BASIC ACCOUNTING CONCEPTS AND PRINCIPLES

Accounting Concepts
Accounting principles and standards need to be taken seriously as financial statements and transaction reports go
through the scrutiny of many users. Banggawan & Asuncion (2017) provided the following basic accounting assumptions:
1. Going Concern Assumption
➔ The underlying assumption in the preparation of financial statements. Financial statements are prepared
on the assumption that the entity will continue in operation into the foreseeable future without the need or
intention to stop operation.
2. The Business Entity Concept
➔ Assumes that all of the business transactions are separate from the business owner’s personal
transactions. A business is considered distinct from the owner and therefore the two should be treated
separately.
3. Accounting Period Assumption
➔ An offshoot of the going concern assumption. The presumed indefinite life of the business is broken into
distinct equal periods called ”accounting period” over which the financial performance and financial
condition of the business are accounted for and reported to users of the financial statements.
4. Accrual Basis Assumption
➔ Requires that all business transactions and other events are recognized in the accounting records when
they occur, rather than when the cash or equivalent is received or paid.
5. Monetary Unit
➔ Assumes that only transactions that can be expressed in terms of money are recorded. Hence, any non-
financial or non-monetary information that cannot be measured in terms of money are not recorded in the
accounting books. A memorandum entry will be prepared instead.

Accounting Principles
The accounting principles are detailed accounting rules and guidelines that entities must follow when measuring,
recording, and reporting financial data. Applying these principles enhances reliability, relevance, and consistency of
financial information which results in better understanding and decision-making of users. As cited by Rabo, Tugas, &
Salendrez, (2016), the following are the basic accounting principles:
1. Cost Principle
➔ All assets 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.
2. Full Disclosure Principle
➔ In the preparation of the financial statements, the accountant should include sufficient information to
permit the stakeholders to make an informed judgment about the financial condition of the enterprise.
3. Matching Principle
➔ This principle requires that expenses be matched with revenues. It means that in a given accounting
period, the revenue recorded should have its corresponding expense recorded, in order to show the true
profit of the business.
4. Revenue Recognition Principle
➔ Revenues are recognized as soon as goods have been sold (delivered to the customer) or a service has
been rendered, regardless of when the money is actually received.
5. Materiality Principle
➔ This principle allows an accountant to violate the matching principle if the amount is insignificant.
Professional judgment is needed to decide whether an amount is material or immaterial. As a general
rule, an item is considered material if knowledge of it would affect the decision of the user of the financial
statement.
6. Conservatism or Prudence Principle
➔ Accountants apply the conservatism concept when they choose the worst-case scenario for the company
when it is faced with significant uncertainties regarding an accounting problem.
7. Objective Principle
 ➔ This principle requires the business transactions to have some form of impartial supporting evidence or
documentation. Also, it entails that bookkeeping and financial recording be performed with independence,
that is free from bias and prejudice.

Accounting Equation
➔ The fundamental accounting equation, also called the balance sheet equation, represents the relationship
between the assets, liabilities, and owner's equity of a person or business. It is the foundation for the double entry
bookkeeping system. Based on this double-entry system, the accounting equation ensures that the balance sheet
remains “balanced,” and each entry made on the debit side should have a corresponding entry (or coverage) on
the credit side (Fernando, 2021).
➔ Assets = Liabilities + Equity