BENIGNO S.

AQUINO NATIONAL HIGH SCHOOL

PRESENTATION
ACCOUNTANCY, BUSINESS & MANAGEMENT
 MELC CONTENT
LESSON 3: Accounting Concepts and
Principles

Most Essential Learning Competencies:

At the end of the lesson, the learner will be able to
explain the varied accounting concepts and principles
solve exercises on accounting principles as applied in various cases
 Accounting concepts and principle (assumptions or postulates) are a set of logical ideas and
procedures that guide the accountant in recording and communicating economic information. They
provide a general frame of reference by which accounting practice can be evaluated. and they
serve as guide in the development of new practice and procedures.

Accounting concepts and principles provide reasonable assurance that information

communicated to users is prepared in a proper ways of performing surgery on a patient; engineers
have a proper way of constructing a bridge; accountants to have a proper way of recording and
communicating economic information. This is to maximize that usefulness of accounting
information

Basic Accounting Concepts:

These are numerous concepts and principles used in accounting. These are sourced from that
Standard (PFRSs), the Conceptual Framework for financial Reporting, or general acceptance in the
profession due to long-time use. Accounting is constantly changing and new concepts and
principles used in accounting. Only some of the basic and most common accounting concept and
principle are listed.
 1. Separate Entity Concept
Under this concept, the business is viewed as a separate person, distinct from its owner(s). Only the
Transaction of the business owner(s) are not recorded.
For Example, you started a business. Under the separate entity concept, you will view your business
as a separate person, like a friend maybe. Your business can also have its own Facebook account.
Therefore, the money you invested to the business is now owned by the business. It is not your
personal money anymore. Also, the business owns any money that it earns. If you take money from the
business for your personal use, it would be recorded in the books of accounts as a withdrawal of your
investment from the business. Similarly, when you take goods from the business for your personal
consumption which you don't intend to pay, this would also be recorded as a withdrawal of your
investment. Your personal transaction (i.e., those that do not involve that business are not recorded in the
books of accounts. For example, using your personal money to buy groceries for home consumption is not
recorded in the book of accounts.
The application of the separate entity is necessary so that the financial position and financial
performance of a business can be measured properly. By applying the separate entity concept, you can
objectively know if the business is really earning profits, or if it has the ability to do so.
 Many business have failed because they did not apply the separate entity concept. Take for example
an owner of a sari-sari store who regards the store's cash register as an extension of his pocket. He
takes money from the business then suffers from lack of working capital, it runs out of goods to sell
without any money to replenish them. Eventually the business becomes bankrupt. Unknowingly, this guy
has caused his own business to fail. If this guy had applied to separate entity concept, he would have
had better accounting information that could have led him to make better business decisions

2. Historical Cost Concept (Cost Principle)

Under this concept, assets are initially recorded at their acquisition cost.
3. Going Concern Assumption
Under this concept the business is assumed to continue to exist for an indefinite period of time.
This is necessary for accounting measurement to be meaningful. For example, measuring assets at
historical cost ( historical cost concept) is appropriate only when the business is going concern.
The opposite of going concern is liquidating concern. This is the case if the business intends to
end its operations or if it has no other choice but to do so (e.g., the business is bankrupt). The assets of
a liquidating concern are measured at net selling price rather that at historical cost. (going concern
good; Liquidating concern-bad.
4. Matching (or Association of Cause and Effect)
Under this concept, some cost are initially recognized as assets and charged as expenses only
when the related revenue is recognized.
5. Accrual Basis of Accounting
Under the "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 in the period when
it is earned rather than when it is collected, while expense is recognized in the period when it is incurred
rather that when it is paid.
6. Prudence (or Conservatism)
Under this concept, the accountant observes some degree of caution when exercising judgments
needed in making accounting estimates under conditions of uncertainty. Such that, if the accountant
needs to choose between a potentially unfavorable outcome versus a potentially favorable outcome, the
accountant chooses the unfavorable one. This is necessary so that asset or income are not overstated
and liabilities or expenses are not understated.
7. Time Period (periodicity, Accounting Period, or Reporting Period Concept)
Under this concept, the life of the business is divided into series of reporting periods.
8. Stable Monetary Unit
Under this concept, 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 is
regarded as stable. Therefore, changes in the purchasing power of the peso due to inflation are ignored.
9. Materiality Concept
This concept guides the accountant when applying accounting principles. This is because accounting
principles are applicable only to material items. An item is considered material if its omission or
misstatement could influence economic decisions. Materiality is a matter of professional judgement is
based on the size and nature of an item being judged. For example material items are communicate to
users in a more detailed manner as compared to immaterial items. Another example is that big companies
often round-off amounts in their financial reports. An account with a balance of PHP 323,487,679,621.21
may be reported as PHP 323,488 with an indication of the level of the rounding-off as (in '000,000s)
meaning "in millions." Since the company is big (nature), the amount of PHP 679,621.21 (size) is
considered immaterial Rounding-off this amount would not affect the decision making of the users.
You may also think of materiality tis way. You go to a store to buy some stuff worth PHP 99.90, which
you pay using a PHP 100.00 bill. the cashier tells you that she has no PHP 0.10 to give you as change. Will
you get mad? i hope not. Most likely, you will just smile and tell her to keep the change. This is because the
PHP 0.10 is most likely to be immaterial to you
It should be noted though that rounding-off of amounts is acceptable only when preparing financial
reports. The accountant does not omit amounts (even centavos) when' recording in the books of accounts.'
Accounting principles do not specify a certain amount that is considered material - this is matter of
professional judgement and depends on the facts and circumstances a surrounding the entity (e.ge., what
18 material to on might be immaterial to others, and vice-versa).
10. Cost-Benefit ( Cost Constraint)
Under this concept, the cost of processing and communicating information should not exceed the
benefits to be derived from it.
11. Full Disclosure Principle
This concept is related to both the concept of materiality and cost-benefit. Under the full disclosure
principle, information communicated to users reflect a series of judgmental trade-offs that strives for;
a. Sufficient detail to disclose matters that make a different to users, yet.
b. Sufficient condensation to make the information understandable. keeping in mind the cost of
preparing and using it.
12. Consistency Concept
This concept requires a business to apply accounting policies consistently, and present information
consistently, from one period to another. this means that like transaction must be accounted for in like
manner
Accounting policies used this year shall be the same policies used last year,. This, however, does
not mean that a business cannot change its accounting policies. Accounting policies can be changed if it is
required by a standard or the change would result in more relevant and more reliable information. Any
change in accounting policy must be disclosed
Application of the Basic Accounting Concepts
During the year, you started a business of selling personalized mugs and T-shirts. You opened a
separate bank for the business and deposited your initial investment of PHP 250.00 to this account.
(Separate entity concept).

The business acquired a printing machine. The regular selling price is PHP 100 000; however, you
were able to acquire it at a ‘discounted price of PHP 90 000. You will record the machine at its
acquisition cost of PHP 90 000 rather than the regular selling price. (Historical cost concept).

The business acquired initial inventory of mugs and T-shirts for a total cost of PHP 50 000. You
will record the cost as an asset (i. e. inventory) rather than as expense. (Matching concepts).

All the inventory was sold on credit for PHP 300 000 (* sold on credit means ‘pinautang’ in
Filipino). You will immediately record the credit sales as accounts receivable* rather than waiting for
them to be collected (* accounts receivable’ means ‘listahan ng mga pinautang in Filipino). (Accrual
basis). Also, you will now record the PHP 50 000 cost of the inventory as expense (Matching
concept)
 You collected PHP 290 000 out of PHP 300 000 total credit sales. You will deposit the collections to the
bank account of the business rather than to your personal account. (Separate entity concept)

The debtor* for the remaining PHP 10 000 is in financial difficulty (*’debtor’ means taong ‘umutang’ in
Filipino). This has raised doubt on whether he can pay his account. You will immediately recognize the
doubtful account as expense. (Prudence or Conservatism and Accrual basis).

You withdrew cash of PHP 80 000 from the business for your personal use. You will record this
transaction as a withdrawal of your investment from the business rather than a business expense. (Separate
entity concept).

At the end of the year, you prepared the financial statement of your business to determine, among
others, whether the business has earned profit. (Time Period)

When preparing financial statements, you discovered that the business has $10 (dollars). You will
translate this to Philippine peso using the current exchange rate. The amount that you will report in the
financial statements is the translated amount. (Stable Monetary Unit).
 Also, you have found out that the regular selling price of a new printing machine increased from PHP
100 000 to PHP 200 000. You will ignore this information (Stable monetary unit) and report the printing
machine at its acquisition cost of PHP 90 000 in the financial statement (Historical cost). This is because
you don’t intend or expect to close your business in the foreseeable time. (Going concern)

During the year, the business bought a trash bin for PHP 80. You expect to use this over several
years. However, because you deemed the cost as immaterial you will record this as an expense rather
than an asset. (Materiality).

Moreover, when you prepared the financial statements you decided to include the cost of the trash
bin in a “Miscellaneous Expenses” account together with other immaterial expenses. You don’t expect
users of the financial statements to benefit from reporting the immaterial cost separately. (Cost-benefit).

You will make brief description of the “Miscellaneous Expenses” account in the notes to financial
statements sufficient to understand the nature of this account. (Full disclosure).

You then adopted an accounting policy of expensing outright all acquisitions of equipment costing P
5,000 and below. You will apply this policy consistently in the future period. (Consistency)
 Accounting Standard
Accounting concept and principles are either explicit or implicit. Explicit concepts and principles are
those that are specifically mentioned in the Conceptual Framework for Financial Reporting and in the
Philippine Financial Reporting Standards (PPRSs). Implicit concepts and principles are those that are not
specifically mentioned in the foregoing but are customarily used because of their general and long time
acceptance within the accountancy profession.
The terms "concept", "principles", "standard", "assumptions" and "postulates" are used
interchangeably in practice. However, the term "standard" is used to specifically refer to the Philippine
Financial Reporting Standards (PFRSS). Traditionally, accounting standards were referred to as the
generally accepted accounting principles (GAAP).

Philippine Financial Reporting Standards (PFRSs)

The Philippine Financial Reporting Standards (PFRSs) are Standards and Interpretations adopted by the
Financial Reporting Standards Councils (PFRSs). They consist of the following.

a. Philippine Financial Reporting Standards (PFRSs)

b. Philippine Accounting Standards (PASS); and
c. Interpretations
 Just like The basic accounting concepts, the standards serve as guide when recording and
communicating accounting information. The difference is that the standards provide a more detailed
application of concept. They also prescribe which principle is most appropriate for specific economic
transaction. They also require certain information that should be included in financial reports and how this
information is presented.

You may think of the difference between basic concepts and Standards this way a basic concept would
be like "You need to brush your teeth daily". On the other hand, a standard would prescribe a proper way
of brushing your teeth, how many times should you brush in a day, and it may even suggest a certain
toothbrush that is the best for you.

The PFRSs are issued by the financial Reporting Standards Council (FRSC), which is the official
accounting standard-setting body in the Philippines.

The PFRSs are patterned from the International Financial Reporting Standards (IFRSS) which is
issued by the International Accounting Standards Board (IASB). This means that the accounting standards
used here in the Philippines are similar to those used in other countries worldwide.
 But why do we need to have uniform accounting standards? Well, this is because, for financial statement
to be useful, they must be prepared using reporting standards that are generally acceptable. Otherwise,
each business would have to develop its own standards. If that is the case, every business may just present
any asset or income it wants and omit any liability or expense it does not want to present. Financial
statements would not be comparable, the risk of fraudulent reporting is heightened, and economic ecisions
based on these financial ataements would be grossly incorrect. For this reason, entities should follow a
uniform set of reporting standards when preparing and presenting financial statements.

Imagine a basketball game with no rules- the player would be like a bunch of monkeys jumping and
running around; or a society with no laws everything would be in chaos.
1. The standard has been stablished by an authoritative accounting standard-setting body; or
2. 'The principle has gained general acceptance due to practice over time and has been proven to be most
useful.

The process of establishing accounting standards is a democratic process in that a majority of

practising accountants worldwide must agree with a standard before it becomes implemented.
 Relevant regulatory bodies

Other than the Financial Reporting Standards Council (FRCS), the following also affect the accounting policies
used by businesses and their financial reporting:

1.Securities and Exchange Commission(SEC), - the SEC is task with regulating corporations including
partnership. the sec requires corporations and partnerships to audited financial statement

2.Bureau of internal revenue (BIR) - the BIR is tasked in collecting national taxes and administering the
provision of the tax code. Although the provisions of the tax code do not always reflect the goals of financial
reporting, they do at times influence the accounting methods and procedures.

3. Bangko Sentral Ng Pilipinas (BSP) - the BSP is tasked in regulating banks and other entities performing
banking function. The BSP influence the selection and application of accounting policies by these businesses.

4. Cooperative Development Authority (CDA) - the CDA is tasked in regulating cooperatives. The CDA
influence the selection and application of accounting policies by cooperatives.
Sources:
- Fundamentals of Accountancy, Business, and Management 1 by Joselito G. Florendo
(1st Edition)
- Fundamentals of Accountancy, Business and Management 1 by Rodiel C. Ferrer and Zeus Vernon Millan
(3rd Edition)