Module 4: Accounting

Concepts and Principles

Objectives:
= explains the various accounting
concepts and principles

= apply accounting concepts and

principle
Module 4: Accounting
Concepts and Principles

The generally accepted

accounting principles serve
as the common language in
business that define the
accepted accounting practices
understood by accountants and
users of accounting
information.
Module 4: Accounting
Concepts and Principles

These principles, concepts,

or standards serve as the
ground rules that govern how
accountants record, classify,
summarize, interpret, and
communicate financial
information.
Module 4: Accounting
Concepts and Principles

With these principles, it is

hoped that misunderstandings
will be prevented between
accountants and users of
accounting information.
Module 4: Accounting
Concepts and Principles
In the Philippines, the body
that sets the accounting
standards is the Financial
Reporting Standards
Council(FSRC).It was
established by the Board of
Accountancy in 2006 by virtue
of the Implementing Rules and
Regulations of RA 9298 or the
Phil. Accountancy Act
Module 4: Accounting
Concepts and Principles
Assumption of Going Concern
=an important accounting
assumption is that the
enterprise will continue its
operation indefinitely
=Related to this assumption
are the basic accounting
concepts of accounting
entity, monetary, unit, time
period or periodicity, and
accrual basis
Assumption of Going Concern
=tells that the business will
continue to operate at an
indefinite period of time.
=with this assumption,
accountants prepare the
financial statements with the
notion that the organization
will continue to exists in
the future, unless evidence
shows other wise.
Accounting Entity Concept
=it recognizes an economic or
business entity as an
individual accounting entity,
and it is separated from its
owner, managers, and
employees.
Monetary Unit Concept
=Under the monetary unit
concept, business activities
that are financial in nature
are recorded with the
corresponding amounts
expressed in the country’s
currency
=Money is quantifiable and is
the generally recognized or
accepted medium of exchange.
Time Period or Periodicity
Concept
=tells that the business
entity’s indefinite time of
existence is divide into time
periods or accounting periods
with equal lengths.
=usually this time period is
12 months long, which can be
classified as a calendar
period or fiscal (or
financial) period.
Accrual Concept

=tells that revenue or income

is recognized when it is
earned regardless of when it
is received, and expense is
recognized when it is
incurred regardless of when
it is paid
=this concept differentiates
income from cash collections,
and expenses from cash
payments
Accounting Principles that
are Related to the Accrual
Concept
=Revenue Recognition
Principle
=Expense Recognition
Principle
=Matching Principle
Revenue Recognition Principle
=Revenue and income in the
flow of asset from the sale
of gods and services. Revenue
is usually earned over time
and is not received
immediately after goods and
services have been delivered.
Therefore, accountants record
income when the sale of goods
and services has been fully
done already even though
payment has not been
collected yet.
Expense Recognition Principle
=Expense refers to consumption
of resources. It is an outflow
of asset. When revenue
increases equity, expense
decreases it. Some expenses are
payable not an instant after
the asset has been consumed.
However the expense recognition
principle requires accountants
to record expenses when it is
already incurred whether or not
payment have been made already
Matching Principle
=it is established in
recognition of the fact that
there is a cause-and-effect
relationship between revenue
and expense. Generally the
total expenses are deducted
from the total revenue to
determine if there is net
income or net loss.
Materiality Concept
=indicates that accountants
should disregard accounting
standards for trivial matters
or for those transactions
that are not important to
influence decisions. This
concept also tells that all
important matters must be
recorded and disclosed. As a
general rule an item is
considered material if
knowledge of it would affect
the decision of users of FS
 Objectivity of Reliability
Concept
=guides accountants in
presenting information free
from biases as evidenced by
documents.
=Documents that serve as
evidence include official
receipts, vouchers, invoices,
and the like. These documents
must be verifiable and must
understand by the users.
Cost Concept
=also known as the historical
cost convention, the cost
concept tells the resources
acquired must be recorded in
reference to the acquisition
price that there must be no
adjustment in value later at
a later period. The value
asset must be recorded at
their original cost.
Conservation Concept
=this concept was applied
when they choose the worst
case scenario for the company
when it is faced with
significant uncertainties
about an accounting problem
=this leans to the direction
of caution so that the users
of financial information will
not have false expectations.
Graded Recitation
Identify the accounting
concept or principle that
should be used in each
situation.

1. The accountant gathers all

the official receipts,
vouchers, and invoices for a
particular period and records
them objectively
2. A typhoon hit the city and
destroyed many
establishments. Supermarket
R, upon inventory, reports a
loss of P50 000.00. It has a
net income of P15 000 000.00.

3. The accountant records

income as soon as the
salespeople report the
delivery of goods to the
clients.
4. The accountant receives
the utility billing
statements for June and
includes them in the
financial statement for the
same month.

5. The accountant finishes

the financial statement for
the year after 12month fiscal
period and begins with the
new fiscal year
6. All transactions are
recorded in pesos.

7. The accountant returns to

the employees the receipts of
the personal transactions
they made during working
hours.

8. The accountant groups the

current and long term
liabilities and assets in the
FS.
9. The accountant records the value
of the acquired computer at their
prevailing price.

10. The accountant records

contingent liability that the
company might incur in a legal
battle with its employees to
indicate that the company might
have to pay out the employees.
Quiz # 4

Identify the following terms

1. The value asset must be recorded

at their original cost.

2. Record income when the sale of

goods and services has been
fully done already even though
payment has not been collected
yet.
3. This concept was applied when
they choose the worst case scenario
for the company when it is faced
with significant uncertainties

4. It recognizes an economic or
business entity as an individual
accounting entity, and it is
separated from its owner, managers,
and employees.

5. This concept also tells that all

important matters must be recorded
and disclosed.
6. Tells that revenue or income is
recognized when it is earned
regardless of when it is received,
and expense is recognized when it
is incurred regardless of when it
is paid

7. Tells that the business entity’s

indefinite time of existence is
divide into time periods or
accounting periods with equal
lengths.
8. It guides accountants in
presenting information free from
biases as evidenced by documents.

9. Business activities that are

financial in nature are recorded
with the corresponding amounts
expressed in the country’s currency

10. It is established in
recognition of the fact that there
is a cause-and-effect relationship
between revenue and expense.