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MODULE 2 Accounting Concepts and Principles

The document provides an overview of accounting concepts and principles for a college module. It defines 12 basic accounting concepts including the separate entity concept, historical cost concept, and matching principle. It also discusses Philippine Financial Reporting Standards and qualitative characteristics of financial reporting such as relevance and faithful representation. The objectives are to describe key concepts and principles and apply them to solving accounting problems.

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Katherine Magpantay
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76 views

MODULE 2 Accounting Concepts and Principles

The document provides an overview of accounting concepts and principles for a college module. It defines 12 basic accounting concepts including the separate entity concept, historical cost concept, and matching principle. It also discusses Philippine Financial Reporting Standards and qualitative characteristics of financial reporting such as relevance and faithful representation. The objectives are to describe key concepts and principles and apply them to solving accounting problems.

Uploaded by

Katherine Magpantay
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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COLLEGE OF BUSINESS AND MANAGEMENT

Dr. Glen D.V. De Leon, CPA


[email protected]

Module 2
Accounting Concepts and Principles________________________________________________

LEARNING OBJECTIVES:
After studying this chapter, you should be able to:
1. Give examples of accounting concepts and principles.
2. Apply the concepts in solving accounting problems.

Basic Accounting Concepts

1. Separate entity concept 7. Time Period


2. Historical cost concept 8. Stable monetary unit
3. Going concern assumption 9. Materiality concept
4. Matching 10. Cost-benefit
5. Accrual Basis 11. Full disclosure principle
6. Prudence (or Conservatism) 12. Consistency concept

• 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.

FINANCIAL ACCOUNTING & REPORTING 1


• 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.
• 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.
• 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.
• 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.
• 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.

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

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

FINANCIAL ACCOUNTING & REPORTING 2


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
c. 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.

FINANCIAL ACCOUNTING & REPORTING 3


Barnes & Noble. Nobles, Scott, et al. (2019). College Accounting (11th ed). Cengage Learning.

Beticon, J., Hinayon, M., and Ireneo, S. (2019). Fundamentals of Accounting. Manila: FCA
Publishing.

Empleo, P., German, C., and Cruz. (2019). Fundamentals of Accounting Vol. 2. Mutual Books,
Inc.

Millan Z.V. (2019) Financial Accounting and Reporting

Saguinsin, A. T. (2013). Basic Concept of Accounting.

“The Spirit of the Lord will rest on him — the Spirit of wisdom and of understanding, the Spirit of counsel and
of might, the Spirit of the knowledge and fear of the Lord.“ (Isaiah 11:2)

- END -

FINANCIAL ACCOUNTING & REPORTING 4

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