LESSON 3

FUNDAMENTAL CONCEPTS
CRITERIA FOR GENERAL ACCEPTANCE
OF AN ACCOUNTING PRINCIPLE
BASIC PRINCIPLES
 FUNDAMENTAL CONCEPTS

1. ENTITY CONCEPT
 The transactions of different entities
should not be accounted for together. Each
entity should be evaluated separately.
 2. PERIODICITY CONCEPT

 An entity’s life can be

meaningfully subdivided into equal
time periods for reporting purpose.
 It will be aimless to wait for the actual last
day of operations to perfectly measure the
entity’s net income.
 This concept allows the users to obtain
timely information to serve as a basis on
making decisions about future activities.
3. STABLE MONETARY UNIT CONCEPT

 The Philippine peso is a reasonable

unit of measure and that its purchasing
power is relatively stable.
 This is the basis for ignoring the effects
of inflation in the accounting records.
 CRITERIA FOR GENERAL ACCEPTANCE OF AN
ACCOUNTING PRINCIPLE

1. RELEVANCE
 A principle has relevance to the extent that it
results in information that is meaningful and useful
to those who need to know something about a
certain organization.
 2. OBJECTIVITY

 Resulting information is not

influenced by the personal bias or
judgment of those who furnish it.
Connotes reliability and trustworthiness.
It also connotes verifiability, which means
that there is some way of finding out
whether the information is correct.
 BASIC PRINCIPLES
The set of guidelines and procedures that constitute
acceptable accounting principle at a given time is GAAP,
which stands for GENERALLY ACCEPTED
ACCOUNTING PRINCIPLE. In order to generate
information that is useful to the users of financial
statements, accountants rely upon the following principles:
 1. OBJECTIVITY
PRINCIPLE
 Accounting records and statements are
based on the most reliable data available
so that they will be as accurate and as
useful as possible.
Reliable data are verifiable when
they can be confirmed by independent
observers.
 Ideally, accounting records are based on
information that flows from activities
documented by objective evidence.
 Without this principle, accounting
records would be based on whims and
opinions and is therefore subject to
disputes.
 2. HISTORICAL COST
 States that acquired assets should be
recorded at their actual cost and not at
what management thinks they are worth as
at reporting date.
 3. REVENUE RECOGNITION PRINCIPLE

 Revenue is to be recognized in the

accounting period when goods are
delivered or services are rendered or
performed.
4. EXPENSE RECOGNITION PRINCIPLE

 Expenses should be recognized in the

accounting period in which goods and services
are used up to produce revenue and not when
the entity pays for those goods and services.
 5. ADEQUATE DISCLOSURE
 Requires that all relevant information that
would affect the user’s understanding and
assessment of the accounting entity be
disclosed in the financial statements.
 6. MATERIALITY

 Financial reporting is only concerned

with information that is significant enough
to affect evaluations and decisions.
 Financial reporting is only concerned
with information that is significant enough
to affect evaluations and decisions.
 Materiality depends on the size and nature
of the item judged in the particular
circumstances of its omission.
 In deciding whether an item or an
aggregate of items is material, the nature
and size of the item are evaluated together.
 7. CONSISTENCY PRINCIPLE

 The firms should use the same

accounting method from period to period
to achieve comparability over time within
a single enterprise.
 However, changes are permitted if
justifiable and disclosed in the
financial statements.