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Fundamentals of
Accountancy, Business and
Management 1
Quarter 3 - Module 2:
Accounting Concepts and Principles
Fundamentals of Accountancy, Business and Management 1 - Senior High School
Alternative Delivery Mode
Quarter 3 - Module 2: Accounting Concepts and Principles
Second Edition, 2021
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Fundamentals of
Accountancy, Business
and Management 1
Quarter 3 - Module 2:
Accounting Concepts & Principles
Icons of this Module
Pre-test ---------------------------------------------------------------------- 3
Lesson 3 ---------------------------------------------------------------------- 4
Post-test ---------------------------------------------------------------------- 15
Reference ---------------------------------------------------------------------- 19
What I Need To Know
Good Job! Thank you for completing Module 1. You are now ready for
the next lesso, Accounting Concepts and Principles. You need to learn more
effectively. Good luck!
Module Content
1
General Instructions
7. Remember to review every time you are done answering the activities; and
2
What I Know
Instructions: Choose carefully the letter that best describes your answer.
Write your answer on the space provided before the number.
____2) What principle that requires every business to be accounted for separately
and distinctly from its owner or owners?
a. Objectivity principle
b. Business entity principle
c. Going-concern principle
d. Revenue recognition principle
e. Cost principle
____3) What rule that requires financial statements to reflect the assumption that the
business will continue operating instead of being closed or sold, unless
evidence shows that it will not continue?
a. Going-concern principle
b. Business entity principle
c. Objectivity principle
d. Cost Principle
e. Monetary unit principle
____4) What is the principle that include the personal assets and transactions of a
business's owner in the records and reports of the business would be in
conflict with?
a. Objectivity principle
b. Realization principle
c. Business entity principle
d. Going-concern principle
e. Revenue recognition principle
3
What’s In
Activity 1. Review
Directions: Complete the statement. Write your answer on the lines provided.
What’s New
Activity 2
Instructions: Answer the question below. Write your interpretations on the lines
provided.
4
What is your understanding on the given concept map about accounting principles?
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
What Is It
5
Examples :
If the owner has a barber shop, the cash of the barber shop should be reported
separately from personal cash.
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.
Examples:
Possible losses from the closure of business cannot be anticipated in the accounts.
Examples :
Philippine companies are required to report financial statements annually.
The salary expenses from January to December 2015 should only be reported
in 2015.
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
6
Historical Cost
All business resources acquired should be valued and recorded based on the
actual cash equivalent or original cost of acquisition, not the prevailing market value
or future value. The exception to the rule is when the business is in the process of
closure and liquidation.
Example:
The cost of fixed assets is recorded at the date of acquisition cost. The acquisition
cost includes all expenditure made to prepare the asset for its intended use. It
includes the invoice price of the assets, freight charges, insurance, and installation
cost of any.
Matching principle
– cost should be matched with the revenue generated. This principle requires that
revenue recorded, in a given accounting period, should have an equivalent expense
recorded, in order to show the true profit of the business.
Examples:
Recording of doubtful account expense should be done when the revenue was
earned.
Advanced payment from clients must be recorded in the month when the
services were rendered.
Accounting Period
This principle entails a business to complete the whole accounting process over a
specific operating time period. Accounting period may be monthly, quarterly or
annually. For annual accounting period, it may follow a Calendar or Fiscal Year.
Example:
The owner can monitor the results of the business operations periodically either
monthly, quarterly, or annually to check whether it is profitable or not.
Conservatism principle
– also known as prudence. In case of doubt,
assets and income should not be overstated while
liabilities and expenses should not be understated.
The principle of conservatism gives guidance on how
to record uncertain events and estimates. The
principle of conservatism states that one should
always consider an error on the most conservative
side of any transaction. This means minimizing profits
by recording uncertain losses or expenses and not
recording uncertain or estimated gains.
https://ya-webdesign.com/explore/money-cartoon-png/.
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Example:
Assume gold guitar, Inc. is in the middle of a patent lawsuit. GGI is suing Blue
Guitar, Inc. for patent infringement and anticipates winning a large settlement. Since,
the settlement is not certain, GGI did not record the gain on the financial statements.
Why? Because GGI might not actually see this gain. It might not win, or they might
not win as much as it expected. Since a large winning settlement might skew the
financial statements and mislead the users, the gain is left off the books.
Consistency Principle
The consistency principle states that companies should use the same
accounting treatment for similar events and transactions over time.
The consistency principle does not state that business always have to use the
same accounting method forever.
Example:
Bob’s Computers, a computer retailer, has historically used FIFO for valuing its
inventory. In the last few years, the business has become quite profitable and Bob’s
accountant suggests that Bob switches to the LIFO inventory system to minimize
taxable income. According to the consistency principle, Bob’s Computers can
change accounting methods for a justifiable reason. Minimizing taxes as a justifiable
reason is debatable.
Materiality principle
– in case of assets that are immaterial to make a difference in the financial
statements, the company should instead record it as an expense. The materiality
concept, also called the materiality constraint, states that financial information is
material to the financial statements if it would change the opinion or view of a
reasonable person. In other words, all important financial information that would sway
the opinion of a financial statement user should be included in the financial
statements.
The concept of materiality is relative in size and importance.
Examples:
A large company has a building in the typhoon area during Yolanda Storm.
The company building is destroyed and after a lengthy battle with the
insurance company, the company reports an extraordinary loss of
P10,000,00. The company has net income of P10,000,000.00 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.
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Objectivity principle
– financial statements must be presented with supporting evidence. The
objectivity principle states that accounting information and financial reporting should
be independent and supported with unbiased evidence. This means that accounting
information must be based on research and facts, not merely preparer’s opinion. The
objectivity principle is aimed at making financial statements more relevant and
reliable.
https://protogenenergy.com/all-rf100-real-talk/economic/net-present-value/.
Example:
When the customers paid Jollibee for their order, Jollibee should have a copy
of the receipt to represent as evidence.
Example:
Bob’s Billiards, Inc. sells a pool table to a bar company on December 31 for
P85,000.00 The pool table was not paid for until January 15 and it was not delivered
to the bar until January 31. According to the revenue recognition principle, Bob’s
should not record the sale in December. Even though the sale was realizable in that
the sale for P85,000.00 was initiated, it was not earned until January when the pool
table was delivered.
Cost principle
– accounts should be recorded initially
at cost.
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.
https://www.sandgravsolutions.dk/ultimativguideloensystemer/.
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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 a barber finishes performing his services he should record it as revenue. When
the barber shop receives an electricity bill, it should record it as an expense even if it
is unpaid.
Disclosure principle
– all relevant and material information should be reported.
Example:
The company should report all relevant information.
RELEVANCE
The concept of relevance implies that financial statements can have predictive
value and feedback value. This means the financial statements are accurate and can
be used to predict future company performance.
PREDICTIVE VALUE
Predictive value refers to the fact that quality financial information can be used
base predictions, forecast, and projections on. Financial analysts and investors can
use past financial statements to chart performance trends and make predictions
about future performance and profitability.
FEEDBACK VALUE
Quality information has a feedback value when it can confirm or correct previous
expectations. In other words, users can examine financial information and confirm or
adjust their predictions made on previous performance trends. Based on the
feedback, users can make future decisions.
TIMELESS
Timeless is one of the most important factors in relevant information. Out of date
information does not do investors or creditors any good when they are trying to make
current and future decisions. Financial reporting must be timely and current in order
to be used by investors and creditors.
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RELIABILITY
The concept of reliability implies that financial information can be verified by many
source with evidence and that all financial information is presented. In other words,
the favorable and unfavorable financial information are presented in the financial
statements.
https://vertriebscontroller.com/technisches/6-gratis-reporting-tools.html.
VERIFIABILITY
Financial information is verifiable when multiple,
independent measures are used to come up with the same
result.
REPRESENTATIONAL FAITHFULNESS
Representational faithfulness simply means that the
financial statements represent reality or what actually
happened during the year.
NEUTRALITY
Finally, in order for financial statements to be reliable
they must be neutral. By definition, financial statements that are prepared by
company management are somewhat biased because the management want to see
the company improve.
COMPARABILITY
Comparability is a quality of accounting information that addresses the usability of
financial information. Information that is prepared using the same measurement
techniques and reported in a similar and can be judged side by side other similar
financial information.
What’s More
Activity 3
Directions: Match the following accounting principles with their definition. Write the
letter of your answer in the space provided.
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___________________ 1. All relevant information should be included in the financial
reports
Activity 4
Directions: Accounting principles. Indicate which principles are violated. Write your
analysis on the line provided.
1. The owner-manager bought a computer for personal use. The invoice was given to
the accountant who recorded it as an asset of the business.
___________________________________________________________________
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3. No financial statements were prepared by Michael Go for his business. He
explained that he will prepare the statements when he closes the business, which he
predicts to take place after 20 years.
___________________________________________________________________
4. Aside from owning a shoe store, Albert operates a canteen. The assets of the
canteen are reported in the statement of financial position of the shoe store.
__________________________________________________________________
What I Can Do
Activity 5
Instructions: Answer the questions below. Write your answer on the lines provided.
TOTAL 60,000
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What do you think should not be included as expenses.
___________________________________________________________________
___________________________________________________________________
Activity 6
Instructions: Solve the following exercises. Write your answer on the lines provided.
Question 1: Andy runs a real estate development firm. Five years ago, he purchased
a piece of land for P250,000. This year, an appraiser tells Andy that the land is worth
P300,000. At what value should Andy report the land on his balance sheet?
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
Question 2: Andy is the sole owner of his firm. In June, he moves P30,000 from his
business checking account to his personal checking account. If Andy wants his
financial records to be in accordance with GAAP, should he record the transaction or
not?
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
Self-Check!
Great job! You have completed Module 2 successfully! Before going to the next
lesson, check the icon that best shows your learning experience.
https://www.focusjunior.it/scuola/italiano/analisi-logica/complementi-cosa-sono-cosa-servono/.
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I need to do additional work to be able to master the
If you checked the first icon, you are ready for lesson 2.
lesson. I need help in some tasks.
https://www.jing.fm/iclipt/Jxhiw/.
If you have checked the first icon, you can proceed to the next module. If you
have checked the second icon, you need to review the things that you need to relearn.
If you have checked the third icon, it would be best if you read more and ask help
from your teacher, parents or peers in clarifying the lessons that you find it difficult.
Be honest so that you will truly improve.
Assessment
Directions: Give at least one real life example for each principle given below. Write
your example on the lines provided.
Objectivity Principle
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
Cost Principle
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
Materiality Principle
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
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CONGRATULATIONS
FOR COMPLETING THIS MODULE!
https://www.pinterest.ph/pin/639651953309372765/.
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Activity 3 Activity 2
1. G Accounting is considered the
2. J language of business. In order for
3. A
4. B
business entities to determine their
5. C financial performance, accounting is
6. D needed. There are different forms
7. H of
8. I
9. E
business entities according to its
10. F organization and operations. A
business can be organized as a sole
proprietorship, a partnership or
corporation. A business can be
operated as a service,
merchandising
and manufacturing entity.
Sometimes
we want to determine our
performance compared to similar
companies, however, since there
are a
lot of ways and assumptions to
present financial reports, we need
Activity 1 to
I have learned in the previous have a generally accepted rule for
lesson that There are two broad
categories of users of financial accounting.
information: internal and external
users. Internal users of accounting
information are those individuals
inside a company who plan,
organize, and run the business. Pre-test
These users are directly involved in
managing and operating the 1. E
business. While External users are 2. B
individuals and organizations outside 3. A
a company who want financial 4. B
information about the company.
These users are not directly involved
5. A
in managing and operating the
business.
Answer Key
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Post Test Activity 6
Business Entity Principle Question 1: Andy
should report the
I have my grocery business. I cannot get cash land at its original
from my sales to buy shoes for personal use cost: P250,000.
Under GAAP’s
Objectivity Principle “Historical Cost”
assumption, assets
Everytime my customer paid their items, I should are reported at their
have a copy of the receipt as evidence historical cost rather
than at their current
Cost Principle market value. This is
done in order to
My customer paid 1 bottle of mineral water for remove subjective
fifteen pesos. I should record fifteen pesos at the asset valuations
price it was purchased. from the reporting
process.
Accrual Accounting Principle
I have received an Electricity bill from Moresco-1. Question 2: Yes, in
order to be in
I recorded it as an expense even do it is still compliance with
unpaid GAAP, Andy must
record the
Materiality Principle transaction. GAAP’s
“Entity Assumption”
I purchased a broom for the groceries cleanliness considers
maintenance. It has a two years estimated useful businesses to be
life. Since it is immaterial relative to assets, I separate entities
recorded it as an expense. from their owners.
As such,
transactions
between a business
Activity 5 and its owners must
be recorded as if
Salary expense – it should be included since it is they were between
related to the operations of the business the business and an
Rent expense – it should be included since the rent entirely separate
is for the business party.
Utilities expense (home) – should not be included; it
is a personal expense
Utilities expense (store) – should be included; it is an
expense of the business
Insurance expense – should be included since the Activity 4
insurance is for the business (1) Business entity
Withdrawals – should not be included since the (2) Monetary unit
withdrawal is for personal use (3) Time period
(4) Business entity
It is an application of the Business Entity Principle. (5) Materiality
References
BOOK
WEBSITE
“Accounting Free Stock Photo”.Public Domain Pictures. Accessed date July 30, 2020.
https://www.publicdomainpictures.net/en/view-image.php?image=162447&pictur
e=accounting&__cf_chl_jschl_tk__=0b0aa1ba64244e3cd152dd334e681e60bba
0379a-1596118939-0-ATCPgiYiMMyggcUMUngXcWUJkBIoNTyqfSDqIrsNnBJC
OQkurmR4dhL6qn4M5gHUYWVXfTppOob564M6GJ0NWoQF5_NGYt24IH56GF
A21dSkA5trEqBmXZKwRWHhqSkbh_eXm7O5q4AiQZ_rfPcme1Vym-EZZtM1vK
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ngeJrzl7ZsYNjfHXGNRoK81ZK7gAt5ttItgzLtPQl2xB1fcexADGvS1LqNpcx_5aec
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“Free Images : child, reading, book, girls, education, toddler. PxHere. Accessed date
July 30, 2020. https://pxhere.com/en/photo/1450659.
“I COMPLEMENTI: COSA SONO?”. Focus Junior. Accessed date July 30, 2020.
https://www.focusjunior.it/scuola/italiano/analisi-logica/complementi-cosa-sono-c
osa-servono/.
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“Illustration Kids Clipart Free Photo”. Needpix.com. Accessed date July 30, 2020.
https://www.needpix.com/photo/1153751/illustration-kids-clipart-graphics-the-cla
ssroom-materials-teaching-materials-study-of-students.
“Książka Rysunek Dla Dzieci”. Jing.fm. Accessed date July 30, 2020.
https://www.jing.fm/iclipt/Jxhiw/.
“Net Present Value (NPV)”. ProtoGen Energy. Accessed date July 30, 2020.
https://protogenenergy.com/all-rf100-real-talk/economic/net-present-value/.
E-BOOK
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