Accounting Concepts and Principles - 2020

Online Class
According to Zeus Vernon B. Millan, accounting
concepts and principles (assumptions or postulates) are
a set of logical ideas and procedures that guide the
accountant in recording and communicating economic
information.¹

Zeus Vernon B. Millan added that accounting concepts

and principles provide reasonable assurance that
information communicated to users is prepared in a
proper way.¹
_________________________
 ¹Zeus Vernon B. Millan, Financial Accounting & Reporting – Fundamentals, 2018,
1st edition
 Basic Accounting Concepts²
 1. Accrual Concept of Accounting – According to the book
Accounting for Management, accrual concept of accounting is a
system used by companies to record their financial transaction at the
point when they occur regardless of whether a cash transfer has been
made.²
 According to the book Accounting for Management, the accrual
concept of accounting is generally used in preparing financial
statements except for cash flow statement. Revenue is recorded when
earned regardless of when cash is received while expenses are recorded
when incurred regardless of when cash is paid.²
____________________________
 ²Retrievable from:
 https://www.accountingformanagement.;org/explanation/accounting-principles-
and-concepts/
Example of Accrual Concept of Accounting:
Suppose that on July 1, 2020, A Co. pays property
insurance premium to X for P10,000 a month.
Consider the following three cases in which A Co,
pays cash to X Co. and records insurance expense.(as
of December 31, 2020)
 Cash paid by A Co.
 a, P 60,000 b. P30,000 c. P120,000
 Expenses recorded by A Co.
 a. P60,000 b. P60,000 c. P60,000
Benefits and Importance of the Accrual Approach:²
According to the book Accounting for Management,
the following are the benefits and importance:
1. Under accrual concept of accounting, financial
statements reflect all the expenses associated with the
reported revenues for an accounting period.²
2. It satisfies the requirements of major accounting
standards applicable in the world such as the generally
accepted accounting principles (GAAP) and
international financial reporting standards (IFRS).²
3. It is considered one of the general assumptions
while interpreting financial statements by various
users.²
4. The departure from accrual concept ceases the
ability of the users to compare the financial statements
of an entity with that of others which ultimately results
in less lucrative from investors’ point of view.²
5. It makes financial information more accurate and
more reliable.²
2. Going Concern Concept - According to the book
Accounting for Management, the going concern
concept of accounting implies that the business entity
will continue its operations in the future and will not
liquidate or be forced to discontinue operations due to
any reason.²
Examples of application of going concern concept:
1. company records its property, plant and equipment
at historical cost instead of current market value²
2. prepayment and accrual of expenses²
 Importance of going concern concept:
1. If a company is a going concern, it must prepare its
financial statements in accordance with applicable
financial reporting framework such as the generally
accepted accounting principles.²
3. Matching Principle of Accounting – According to
the book Accounting for Management, matching
principle states that the revenues and related revenues
must be matched in the same period to which they
relate.²
Illustration:²
 REVENUES GENERATED IN 2020
 LESS
 EXPENSES INCURRED IN YEAR
2020
 TO GENERATE YEAR 2020
REVENUES
 EQUALS
 PROFIT EARNED IN YEAR 2020
Importance of Matching Concept:
According to the book Accounting for Management,
the main purpose of the matching concept is to avoid
any possibility of misstatement of profits for a
particular period.²
4. Business Entity Concept – According to the book
Accounting for Management, business entity
concept (also known as separate entity and economic
entity concept) states that the transactions related to a
business must be recorded separately from those of its
owners and any other business.²
 Importance of business entity concept:
 According the book Accounting for Management, the business entity concept
of accounting is of great importance because of the following reasons:
 1. The business entity concept is essential to separately measure the
performance of a particular business in terms of profitability and cash flows,
etc.²
 2. It helps in assessing the financial position of each and every business
separately on a particular date.²
 3. It becomes difficult and impossible to audit the records of a business if
they are intermingled with those of different entities/individuals.²
 4. The concept ensures that each and every business entity is taxed
separately.²
 5. If a company ignores this concept, it would not be able to compare its
financial performance with those of others in the industry.²
5. Monetary Unit Assumption - According to the
book Accounting for Management, monetary unit
assumption (also known as money measurement
concept) states that only those events and transactions
are recorded in books of accounts of the business which
can be measured and expressed in monetary terms.²
Likewise, the book Accounting for Management states
that a very closely related concept to the monetary unit
assumption is the stable monetary value assumption
which means that the peso (or any other currency) does
not lose its purchasing power over time.²
6. Time Period Assumption – According to the book
Accounting for Management, the time period
assumption (also known as periodicity assumption
and accounting time period concept) states that the
life of a business can be divided into equal time
periods.²
Importance of Time Period Assumption:
According to the book Accounting for Management,
the time period assumption enables business
organizations to stop and see how successful they have
been in achieving their objectives during a particular
period of time and where the room for improvement
exists.²
7. Materiality Concept of Accounting - According
to the book Accounting for Management, materiality
concept of accounting states that all material items
must be properly reported in the financial statements.²
Likewise the book Accounting for Management states
that an item is considered material if its inclusion or
omission significantly impacts the decision of the users
of financial statements. ²
What constitutes materiality? – According to the
book Accounting for Management, materiality of an
amount is a matter of professional judgment.²
Factors to Consider in Deciding Whether an Item is
Material or Immaterial:
1. Size of the organization²
2. Cumulative effect²
3. Nature of the item²
8. Historical Cost Concept – According to the book
Accounting for Management, the historical cost
concept (also known as cost principle of accounting)
states that the assets and liabilities of a business should
be presented in accounting records at historical cost.²
Historical cost is the amount that is originally paid to
acquire the asset and may be different from the current
market value of the asset.²
Importance of Historical Cost Concept:
According to the book Accounting for Management,
an important advantage of historical cost concept is
that the records kept on the basis of it are considered
consistent, comparable, verifiable and reliable.²
Exceptions to Cost Principle:
1. Investment in Debts of Other Enterprises that are
expected to be converted to cash in the near future –
presented at Current Market Value²
2. Investment in Shares of Other Enterprises that
are expected to be converted to cash in the near future
– presented at Current Market Value²
3. Accounts Receivable – presented at Net
Realizable Value²
9. Full Disclosure Principle – According to the book
Accounting for Management, under the full
disclosure principle, the management of an entity is
required to disclose all the relevant and appropriate
information (both financial and non financial) in their
financial statements that could impact the decision
making of the users of those statements.²
Such information is made available to shareholders
and users either on the face of financial statements or
in the notes to the financial statements.²
Examples:
1. Accounting methods and procedures used²
2. Loans granted to directors²
3. Impact of new tax laws²
4. Material events that took place between the date of
the financial statements and date of its issuance
10. Consistency Principle of Accounting –
According to the book Accounting for Management,
under the consistency principle of accounting, a
company should use the same accounting policies and
methods for recording similar events or transactions
from one financial period to another²
Importance /Advantages of Consistency Principle:
1. Audit²
2.Ease for Management²
3. Cost Efficiency²
4. Comparable financial information²
Exception:
According to the book Accounting for Management,
a company can change its accounting methods and
policies only if there are one or more reasonable
grounds to do so and the change reflects a more
accurate picture of financial performance and position
of the business in the company’s financial statements.²
11.Prudence Concept of Accounting – According to
the book Accounting for Management, prudence
concept of accounting states that an entity must not
overestimate its revenues, assets, and profits . ²
The book Accounting for Management adds that it
must not underestimate its liabilities, losses, and
expenses. ²
12. Cost-Benefit (Cost Constraint) – According to Zeus
Vernon B. Millan, under the cost-benefit concept, the
cost of processing and communicating information should
not exceed the benefits to be derived from it.³

_____________________
 ³Zeus Vernon B. Millan, Financial Accounting & Reporting – Fundamentals, 2018, 1st Edition
 Qualitative Characteristics of Financial
Information
According to Zeus Vernon B. Millan, qualitative
characteristics are the traits that make information
useful to users.³
 Classification of Qualitative Characteristics
According to Zeus Vernon B. Millan, the qualitative
characteristics are broadly classified into two:
1. Fundamental qualitative characteristics – these
refer to the essential characteristics that information
must have before it can be included in the financial
statements.³
2. Enhancing qualitative characteristics – these
characteristics support the fundamental
characteristics.³
 Fundamental Qualitative Characteristics³
According to Zeus Vernon B. Millan, the fundamental
qualitative characteristics are as follows:
1. Relevance - information is considered relevant if it
has the ability to affect the decision making of the
users.³
  Elements of Relevance
 According to Zeus Vernon B. Millan, the following are the
elements of relevance:
 A. Predictive Value – Information has a predictive value if
users can use it as an input in making predictions or forecasts
of outcomes of events.³
 B. Confirmatory Value (or Feedback Value) – Information
has a confirmatory value if users can use it to confirm their
past predictions.³
 C. Materiality – Information is material if omitting it or
misstating it could influence the decision making of the users.³
2. Faithful Representation – According to Zeus
Vernon B. Millan, information is faithfully
represented if it has factual, meaning it represents the
actual events that have taken place.³
 Elements of Faithful Representation
According to Zeus Vernon B. Millan, the following
are the elements of faithful representation:
A. Completeness – Information must be presented
with sufficient detail necessary for users to understand
them.³
B. Neutrality – Information are selected or presented
without bias.³
C. Free from error – Information presented in the
financial statements must not be materially misstate.³
 Enhancing Qualitative Characteristics
According to Zeus Vernon B. Millan, the following
are the enhancing qualitative characteristics:
1. Comparability – Information will have
comparability if it enables users to make comparisons
to identify and understand the similarities in, and the
differences among items.³
2. Verifiability – Information is verifiable if it
enables different and independent users to reach a
general agreement about what the information intends
to depict.³
3. Timeliness – Information must be provided to users
on time to be capable of influencing their decisions.³

4. Understandability – Information must be

presented clearly and concisely in order for users to
understand them.³
Disclaimer: This power point presentation is for
class discussion purposes only. Not for publication.

SOURCES & REFERENCES:

 Zeus Vernon B. Millan, Financial Accounting & Reporting – Fundamentals, 2018,
1st Edition

 Retrievable from:
 https://www.accountingformanagement.org/explanation/accounting-principles-and-
concepts/
End of Presentation