FINANCIAL ACCOUNTING

&
REPORTING
(Fundamentals)

Chapter 2: Accounting Concepts and Principles (FAR by: Millan)

Chapter 2
Accounting Concepts and Principles
Learning Objectives
1. Give examples of accounting concepts and principles.
2. Apply the concepts in solving accounting problems.

Chapter 2: Accounting Concepts and Principles (FAR by: Millan)

Basic Accounting Concepts
1. Separate entity concept 7. Time Period
2. Historical cost concept 8. Stable monetary
unit
3. Going concern assumption 9. Materiality
concept
4. Matching 10. Cost-benefit
5. Accrual Basis 11. Full disclosure
principle
6. Prudence (or Conservatism) 12. Consistency
concept
Chapter 2: Accounting Concepts and Principles (FAR by: Millan)
Basic Accounting Concepts – (cont’n)
 Separate entity concept – The business is viewed as a separate entity,
distinct from its owner(s). Only the transactions of the business are
recorded in the books of accounts. The personal transactions of the
business owner(s) are not recorded.
 Historical cost concept (Cost principle) – assets are initially recorded
at their acquisition cost.
 Going concern assumption – The business is assumed to continue to
exist for an indefinite period of time.
 Matching – Some costs are initially recognized as assets and charged as
expenses only when the related revenue is recognized.

Chapter 2: Accounting Concepts and Principles (FAR by: Millan)

Basic Accounting Concepts – (cont’n)
 Accrual Basis of accounting – income is recorded in the period when it
is earned rather than when it is collected, while expense is recorded in
the period when it is incurred rather than when it is paid.
 Prudence – The observance of some degree of caution when exercising
judgments under conditions of uncertainty. Such that, if there is a
choice between a potentially unfavorable outcome and a potentially
favorable outcome, the unfavorable one is chosen. This is necessary so
that assets or income are not overstated and liabilities or expenses are
not understated.

Chapter 2: Accounting Concepts and Principles (FAR by: Millan)

Basic Accounting Concepts – (cont’n)
 Reporting Period – The life of the business is divided into series of
reporting periods.
 Stable monetary unit – Assets, liabilities, equity, income and expenses
are stated in terms of a common unit of measure, which is the peso in
the Philippines. Moreover, the purchasing power of the peso is regarded
as stable. Therefore, changes in the purchasing power of the peso due
to inflation are ignored.

Chapter 2: Accounting Concepts and Principles (FAR by: Millan)

Basic Accounting Concepts – (cont’n)
 Materiality concept – An item is considered material if its omission or
misstatement could influence economic decisions. Materiality is a
matter of professional judgment and is based on the size and nature of
an item being judged.
 Cost-benefit – The costs of processing and communicating information
should not exceed the benefits to be derived from the information’s
use.

Chapter 2: Accounting Concepts and Principles (FAR by: Millan)

Basic Accounting Concepts – (cont’n)
 Full disclosure principle – Information communicated to users reflect
a balance between detail and conciseness, keeping in mind the cost-
benefit principle.
 Consistency concept – Like transactions are accounted for in like
manner from period to period.

Chapter 2: Accounting Concepts and Principles (FAR by: Millan)

Philippine Financial Reporting Standards
(PFRSs)
The PFRSs are Standards and Interpretations adopted by the FRSC. They
consist of the following:
1. Philippine Financial Reporting Standards (PFRSs);
2. Philippine Accounting Standards (PASs); and
3. Interpretations

Chapter 2: Accounting Concepts and Principles (FAR by: Millan)

Qualitative Characteristics
I. Fundamental Qualitative Characteristics
i. Relevance (Predictive Value, Confirmatory Value,
Materiality)
ii. Faithful Representation (Completeness, Neutrality,
Free from error)

II. Enhancing Qualitative Characteristics

i. Comparability
ii. Verifiability
iii. Timeliness
iv. Understandability
Chapter 2: Accounting Concepts and Principles (FAR by: Millan)
Fundamental vs. Enhancing
 The fundamental qualitative characteristics are the characteristics
that make information useful to users.
 The enhancing qualitative characteristics are the characteristics that
enhance the usefulness of information

Chapter 2: Accounting Concepts and Principles (FAR by: Millan)

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

➢ Materiality – is an ‘entity-specific’ aspect of relevance.

Chapter 2: Accounting Concepts and Principles (FAR by: Millan)

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.
Chapter 2: Accounting Concepts and Principles (FAR by: Millan)
Enhancing Qualitative Characteristics
1. Comparability – the information helps users in
identifying similarities and differences between
different sets of information.
2. Verifiability – different users could reach consensus
as to what the information purports to represent.
3. Timeliness – the information is available to users in
time to be able to influence their decisions.
4. Understandability – users are expected to have:
a. reasonable knowledge of business activities;
and
b. willingness to analyze the information
diligently.
Chapter 2: Accounting Concepts and Principles (FAR by: Millan)
 APPLICATION OF
CONCEPTS
PROBLEM 3: FOR CLASSROOM DISCUSSION

Chapter 2: Accounting Concepts and Principles (FAR by: Millan)