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The basic accounting concepts are the following:

● Entity concept – is the most basic concept in accounting, wherein the business transactions
of a business entity must be separated from those of other related organizations and owners.
(Bragg, 2019)

Example: The owner of a company acquired two floors of a building for P30,000.00 a month,
wherein one floor is for business use, while the other is for personal use. As such, according
to the entity concept, the company will record only P15,000.00 as rent expense.

● Periodicity Concept – In this concept, long term and ongoing activities can be subdivided in
equal time periods and reported in monthly, quarterly, annual financial statements. This
concept aids in the decision-making process for future activities of the company as it provides
a comparison and timely information (Averkamp, n.d.).

Example: A company under periodicity concept issues monthly financial statements in order
to have a clear picture of the changes in income and a comparison of the monthly results.

● Stable Monetary Unit Concept – Accountants assume that the value of the Philippine peso
is relatively constant over time. Hence, this concept allows accountants to ignore the effects
of inflation in the financial records (Petryni, 2017).

Example: If a company acquires an office building worth P100,000.00, after 10 years, the
value of the building will still be reported with the original price and it will not be adjusted
based on inflation.

Accrual Basis – In the accrual basis of accounting, the transactions are recorded when they
occur instead of recording it when cash changes take place. This basis is applicable in the
preparation of financial statements except the cash flow statement (Accounting For
Management, n.d.).

Example: A company has an annual rent expense of P200,000.00 but only paid half of the
amount. According to accrual basis of accounting, the company, despite not being fully paid,
already recorded the full amount of P200,000.00 as rent expense, considering that the
company will eventually pay the other half within the accounting period.

1. What is the basic accounting equation? Provide a brief description of each element of the
equation. (5 pts)

The basic accounting equation is Assets = Liabilities + Equity. This equation

consists of three (3) elements: assets, liabilities, and equity (Lumen, n.d.). The assets are
current or non-current resources owned by a company or an individual that can be converted
to cash, used in paying debts, and aids in reducing expenses (Barone, 2020). On the other
hand, liabilities are current or non-current debts that a company is obligated to pay to
creditors. Lastly, the equity is the residual value after deducting all the liabilities to the assets
as well as the amount of assets contributed by the owner of stakeholder (Murphy, 2020).

2. What is the expanded accounting equation: (5 pts)

a. for sole proprietorships and/or partnerships?
 b. for corporations?

The extended accounting equation for sole proprietorship and/or partnership is Assets =
Liabilities + Owner's Capital + Revenues – Expenses – Owner's Draws. While, the
expanded accounting equation for corporations is Assets = Liabilities + Paid-in Capital +
Revenues – Expenses – Dividends – Treasury Stock (Averkamp, n.d). The abovementioned
equations are composed of similar elements except for the owner’s draws and treasury stock.
Furthermore, it can be seen that the extended equations provided a more detailed calculation
of the owner’s equity in comparison to the basic accounting equation.

3. Give four (4) business transactions and analyze the effects of each transaction to the BASIC
accounting equation. (20 pts)
Example:
Transaction: Luffy, the owner, invested P300,000 cash in the business.
Effects: Assets is increased; Equity is increased

1. Transaction: Killua’s Corporation paid a debt of P2,000 to Gon Manufacturing Company

Effects: Assets is decreased; Liabilities is decreased

2. Transaction: Eren Co. purchased P15,000 worth of office supplies on account from
Mikasa Hardware
Effects: Assets is increased; Liabilities is increased

3. Transaction: Lababo Co. earned P30,000 from clients who previously bought cleaning
services on account
Effects: Assets is increased; Equity is increased

4. Transaction: Mr. Ong withdrew P55,000 cash from the business in order to pay for his
personal expenses.
Effects: Assets is decreased; Equity is decreased

References:

Bragg, S. (2019, April 05). The business entity concept. Accounting Tools.
https://www.accountingtools.com/articles/what-is-the-business-entity-concept.html#:~:text=The%20b
usiness%20entity%20concept%20states,other%20entity%20or%20the%20owner.

Barone, A. (2020, May 28). Asset. Investopedia.

https://www.investopedia.com/terms/a/asset.asp

Averkamp, H. (n.d.). What is periodicity concept in accounting?. Accounting Coach.

https://www.accountingcoach.com/blog/what-is-periodicity-in-accounting

Averkamp, H. (n.d.). What is the expanded accounting equation?. Accounting Coach.

https://www.accountingcoach.com/blog/expanded-accounting-equation#:~:text=The%20expanded%2
0accounting%20equation%20for%20a%20corporation%20is%3A%20Assets%20%3D%20Liabilities,
Expenses%20%E2%80%93%20Dividends%20%E2%80%93%20Treasury%20Stock.https://www.acc
ountingcoach.com/blog/expanded-accounting-equation#:~:text=The%20expanded%20accounting%20
equation%20for%20a%20corporation%20is%3A%20Assets%20%3D%20Liabilities,Expenses%20%
E2%80%93%20Dividends%20%E2%80%93%20Treasury%20Stock.
 Petryni, M. (2017). The Stable Monetary Unit Concept of Accounting. BizFluent.
https://bizfluent.com/info-12053293-stable-monetary-unit-concept-accounting.html

Accounting for Management. (n.d.). Accrual Concept of Accounting.

AccountingForManagement.Org. https://www.accountingformanagement.org/accrual-concept/

Lumen. (n.d). The Basic Accounting Equation. Lumen Leaning.

https://courses.lumenlearning.com/sac-finaccounting/chapter/the-basic-accounting-equation/

Murphy, C. (2020, August 2). Equity. Investopedia.

https://www.investopedia.com/terms/e/equity.asp