ACCOUNTING CONCEPTS

AND
PRINCIPLES
GENERAL ACCEPTED ACCOUNTING
PRINCIPLES(GAAP)
-This governs the application of accounting procedures.
-The GAAP has been developed by the accounting professionals to
guide preparers of financial statements in recording and reporting
financial information regarding a business enterprise, hence aiding
in the effective execution of the accounting procedure and in
communicating the financial condition of the business.
ACCOUNTING STANDARDS USED IN THE PH

1. Philippine Accounting Standards (PAS)

2. Philippine Financial Reporting Standards (PFRS)
3. Financial Reporting Standards Committee (FRSC)
ACCOUNTING ASSUMPTIONS:

1. Economic Entity Assumption

2. Accrual Basis Assumption
3. Going Concern Assumption
4. Monetary Unit Assumption
5. Time-Period Assumption
1. ECONOMIC ENTITY ASSUMPTION
-it assumes that all of the business transactions are separate from the
business owners’ personal transactions

2. ACCRUAL BASIS ASSUMPTION

-it 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.

-it is assumed that revenue is recorded in the period it is earned and expenses are
recorded when it happens regardless of the time the cash is received or collected.
3. GOING CONCERN ASSUMPTION
-in the absence of contrary information, a business entity is assumed to remain
inexistence for an indeterminate period of time.

4. MONETARY UNIT ASSUMPTION

-economic activities of a Philippine Entity are measured and reported in the
Philippine entity are measured and reported in Philippine peso.

-It assumes that only transactions that can be expressed in terms of money are
recorded.
5. TIME-PERIOD ASSUMPTION
-this assumption requires a business to complete the whole accounting process of a
business over a specific operating time period.
BASIC ACCOUNTING PRINCIPLES:
1. Cost Principle
2. Full Disclosure Principle
3. Matching Principle
4. Revenue Recognition Principle
5. Materiality Principle
6. Conservatism or Prudence Principle
7. Objectivity Principle
1. COST PRINCIPLE
-cost refers to the amount spent when an item was originally obtained, whether that
purchase happened last year or ten years ago; amounts are not adjusted upward
for inflation.

2. FULL DISCLOSURE PRINCIPLE

-in the preparation of financial statements, the accountant should include sufficient
information to permit the stakeholders to make an informed judgement about the
financial condition of the enterprise.
3. MATCHING PRINCIPLE
-this principle requires that expenses be matched with revenues. It means that in
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 or a service has been
rendered, regardless of when the money is actually received.
5. MATERIALITY PRINCIPLE
-this principle allows an accountant to violate another accounting principles if an
amount is insignificant

6. CONSERVATISM & PRUDENCE PRINCIPLE

-this principle states that given two options in the valuation of business transactions,
the amount recorded should be the lower rather than the higher value.

-the basic accounting principle of conservatism leads to accountants to anticipate or

disclose losses, but it does not allow a similar action of gains.
7. OBJECTIVITY PRINCIPLE
-this principle requires business transactions to have some form of impartial
supporting evidence or documentation
OTHER CHARACTERISTICS OF AN
ACCOUNTING INFORMATION
 THE BASIC
ACCOUNTING EQUATION
 ASSETS = LIABILITIES + OWNER’S EQUITY
LIABILITIES = ASSETS – OWNER’S EQUITY
OWNER’S EQUITY = ASSETS - LIABILITY

Example:
1. Liability = 50,000 while the Owner’s Equity = 30,000. How much is the Asset?
2. Asset = 7,000 while the Owner’s Equity is 4,000. How much is the Liability?
3. Asset = 20,000 while the Liability is 10,000. How much the Owner’s Equity?
EXAMPLE:
1.CHARSON MOTORCYCLE SHOP HAS ASSETS OF
564,000 AND LIABILITIES OF 153,700.

A=564,000
L= 153,700
OE= 410,300
2. AUTHENTEACITY MILKTEA STATION HAS ASSETS
OF 624,000 AND OWNER’S EQUITY OF 236,500.

A= 624,000
L= 387,500
OE= 236,500
3. YES DANCE STUDIO HAS LIABILITIES OF 110,000
AND OWNER’S EQUITY OF 176,500.

A= 286,500
L=110,000
OE= 176,500
AT THE BEGINNING OF THE YEAR, THE ASSETS WERE 360,000 AND ITS OWNER’S EQUITY
WAS 200,000. DURING THE YEAR, ASSETS INCREASE BY 120,000 AND LIABILITY INCREASE BY
20,000. WHAT WAS THE OWNER’S EQUITY AT THE END OF THE YEAR?

ASSETS LIABILITIES OWNER’S EQUITY

360,000 160,000 200,000
120,000 20,000 100,000
480,000 180,000 300,000
AT THE BEGINNING OF THE YEAR, THE COMPANY HAD LIABILITIES OF 100,000 AND
OWNER’S EQUITY OF 96,000. IF ASSETS INCREASED BY 40,000 AND LIABILITIES DECREASED
BY 30,000. WHAT WAS THE OWNER’S EQUITY AT THE END OF THE YEAR?

ASSETS LIABILITIES OWNER’S EQUITY

196,000 100,000 96,000
40,000 (30,000) 70,000
236,000 70,000 166,000
• ASSETS
-are resources controlled by the business as a result of past transactions and events
and from which future economic benefits are expected to flow to the business.
2 classifications of Assets:
• Current Assets – are those reasonably expected to be realized in cash within one
year from the reporting date or the normal operating cycle.
• Non-current Assets

Examples of Asset accounts include:

Cash, Accounts Receivable, Notes Receivable, Inventories, Unused Supplies, Prepaid
Rent, Equipment, Furnitures & Fixtures, Building, Land, Allowance for Doubtful Accounts,
Accumulated Depreciation.
1. Cash – this includes cash on hand, cash deposited in the bank and cash fund which are unrestricted to use.

2. Accounts receivable- this refers to open accounts which represent the amount of money owed by the customers to the
business. This arises from the business rendering services or selling goods to customers.

3. Notes receivable- this represents the amount of money owed by the customer or debtor to the business evidence by a
promissory note.

4. Inventories- this represents assets held for sale in the ordinary course of business, in the process of production for sale
or in the form of materials or supplies to be consumed in the process or in the rendering of service.

5. Unused Supplies- this represents supplies which remain unused at the end of the accounting period.

6. Prepaid Rent- this refers to an advance payment made by the business to cover for future rental payments.
7. Equipment – this represents manual or automated machines used in the business and they include photocopying
equipment, computers, laptops, ring binders, laminating machines, delivery vehicles and vans, among others.

8. Furnitures and Fixtures- this represents assets such as tables, chairs, filing cabinets and display racks.

9. Building – this refers to the physical structure owned and used by the business to conduct its business operation.

10. Land- this refers to the physical site owned by the business where the building is situated. It is not subject to
depreciation.

11. Allowance for doubtful accounts- this is a contra-asset or a valuation account which refers to the portion of
accounts receivable that is estimated to be uncollectible at the end of a particular accounting period.

12. Accumulated Depreciation – this is a contra-asset or a valuation account which refers to the aggregate portion of
the total cost of property, plant, and equipment that has been charged to depreciation expense.
• LIABILITIES
Are present obligations of an entity arising from past transactions or events, the settlement of
which is expected to result in an outflow form the business of resources embodying economic
benefit.
2 Classifications of Liabilities:
• Current Liabilities-are those reasonably to be settled by payment of cash, delivery of goods
or performance of service date, whichever is longer.
• Non-current liabilities

Examples of Liability accounts include:

Accounts Payable, Notes Payable, Loan Payable, Mortgage Payable, Unearned Revenues.
1. Accounts Payable – this refers to open accounts which represent the amount of money owed by the business to
creditors or suppliers.

2. Notes Payable- this represents the amount of money owed by the business to the supplier or creditor evidenced
by a promissory note.

3. Loan Payable – this represents the amount of money borrowed by the business from third party creditors.

4. Mortgage Payable – this represents the amount of money borrowed by the business from a bank or a lending
instruction which is secured by collateral.

5. Unearned Revenues – this represents cash collected by the business in advance for a service or good that is yet
to be rendered or delivered.
• OWNER’S EQUITY
It represents ownership and its terminology changes depending on the form of
business organization.
Sole Proprietorship – Owner’s Equity (ex. Santos, Capital)
Partnership – Partners’ Equity
Corporation – Shareholder’s Equity

Owner’s Drawing – refers to withdrawals by the owner.

 EXPANDED ACCOUNTING EQUATION

ASSETS = LIABILITIES + OWNER’S EQUITY (+ REVENUES –

EXPENSES – WITHDRAWALS)
• REVENUE
Are the earnings arising from the main line of operations of the business.
Revenues result from rendering of services or selling of goods.

Examples of Revenue accounts include:

Service Revenue, Income Interest, Sales, Professional Fees.
1. Service Revenue – this refers to the earnings made by any business that is into
rendering services.

2. Interest Income- this represents interests credited by the bank to the account of the
business arising from bank deposits.

3. Sales- this represents the earnings made by any business that is into selling goods or
merchandise.

4. Professional Fees – this represents earnings made by professionals or experts from

rendering services to their clients.
• EXPENSE
Are the costs being incurred by the business in generating revenues.

Examples of Expense accounts include:

Utilities Expense, Salaries Expense, Wages Expense, Taxes and Licenses
Expenses, Cost of Sales, Supplies Expense, Doubtful accounts Expense,
Depreciation Expense.
1. Utilities Expense- this refers to costs associated with the usage of electricity, water, and communication
for a particular accounting period.
2. Salaries Expense- this refers to costs incurred associated with the services rendered normally by
permanent and full-time employees who are paid on a regular basis, usually monthly.
3. Wages expense- this refers to costs incurred associated with the services rendered normally by
contractual and temporary employees and workers who paid on an hourly rate or based on output.
4. Taxes and Licenses Expense- this represents costs incurred to register the business, to acquire the right to
operate and to settle taxes.
5. Cost of Sales- this refers to the cost of merchandise or goods that were sold during a particular
accounting period.
6. Supplies Expense- this refers to the amount of supplies that was used during a particular accounting
period..
7. Doubtful Accounts Expense- this refers to the amount of accounts receivable that is estimated as
uncollectible and is recognized as an expense in the current accounting period.
8. Depreciation Expense- this refers to the allocated portion of the cost of property plant and equipment
charged to expense in the current accounting period.
NORMAL BALANCE OF AN ACCOUNT
Type of accounts Normal Increase Decrease
Balance through (+) through (-)
Assets Debit Debit Credit
Liabilities Credit Credit Debit
Owners Equity
• Owner, Capital Credit Credit Debit
• Owner, Drawing Debit Debit Credit
Revenues Credit Credit Debit
Expenses Debit Debit Credit
Contra-asset accounts:
Allowance for Doubtful Accounts Credit Credit Debit
Accumulated Depreciation Credit Credit Debit
 OWNER’S
ASSETS LIABILITIES
EQUITY
If there are payments If the company will avail Through INVESTMENTS
from clients/customers, loans/credits. AND REVENUE/INCOME.
investments by the owner
and if there are
additional properties.

If there are expenses and If the company will settle Through WITHDRAWALS
payables that needs to the loans. AND EXPENSES.
pay.