INTEGRATED ACCOUNTING LEARNING MODULE ATTACHMENT (DO NOT COPY)

ACCOUNTING CONCEPTS AND PRINCIPLES

NING OBJECTIVES:

BASIC ACCOUNTING CONCEPTS

1. Separate Entity Concept – the business is viewed as a separate person, distinct from its
owner(s). Only the transactions of the business are recorded in the books of accounts. The personal
transactions of the owner(s) are not recorded.
2. Historical Cost Concept – the assets are initially recorded at their acquisition cost.
3. Going Concern Concept – the business is assumed to continue to exist for an indefinite period of
time.
4. Matching (Associated of cause and effect) - under this concept, some costs are initially recognized
as assets and charged to expenses only when related revenue is recognized.
5. Accrual Basis of Accounting - Economic events are recorded in the period in which they occur
rather than at the point in time when they affect cash.
6. Prudence or Conservatism – Observes degree of caution when exercising judgements in making
accounting estimates under the condition of uncertainty.
7. Time Period (Periodicity) – the life of the business is divided into series of reporting periods.
A reporting period is usually 12 months, although it can be longer or shorter. A 12- month accounting
period is either calendar year period or fiscal year.
• Calendar year period starts on January 1 and ends on December 31 of the same year
• Fiscal year period also covers 12 months but starts on date other than January 1,
e.g. July 1, 2019 to June 30, 2020.

8. Stable Monetary Unit – assets, liabilities, equity, income and expenses are stated in terms of
common unit of measure, which is the peso in the Philippines.
9. Materiality Concept – This concept guides the accountant when applying accounting principles. This
is because accounting principles are applicable only to material items.
An item is considered material if the omission or misstatement could influence economic decisions.
Materiality is a matter of professional judgement and based on the size and nature of item being
judged.
10. Cost-Benefit - costs of processing and communicating information should not exceed the benefits to
be derived from the information’s use.
11. Full disclosure principle– related to both concepts of materiality and cost-benefit, information
communicated to users reflect a series of judgmental trade-offs that strive for:
a. Sufficient details to disclose matters that make a difference to users, yet
b. Sufficient condensation to make the information understandable, keeping in mind the costs of
preparing and using it.
12. Consistency - it requires business to apply accounting policies consistently, and present information
consistently, from one period to another. The transactions are must be accounted for in the like
manner.

APPLICATION OF BASIC ACCOUNTING CONCEPTS

During the year, you started a business of selling personalize mugs and T-shirts. You opened a separate
bank account for the business and deposited your initial investment of P250,000 (Separate Entity Concept)

THIS FORM IS FOR INSTITUTIONAL PURPOSES ONLY!

 The business acquired a printing machine with a regular selling price of P100,000; however, you were
able to acquire it at discounted price of P90,000. You will record the machine at its acquisition costs of
P90,000 rather than at the regular selling price (Historical Cost Concepts)
The business acquired initial inventory (stocks) of mugs and T-shirts for a total cos of P50,000 and you
will record the cost as an assets (inventory) rather than expense (Matching Concept)
All inventories were sold on account or on credit for P300,000 (meaning pinautang) then you immediately
record the credit sales as account receivable rather than waiting for them to be collected **meaning no
money or payment involve** (Accrual Basis). Also, the initially recorded as inventory of P50,000 will now
be recorded as cost of inventory - as expenses (Matching Concepts)
You collected P290,000 out of the P300,000 total credit sales (account receivable) and you deposit the
collection to the bank account rather than to your personal account (Separate Entity Concept)
The debtor (taong umutang) for the remaining P10,000 is in financial difficulty. This raised doubt that he
can pay the balance, you will immediately recognize the doubtful account as expense (Conservatism or
Prudence and Accrual Basis)
You withdrew P80,000 from the business for personal use, you will immediately record the transaction
as withdrawal of investment from the business rather than business expenses (Separate Entity Concept)

At the end of the year, you prepared the financial statement of your business to determine among others
whether the business earned profit or loss (Time Period or Periodicity)
When preparing the financial statement, you discovered the business has $10 (dollars). You will translate
this to Peso using the exchange rate. The amount you will report in financial statement is translated to
amount or common unit of measurement (Stable Monetary Unit)
You found out the regular price of new printing machine increased from P100,000 to P120,000. You will
ignore this information and report the printing machine at acquisition cost of P90,000 in the financial
statements, because you don’t intend or expect to close your business in the foreseeable time
(Going Concern Concept)
During the year, the business bought a trash bin amounting to P80, you will expect to use this over a
several years. However, because you deemed the cost immaterial you will record it as an expense rather
than an asset (Materiality).
Moreover, when you prepared the financial statemen you decided to include the cost of trash bin in a
“Miscellaneous Expenses” account together with other immaterial expenses. You don’t expect users of the
financial statement to benefits from reporting the immaterial cost separately (Cost-Benefit)
You will make a briefly description of the “Miscellaneous Expenses” accounts in the notes to financial
statements, sufficient for users to understand the nature of account (Full Disclosure)
You then adopted an accounting policy of expensing outright all acquisition of equipment costing P5,000
and below. You will apply this policy consistently in the future periods (Consistency)

ACCOUNTING STARDARDS

Philippines Financial Reporting Standards (PFRSs) are Standards and Interpretations adopted by the
Financial Reporting Standards Council (FRSC). They consist of the following:
1. Philippines Financial Reporting Standards (PFRSs)
2. Philippine Accounting Standards (PASs) and
3. Interpretations

The term “generally acceptable “means that either:

1. The standard has been established by authoritative accounting standard-setting body or
2. The principle has gained general acceptance due to practice over time and proven to be most useful.

THIS FORM IS FOR INSTITUTIONAL PURPOSES ONLY!