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Basic Accounting Concepts

concept and principle

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52 views3 pages

Basic Accounting Concepts

concept and principle

Uploaded by

m.pedrigosa
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Accounting concepts and principles

Accounting concepts and principles (assumption 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 a guide in the development of new practices and
procedures.
Basic Accounting Concepts
There are numerous concepts and principles used in accounting. These are sourced
from the Standards (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 are continuously emerging. It is therefore, not practicable to
list all the concepts and principles used in accounting. Only some of the basic and most
common accounting concepts and principles are listed below.
1. Separate entity concept - Under this concept, the business is viewed as a
separate person, 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.

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
measurements to be meaningful.

4. Matching (or Association of cause and effect) - Under this concept, some costs
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 than 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
assets 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.
Managers need periodic information on the results of operations for them to
properly perform their functions, For example, managers may need to know the
following:

⮚ Which products or services are selling well and which are not?

⮚ Is the business spending too much on expenses? Does the business need to
cut down costs?
⮚ Is the business generating enough cash from its operating activities?

External users may need to know the following:

⮚ For creditors: Is the business generating enough cash needed to pay its
maturing liabilities?
⮚ For investors: Is the business earning enough profits to ensure future growth?

⮚ For the government: Is the business paying the right taxes?

Thus, instead of waiting until the life of the business ends before profit is determined,
the life of the business is divided into series of equal short periods called reporting
periods (or accounting periods).
A reporting period is usually 12 months, although it can be longer or shorter. A
12-month accounting period is either a calendar year period or a fiscal year period.

⮚ A calendar year period starts on January 1 and ends on December 31 of the


same year.
⮚ A fiscal year period also covers 12 months but starts on a date other than
January 1, e.g., July 1, 2019 to June 30, 2020.
An accounting period that is shorter than 12 months is called an "interim period." An
interim period can be a month, a quarter (3 months) or a semiannual period (6 months).
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 peso is regarded as
stable. Therefore, changes in the purchasing power of the 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
judgment and is based on the size and nature of an item being judged.
Accounting principles do not specify a certain amount this is a matter of
professional that is considered material judgment and depends on the facts and
circumstances surrounding the entity (e.g., what is material to you 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 concepts of
materiality and cost-benefit. Under the full disclosure principle, information
communicated to users reflect a series of judgmental trade-offs that strive for:
a. Sufficient detail to disclose matters that make a difference to users, yet
b. Sufficient condensation to make the information understandable, keeping in
mind the costs of preparing and using it.

12. Consistency concept - This concept requires a business to and present apply
accounting policies consistently, information consistently, from one period to
another. This means that like transactions must be accounted for in like manner.

Accounting policies used this year shall be the same accounting 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.

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