FUNDAMENTALS OF ACCOUNTANCY, BUSINESS, AND MANAGEMENT 1
Lesson 6: Accounting Concepts and Principles
Accountants use generally accepted
accounting principles (G.A.A.P) to guide them in
recording and reporting financial information. GAAP
comprises a broad set of principles that have been
developed by the accounting profession and the
Securities and Exchange Commission (SEC). Two laws,
the Securities Act of 1933 and the Securities
Exchange Act of 1934, give the SEC authority to
establish reporting and disclosure requirements.
GAAP encompass the conventions, rules, and
procedures necessary to define accepted accounting
practice at a particular time. The GAAP usually
depends on how well it meets the three criteria:
i. A principle has relevance to the extent that
it results in information that is meaningful
and useful to those who need to know
something about a certain organization.
ii. A principle has objectivity to the extent that
the resulting information is not influenced
by the personal bias or judgment of those
who furnish it.
iii. A principle has feasibility to the extent that
it can be implemented without undue
complexity or cost.
THE BUSINESS ENTITY CONCEPT
This concept provides that the accounting for
a business or organization be kept separate from the
personal affairs of its owner, or from any other
business or organization. This means that the owner
of a business should not place any personal assets of
the business balance sheet.
The balance sheet of the business must
reflect the financial position of the business alone.
Also, when transactions of the business are recorded,
any personal expenditures of the owner are charged
to the owner and are not allowed to affect the
operating results of the business.
Examples:
 The owner had a business meeting with a
prospective client. The expenses that come
with that meeting should be part of the
company’s expenses. If the owner paid for
gas for his personal use, it should not be
included as part of the company’s expenses.
 Insurance premiums for the owner’s house
should be excluded from the expense of the
business.
THE CONTINUING CONCERN CONCEPT
This concept assumes that a business will
continue to operate, unless it is known that such is not
the case. The values of the assets belonging to a
business that is alive and well are straightforward.
Financial statements should be prepared on a
going concern basis unless management either
intends to liquidate the enterprise or to cease trading,
or has no realistic alternative but to do so. The
business is assumed to have a continuing and
indefinite life. The business is not on the verge of
extinction.
Examples:
 Possible losses from the closure of business
will not be anticipated in the accounts.
 When preparing financial statements, you
should assume that the entity will continue
indefinitely.
THE TIME PERIOD CONCEPT
This assumes that the business has a
continuous life of existence. Due to the duration of its
existence, the life od the business is divided into equal
periods wherein at the end of each period the
accountant prepares the financial statements. The
period being referred to is known as “accounting
periods”.
Speaking of accounting periods, it can be a
period of:
a. 1 Month – financial statements are prepared
on a “monthly basis”.
b. 3 Months – financial statements are prepared
on a “quarterly basis”.
c. 6 Months – financial statements are prepared
on a “semi-annual basis” or “semestral basis”.
d. 12 Months – financial statements are
prepared on a “yearly basis” or “annual
basis”.
The accounting period of less than a year is
called “Fiscal Period” and the financial statements
prepared are being referred to as “interim financial
statements”.
The owner or management has three (3)
annual accounting periods to choose from as far as
periodic reporting of financial statements are
concerned, these are:
i. Calendar Year
 The accounting period will begin
on January 1 and will end on
December 31 of the same year.
 This is the most common annual
accounting period that the
business adopts because this is the
nearest accounting period wherein
business entities file their Income
Tax Returns.
ii. Fiscal Year
 The accounting period will begin
on the first day of any month of
the year except January and will
end on the last day of the twelfth
 FUNDAMENTALS OF ACCOUNTANCY, BUSINESS, AND MANAGEMENT 1
month completing the one year
period.
iii. Natural Business Year
 This is a twelve month period that
ends on any month when the
business is at the lowest or
experiencing slack season.
Examples:
 Philippine companies are required to report
financial statements annually.
 The salary expenses from January to
December 2015 should only be reported in
2015.
THE MONETARY UNIT CONCEPT
In this, the function of accounting is “to
account for peso only and not for changes in its
purchasing power.”
Amounts are stated into a single monetary
unit. This assumes that in the Philippines, we use the
“peso” as a unit of measure.
Examples:
 Jollibee should report financial statements in
pesos even if they have a store in the United
States.
 IHOP should report financial statements in
dollars even if they have a branch here in the
Philippines.
THE OBJECTIVITY PRINCIPLE
States that accounting will be recorded on the
basis of objective evidence. Objective evidence
means that different people looking at the evidence
will arrive at the same values for the transaction.
Simply put, this means that accounting entries will be
based on fact and not on personal opinion or feelings.
Financial statements must be presented with
supporting evidence.
Examples:
 When the customer paid Jollibee for their
order, Jollibee should have a copy of the
receipt to represent as evidence.
 When a company incurred a transportation
expense, a voucher should be prepared as
evidence.
THE COST PRINCIPLE
States that the accounting for purchases must
be at their cost price. This is the figure that appears
on the source document for the transaction in almost
all cases. This principle requires that assets should be
recorded at original or acquisition cost.
The value recorded in the accounts for an
asset is not changed until later if the market value of
the asset changes.
Lesson 6: Accounting Concepts and Principles
Examples:
 When Jollibee buys a cash register, it should
record the cash register at its price when they
bought it.
 When a company purchases a laptop, it
should be recorded at the price it was
purchased.
 If you buy a land today costing PHP1,000,000,
three years after, the current value of the
land is approximately PHP2,500,000; what
will prevail in the record is the PHP1,000,000
and not the PHP2,500,000 because cost is
definite and verifiable.
THE ACCRUAL ACCOUNTING PRINCIPLE
Revenue should be recognized when earned
regardless of collection and expenses should be
recognized when incurred regardless of payment.
On the other hand, the cash basis principle in
which revenue is recorded when collected and
expenses should be recorded when paid. Cash basis is
not the generally accepted principle today.
Example:
 When the barber finishes performing his
services, he should record it as revenue.
When the barber ship receives an electricity
bill, it should record it as an expense even if it
is unpaid.
THE MATCHING PRINCIPLE
States that each expense item related to
revenue earned must be recorded in the same
accounting period as the revenue it helped to earn.
If this is not done, the financial statements
will not measure the results of operations fairly.
Example:
 When you provide tutorial services to a
customer and there is a transportation cost
incurred related to the tutorial services, it
should be recorded as an expense for the
period.
THE DISCLOSURE PRINCIPLE
States that any and all information that affect
the full understanding of a company’s financial
statements must be included with the financial
statements.
All relevant and material information should
be reported.
Example:
 The company should report all relevant
information.
THE CONSERVATISM PRINCIPLE
 FUNDAMENTALS OF ACCOUNTANCY, BUSINESS, AND MANAGEMENT 1
Lesson 6: Accounting Concepts and Principles

Also known as prudence; provides that

accounting for a business should be fair and
reasonable. Accountants are required in their work to
make evaluations and estimates, to deliver opinions,
and to select procedures.
In case of doubt, assets and income should
not be overstated while liabilities and expenses
should not be understated.

Example:
 Expenses should be recorded at a higher
amount. Revenue should be recorded at a
lower amount.

THE MATERIALITY PRINCIPLE

This requires accountants to use generally
accepted accounting principles except when to do so
would be expensive or difficult, and where it makes
no real difference if the rules are ignored.
This principle dictates practicability to rule
over theory in determining the valuation of an item.

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.