than when it is
paid.
Prudence or Conservatism

• The accountant observes some degree of

caution when exercising judgments
needed in making accounting estimates
under conditions of uncertainty.
• This concept is necessary so that assets
or income are not overstated and liabilities
and expenses are not understated.
 Time Period

• Under this method, the life of the business

is divided into series of reporting periods.
• Calendar or fiscal year = Jan. to Dec.
• Interim period = monthly, quarterly, semi-
annually
 Stable Monetary Unit

• ALOEIE are stated in terms of a common

unit of measure, which is the peso.
• The purchasing power of the peso is
regarded as stable, therefore, inflation are
ignored.
 Materiality Concept

• Guides the accountant when applying

accounting principles which is applicable to
material items.
• An item is considered material if its omission
or misstatement could influence economic
decisions
• Accounting principle does not specify a
certain amount that is considered material.
It’s a matter of professional judgment.
 Cost Benefit

• The cost of processing and

communicating information should not
exceed the benefits to be derived from it.
• Cost constraint.
Full disclosure Principle

• Sufficient detail to disclose matters that

make a difference to users.
• Sufficient condensation to make the
information understandable, keeping in
mind the costs of preparing and using it.
Consistency Concept

• Business shall apply accounting policies

consistently, and present information
consistently from one period to another.
• Accounting policies used this year shall be
the same accounting policies used last
year.
• Any change in accounting policy must be
disclosed.
Accounting Standards

• PFRS – Philippine Financial Reporting

Standards
• GAAP – Generally Accepted Accounting
Principles
• FRSC – Financial Reporting Standards
Council
• IASB – International Accounting Standards
Board
 Regulatory Bodies

• SEC – Securities and Exchange

Commissions
• BIR – Bureau of Internal Revenue
• BSP – Bangko Sentral ng Pilipinas
• CDA – Cooperative Development Authority
Fundamental Qualitative Characteristics
I. Relevance

• The ability to affect the decision making of

the users.
a)Predictive Value
b)Confirmatory Value
c)Materiality
II. Faithful representation

• If its factual and it represents actual effects

of events that have taken place.
a)Completeness
b)Neutrality
c)Free from error
Enhanced Qualitative Characteristics
I. Comparability

• It enables users to make comparison to

identify and understand the similarities in
and the differences among items.
• A comparison requires at least two items
 II. Verifiability

• If it enables different and independent

users to reach a general agreement about
what the information intends to depict.
 III. Timeliness

• Information must be provided to users on

time to be capable of influencing their
decisions
 IV. Understandability

• Information must be presented clearly and

concisely in order for the users to
understand them.
• Users are expected to have a reasonable
knowledge to understand the information
contained in the FS.