Professional Documents
Culture Documents
Learning Outcomes:
After reading this handout the student will be able to:
Accounting concepts and principles (assumption or postulates) are a set of logical ideas and
procedures that guide the accountant in recording and communicating economic information.
They provide a general frame of reference by which accounting practice can be evaluated and
they serve as guide in the development of new practices and procedures.
1. Separate Entity Concept - under this concept, the business is viewed as a separate
person, distinct from its owner(s)
2. Historical Cost Concept (Cost Principle) – at this concept asset are initially recorded at
their acquisition cost.
3. Going Concern Assumption – under this concept, the business is assumed to continue
to exist for indefinite period of time. Liquidating concern use only when the business
would no longer operate for the coming future.
4. Matching Principle (or association of cause and effect) – under this concept some cost is
initially recognized as assets and charge as expense only when the related revenue is
recognized.
5. Accrual Basis of accounting - under the accrual basis of accounting, economic events
are recorded in the period in which they occur rather than at the point of time when
they affect cash.
6. Prudence (or Conservatism) – under this concept the accountant observes some degree
of caution when exercising judgements needed in making accounting estimates under
conditions of uncertainty.
7. Time Period (Periodicity or Accounting Period Concept) – under this concept, the life of
business is divided into series of reporting periods.
Calendar Year Period - covers 12 months starting January and ending
December.
Fiscal Tear – covers 12 months also however starts in different months aside
from January
Interim Period - accounting period shorter than 12 months, it maybe monthly,
quarterly or semiannually.
8. Stable Monetary Unit (Monetary Unit Assumption) – under this concept, assets
liabilities, equity, income and expense are stated in terms of common unit of measure.
9. Materiality Concept – This concept guides the accountant when applying accounting
principles. This is because accounting principles are applicable only to material items.
Accounting Standards – accounting concepts and principles are either explicit or implicit.
Explicit concepts and principles are those that are specifically mentioned in the Conceptual
Framework for Financial Reporting and in the Philippine Financial Reporting Standards (PFRSs).
Traditionally, accounting standards were referred to Generally Accepted
Accounting Principle (GAAP).
Financial Reporting Standard Council (FRSC) – adopted the standards and interpretations that
is called Philippine Financial Reporting Standards (PFRS) which consist of the following:
1. Philippine Financial Reporting Standards (PFRSs)
2. Philippine Accounting Standards (PASs); and
3. Interpretations
PFRSs are patterned from the International Financial Reporting Standards (IFRSs)
which
are issued by International Accounting Standards Board (IASB)
“Generally Acceptable”
1. Standard has been stablished by an authoritative accounting standard setting body; or
2. The principle has gained general acceptance due to practice over time and has been
proven to be most useful.
Conceptual Framework is not a standard rather, the Conceptual Framework serves as a general
frame of reference in the application or development of the standards.
Qualitative characteristics – are the traits that make information useful to users. Without these
characteristics, information may be deemed useless.
ASSETS – are the resources that reporting entity control that have resulted from past events
and can provide the entity with future economic benefits.
LIABILITIES – are the entities present obligations that have resulted from past events and can
require you to give up resources when settling them.
Essential elements in the definition of liability
a. Present obligation – means that right now, you have a responsibility to pay someone
because of an obligating event that has already transpired.
An obligating event is an event that creates either (a) a legal obligation or (b) a
constructive obligation.
➢ A constructive obligation arises from the entities past business practices or published
policies that have created a valid expectation on the part of others that you will pay
them.
Equity – is simply assets minus liabilities. Other terms for equity are “capital,” “net assets,” and
“net worth”
Illustration:
Mr. Mando Rogas decided to put up a pawnshop and have estimated that he will be
needing Php 800,000 as start-up capital.
He went to Pig-E Bank and withdrew his personal savings there amounting Php 550,000
to be used in the pawnshop business. Then, he bought a small business establishment where
his pawnshop will be operating.
Since, he needed Php 250,000 for his pawnshop business to start to operate, He went so
his Chinese bestie Ms. Pau Tang. Because Mr. Mando Rogas was an honest and trustworthy
bestie of Ms. Pau Tang, she lend Mr. Mando Rogas Php 250,000 for his business.
After Ms. Pau Tang lend the said amount Mr. Mando Rogas has now:
INCOME – is increases in economic benefits during the period in the form of inflows or
enhancements of assets or decreases of liabilities that result in the increases in equity,
excluding those relating to investments by the business owners.
EXPENSES – is excluding in economic benefits during the period in the form of inflows or
enhancements of assets or decreases of liabilities that result in decreases in equity, excluding
those relating to distributions by the business owners.
Illustration: (Continuation)
After the operations period Mr. Mando Rogas, earned income amounting of
Php 100,000 and incurred only Php 20,000 for his expenses in the business.
In this case, the total assets of Mr. Mando Rogas in his business would increase by
Php 80,000.