ACCOUNTING CONCEPTS

AND PRINCIPLES
 ACCOUNTING CONCEPTS
AND PRINCIPLES
• Also called assumptions or postulates
• Set of logical ideas and procedures that guide the
accountant in recording and communicating
economic information.
• Provides general frame of reference by which
accounting practice can be evaluated and they
serve as guide in the development of new practices
and procedures.
BASIC ACCOUNTING
CONCEPTS
 1. SEPARATE ENTITY
CONCEPT
• The business is viewed as separate person, distinct
from its owners.
• Only transactions of the business are recorded in the
books of accounts.
• “Your personal transactions must NOT be recorded
in the books of accounts.”
• This concept is necessary so that the financial
position and performance of a business can be
measured properly.
 2. HISTORICAL COST
CONCEPT
•Also called the Cost Principle
•Assets are initially recorded at
their acquisition cost.
 3. GOING CONCERN
ASSUMPTION
• The business is assumed to continue to
exist for an indefinite period of time.
• It’s opposite is the – liquidating concern –
case if the business intend to end its
operations or if it has no other choice but
to do so.
 4. MATCHING
•Association of Cost and Effect
•Some costs are initially recorded as
assets and charged as expenses only
when the related revenue is
recognized.
 5. ACCRUAL BASIS OF
ACCOUNTING
• Economic events are recorded in the period in
which they occur rather than at point in time
when time affect in cash.
• Thus income is recorded when it is earned
rather than collected.
• Expense is recognized in the period when it is
incurred rather than when it is paid.
 6. PRUDENCE
•Also called as Conservatism
•The accountant observes some
degree of caution when exercising
judgments needed in making
accounting estimates under
conditions of uncertainty.
 7. TIME PERIOD
•Also called as Periodicity or
Accounting Period Concept.
•The life of the business is
divided into series of reporting
periods.
 TIME PERIOD
• A reporting period is usually 12 months.
• A 12 – month accounting period is either
calendar year period or a fiscal year period.
• A calendar year starts on January 1 and ends
on Dec 31 of the same year.
• A fiscal year period also covers 12 months but
starts on date other than January 1.
 8. STABLE MONETARY
UNIT
•Assets, liabilities, equity,
income and expenses are
stated in terms of a common
unit of measure which is the
Philippine Peso.
 9. MATERIALITY CONCEPT
•An item is considered material if its
omission or misstatement could
influence the economic decisions.
• It is a matter of professional judgment and
is based on the size and nature of an item
being judged.
 10. COST BENEFIT
•Also called the Cost Constraint.
•The cost of processing and
communicating information should
not exceed the benefits to be
derived from it.
 11. FULL DISCLOSURE
PRINCIPLE
•Information communicated to
users reflect a series of
judgmental trade – offs.
 12. CONSISTENCY
CONCEPT
•A business shall apply
accounting policies
consistently, and present
information consistently, from
one period to another.
ACCOUNTING
STANDARDS
 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 Philippine Financial Reporting
Standards.
• Implicit are those that are not specifically mentioned in
the foregoing but are customarily used because of their
general and long time acceptance within the
accountancy profession.
 PHILIPPINE FINANCIAL
REPORTING STANDARDS
• These are Standards and Interpretations
adopted by the Financial Reporting
Standards Council (FRSC). They consist of
the following:
• Philippine Financial Reporting Standards
(PFRS)
• Philippine Accounting Standards (PAS)
• Interpretations
 RELEVANT REGULATORY
BODIES
• Securities and Exchange Commission
(SEC)
• Bureau of Internal Revenue (BIR)
• Bangko Sentral ng Pilipinas (BSP)
• Cooperative Development Authority
(CDA)
CONCEPTUAL FRAMEWORK
FOR FINANCIAL REPORTING
 CONCEPTUAL FRAMEWORK
FOR FINANCIAL REPORTING
• Just like the standards, the Conceptual
Framework for Financial Reporting also
prescribes accounting concepts meant to
guide the accountant in preparing and
presenting financial statements.
• However, 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
OF USEFUL FINANCIAL
INFORMATION
•Qualitative Characteristics are
the traits that make information
useful to users. Without these,
information may be deemed
useless.
 CLASSIFICATION OF QUALITATIVE
CHARACTERISTICS
1. Fundamental Qualitative Characteristics
– refer to the essential characteristics that
information must have before it can be
included in the financial statements.
• Relevance
• Faithful Representation
 CLASSIFICATION OF QUALITATIVE
CHARACTERISTICS
2. Enhancing Qualitative Characteristics –
these characteristics support the fundamental
characteristics. They enhance the usefulness
of information.
• Comparability
• Verifiability
• Timeliness
• Understandability
FUNDAMENTAL QUALITATIVE
CHARACTERISTICS
 RELEVANCE
•Information is considered relevant
if it has the ability to affect the
decision making of the users.
Without this ability, information is
deemed irrelevant and useless.
ELEMENTS OF
RELEVANCE
 1. PREDICTIVE VALUE

•Information has a predictive value

if users can use it as an input in
making predictions or forecasts of
outcomes or events.
 2. CONFIRMATORY VALUE

•This concept is related to

predictive value. Information has a
confirmatory value if users can use
it to confirm their past predictions.
 3. MATERIALITY
• It is an ‘entity-specific’ aspect of relevance
meaning it depends on the facts and
circumstances surrounding a specific entity.
• An item may be considered by one business
as material but considered by another as
immaterial. Information is material if omitting it
or misstating it could influence the decision
making of the users.
ELEMENTS OF FAITHFUL
REPRESENTATION
 FAITHFUL REPRESENTATION

• Information if faithfully represented if it is

factual, meaning it represents the actual
effects of events that have taken place.
 1. COMPLETENESS

• Information must be presented with sufficient

detail necessary for users to understand them.
Important information must not be omitted.
 2. NEUTRALITY

• Information are selected or presented without

bias. Information must not be manipulated to
increase the probability that it will be received
favorably or unfavorably by the users.
 3. FREE FROM ERROR
• Free from error means information presented in the
financial statements must not be materially
misstated. This does not mean, however, that
accounting information must be perfectly
accurate in all respects, because some
accounting information necessarily needs to be
estimated.
• Free from error means there are no errors in the
description and in the process by which the
information is selected and applied.
ENHANCING QUALITATIVE
CHARACTERISTICS
 1. COMPARABILITY
• Information has this characteristic if it enables
users to make comparisons to identity and
understand the similarities in, and the
differences among, items. Unlike the other
qualitative characteristic, comparability does
not relate to a single item. A comparison
requires at least two items.
 2. TIMELINESS
• Information must be provided to users on time
to be capable of influencing their decisions.
 3. UNDERSTANDABILITY
• Information must be presented clearly and
concisely in order for users to understand
them. On the other hand, users are expected
to have a reasonable knowledge of business
and economic activities and to review and
analyze the information diligently, sufficient for
them to understand the information contained
in the financial statements.
 4. VERIFIABILITY
• Information is verifiable if it enables different
and independent users to reach a general
agreement about what the information
intends to depict.