INTEGRATED

ACCOUNTING
FUNDAMENTAL
Course Material No. 2
S
The Accounting Concepts
and Principles

Marina V. Justiniani, CPA,

MBA
 2 Accounting Concepts and Principles • NU LAGUNA

Accounting Concepts and Principles,

2
LEARNING OUTCOMES

Here’s what I will teach you in this course material:

LESSON OUTLINE
 Give examples of accounting concepts and principles
 Apply the concepts in solving accounting problems
 Basic Accounting
Unit Outline
Concepts

 Accounting Standards

 Philippine Financial
Reporting Standards

 Relevant regulatory bodies

 The Conceptual Framework

RESOURCES NEEDED
for financial reporting

For this lesson, you would need the following resources:

 Financial Accounting and Reporting

Accounting Concepts and Principles • NU LAGUNA 3

TABLE OF CONTENTS

Pretest 3 Questions for Review

and Discussion

Accountant’s Word Hunt

Before you start, try answering the following 4
questions.

1. Give at least five (5) basic accounting concepts and Accounting Concepts &
explain briefly. 5 Principles

_________________________________________
_________________________________________
_________________________________________ 9 Test Yourself

2. Give the two classifications of qualitative

characteristics of financial information
13 References

_________________________________________
_________________________________________
_________________________________________

3. What is the fundamental qualitative characteristics?

________________________________________
________________________________________
________________________________________

4. What is the enhancing qualitative characteristics?

________________________________________
________________________________________
________________________________________

5. Why is Conceptual Framework for Financial

Reporting relevant?

________________________________________
________________________________________
________________________________________
4 Accounting Concepts and Principles • NU LAGUNA

Accounting Concepts
and Principles

This lesson comprises of

the discussion of the
different Accounting
Concepts and Principles.
These provides reasonable
assurance that information
communicated to users is
prepared in a proper way.

Accountant’s Word Hunt

Identify what is needed and color it according to the designated
color after the questions.

G O I N G H T Y U P
Find all the words that
C O N C E R N S Y D corresponds to elements
T I M E P E R I O D of Accounting Concepts
A C C R U A L R O Q and Principles inside the
Box
H C T E X P E N S E
S N S D S Q T A G I

S E P E R A T E Y U
E N T I T Y G E S T
R E L E V A N C E G

F A I T H F U L A S
R E P R E S E N T X
 Accounting Concepts and Principles • NU LAGUNA

Accounting Concepts and Principles

Hello Class. How is your day? I hope your fine. Today, we shall discuss about
Accounting Information.

Speaking of accounting information, there are two types of accounting information dependent on
the needs of the users, to wit:

• General purpose accounting information - designed to meet the common needs of most
statement users. This information is governed by the Philippine Financial Reporting
Standards (PFRSs).

• Special purpose accounting information - designed to meet the specific needs of particular
statement users. This information is provided by other types of accounting, e.g., managerial
accounting, tax basis accounting, etc.

Let’s talk about the basic accounting concepts. They are as follows:

• Double-entry system – each accountable event is recorded in two parts – debit and
credit.

• Going concern - the entity is assumed to carry on its operations for an indefinite period of
time.

• Separate entity – the entity is treated separately from its owners.

• Stable monetary unit - amounts in the financial statements are stated in terms of a
common unit of measure; changes in purchasing power are ignored.

• Time Period – the life of the business is divided into series of reporting periods.

• Materiality concept – information is material if its omission or misstatement could

influence economic decisions.

• Cost-benefit – the cost of processing and communicating information should not exceed
the benefits to be derived from it.

• Accrual Basis of accounting – effects of transactions are recognized when they occur
(and not as cash is received or paid) and they are recognized in the accounting periods to
which they relate.

• Historical cost concept – the value of an asset is determined on the basis of acquisition
cost.

• Concept of Articulation – all of the components of a complete set of financial statements

are interrelated.
6 Accounting Concepts and Principles • NU LAGUNA

• Full disclosure principle – financial statements provide sufficient detail to disclose

matters that make a difference to users, yet sufficient condensation to make the
information understandable, keeping in mind the costs of preparing and using it.

• Consistency concept – financial statements are prepared on the basis of accounting

policies which are applied consistently from one period to the next.

• Matching – costs are recognized as expenses when the related revenue is recognized.

• Residual equity theory – this theory is applicable where there are two classes of shares
issued, ordinary and preferred. The equation is “Assets – Liabilities – Preferred
Shareholders’ Equity = Ordinary Shareholders’ Equity.”

• Fund theory – the accounting objective is the custody and administration of funds.

• Realization – the process of converting non-cash assets into cash or claims for cash.

• Prudence (Conservatism) – the inclusion of a degree of caution in the exercise of the

judgments needed in making the estimates required under conditions of uncertainty , such
that assets or income are not overstated and liabilities or expenses are not understated.

I. Fundamental qualitative characteristics

Relevance

Information is relevant if it can affect the decisions of users. Relevant information has the
following:

a. Predictive value – the information can be used in making predictions

b. Confirmatory value – the information can be used in confirming past predictions

Faithful Representation

Faithful representation means the information provides a true, correct and complete depiction
of what it purports to represent. Faithfully represented information has the following:

a. Completeness – all information necessary for users to understand the phenomenon being
depicted is provided.

b. Neutrality – information is selected or presented without bias.

c. Free from error – there are no errors in the description and in the process by which the
information is selected and applied.

2. Enhancing qualitative characteristics

a. Comparability – the information helps users in identifying similarities and differences

between different sets of information.

b. Verifiability – different users could reach consensus as to what the information purports
to represent.
Accounting Concepts and Principles • NU LAGUNA

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c. Timeliness – the information is available to users in time to be able to influence their
decisions.

d. Understandability – users are expected to have:

 reasonable knowledge of business activities;

 and willingness to analyze the information diligently

Now, we shall discuss Philippine Financial Reporting Standards or PFRSs.

Philippine Financial Reporting Standards (PFRSs) are Standards and Interpretations

adopted by the Financial Reporting Standards Council (FRSC). They comprise:
1. Philippine Financial Reporting Standards (PFRSs);
2. Philippine Accounting Standards (PASs); and
3. Interpretations

Why is there a need for reporting standards?

1. Entities should follow a uniform set of generally acceptable reporting standards when
preparing and presenting financial statements; otherwise, financial statements would
be misleading.

2. The term “generally acceptable” means that either:

a. the standard has been established by an authoritative accounting rule-making body;
or
b. the principle has gained general acceptance due to practice over time and has been
proven to be most useful.

3. The process of establishing financial accounting standards is a democratic process in

that a majority of practicing accountants must agree with a standard before it becomes
implemented.

The PFRS are issued by the Financial Reporting Council (FRSC) which is the official accounting
standard0setting body in the Philippines. These 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 worldwide.

Relevant regulatory bodies

Other than the Financial Reporting Standards Council (FRSC), the following also affect the
accounting policies used by businesses and their financial reporting:

1. Securities and Exchange Commission (SEC) – The SEC is tasked with regulating
corporations, including partnerships. SEC required corporations and partnerships to
file audited financial statements.

2. Bureau of Internal Revenue (BIR) – The BIR is taksed in collecting national taxes and
administering the provisions of the Tax Code.
8 Accounting Concepts and Principles • NU LAGUNA

3. Bangko Sentral ng Pilipinas (BSP) – BSP is tasked in regulating banks and other
entities performing baking functions. BSP influences the selection and application of
accounting policies by these businesses.

4. Cooperative Development Authority – CDA is tasked in regulating cooperatives. The

CDA influences the selection and application accounting policies by cooperatives.
 Accounting Concepts and Principles • NU LAGUNA

Test Yourself
Choose the best answer:

1. Which of the following terms may not refer to the logical notions and procedures that guide the
accountant in recording and communicating financial information?
a. Accounting concepts
b. Accounting principles
c. Accounting standards
d. Accounting laws and regulations

2. Under this concept, a business is not expected to end its operations in the near term.
a. Separate entity concept
b. Going concern
c. Stable monetary unit
d. Materiality

3. Transactions and other events are recorded in the periods in which they occur, not when they affect
cash.
a. Going concern
b. Accrual basis
c. Reporting period
d. Consistency

4. The personal transactions of the business owner that do not involve the business are not recorded in
the books of accounts of the business. This relates to the concept of
a. Separate entity concept.
b. Going concern.
c. Stable monetary unit.
d. Materiality.
10 Accounting Concepts and Principles • NU LAGUNA

5. Presenting all amounts in the financial statements in Philippine pesos and disregarding the effects of
inflation on the purchasing power of the Philippine peso relate to the concept of
a. Separate entity concept.
b. Going concern.
c. Stable monetary unit.
d. Materiality.

6. Under this concept, the life of the business is divided into series of reporting periods.
a. Time period
b. Periodicity
c. Reporting period
d. All of these

7. The banking industry in the Philippines is mainly regulated by the

a. CDA.
b. SEC.
c. BSP.
d. BIR.

8. The Standards used in the Philippines are patterned from

a. U.S. GAAP.
b. Spanish Standards.
c. Japanese Financial Reporting Standards
d. international standards, called the International Financial Reporting Standards (IFRS) issued by the
International Accounting Standards Board (IASB) which is based in the U.K.

9. Recording assets at their acquisition cost (entry value), rather than at their net selling price (exit value),
is in line with the concept of
a. Single entity concept.
b. Historical cost concept.
c. Going concern concept.
d. Matching principle.

10. Which of the following relates to the concept of consistency?

a. Treating the business as a separate entity from its owner.
b. Recording sales revenue when a sale occurs rather than when the sale price is collected.
c. Measuring assets at their acquisition cost.
d. Using the same accounting treatment for similar items from period to period.

11.Which of the following is an application of the concept of prudence or conservatism?

a. Choosing a potentially unfavorable outcome over a potentially favorable one.
b. Choosing a potentially favorable outcome over a potentially unfavorable one.
c. Deliberately understating assets and income and deliberately overstating liabilities and
expenses.
d. Doing nothing in cases of uncertainty.
Accounting Concepts and Principles • NU LAGUNA

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12.The cost of providing or using information should not exceed the information’s usefulness.
a. Materiality
b. Cost-benefit or Cost constraint
c. Going concern
d. Relevance

13.Under this concept, some costs are initially recognized as assets and recognized only as expenses
when the related revenue is recognized.
a. Separate entity concept
b. Historical cost concept
c. Going concern
d. Matching principle

14.Businesses are required by law to file tax returns with this government agency.
a. Security and Exchange Commission
b. Bureau of Internal Revenue
c. Cooperative Development Authority
d. Bangko Sentral ng Pilipinas

15.The accounting standards that are currently used in the Philippines are referred to as the
a. Philippine Financial Reporting Standards (PFRS).
b. Philippine GAAP.
c. Filipino Accounting Standards (FAS).
d. Juan’s GAAP.

16.The usefulness of information is assessed in terms of its

a. qualitative characteristics.
b. verifiability.
c. timeliness.
d. size.

17.Which of the following is one of the fundamental qualitative characteristics?

a. Comparability
b. Relevance
c. Timeliness
d. Verifiability

18.Which of the following is correct concerning the qualitative characteristics?

a. Free from error means the information contained in the financial statements is perfectly
accurate in all respects.
b. Neutrality means information is selected or presented with bias to increase the probability that
the information will be received favorably by the users.
c. Information that is not capable of affecting the decisions of users is considered irrelevant.
d. The enhancing qualitative characteristics can convert non-useful information to useful
information.
12 Accounting Concepts and Principles • NU LAGUNA

19.A business purchased equipment for ₱10,000 but deliberately reported it as ₱100,000. Which of the
following principles is most likely not violated?
a. Faithful representation
b. Free from error
c. Historical cost
d. Materiality

20.This qualitative characteristic requires at least two items.

a. Comparability
b. Timeliness
c. Verifiability
d. Understandability
Accounting Concepts and Principles • NU LAGUNA

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Reference

Millan,Zeus Vernon B., 19th Edition Financial Accounting and Reporting, Bandolin Enterprise

Valix, Conrado T., 20th Edition Financial Accounting and Reporting, GIC Enterprises & Co., Inc

Cabrera, E. and Ocampo Reynaldo Financial Accounting and Reporting Standards and Applications
Volume 3 2014-2015 Edition GIC Enterprises & Co., Inc.