Fundamentals of Accountancy,

SENIOR
Business and Management 1 HIGH
SCHOOL
( FABM 1)
Self-Learning
Module
Application of Accounting Concepts
and Principles 7
666
Quarter 3
Fundamentals of Accountancy, Business and Management 1
Quarter 3 – Self-Learning Module 7: Application of Accounting Concepts and Principles
First Edition, 2020

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 Fundamentals of
SENIOR
Accountancy,Business HIGH
SCHOOL
and Management 1
(FABM 1)

Self-Learning
Module

7
Quarter 3

Application of Accounting Concepts

and Principles
Introductory Message

For the facilitator:

Welcome to the Senior High School – Fundamentals of Accountancy, Business

and Management 1 Self Learning Module on Application of Accounting Concepts and
Principles!

This Self-Learning Module was collaboratively designed, developed and

reviewed by educators from the Schools Division Office of Pasig City headed by its
Officer-in-Charge Schools Division Superintendent, Ma. Evalou Concepcion A.
Agustin, in partnership with the City Government of Pasig through its mayor,
Honorable Victor Ma. Regis N. Sotto. The writers utilized the standards set by the K
to 12 Curriculum using the Most Essential Learning Competencies (MELC) in
developing this instructional resource.

This learning material hopes to engage the learners in guided and independent
learning activities at their own pace and time. Further, this also aims to help learners
acquire the needed 21st century skills especially the 5 Cs, namely: Communication,
Collaboration, Creativity, Critical Thinking, and Character while taking into
consideration their needs and circumstances.

In addition to the material in the main text, you will also see this box in the
body of the module:

Notes to the Teacher

This contains helpful tips or strategies that
will help you in guiding the learners.

As a facilitator you are expected to orient the learners on how to use this
module. You also need to keep track of the learners' progress while allowing them to
manage their own learning. Moreover, you are expected to encourage and assist the
learners as they do the tasks included in the module.
 For the learner:

Welcome to the Fundamentals of Accountancy, Business and Management 1

Self Learning Module on Application of Accounting Concepts and Principles!

This module was designed to provide you with fun and meaningful
opportunities for guided and independent learning at your own pace and time. You
will be enabled to process the contents of the learning material while being an active
learner.

This module has the following parts and corresponding icons:

Expectations - This points to the set of knowledge and skills

that you will learn after completing the module.

Pretest - This measures your prior knowledge about the lesson

at hand.

Recap - This part of the module provides a review of concepts

and skills that you already know about a previous lesson.

Lesson - This section discusses the topic in the module.

Activities - This is a set of activities that you need to perform.

Wrap-Up - This section summarizes the concepts and

application of the lesson.

Valuing - This part integrates a desirable moral value in the

lesson.

Posttest - This measures how much you have learned from the
entire module.
 EXPECTATIONS

After going through this module, you are expected to:

1. analyze the accounting concepts and principles;
2. explain varied accounting concepts and principles; and
3. apply the accounting concepts and principles in various business scenarios.

PRETEST

Directions: Identify the basic accounting assumption, concept, or principle that must
be applied in various events presented below.

Event 1: Ruby Ochoa, owner of Rainbow Nailposh purchased school supplies

for her daughter.

Event 2: Rainbow Nailposh purchased an equipment ten years ago and was
combined and shown with the business’ recent purchases.

Event 3: Rainbow Nailposh purchased a POS system and register for ₱15,000
in SM East, but it could have been purchased online for ₱13,000.

Event 4: Rainbow Nailposh is facing a lawsuit from a dissatisfied customer

and it is probable that Rainbow Nailposh will lose the case.

Event 5: Rainbow Nailposh has a gross monthly income of ₱150,000. The

accountant after examining the business’ book discovered that
Rainbow Nailposh bought a puncher with a cost of ₱200 and an
estimated useful life of 3 years. The amount of purchase was
recorded as an outright expense.
 RECAP

Directions: Complete the table below by providing what is required.

BASIC ACCOUNTING ASSUMPTIONS ACCOUNTING CONCEPTS

AND PRINCIPLES
1. 1.
2. 2.
3. 3.
4. 4.
5. 5.

LESSON

Let us now apply what we have learned about the basic accounting
assumptions, accounting concepts and principles by analyzing the scenarios that
follow.

Accounting Assumptions:
1. Economic Entity Assumption

Mara Villa runs a successful printing business from her home in Pasig. She
works more than she can handle because of the bulk of regular clients. Her
business is structured as a sole proprietorship. The purchase of computers
exclusively used for business activities, printing materials, and other costs
associated with her printing business appear in the accounting records. The
accounting records correctly contain details of these transactions. Travel costs
for a family vacation and a certain amount that Mara paid for her meals and
personal use are not recorded in Mara’s printing business accounting records.

Case 1:
2. Accrual Basis Assumption

HBC Company will reward its board of directors if net sales for 2019 reached
₱40,000,000. Part of these sales is collected from customers during the year.
But, probably there are some remaining amounts that customers still not pay.
If we use a cash basis to record sale, in this case, it does not show the real
performance.

But if we use the Accrual Basis, the net sales will be ₱40,000,000. And that is
the real economic performance. So, this is why the accrual basis is important
to the company.
3. Going Concern Assumption-

HBC Company purchased equipment with a cost of ₱150,000. If the company

will be liquidated, the equipment can be sold for ₱110,000. If the business
expects to continue in operation and recovers, the equipment shall be
presented as ₱150,000 in the accounting records in the normal course of the
business without the need of recovering the equipment through the sale. The
company should forego ₱150,000 if it is expected to terminate and re-state the
equipment to a ₱110,000 valuation because it is the most relevant mode of the
realization of the asset.

4. Monetary Unit Assumption

HBC Company in 2018 purchased fixed assets for a value of ₱5,000,000. The
following year, 2019, there is inflation. The fixed assets now require
₱6,000,000 to purchase. In this case, the valuation of the fixed assets in the
financial statements could not change.

5. Time-Period Assumption
HBC company selects May 31st as its fiscal year-end. She will report all
activity for her business from June 1st to May 31st of the next year in its
formal financial statements. HBC company will include the revenues or the
amount the company earned from selling and all the expenses or the costs
incurred to help her earn the revenue for the twelve-months.
HBC company can also prepare financial information more frequently than
once a year. For example, she could prepare it monthly, quarterly, or semi-
annually.
Let's assume that HBC company earned revenues of ₱1,500,000 and incurred
expenses of ₱300,000 for November. If it prepared financial reports every
month, HBC company must determine that it earned net income or the excess
of revenues over expenses of ₱1,200,000 for the month. HBC company can
use this information to evaluate actual performance than anticipated.
Accounting Principles

1.Cost Principle

H & B Tax Traders is a large-scale tax accountant firm. They purchased an

office building for ₱300,000,000 in 2018. In 2020, the property is appraised
at a value of ₱400,000,000. Since this increase relates to the increase in
market value, the tax firm may not change the cost principle. The firm might
credit the difference in value to an equity account. Therefore, the actual cost
principle still reflects the initial purchase price of the building and not the
increased value.
2. Full Disclosure Principle

HBC company might lose large contracts with its customers to its competitor.
Such loss of contract could subsequently turn the company into bankruptcy.
In such a case, management probably doesn’t want outsiders, especially
investors to know the real situation of an entity, yet the company is required
to disclose such a situation in its financial statements.

3. Matching Principle

A company purchases a new computer for ₱20,000 in 2019. The computer is

expected to last 10 years, meaning it will produce projects for the projected
decade. The price of the computer should then be matched with the revenue
it's creating for the company. In this instance, the company should charge the
computer's price tag to the depreciation expense of ₱2,000 per year, adding up
to 10 years.

4.Revenue Recognition Principle

J & C Consultants is an accounting firm that provides tax and consulting

work. During December, J & C provides ₱5,000 of consulting work to one of
its clients. The client does not pay for the consulting time until the following
January. According to the revenue recognition principle, J & C should record
the revenue in December because the revenue was realized and earned in
December even though it was not received until January.

5.Materiality Principle

A large company has a building that was destroyed during Typhoon Ondoy.
After a lengthy battle with the insurance company, the company reports an
extraordinary loss of ₱10,000. The company has a net income of ₱10,000,000.
The materiality concept states that this loss is immaterial because the average
financial statement user would not be concerned with something that is only
.1% of net income fault by a customer who owes only ₱1000 to a company
having net assets of worth $10 million

6.Conservatism Principle

Let us assume that a company XYZ Ltd. is embroiled in a patent lawsuit. XYZ
Ltd. suing ABC Ltd for patent infringement and is expecting to win a
substantial settlement. Since the settlement is not a surety, XYZ Ltd. does not
record the gain in the financial statements. Now the question is, why does it
not record this in the financial statement?
The answer is XYZ Ltd. may win, or it may not win the amount it is expecting
by winning the settlement. Since a sizeable winning settlement amount may
lead to complexities in financial statements and also mislead the users, this
gain is not recorded in the books. Again taking the same example, if ABC Ltd.
expects to lose the suit, then they must record the losses in the footnotes of
the financial statements. It will be the most conservative approach because
 the users will want to be aware of the company will have to pay out a large
sum for settlement in the coming days.

7.Objectivity Principle

A company trying to get an extra vehicle, financed through a bank for the
business must provide financial statements to the bank before receiving the
cash.
If the company bookkeeper provides the financial statements in an unaudited
format printed from the accounting system, the bank will most likely deny the
request for financing the vehicle, as the objectivity principle is being violated.
If, however, the financial statements are prepared by an independent firm, the
bank will more likely accept the request of the firm, as the accounts will be
free of bias and opinions.

ACTIVITIES

Activity 1: Accounting Assumptions and Principles

Directions: Write A if an event requires an accounting assumption and P if it
requires an accounting principle.
1. Management would not want its investors to know that the company is certain
for bankruptcy, yet it is stated in the financial statements

2. Accounts free of bias and opinions

3. Large sum probable settlement of a lawsuit

4. Sales that occurred on a particular day is recorded on the same day

5. Initial cost and depreciation of an asset over time

Activity 2: Basic Accounting Assumptions

Directions: Identify the underlying accounting assumptions using the indications
below.

____________1. Significant trading losses incurred for consecutive years

____________2. High financial risks and vulnerability to delayed payments

____________3. The bankruptcy of a major customer of the company

____________4. Inflation or deflation is disregarded in the accounting records

____________5. An investment 20years ago against an investment in the current year

to the same business
 WRAP-UP

To summarize what you have learned in the lesson, answer the question below.

Where you able to analyze and solve exercises on accounting concepts and
principles as applied in various cases? Why yes? Why not?

VALUING

Reflect on this!

“Analysis is more likely to adjust evidence than to adjust itself.”

-Mason Cooley

POSTTEST

Directions: Write TRUE if you agree with the statement and FALSE if otherwise.

____________1. Professional accountants generate financial reports that are reliable

and verifiable.

____________2. Useful financial information must be relevant, reliable and prepared

in a consistent manner.

____________3. Consistency allows meaningful comparisons.

____________4. Consistency and reliability are only expected in the financial report
but not in the accountants.

____________5. Information needs of individual users do not vary.

 KEY TO CORRECTION

5. MONETARY UNIT
4. MONETARY UNIT
3. GOING CONCERN
MATERIALITY 5. 5. FALSE
2. GOING CONCERN
CONSERVATISM 4. 1. GOING CONCERN 4. FALSE
ACTIVITY 2 3. TRUE
COST PRINCIPLE 3.
5. P (Cost Principle)
2. TRUE
ASSUMPTION 4. P (Revenue Recognition)
3. P (Conservatism) 1. TRUE
MONETARY UNIT 2.
2. P (Objectivity) POSTTEST
1. ECONOMIC ENTITY 1. P (Full Disclosure)
PRETEST ACTIVITY 1

References
Florendo, J.G. Fundamentals of Accountancy, Business, and Management 1.Manila: Rex
Bookstore Inc.2016.

"Accrual Basis in Accounting: Definition: Example: Explanation." WIKIACCOUNTING.

February 16, 2020. Accessed on July 19, 2020.
https://www.wikiaccounting.com/ultimate-guide-accrual-accounting/.

"Economic Entity Assumption [Definition Examples]." Crush The CPA Exam. November 16,
2019. Accessed on July 19, 2020. https://crushthecpaexam.com/accounting-
glossary/what-is-economic-entity-assumption/.

"What Is a Going Concern?" Going Concern Assumption | Accounting Concept & Example.
Accessed on July 19, 2020. https://accounting-simplified.com/financial-
accounting/accounting-concepts-and-principles/going-concern.html.

Study.com. https://study.com/academy/lesson/time-period-assumption-in-accounting-
definition-examples.html.

"Monetary Unit Assumption: Definition: Explanation: Example." WIKIACCOUNTING. June

12, 2020. Accessed on July19, 2020. https://www.wikiaccounting.com/monetary-
unit-assumption/.

"What Is Cost Principle? (Definition and Examples)." Indeed Career Guide. Accessed on July
19, 2020. https://www.indeed.com/career-advice/career-development/what-is-cost-
principle.

"Full Disclosure Principle: Definition: Example: Checklist." WIKIACCOUNTING. July 28,

2019. Accessed on July 19, 2020. https://www.wikiaccounting.com/full-disclosure-
principle/.

"Matching Principle: Definition and Examples." Indeed Career Guide. Accessed on July 19,
2020. https://www.indeed.com/career-advice/career-development/matching-
principle-definition-and-examples.

Objectivity Principle: Definition, Meaning, and Examples." Study Finance. May 26, 2020.
Accessed on July 19, 2020.