Lesson 4.

Application of Accounting
Concepts and Principles

Fundamentals of Accountancy, Business,

and Management 1
Accountancy, Business, and Management

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Although the famous
adage says, “Ignorance is
not an excuse.”, an
individual may still violate
these rules and regulations
if they are not aware of it.

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The same is true in the
business world. One wrong
move may compromise the
operations of a business or
affect the company’s position
in the market.

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Quick Look

Securities and Exchange Commission

The Securities and Exchange Commission (SEC) is a government agency
mandated to regulate corporations and financial institutions. It is also
established to protect the public from investing in scams and other
related fraudulent business activities.

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Quick Look

Securities and Exchange Commission

To uphold its mandate, one of SEC’s tasks is to assess all the financial
statements submitted by corporations. The Securities Regulation Code
(SRC) ensures that financial reports are audited by independent Certified
Public Accountant (CPA). Moreover, the SRC Implementing Rules and
Regulations (IRR) contain conditions for internal record keeping and
accounting controls for businesses to follow.

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Quick Look

Questions to Ponder

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

2. What is the role of a Certified Public Accountant in performing the
mandate of the Securities and Exchange Commission?
3. How can the public benefit from the mandate of the Securities and
Exchange Commission?

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Learning Competency

Solve exercises on accounting principles as applied in various

cases (ABM_FABM11-IIIb-c-16).

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Learning Objectives

At the end of this lesson, you should be able to do the following:

● Give examples of transactions applying accounting concepts

and principles.
● Differentiate accounting concepts and principles.
● Analyze violations of accounting concepts and principles in
business transactions.

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How do accounting concepts and principles
affect a business’ economic activities?

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Application of Accounting Concepts and Principles

● sets of rules and guidelines that a business follows when

preparing financial reports
● ensure that a company’s reports are valid, reliable,
consistent, and comparable

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Application of Accounting Concepts and Principles

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 Application of Accounting Concepts and Principles
Business Entity
Concept
Financial transactions must
be recorded separately
from those of its owners
and other businesses.
Mr. Wilkins owns an
electronic company and
drives a personal luxury car.
According to the business
entity concept, Mr. Wilkin’s
luxury car should not be
counted as part of his
company’s assets.
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 Application of Accounting Concepts and Principles

Monetary Unit Mr. Nagoya, the CEO of Tokyo

Concept Builders, invested additional
capital in the form of 20
hectares of land. Under the
Record only the monetary unit principle, the
transactions that can be said investment can not be
expressed in terms of a recorded unless there is a
currency. statement of value in terms
of a common monetary unit.

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 Application of Accounting Concepts and Principles

Going Concern
One of the branches of Star
Principle
Company will close because
of financial instability.
Assume that a business Shutting down one of its
entity will operate branches does not harm the
indefinitely. capacity of the other
branches to operate.

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 Application of Accounting Concepts and Principles
Time Period Principle
Financial transactions must
be reported in a standard
period of time.
Gamma Company rendered
services to Meta Company
in the second quarter; this
transaction must be
reflected in Gamma
Company’s income
statement for the said
quarter.
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 Application of Accounting Concepts and Principles
Objectivity Principle
Financial reports must be
based on solid evidence.
Company NYZ was audited
by an external auditor and
was asked to provide
customers' receipts to
validate its financial
statements.
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 Application of Accounting Concepts and Principles
Cost Principle
Acquired assets, liabilities,
and equity investments
should be recorded at their
original cost.
Roma Cleaning Services
bought equipment for
₱60,000 and is estimated to
be worth ₱30,000 in four
years. The business should
record the equipment at
₱60,000 despite the price
adjustment in the future.
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 Application of Accounting Concepts and Principles
Accrual Accounting
Principle
recording revenues when
earned and expenses as
incurred
JM Builders received an
electricity bill on December
26 and intended to pay it on
January 15. The bill should
be recorded as an expense
at year-end even if it is not
yet paid.
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 Application of Accounting Concepts and Principles
Revenue Recognition
Principle
guides businesses on how
and when revenue is to be
recognized
Mexico Auditing performed
services for Best Retails on
credit. Mexico Auditing
should recognize this
transaction as revenue even
if it is not yet paid.
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 Check Your Progress

1
What is the difference between accrual accounting principle
and revenue recognition principle?

Answer area

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 Application of Accounting Concepts and Principles
Matching Principle
Revenues are reported
together with related
expenses in the same
reporting period.
Monday Company gives
bonuses to its employees
every year, paid in the
following year. The business
should record the bonus as
an expense in the same
year that the employees
earned it.
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 Application of Accounting Concepts and Principles

Full Disclosure
Principle
O Company is involved in a
should include all relevant lawsuit. The business
and necessary information should disclose that it has a
relevant to the pending lawsuit that could
affect its financial situation.
understanding of the
financial statements

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 Application of Accounting Concepts and Principles

Conservatism Red Residences is in a

Principle lawsuit against its
● assets and revenue competitor. The business
should not be should not report possible
gains from the lawsuit
overstated
because the case hasn’t
● liabilities and expenses been decided on yet.
should not be Therefore, the gain is not yet
understated final.
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 Application of Accounting Concepts and Principles
Materiality Principle
companies can ignore some
misstatements if the impact
is immaterial
Grace Company may not
depreciate an asset worth
₱200.00 over its useful life
of five years and may
outright record it as an
expense.
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 Philippine Financial Reporting Standards

Closer L
o ok

Businesses in the Philippines follow the Philippine Financial

Reporting Standards (PFRS) when preparing financial reports.
Most of the PFRS are adopted from the International Financial
Reporting Standards (IFRS), but some with modifications and
amendments. These standards are based on the Generally
Accepted Accounting Principles (GAAP).

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 Suspension of Trading of Shares of PAL Holdings in the PSE
Case Stu
dy

The trading of shares of PAL Holdings in the Philippine Stock

Exchange was suspended last June 18, 2021 because its
auditor, SyCip Gorres Velayo & Co. (SGV & Co.), was not able to
give an opinion on PAL’s audited financial statements.

Keren Concepcion Valmonte, “PAL share trading halted on audit disclaimer,” BusinessWorld, June 18, 2021,
https://www.bworldonline.com/pal-share-trading-halted-on-audit-disclaimer/, last accessed on March 11, 2022.
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 Suspension of Trading of Shares of PAL Holdings in the PSE
Case Stu
dy

The failure to give an opinion violates Rule 68 of the Securities

Regulation Code (SRC). Rule 68 requires all companies to
submit audited financial statements with an unqualified
opinion from their respective auditor.

Keren Concepcion Valmonte, “PAL share trading halted on audit disclaimer,” BusinessWorld, June 18, 2021,
https://www.bworldonline.com/pal-share-trading-halted-on-audit-disclaimer/, last accessed on March 11, 2022.
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 Suspension of Trading of Shares of PAL Holdings in the PSE
Case Stu
dy

An unqualified opinion from an auditor means that the

financial reports submitted to them were accurate and fair.

To cite SGV & Co., the auditing firm was “unable to obtain
sufficient appropriate audit evidence” for an opinion on PAL’s
financial statement.

Keren Concepcion Valmonte, “PAL share trading halted on audit disclaimer,” BusinessWorld, June 18, 2021,
https://www.bworldonline.com/pal-share-trading-halted-on-audit-disclaimer/, last accessed on March 11, 2022.
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 Suspension of Trading of Shares of PAL Holdings in the PSE
Case Stu
dy

The role of auditors and the Securities and Exchange

Commission is important because they ensure that
companies present their financial reports accurately and
fairly.

Keren Concepcion Valmonte, “PAL share trading halted on audit disclaimer,” BusinessWorld, June 18, 2021,
https://www.bworldonline.com/pal-share-trading-halted-on-audit-disclaimer/, last accessed on March 11, 2022.
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Keep in Mind

● Accounting is driven by various concepts and principles that

businesses must adhere to when dealing with financial
information. These guidelines are essential to guarantee that
statements are comprehensive and constant.

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Keep in Mind

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Keep in Mind

● Accounting concepts and principles guide businesses in

analyzing economic events and when preparing financial
reports. They help companies track errors and avoid
fraudulent activities.

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 Try This

True or False.

1. Personal transactions made by the owner cannot be

recorded in the business’s accounting books.

True False

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 Try This

True or False.

2. A business may remove financial data that may affect the

image of the business among its users.

True False

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 Try This

True or False.

3. An asset that has a negligible impact on the business’s

financial statements can be reported as an expense.

True False

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 Try This

True or False.

4. A business purchased insurance that is good for one year

and recorded expenses right away.

True False

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 Try This

True or False.
5. 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 False

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 Practice Your Skills
Correct the sentences to make them adhere to accounting concepts and
principles and make the transactions valid.

1. White Logistics suffered from losses due to low demand. Its

cash flow is below target and all measures have been taken
into consideration. The owner took the advice of the
financial manager to permanently suspend operations.
Answer area

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 Practice Your Skills
Correct the sentences to make them adhere to accounting concepts and
principles and make the transactions valid.

2. 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.
Answer area

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 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?
Answer area

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 Challenge Yourself
Answer the following questions.

2. Choose an accounting concept or principle and provide a

business transaction where it should be applied.

Answer area

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Photo Credits

Slide 1: money-profit-finance-business-2696228.jpg, by nattanan23 is licensed under Pixabay License via Pixabay.

Slide 2: compliance-observance-consent-5899190.jpg, by geralt is licensed under Pixabay License via Pixabay.

Slide 3: startup-whiteboard-room-indoors-3267505.jpg, by StartupStockPhotos is licensed under Pixabay License via

Pixabay.

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Bibliography

Accounting Tools, Inc. “Basic Accounting Principles”. Last modified June 15, 2021.
https://www.accountingtools.com/articles/2017/5/15/basic-accounting-principles

“Mandate, Mission, Values and Visions.” Securities and Exchange Commission. Accessed January 28, 2022.
https://www.sec.gov.ph/about-us/mandate-mission-values-and-vision-2/.

Valmonte, Karen Concepcion. “PAL share trading halted on audit disclaimer. BusinessWorld, June 18, 2021.
https://www.bworldonline.com/pal-share-trading-halted-on-audit-disclaimer/.

Wood, Frank, and David Horner. Business Accounting Basics. Harlow: Pearson Education Limited, 2010.

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