Varied accounting

concepts & principles

MODULE 2
OBJECTIVES:

Knowledge: Define terms related to varied accounting concepts and

principles.

Skills: Apply the appropriate accounting concepts and principles in

analyzing business transactions.

Affective: Appreciate the importance of understanding and applying

the different accounting concepts and principles in analyzing business
transactions
Accounting is called
the language of
business.
• It communicates the
financial condition and
performance of a business
to interested users for
decision-making purposes.
Generally Accepted Accounting Principles
(GAAP)
GAAP is a widely GAAP has been developed by the
accounting professionals to guide in
accepted set of rules, preparers of financial statements in
concepts and principles recording and reporting financial
information regarding a business
that governs the enterprise, hence aiding in the
application of effective execution of the accounting
procedure and in communicating the
accounting procedures. financial condition of the business

International Financial Reporting Standards (IFRS)

 The Basic Accounting
Concepts and Principles
1. Business entity principle
(also known as separate entity
and economic entity concept)

• states that the transactions

related to a business must be
recorded separately from those of
its owners and any other
business.

• Example: ➢ If the owner has a

barber shop, the cash of the
barber shop should be reported
separately from personal cash
2. Going concern principle

• implies that the business entity will continue

its operations in the future and will not
liquidate or be forced to discontinue
operations due to any reason. A company is a
going concern if no evidence is available to
believe that it will or will have to cease its
operations in foreseeable future. In other
words, the going concern concept assumes
that businesses will have a long life and not
close or be sold in the immediate future.

• Example: ➢ When preparing financial

statements, you should assume that the
entity will continue indefinitely.
3. Time period principle (also
known as periodicity assumption
and accounting time period
concept)

• states that the life of a business can be

divided into equal time periods. These time
periods are known as accounting periods for
which companies prepare their financial
statements to be used by various internal
and external parties. The length of
accounting period to be used for the
preparation of financial statements depends
on the nature and requirement of each
business as well as the need of the users of
financial statements. Normally, an accounting
period consists of a quarter, six months or a
year.

• Example: ➢ The salary expenses from

January to December 2015 should only be
reported in 2015.
4. Monetary unit principle
(also known as money
measurement concept)

• states that only those events and

transactions are recorded in books of
accounts of the business which can be
measured and expressed in monetary
terms. Amounts should only be stated
into a single monetary unit. Therefore,
an information that cannot be expressed
in terms of money is useless for financial
accounting purpose and is therefore not
recorded.

• Example: ➢ Jollibee should report

financial statements in pesos even if
they have a store in the United States.
5. Objectivity
principle
• states that accounting information and
financial reporting should be independent
and supported with unbiased evidence.
This means that financial statements must
be presented with supporting evidence.
The objectivity principle is aimed at
making financial statements more relevant
and reliable.

• Example: ➢ When the customer paid

Jollibee for their order, Jollibee should
have a copy of the receipt to represent as
evidence.
6. Cost principle

• is an accounting principle that records

assets at their respective cash amounts at
the time the asset was purchased or
acquired. Assets that are recorded can
include short-term and long-term assets,
liabilities and any equity, and these assets
are always recorded at their original cost.

• Example: ➢ When Jollibee buys a cash

register, it should record the cash register at
its price when they bought it.
7. Accrual Accounting Principle
• is an accounting method where revenue or
expenses are recorded when a transaction
occurs rather than when payment is received or
made. The method follows the matching
principle, which says that revenues and
expenses should be recognized in the same
period. Cash accounting is the other accounting
method, which recognizes transactions only
when payment is exchanged. However, cash
basis is not the generally accepted principle
today.

• Example: ➢ When a barber finishes performing

his services he should record it as revenue.
When the barber shop receives an electricity
bill, he should record it as an expense even if it
is unpaid.
 • is a principle that requires a company to
match expenses with related revenues in
order to report a company's profitability
during a specified time interval. Therefore,
cost should be matched with the revenue
8. generated.

Matching • Example: ➢ When you provide tutorial

services to a customer and there is a
transportation cost incurred related to the

principle tutorial services, it should be recorded as

an expense for that period.

• Incurred means expense has occurred and

needs to be recognized even though no
payment was made.
9. Disclosure
principle
• is a concept that requires a
business to report all
necessary information
about their financial
statements and other
relevant information to any
persons who are
accustomed to reading this
information. In other
words, all relevant and
material information
should be reported.
• Example: ➢ The company
should report all relevant
information.
10. Conservatism
principle
• is the general concept of recognizing
expenses and liabilities as soon as possible
when there is uncertainty about the
outcome, but to only recognize revenues and
assets when they are assured of being
received. In case of doubt, assets and
income should not be overstated while
liabilities and expenses should not be
understated.

• Example: ➢ In case of doubt, expenses

should be recorded at a higher amount.
Revenue should be recorded at a lower
amount.
11. Materiality principle
• states that financial reports only need to include information
that will be significant or material to their users. In case of
assets that are immaterial to make a difference in the financial
statements, the company should instead record it as an
expense.

• Example: ➢ A school purchased an eraser with an estimated

useful life of three years. Since an eraser is immaterial relative
to assets, it should be recorded as an expense
Review

• 1. Business entity principle (also known as

separate entity and economic entity concept)
• 2. Going concern principle
• 3. Time period principle (also known as
periodicity assumption and accounting time
period concept)
• 4. Monetary unit principle (also known as
money measurement concept)
• 5. Objectivity principle
• 6. Cost principle
• 7. Accrual Accounting
Principle
• 8. Matching principle
• 9. Disclosure principle
• 10. Conservatism
principle
• 11. Materiality principle
What Have I Learned
Analyze the given situations below. Identify what accounting principle it relates to
and explain briefly why you derived with that answer. Be guided with the rubrics for
the rating of your answer. Write your answers in your notebook.

• 1. The accountant records income as soon as the sales people report the delivery
of goods to the clients.
• 2. All transactions are recorded in pesos.
• 3. The accountant return to the employees the receipts of the personal
transaction they made during working hours.
• 4. The accountant finishes the financial statement for the year after the 12-month
fiscal period and begins with the new fiscal year.
• 5. The accountant gathers all the official receipts, vouchers, and invoices for a
particular period and records them objectively.
• 6. The accountant records the value of the acquired computer units at its
prevailing price.
• 7. The accountant receives the utility billing statements for June and
includes them in the financial statement for the same month.
• 8. The ML Enterprises reported all assets in the balance sheet at current
market value.
• 9. The owner of ABC Company personally acquires an office building, and
rents space in it to his company at Php20,000 per month. This rent
expenditure is a valid expense to the company, and is taxable income to the
owner.
• 10. The accountant records contingent liability that the company might
incur in a legal battle with its employees to indicate that the company
might have to pay out employees.
Questions?
Lesson 2:
Application of Accounting Principles
OBJECTIVES:
K: Identify the generally accepted accounting
principles.
S: Solve exercises on accounting principles as applied
in various cases.
A: Appreciate the importance of understanding and
applying the different accounting concepts and
principles in analyzing business transactions.
What You Need To Know
• The importance of these concepts and principles lies in the fact that they are
related to the entire financial accounting process while they affect directly the
way the financial reports are prepared.
• Accountants need to apply professional judgments while preparing financial
reports, these concepts and principles help them to ensure that they are not
being misled and that providing a true and fair view of financial statements is
being accomplished.
• Also, it’s worthwhile to note that the accounting concepts and principles is of
great help and assistance to the professional accountants to consider and apply
what is best in the interests of the users of financial information in case an
accounting concept or principle leads to create conflict with that of another.
• In addition, after you acquire a good knowledge of accounting principles, most
accounting topics will make more sense to help you perform the related
activities in a more professional manner.
• Thus, the accounting concepts and principles are important for accountants, as
they need to abide by them every time they involve in analyzing, recording,
summarizing, reporting and interpreting financial transactions of a business.
The following are given situations related to accounting
concepts and principles. Let us now apply these principles
in analyzing business transactions.

• SITUATION 1:
The accountant return to the employees the receipts of the personal transaction
they made during working hours.

• In this scenario, we can say that this relates to the Business Entity Principle
which states that the transactions related to a business must be recorded
separately from those of its owners and any other business.
 SITUATION 2: The accountant compute the
depreciation on the basis of expected economic life
of fixed assets rather than their current market
value.

In this scenario, companies assume that their

business will continue for an indefinite period of
time and the assets will be used in the business until
fully depreciated. Therefore, this applies to the
Going-Concern Principle.
• SITUATION 3: The accountant finishes
the financial statement for the year
after the 12- month fiscal period and
begins with the new fiscal year.

• In this scenario, Time-Period Principle

applies wherein companies should
prepare their financial statements to
be used by various internal and
external parties in a time period.
These time periods are known as
accounting periods that can either be
of a quarter, six months or a year.
• SITUATION 4: The accountant
recorded all monetary
transactions in pesos.

• In this scenario, the Monetary

Unit Principle is applied. All
transactions are recorded in
books of accounts of the
business which can be measured
and expressed in monetary terms
and amounts should only be
stated into a single monetary
unit which in this case is in pesos
• SITUATION 5: The accountant
gathers all the official receipts,
vouchers, and invoices for a
particular period and records
them objectively.

• In this scenario, this simply

applies to Objectivity Principle
which states that all accounting
information and financial
reporting should be
independent and supported
with unbiased evidence.
• SITUATION 6: The
accountant records the
value of the acquired
computer units at its
prevailing price.

• In this scenario, assets

should be recorded at
their respective cash
amounts at the time it
was purchased or
acquired. This applies
to the Cost Principle.
• SITUATION 7: The
accountant records
income as soon as the
salespeople report the
delivery of goods to the
clients.

• In this scenario, revenue

is recorded when a
transaction occurs rather
than when payment is
received or made. This
process follows the
Accrual Accounting
Principle.
SITUATION 8: The accountant receives the utility billing
statements for June and includes them in the financial
statement for the same month.

In this scenario, the company match their expenses

with related revenues in order to report a company's
profitability during a specific time interval. Therefore,
in the Matching Principle cost should be matched
with the revenue generated.
• SITUATION 9: Company X purchased a
piece of property, and are now the
current owners. A passing pedestrian
had a terrible fall on the property and
got badly injured. This pedestrian is
now suing Company X for a significant
amount of money for negligence. The
pedestrian is likely to win the lawsuit
in the following year.

• Under the Disclosure Principle,

Company X should disclose the
anticipated losses from the lawsuit in
the footnotes of their financial
statement, even though the loss has
not been confirmed or finalized yet.
Thus, this principle requires a
business to report all necessary
information about their financial
statements and other relevant
information to any persons who are
accustomed to reading this
information.
• SITUATION 10: The accountant
records contingent liability that the
company might incur in a legal
battle with its employees to
indicate that the company might
have to pay out employees.

• In this scenario, the Conservatism

Principle is applied. It recognizes
expenses and liabilities as soon as
possible when there is uncertainty
about the outcome. The idea of
conservatism suggests that a
business should anticipate and
record future losses rather than
future gains.
• SITUATION 11: A school purchased
an eraser with an estimated useful
life of three years. Since an eraser
is immaterial relative to assets, it
was recorded as an expense.

• In this scenario, Materiality

Principle is applied. Financial
reports only need to include
information that will be significant
or material to their users. In this
case, the eraser is immaterial to
make a difference in the financial
statements, thus it was recorded as
an expense.
• SITUATION 11: A school
purchased an eraser with an
estimated useful life of three
years. Since an eraser is
immaterial relative to assets, it
was recorded as an expense.

• In this scenario, Materiality

Principle is applied. Financial
reports only need to include
information that will be
significant or material to their
users. In this case, the eraser is
immaterial to make a difference
in the financial statements, thus it
was recorded as an expense.
What Have I Learned
Identify the accounting concepts and principles that is
being violated in each scenario and indicate what
should be done to rectify or correct the violation. Be
guided with the rubrics for the rating of your answer.
Write your answers in your notebook.

• 1. The owner-manager bought a computer for

personal use. The invoice was given to the accountant
who recorded it as an asset of the business.

• 2. The statement of financial position of a company

included an equipment purchased from Japan for
350,000 yen. It was reported at that amount in the
statement of financial position while all the other
assets were reported in Philippine pesos.
 What Have I Learned

• 3. No financial statements were prepared by

Michael Go for his business. He explained that
he will prepare the statements when he
closes the business, which he predicts to take
place after 20 years.

• 4. Aside from owning a shoe store, Albert

operates a canteen. The assets of the canteen
are reported in the statement of financial
position of the shoe store.
What Have I Learned
• 5. Ace Company purchased a large printing machine for Php1,000,000
(a material amount) and recorded the purchase as an expense.

• 6. A food company ordered a machine needed in the assembly line of

its production department. Upon order, the machine was
immediately listed as one of its assets.
What Have I Learned
• 7. ABC Company purchased land two years ago at a price of
Php300,000. Because the value of the land has appreciated to
Php500,000, the company has valued the land at Php500,000 in its
most recent balance sheet.

• 8. XYZ Corporation has not prepared financial statements for external

users for over three years.
What Have I Learned
• 9. At the end of each year, King Company reports its economic
resources on a liquidation basis even though it is likely to operate in
the future.

• 10. Hardware Company purchased a hammer at a cost of PHP500

(immaterial amount). This was recorded as an asset and expense to
decrease its value by PHP50 per year for 10 years.