John Aldrich C.

Cabig
BSBA 2 A

Basic Accounting Concepts

1. Separate Entity Concept

The Business is viewed as a separate entity or person, aside from its

owners, Only the transactions of the business are recorded in the books of
accounts. All of the personal transactions of the owners are not recorded.

Applying the separate entity concept is vital to the business, because it can
properly measure the financial position and financial performance. Through
this you can truly know if the business is earning profits , or if the business
has the ability to do so.

2. Historical Cost Concept

Assets are measured and initially recorded based on their acquisition or

original amount.

3. Going Concern Assumptions

The entity or business will continue to exist for the foreseeable future,
which implies that it won't be required to immediately cease operations and
sell off its assets at what may be extremely low fire-sale prices.

This concept is important in business because without it businesses

couldn't handle accrued or prepaid expenses The going concern principle
enables a business to postpone the recognition of some of its prepaid
expenses to later accounting periods rather than all of them at once.

Assets are measured appropriately by its historical cost on the going

concern assumptions.
 Liquidating concerns

If the business or company intends to end its operations or has no other

choice but to do so due to bankruptcy, the assets of a liquidating concern
are measured and recorded at the net selling price rather than the
historical cost.

4. Matching Principle

is a method of recording revenues and expenses in accounting. It

demands that a business keep track of both its expenses and its earnings.
For the most accurate tracking, it is ideal if they both fall within the same
time frame.. It requires that a business records expenses alongside
revenues earned.

Basically, some costs are initially recognized as assets and charge as

expense only when the related revenue is recognized.This concept helps
to ensure that the financial statements are accurate and that they present
a true and fair view of the business operations

5. Accrual basis and cash basis of accounting

Accrual basis of accounting recognizes income in the period that when it is

Earned rather than collected, while expense is recognized in the period
when it is incurred rather than when it is paid

Cash basis accounting records revenue and expenses when actual

payments are received or disbursed. It does not take into account when
the transactions that generate them take place. Cash accounting reflects
the business transactions of a company's financial statements in terms of
the cash flows into or out of the business.

6. Conservatism (Prudence)

The accountant exercises some degree of caution when using judgments

necessary to make accounting estimates under uncertain circumstances.
 refers to the idea that expenses and liabilities should be recognized as
soon as possible when there is uncertainty about the outcome, while
assets and revenues should only be recorded when they are guaranteed to
be received.

7. Time Period

a rule of accounting that states a company should present financial

information that is accurate in the given period of time.

It allows a company's operations to be divided into informal time periods so

that it can generate financial information that people can use to make
decisions.

Mainly the life of the entity or business is divided into a series of reporting
periods ( monthly, quarterly, annually).

Example is at the end of the year, you prepared the financial statements of
your business to determine, among others, whether the business has
earned profit.

8. Stable monetary unit

All transactions are recorded in the books of accounts and measured in

terms of money, which is typically the currency unit in a country.
In the Philippines, the peso serves as the common unit of measurement for
the asset, liabilities, equity, income, and expenses. Additionally, the impact
of inflation on the peso's purchasing power is disregarded.

9. Materiality Concept

Materiality concept in accounting refers to the concept that all the material
items should be reported properly in the financial statements. Material
items are considered as those items whose inclusion or exclusion results in
significant changes in the decision making for the users of business
information.
10. Cost-benefit principle

The cost-benefit principle states that the cost of providing the information in
the financial statements should not be greater than the benefits that the
users receive from reading those statements.

11. Full disclosure principle

Both the ideas of materiality and cost advantages are connected to this
idea. Under the full disclosure principle, information communicated to
users reflects a series of subjective trade-offs that aim for sufficient detail
to disclose matters that matter to users and sufficient condensation to
make the information understandable, keeping in mind the cost of
preparing and using it.

A concept that requires a business or entity to report all necessary

information about their financial information and financial statements and
other relevant information to any individuals who are accustomed to
reading this information.

12. Consistency concept

This concept requires a business to apply accounting policies consistently,

and present information consistently, from one period to another. This
means that like transactions must be accounted for in like manner.

Accounting policies used this year shall be the same accounting policies
used last year. This, however, does not mean that a business cannot
change its accounting policies. Accounting policies can be changed if it is
required by a standard or the change would result in more relevant and
more reliable information. Any change in accounting Policy must be
disclosed.

The accounting standard in the Philippines is based on the

Philippine Financial Reporting Standards and Philippine Accounting

Standards
13. Differentiate accounting standards and conceptual framework

The accounting standards are concepts and principles that are either
explicit or implicit.

Explicit concept and principles are the one that is mentioned in the
conceptual framework for financial reporting and in the
Philippine Financial Reporting Standards (PFRSs).

Implicit concepts and principles are those that are not specifically
mentioned in the foregoing but are customarily used because of their
general and long time acceptance within the accountancy profession.

Accounting standards were referred to as the generally accepted

accounting principles. While conceptual frameworks for financial reporting
are just like the accounting standards, relatively they both prescribe
accounting concepts that are relevant to the preparation of financial
statements, However, the Conceptual framework is not a standard, rather it
serves as a general frame of reference in developing or applying the
standards.

14. What are the qualitative characteristics of useful information?

Qualitative characteristics are the traits that determine whether an item of

information is useful to the users. Without these characteristics, all of the
information may be deemed useless.

The qualitative characteristics are broadly classified into two which is

Fundamental and enhancing qualitative characteristics.
Fundamental qualitative characteristics are the characteristics that
makes the accounting information useful to the users, this includes the
relevance and faithful representation.

Relevant information can affect the decision of users, without this trait
information is deemed irrelevant. Relevant information has the following
aspects:

● Predictive value
● Confirmatory value
● Materiality

Faithful representation is the information that is faithfully represented if it

is factual, meaning it represents the actual effects of events that have
taken place. Faithful representation has the following aspects:

● Completeness
● Neutrality
● Free from error

Enhancing qualitative characteristics are characteristics that support its

fundamentals, they basically enhance and maximize the usefulness of
information. This characteristic consists of Comparability, Verifiability,
Timeliness, and Understandability.

Comparability can help users identify similarities and differences between

different sets of information.

Verifiability helps different users with information to reach a general

agreement as to what the information intends to represent.

Timeliness is information that is timely if it is available to users in time to

be able to influence their decisions.

Understandability is information that is understandable if it is presentable

in a clear and concise manner.