Accounting Concepts and

Principles
 Generally Accepted Accounting
Principles (GAAP)
GAAP is a widely accepted accounting set of
rules, concepts, and principles. It has been
developed by the accounting professionals to guide
preparers in recording and reporting of financial
reports. GAAP aids in the effective preparation and
execution of accounting procedures and in
communicating the financial condition of the
business.
 Underlying Accounting Assumptions

1. Economic Entity Assumption - A

business is considered a distinct entity from
the owner and therefore all business
transactions are treated separately from the
business owner’s transactions.
 Underlying Accounting Assumptions
• 2. Accrual Basis Assumption - Regardless of the
time cash or its equivalent is received or paid,
revenue should be recorded in the period it is
earned. All business transactions are recognized
in the accounting records when they occur.
Expense is recognized and recorded at the time it
is incurred regardless of the time that payment of
cash occurred. This assumption adheres to the
revenue recognition, matching ,and cost
principles.
 Underlying Accounting Assumptions
3. Going Concern Assumption - a company will
continue to exist to carry out its objectives and
commitment and will not liquidate in the
foreseeable future. It assumes that assets are
recorded at their original acquisition cost and not
based on their market values. The historical cost
principle is dependent on the going concern
assumption. Moreover, a business entity is
assumed to remain in existence for an
intermediate period.
 Underlying Accounting Assumptions
•4. Monetary Unit Assumption - all
recognizable events are measured and
reported in Philippine peso. It assumes that
the Philippine peso will remain relatively
stable over the years in terms of purchasing
power.
 Underlying Accounting Assumptions
•5. Time-Period Assumption – to provide
periodic reports on economic activities,
financial statements are prepared at equal
time intervals. The whole accounting process
of a business must be completed over a
specific operating time period which could
be monthly, quarterly, or annually.
 Basic Accounting Principles
• 1. Cost Principle - refers to the amount spent
(cash or the cash equivalent) when an item
was originally obtained, whether that purchase
happened last year or ten years ago; amounts
are not adjusted upward for inflation. Asset
valuation and recording should be based on
actual cash equivalent or original cost of
acquisition and not the prevailing market value
or future value.
 Basic Accounting Principles
•2. Full Disclosure Principle - the
accountant should include sufficient
information to permit the stakeholders to
make an informed judgment about the
financial condition of the enterprise.
 Basic Accounting Principles

•3. Matching Principle - revenues should

have an equivalent expense recorded in a
given accounting period to show the true
profit of the business.
 Basic Accounting Principles
• 4. Revenue Recognition Principle - as soon
as goods have been sold (delivered to the
customers) or service has been rendered,
regardless of when the money is received,
revenues are to be recognized. After an
exchange of transaction has occurred and the
earning process is complete, revenue must be
recognized.
 Basic Accounting Principles
• 5. Materiality Principle - to decide whether
an amount is significant or material requires
professional judgment and all business
transactions that may affect the decision of the
user of the financial information and are
considered important or material and must be
recorded properly.
 Basic Accounting Principles
•6. Conservatism Principle - if a situation
arises wherein an accountant has two
acceptable alternatives for reporting an item,
it guides the accountant to choose the
alternative that will result in the less effect
and/or less asset amount. The lower
amount should be recorded rather than that
of higher value.
 Basic Accounting Principles
•7. Objectivity Principle - requires that
bookkeeping and financial recording be
performed with interdependence, that is free
of bias and prejudice. All business
transactions should have some form of
impartial supporting evidence or
documentation.
Accounting Equation
 The Accounting Elements
• 1. Assets- these are the resources controlled by the
business as a result of past transactions and events
from which future economic benefits are expected to
flow to the business. Anything that is of value that is
owned by the business is its assets. Assets can be
classified as current assets and noncurrent assets.
Current assets are those that can be realized
reasonably in cash within one year from the
reporting date or the normal operating cycle,
whichever is longer. If an asset cannot be classified
as current, then its rightful classification is
noncurrent.
 The Accounting Elements
• 2. Liabilities-These are the present obligations of an
entity arising from past transactions or events. The
settlement of liabilities is expected to result in an
outflow of resources from the business embodying
economic benefits. Liabilities can be current or
noncurrent. Current liabilities are those which are
expected to be settled in cash by the business within
the normal operating cycle of the business or within
one year from the reporting date, whichever is
longer. Noncurrent liabilities are those liabilities are
obligations reasonably expected to be paid in cash
beyond one year.
 The Accounting Elements
• 3. Owner’s Equity-The owner’s equity contains
the net difference between total assets and total
liabilities. The owner’s drawing account is used
when the withdrawal is made by the owner to
determine total withdrawals for each accounting
period.
• 4. Revenues-These are earnings arising from the
main operations of the business. Service revenue,
interest income, sales, and professional fees are
examples of revenues.
 The Accounting Elements

• 5. Expenses-These are the costs being incurred

by the business in generating revenues and doing
mainline operations of the business.
 The Accounting Equation
•What does the accounting equation typically
mean? It can be structured :
Assets = Liabilities + Owner Equity
Liabilities = Assets + Owner’s Equity
Owner’s Equity = Assets - Liabilities
 The Accounting Equation
• Assets must be equal to the sum of the liabilities
and owner’s equity. It is important to ensure the
balance of the movement of the three main
accounts being used in accounting. The equal
sign separates the account on the left side (debit)
from the right side (credit) of the equation. The
accounting equation is the backbone of the entire
accounting cycle. Movements of specific accounts
are either debit or credit, depending on the
account’s normal balance.
 The Accounting Equation
DEBIT CREDIT
ASSETS = LIABILITIES + OWNER’S EQUITY

Examples
1. XYZ Company has total assets amounting to
₱250,000. The company’s debt amounts to
₱150,000. The company’s capital is ₱100,000.
Assets = Liabilities + Owner’s Equity (or Capital)
₱250,000 = ₱ 150,000 + ₱150,000
 The Accounting Equation
3. Ruby Ochoa purchased standard catering
equipment (tongs, dinner plates, wine glasses, and
tablecloths) worth ₱ 75,000 in cash.
Assets = Liabilities + Owner’s Equity
₱75,000 + (75,000) = ₱0 + ₱0
Equipment (cash)
Note: Increase in assets equipment, decrease in
another asset cash
 The Accounting Equation
4. Ruby Ochoa withdraw cash from the catering
business amounting to ₱20,000 for personal use.

Assets = Liabilities + Owner’s Equity (or Capital)

(₱20,000) = ₱0 + (₱20,000)

Note: The parentheses ( ) means a decrease in

value.