Chapter 4
Accounting Concepts &
Principles Joshua Farparan
The learners should be able to......
Explain the varied
accounting concepts
Learning and principles
Competencies
solve exercises on
accounting principles as
applied in varied cases
Introduction
Accounting concepts and principles are logical
ideas and procedures that guide recording and
communication of economic information,
providing a framework for evaluating practices
and developing new procedures.
Introduction
Accounting concepts ensure proper
preparation of information, maximizing its
usefulness to users, similar to how doctors,
engineers, and accountants handle medical
procedures and bridge construction.
Basic Accounting Concepts
Accounting concepts and principles are
constantly evolving, sourced from (PFRSs)
and the Conceptual Framework for financial
reporting. Some basic and most common
concepts are listed below, as accounting is a
constantly changing profession..
Separate entity concept
- Under this concept, the business is viewed as a
separate person, distinct from its owner(s). Only
the transactions
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of the business are recorded in
the books of accounts. The personal
transactions of the business owner(s) are not
recorded
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Separate entity concept
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.)
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Separate Entity Concept
The money invested in a business is now owned by the business,
not your personal money. Any earnings from the business are
also owned. Any personal use or unpaid purchases are
recorded as withdrawals.
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Separate entity concept
Personal transactions, such as
buying groceries for home
consumption, are not recorded in
the booksTitle
oftext
accounts,
addition excluding
those not related to business.
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02
Historical Cost
Concept
Historical Cost Concept
Under this concep
assets are initially
recorded at their
acquisition cost
Historical Cost Concept
Example: ABC Enterprises is a
company that purchased a building
in 1955 for a price of $20,000. In its
accounting record, theaddition
Title text asset value is
$20,000. In the real market, however,
this asset is valued at $875,000.
Under the historical cost principle,
the asset wouldTitle
remain in the
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company's books at $20,000
Historical Cost Concept
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Accounting Concepts and
Principles
Going Concern Assumption
- Under this
Title text concept, the business is assumed to
addition
continue to exist for an indefinite period of time
is assume necessary for accounting
measurements
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to meaningful
Accounting Concepts and
Principles
For Example:
measuring assets
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at historical co
(historical cost concept) is appropriate
only when the business a going concern
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Accounting Concepts and
Principles
A liquidating concern is a
business that ends operations or is
bankrupt, with assets measured
at net sellingTitleprice, unlike a going
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concern.
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Accounting Concepts and
Principles
4.) Matching (or association of cause and effect)
- Under this concept, some costs are
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initially recognized as assets and
charged as expenses only when the
related
Title text revenue
addition is recognized.
Accounting Concepts and
Principles
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Accounting Concepts and
Principles
5.) Accrual Basis of accounting
- Under the accrual basis of
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accounting, economic events are
recorded in the period in which they
occur rather than at the point in time
when they affect cash
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Accounting Concepts and
Principles
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Accounting Concepts and
Principles
Thus, income is recorded
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in the period when it is
earned rather t han when it is collected, while
expense is recognized in the period when it is
incurred rather than when it is paid.
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Accounting Concepts and
Principles
6. Prudence (or conservatism)
An accountant
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uses caution in making
accounting estimates under uncertainty,
choosing the unfavorable outcome to avoid
overstating assets or income and understating
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liabilities or expenses.
Accounting Concepts and
Principles
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Accounting Concepts and
Principles
7.) Time Period (Periodicity, Accounting period,
or Reporting period concept)
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- Under this concept, the life of the
business is divided into series of
reporting periods
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Accounting Concepts and
Principles
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
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• 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
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other than January 1, e.g., July 1, 2019 to June 30, 2020.
Accounting Concepts and
Principles
An accounting period that is shorter than 12
months Title
is called an "interim period." An interim
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period can be a month, a quarter (3 months) or a
semiannual period (6 months).
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Accounting Concepts and
Principles
8.) Stable Monetary Unit
The concept in the Philippines relates
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assets, liabilities, income, and expenses to
the peso, a stable unit measure, and
ignores inflation-related changes.
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Accounting Concepts and
Principles
9.) Materiality Concept
This concept guides accountants in applying
accounting principles, as accounting principles
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are only applicable to material items.
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Accounting Concepts and
Principles
Materiality is a professional judgment based
on the size and nature of an item,
determining its impact on economic
decisions if misstatement is not present.
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For example Material items are communicated
more detailed to users than immaterial items,
and big companies often round off amounts in
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their financial reports.
Accounting Concepts and
Principles
•
An account with a balance of P323,487,679,621.21 may be
reported as P323,488 with an indication of the level of
rounding-off as (in "000,000s), meaning "in millions."
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•
Since the company is big (nature), the amount of
679,621.21 (size) is considered immaterial. Rounding-
off this
Titleamount
text additionwould not affect the decision making of
the users.
Accounting Concepts and
Principles
Accounting principles do not set a specific
material amount, but rather rely on
professional judgment and the
circumstancesTitlesurrounding
text addition an entity, as
materiality can vary among different
individuals.
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Accounting Concepts and
Principles
10.) Cost-benefit (cost constraint)
Under this concept, the cost of processing
and communicating
Title text addition information should not
exceed the benefits to be derived from it.
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Accounting Concepts and
Principles
11.) Full Disclosure Principle
The full disclosure principle involves a series of judgmental
trade-offs that aim to provide users with accurate information.
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a.) Sufficient detail to disclose matters that make a differen to users,
yet
b.) The information should be clearly condensed while considering the
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cost of preparation and usage.
Accounting Concepts and
Principles
12.) Consistency Concept
- Businesses need to consistently apply accounting policies and
maintain information storage to ensure uniform accounting
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across different periods.
- Accounting policies for this year must be the same as last year,
but can be changed if required by standard or for more reliable
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information.
Accounting Concepts and
Principles
Accounting Standard
Explicit concepts and principles in Philippine
Financial Reporting
Title text addition Standards are specific, while
implicit concepts and principles are commonly used
due to their long-standing acceptance within the
accountant profession.
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Accounting Concepts and
Principles
Accounting Standard
The terms "concepts," "principles,"
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"standards," "assumptions," and "postulates"
are used interchangeably, but "standards"
specifically refer to the Philippine Financial
Reporting Standards,
Title text addition traditionally accounting
principles.
Accounting Concepts and
Principles
Philippine Financial Reporting Standards (PFRSs)
The Philippine Financial Reporting Standards (PFRSs) are
standard and Interpretations adopted by the Financial
Reporting
TitleStandar are Council (FRSC). They consist of the
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following:
a. Philippine Financial Reporting Standards (PFRSs);
b. Philippine Accounting Standards (PASS); and
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c. Interpretations
Accounting Concepts and
Principles
Relevant Regulatory Bodies
Other than the Financial Reporting Standards Council (FRSC), the
following also affect the accounting policies used by businesses
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whether an item of in and their financial reporting:
1.) Securities and Exchange Commission (SEC)
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- The SEC regulates corporations and partnerships by requiring
them to file audited financial statements.
Accounting Concepts and
Principles
2.) Bureau of Internal Revenue (BIR) - The BIR's role in collecting and
managing national taxes may affect accounting methods and procedures,
potentially causing discrepancies in financial reporting goals.
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3.) Banko Sentral Ng Pilipinas (BSP,) - The BSP regulates banks and other
banking entities, influencing the selection and application of accounting
policies by these
Titlebusinesses.
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Accounting Concepts and
Principles
4.) Cooperative Development Authority (CDA) - the CDA is
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tasked in regulating cooperatives. The CDA influences the
selection and application of accounting policies by
cooperatives.
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Accounting Concepts and
Principles
The Conceptual Framework for Financial Reporting
The conceptual framework for Financial
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Reporting prescribes accounting concepts for
financial statement preparation, but is not a
standard but a general reference frame for
developing or applying standards.
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Accounting Concepts and
Principles
4.) Cooperative Development Authority (CDA) - the CDA is
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tasked in regulating cooperatives. The CDA influences the
selection and application of accounting policies by
cooperatives.
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GOODLUCK SA INYO!
Prepared By: Joshua B Farparan Grade 12 Flexible
