ACCOUNTING

CONCEPTS,
PRINCIPLES, AND
STANDARDS
By: Vince Joel P. Olmoguez, CPA
 What are Accounting
Concepts and Principles?
Accounting concepts and principles are a set of logical ideas
and procedures that guide the accountant in recording and
communicating economic information. They are also known as
accounting assumptions or accounting postulates.
Accounting concepts and principles provide a reasonable
assurance that information communicated to users is prepared in a
proper way.
 BASIC ACCOUNTING CONCEPTS

• Separate Entity Concept • Accounting Period Concept

• Cost Principle • Stable Monetary Unit
• Going Concern Assumption • Materiality Concept
• Matching Principle • Cost-benefit Concept
• Accrual Basis of Accounting • Full Disclosure Principle
• Conservatism Principle • Consistency Concept
SEPARATE ENTITY CONCEPT
Under this concept, the business is viewed as a separate person,
distinct from its owner(s). Therefore, only transactions of the business are
recorded in the books of accounts. Personal transactions of the business
owner(s) are not recorded.
The application of the separate entity concept is necessary so that the
financial position and financial performance of a business can be measured
properly. By applying this concept, you will objectively know if the business
is really earning profits, or if it has the ability to do so.
Also known as the accounting entity concept, business entity concept or
entity concept.
COST PRINCIPLE

Under this concept, assets are initially recorded at their acquisition cost.
This principle anchors on the going concern assumption. Measuring assets at
historical cost is appropriate only when the business is a going concern.

This is also known as the historical cost concept or historical cost principle.
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.

The opposite of going concern is the 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. If this is the case, the assets are then measured at selling price less cost to
sell (net selling price) rather than at historical cost.
MATCHING PRINCIPLE

Under this concept, some costs are initially recognized as assets and
charged as expenses only when the related revenue is recognized.

This is also known as the association of cause and effect, or cost-and-effect

principle.
ACCRUAL BASIS OF ACCOUNTING

Under this the accrual basis of accounting, economic events are recorded
in the period which they occur rather than the period when they affect cash.

Therefore, 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.

The opposite of the accrual basis of accounting is the cash basis of

accounting, where economic events are recorded only when they affect cash.
CONSERVATISM PRINCIPLE
Under this concept, the accountant observes some degree of caution when
exercising judgments needed in making accounting estimates under the
condition of uncertainty.

Therefore, when the accountant is to choose between an outcome which

is potentially favorable versus potentially unfavorable, the accountant chooses
the unfavorable one. This is necessary so that assets or income are not
overstated and liabilities are not understated.

This is also known as the principle of prudence.

ACCOUNTING PERIOD CONCEPT
Under this concept, the life of the business is divided into series of
reporting periods. This is because users need timely periodic information for
decision making.
Thus instead of waiting until the life of the business ends before profit can
be determined, the life of the business is divided into series of equal short
periods called reporting periods or accounting periods.

An accounting period is usually 12 months, although it can be longer or

shorter. It may also be a calendar year period or fiscal year period. An
accounting period that is shorter than 12 months is called an interim period.
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 peso during inflation is
ignored. This principle is associated with the historical cost principle.

This is also known as the stable monetary assumption or the monetary unit
assumption.
MATERIALITY CONCEPT

This concept guides the accountant in 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.

What may be material to one, may be immaterial to another, and vice versa.
COST-BENEFIT CONCEPT

Under this concept, the cost of processing and communicating

information should not exceed the benefits to be derived from it.

This is also known as the cost constraint principle.

FULL DISCLOSURE PRINCIPLE

This concept is related to both the concepts of materiality and cost-

benefit. Under this principle, information is communicated to users to reflect a
series of judgmental trade-offs between:

a) Sufficient detail to disclose matters that make a difference to users, yet

b) Sufficient condensation to make the information understandable and

keeping in mind the costs of preparing and using it.
CONSISTENCY CONCEPT
Under this concept, a business hall apply accounting policies consistently,
and present 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 the 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 reliable information. Any change
in accounting policy must be disclosed.
 What are Accounting Standards?
Accounting concepts are either explicit or implicit. Explicit concepts and
principles are those that are specifically mentioned in the Conceptual
Framework for Financial Reporting and Philippine Financial Reporting
Standards (PFRSs). While those that are implicit, are those not mentioned but
have been customarily used in business due to their general and longtime
acceptance.
The terms “concept”, “principles”, “standards”, “assumptions”, and
“postulates” are used interchangeably in practice. However, the “standards” is
used to specifically refer to the PFRSs. Traditionally, accounting standards
were referred to as the generally accepted accounting principles (GAAP).
 The Philippine Financial Reporting Standards (PFRSs) are the
Standards and Interpretations adopted by the Financial Reporting
Standards Council (FRSC), now known as the Financial and
Sustainability Reporting Standards Council (FSRSC), as amended on
September 16, 2022. They consist of the following:

Philippine Financial Reporting Standards (PFRSs)

Philippine Accounting Standards (PASs)

Interpretations
 Just like the basic accounting concepts, the standards serve as a guide
when recording and communicating accounting information. The difference is
that:

• the standards provide a more detailed application of concepts

• the standards prescribe which principle is most appropriate for
specific economic transactions
• the standards require certain information that should be included
in financial reports
• the standards prescribe how certain information are presented
 The PFRSs are issued by the Financial and Sustainability Reporting
Standards Council (FSRSC), which is the official accounting standard setting
body in the Philippines.

The PFRSs are patterned from the International Financial Reporting

Standards (IFRSs) which are 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.

For financial statements to be useful, they must be prepared using

reporting standards that are generally acceptable. Otherwise, each business
would have to develop its own standards, making comparability virtually
impossible to achieve.
 THE CONCEPTUAL FRAMEWORK
FOR FINANCIAL REPORTING
Just like the standards, the Conceptual Framework for Financial
Reporting also prescribes accounting concepts meant to guide the accountant in
preparing and presenting financial statements.

However, it must be clarified that the Conceptual framework is not a standard.

The conceptual framework serves as a general frame of reference in the

application or development of the standards
 Among the concepts stated in the Conceptual Framework are the
qualitative characteristics of useful financial information.
Qualitative characteristics are the traits that make information useful to users.
Without these characteristics, information may be deemed useless.

Qualitative Characteristics

Fundamental Enhancing
Qualitative Qualitative
Characteristics Characteristics
 FUNDAMENTAL QUALITATIVE CHARACTERISTICS
These refer to the essential characteristics that information must have
before it can be included in the financial statements. They consist of the
following:

Faithful
Relevance
Representation
Relevance

Information is considered relevant if it has the ability to affect the

decision making of the users. Without this ability, information is deemed
irrelevant and useless.

Faithful Representation

Information is faithfully represented if it is factual, meaning it represents

the actual effects of events that have taken place.
 Elements of Relevance
a. Predictive Value – Information has predictive value if users can
use it as an input in making predictions or forecasts of outcomes of
events.
b. Confirmatory Value – Information has confirmatory value if
users can use it to confirm past predictions. Also known as feedback
value.
c. Materiality – Information is material if omitting it or misstating it
could influence the decision making of the users.
Elements of Faithful Representation
a. Completeness – Information must be presented with sufficient
detail necessary for users to understand them. Important information
is not omitted.
b. Neutrality – Information are selected and presented without bias.
Information must not be manipulated in any case.
c. Free from error – Information presented must not be materially
misstated. This does not mean, however, that accounting information
must be perfectly accurate, because some information requires
estimates.
 ENHANCING QUALITATIVE CHARACTERISTICS
These characteristics support the fundamental characteristics. They
enhance the usefulness of information. As such, they must be maximized. The
enhancing qualitative characteristics comprise of the following:

Comparability Verifiability

Timeliness Understandability
Comparability

Information has this characteristic if it enables users to make

comparisons to identify and understand the similarities in, and the differences
among items. Unlike other characteristics, comparability does not relate to a
single item. Comparison requires at least two items.

Verifiability

Information is verifiable if it enables different and independent users to

reach a general agreement about what the information intends to depict.
Timeliness

Information must be provided to users on time to be capable of

influencing their decisions.

Understandability

Information must be presented clearly and concisely in order for users to

understand them. On the other hand, users are expected to have reasonable
knowledge of business and economic activities and to review and analyze the
information diligently, sufficient for them to understand the information
contained in the financial statements.
The End.