Accounting Concepts and

Principles

Reference: Fundamentals of Accountancy, Business and

Management Part 1 by R.C.Ferrer and Z.B.Millan
 set of logical ideas and procedures that
guide the accountant in recording and
communicating economic information

Accounting
concepts provide reasonable assurance that
information communicated to users is
and prepared in a proper way

principles These are sourced from the Standards

(PFRS), Conceptual Framework for
Financial Reporting, or general
acceptance in the profession due to long-
time use
SEPARATE ENTITY CONCEPT

 business is viewed as a
separate person, distinct
from its owner(s)

 only transactions of the

business are recorded in
the books of accounts
HISTORICAL COST CONCEPT
 assets are initially recorded at their acquisition costs
GOING CONCERN ASSUMPTION

 business is assumed to
continue to exist for an
indefinite period of time

 opposite of liquidating
concern
Matching
(association of
cause and effect)
• costs are initially recognized as assets and charged
as expenses only when the related revenue is
recognized
 Accrual Basis of accounting

 economic events are recorded in the period in

which they occur rather than at the point in
time when they affect cash

 income is recorded in the period when it is

earned rather than when it is collected, while
expense is recognized in the period when it is
incurred rather than when it is paid

 “ earned/ incurred”
(Conservatism)
 accountant observes some
degree of caution when exercising
judgments needed in making
accounting estimates under
conditions of uncertainty
Prudence

 accountant chooses the

unfavorable outcomes
Time Period (Periodicity,
Accounting period or Reporting
period concept)

 the life of business is divided into

series of reporting periods

 Reporting period
 usually 12 months
 can be calendar year period or
fiscal year period
Stable
monetary
unit
assets, liabilities, equity, income
and expenses are stated in terms
of a common unit of measure
Materiality concept

 guides the accountant when applying accounting principles

 is a matter of professional judgment and is based on the size and
nature of an item being judged
Cost benefit (Cost constraint)

 cost of processing and communicating information should not exceed

the benefits to be derived from it
Full disclosure principle

 related to both the concepts of materiality

and cost-benefit

 information communicated to users reflect a

series of judgmental trade-offs that strive for:
a. Sufficient detail to disclose matters that
make a difference to users, yet
b. Sufficient condensation to make the
information understandable, keeping in
mind the costs of preparing and using it.
Consistency
concept
 requires a business to apply
accounting policies consistently, and
present information consistently, from
one period to another
 like transactions must be accounted
for in like manner
 accounting policies used this year
shall be the same accounting policies
used last year
 change in accounting policy must be
disclosed in the notes
Application of the Basic Accounting
Concepts
During the year, you started a business of selling personalized
mugs and T-shirts. You opened a separate bank account for the
business and deposited your initial investment of P250,000 to
this account. (Separate entity concept)

The business acquired a printing machine. The regular selling

price is P100,000; however, you were able to acquire it at a
discounted price of P90,000. You will record the machine at its
acquisition cost of P90,000 rather than at the regular selling
price. (Historical concept)
Application of the Basic Accounting
Concepts
The business acquired initial inventory of mugs and T-shirts for a
total cost of P50,000. You will record the cost as an asset (i.e.,
inventory) rather than as expense (Matching concept)

All the inventory was sold on credit for P30,000. You will
immediately record the credit sales as accounts receivable rather
than waiting for them to be collected. (Accrual basis)

Also, you will now record the P50,000 cost of the inventory as
expense (Matching concept)
Application of the Basic Accounting
Concepts
You collected P290,000 out of the P300,000 total credit sales.
You will deposit the collections to the bank account of the
business rather than to your personal account (Separate entity
concept)

The debtor for the remaining P10,000 is in financial difficulty. This

has raised doubt on whether he can pay his account. You will
immediately recognize the doubtful account as expense
(Prudence or Conservatism and Accrual basis)
Application of the Basic Accounting
Concepts
You withdrew cash of P80,000 from the business for your personal use. You
will record this transaction as a withdrawal of your investment from the
business rather than a business expense. (Separate entity concept)

At the end of the year, you prepared the financial statements of your business
to determine, among others, whether the business has earned profit. (Time
period)

When preparing the financial statements, you discovered that the business has
$10 (dollars). You will translate this to Philippine peso using the current
exchange rate. The amount that you will report in the financial statements is the
translated amount (Stable monetary unit)
Application of the Basic Accounting
Concepts
Also, you have found out that the regular selling price of a new
printing machine increased form P100,000 to P120,000. You will
ignore this information (Stable monetary unit) and report the printing
machine at its acquisition cost of P90,000 in the financial statements
(Historical cost). This is because you don’t intend or expect to close
your business in the foreseeable time. (Going concern)

During the year, the business bought a trash bin for P80. You expect
to use this over several years. However, because you deemed the
cost as immaterial, you will record this as an expense rather than an
asset (Materiality)
Application of the Basic Accounting
Concepts
Moreover, when you prepared the financial statements, you decided to include
the cost of the trash bin in a “Miscellaneous Expenses” account together with
other immaterial expenses. You don’t expect users of the financial statements to
benefit from reporting the immaterial cost separately (Cost-benefit)

You will make a brief description of the “Miscellaneous Expenses” account in the
notes to financial statements, sufficient for users to understand the nature of this
account (Full disclosure)

You then adopted an accounting policy of expensing outright all acquisitions of

equipment costing P5,000 and below. You will apply this policy consistently in
the future periods (Consistency)
Additional source
• Accounting information
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Accounting Standards
• Accounting concepts and principles are either explicit or implicit.
Explicit
a. Phil. Financial Reporting
Standards (PFRS)
Implicit
b. Phil. Accounting Stds.
(PAS) Customarily used
c. Interpretations

• Standards provide more detailed application of concepts

• PFRSs are patterned from the International Financial Reporting
Standards (IFRS) which are issued by the International Accounting
Standards Board (IASB)
Generally acceptable means
• The standard has been established by an authoritative
accounting standard-setting body; or

• The principle has gained general acceptance due to practice

over time and has been proven to be most useful

 The process of establishing accounting standards is a

democratic process in that a majority of practicing accountants
worldwide must agree with a standard before it becomes
implemented
Relevant regulatory bodies
• Securities and Exchange Commission (SEC)

 Regulate corporations and

partnerships

 Requires corporations and

partnerships to file audited
financial statements
Relevant regulatory bodies
• Bureau of Internal Revenue (BIR)

 tasked in collecting national

taxes and administering the
provisions of tax code
Relevant regulatory bodies
• Bangko Sentral ng Pilipinas (BSP)

 tasked in regulating banks

and other entities performing
banking functions
Relevant regulatory bodies
• Cooperative Development Authority (CDA)

 tasked in regulating
cooperatives
The Conceptual Framework for Financial
Reporting
• prescribes accounting concepts that are relevant to the
preparation of financial statements

• serves as a general frame of reference in developing or

applying the standards
Qualitative Characteristics of useful
financial information
• Qualitative characteristics are the traits that determine whether an item of information
is useful to users

 Fundamentals qualitative characteristics- make information useful to users (FR)

a. Relevance
b. Faithful representation
 Enhancing qualitative characteristics- support the fundamental characteristics and
enhance the usefulness of information (V-CUT)
a. Verifiability
b. Comparability
c. Understandability
d. Timeliness
Relevance
 can affect the decisions of users
 it has the following aspects : Predictive Value, Confirmatory
Value and Materiality (entity specific)
 • represents the actual effects of
events that have taken place
• It has the following aspects:
a. Completeness

Faithful - All information necessary for users to

have a complete understanding of the
Representation financial statements is provided
b. Neutrality
-Information presented is without bias
c. Free from error
-is not materially misstated
Enhancing Qualitative Characteristics
• Verifiability – users could reach a general agreement as to what the
information intends to represent

• Comparability – help users identify similarities and differences between

different sets of information

• Understandability – information is presented in a clear and concise manner

• Timeliness –available to users in time to be able to influence their decisions