Basic Accounting

Concepts
Learning Objectives
1. Give examples of accounting concepts and principles.
2. Apply the concepts in solving accounting problems.
3. Give examples of accounting concepts and principles.
4. Apply the concepts in solving accounting problems.
 Accounting Information
• General purpose accounting information – designed to
meet the common needs of most statement users. This
information is governed by the Philippine Financial
Reporting Standard

• Special purpose accounting information - designed to

meet the specific needs of particular statement users. This
information is provided by other types of accounting, e.g.,
managerial accounting, tax basis accounting, etc.
 Basic Accounting Concepts
Accounting Concepts and Principles
• Set of logical ideas and procedures that guide the
accountant in recording and communicating economic
information.
• They provide reasonable assurance that information
communicated to users is prepared in a proper way.
 Basic Accounting Concepts
1. Separate entity concept 9. Materiality concept
2. Historical cost concept 10. Cost-benefit
3. Going concern assumption 11. Full disclosure principle
4. Matching 12. Consistency concept
5. Accrual Basis 13. Concept of Articulation
6. Prudence (or Conservatism) 14. Residual equity theory
7. Time period 15. Fund Theory
8. Stable monetary unit 16. Realization
 Basic Accounting Concepts
• Separate entity concept – The business is viewed as a
separate entity, distinct from its owner(s). Only the
transactions of the business are recorded in the books of
accounts. The personal transactions of the business
owner(s) are not recorded.
• Historical cost concept (Cost principle) – assets are initially
recorded at their acquisition cost.
• Going concern assumption – The business is assumed to
continue to exist for an indefinite period of time.
• Matching – Some costs are initially recognized as assets
and charged as expenses only when the related revenue is
recognized.
 Basic Accounting Concepts
• Accrual Basis of accounting – income is recorded in the
period when it is earned rather than when it is
collected, while expense is recorded in the period when
it is incurred rather than when it is paid.
• Prudence – The observance of some degree of caution
when exercising judgments under conditions of
uncertainty. Such that, if there is a choice between a
potentially unfavorable outcome and a potentially
favorable outcome, the unfavorable one is chosen. This
is necessary so that assets or income are not overstated
and liabilities or expenses are not understated.
 Basic Accounting Concepts – (cont’n)
• Reporting Period – The life of the business is
divided into series of reporting periods.
• Stable monetary unit – Assets, liabilities,
equity, income and expenses are stated in
terms of a common unit of measure, which is
the peso in the Philippines. Moreover, the
purchasing power of the peso is regarded as
stable. Therefore, changes in the purchasing
power of the peso due to inflation are ignored.
 Basic Accounting Concepts
• Materiality concept – 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.
• Cost-benefit – The costs of processing and
communicating information should not exceed
the benefits to be derived from the
information’s use.
 Basic Accounting Concepts
• Full disclosure principle – Information
communicated to users reflect a balance
between detail and conciseness, keeping in
mind the cost-benefit principle. 
• Consistency concept – Like transactions are
accounted for in like manner from period to
period.
 Basic Accounting Concepts
• Concept of Articulation – All of the
components of a complete set of financial
statements are interrelated.
• Residual equity theory – This theory is
applicable where there are two classes of
shares issued, ordinary and preferred. The
equation is “Assets – Liabilities – Preferred
Shareholders’ Equity = Ordinary
Shareholders’ Equity”
 Basic Accounting Concepts
• Fund Theory – The accounting objective is
the custody and administration of funds.
• Realization – The process of converting non-
cash assets into cash or claims for cash.
Philippine Financial Reporting Standards (PFRSs)

The PFRSs are Standards and Interpretations

adopted by the FRSC. They consist of the
following:
1. Philippine Financial Reporting Standards
(PFRSs);
2. Philippine Accounting Standards (PASs);
and
3. Interpretations
Importance of Philippine Financial Reporting Standards (PFRSs)

1. Entities should follow a uniform set of generally acceptable

reporting standards when preparing and presenting financial
statements; otherwise, financial statements would be
misleading.
 2. The term “generally acceptable” means that either:
a. the standard has been established by an authoritative
accounting policy-making body; or
b. the principle has gained general acceptance due to
practice over time and has been proven to be most
useful.
3. The process of establishing financial accounting standards
is a democratic process in that a majority of practicing
accountants must agree with a standard before it
Relevant Regulatory Bodies
1. Securities and Exchange Commission (SEC) – The SEC is tasked
with regulating corporations, including partnerships. SEC required
corporations and partnerships to file audited financial statements.
2. Bureau of Internal Revenue (BIR) – The BIR is tasked in collecting
national taxes and administering the provisions of the Tax Code.
3. Bangko Sentral ng Pilipinas (BSP) – BSP is tasked in regulating
banks and other entities performing baking functions. BSP
influences the selection and application of accounting policies by
these businesses.
4. Cooperative Development Authority – CDA is tasked in regulating
cooperatives. The CDA influences the selection and application
accounting policies by cooperatives.
 
 
 Qualitative Characteristics
I. Fundamental Qualitative Characteristics
i. Relevance (Predictive Value, Confirmatory Value, Materiality)
ii. Faithful Representation (Completeness, Neutrality,
Free from error)

II. Enhancing Qualitative Characteristics

i. Comparability
ii. Verifiability
iii. Timeliness
iv. Understandability
 Fundamental vs. Enhancing
• The fundamental qualitative characteristics are
the characteristics that make information useful to
users.
• The enhancing qualitative characteristics are the
characteristics that enhance the usefulness of
information
 Relevance
• Information is relevant if it can affect the decisions of users.
• Relevant information has the following:
a. Predictive value – the information can be used in making
predictions
b. Confirmatory value – the information can be used in
confirming past predictions

 Materiality – is an ‘entity-specific’ aspect of relevance.

 Faithful representation
• Faithful representation means the information provides a
true, correct and complete depiction of what it purports to
represent.
• Faithfully represented information has the following:
a. Completeness – all information necessary for users to
understand the phenomenon being depicted is provided.
b. Neutrality – information is selected or presented
without bias.
c. Free from error – there are no errors in the description
and in the process by which the information is selected
and applied.
Enhancing Qualitative Characteristics
1. Comparability – the information helps users in
identifying similarities and differences between different
sets of information.
2. Verifiability – different users could reach consensus as
to what the information purports to represent.
3. Timeliness – the information is available to users in time
to be able to influence their decisions.
4. Understandability – users are expected to have:
a. reasonable knowledge of business activities; and
b. willingness to analyze the information diligently.