Accounting Concepts

And
Principles

Prepared by: Ivy Beatrice A. Alias, CPA

 Accounting Concepts and Principles

• These are set of logical ideas and procedures

that guide the accountant in recording and
communicating economic information.

Prepared by: Ivy Beatrice A. Alias, CPA

 Separate Entity Concept

• Under this concept, the business is viewed as a

separate person, distinct from its owner(s). Only
the transactions of the business are recorded in
the books of accounts. Personal transactions of
the business owner(s) are not recorded.

Prepared by: Ivy Beatrice A. Alias, CPA

 Historical Concept (Cost Principle)
• Under this concept, assets are initially recorded at
their acquisition cost.

Prepared by: Ivy Beatrice A. Alias, CPA

 Going Concern Assumption
• Under this concept, the business is assumed to
continue to exist for an indefinite period of time. This is
necessary for accounting measurements to be
meaningful.
• Opposite of going concern is liquidating concern. This
is the case if the business intends to end its operation or
if it has no other choice but to do so.
Prepared by: Ivy Beatrice A. Alias, CPA
 Matching
• Under this concept, some costs are initially
recognized as assets and charged as expenses
only when the related revenue is recognized.

Prepared by: Ivy Beatrice A. Alias,

 Accrual Basis of Accounting
• Under the 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.
• Thus 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.

Prepared by: Ivy Beatrice A. Alias, CPA

 Prudence or Conservatism
•Under this concept, the accountant observes some degree of caution
when exercising judgements needed in making accounting estimates
under conditions of uncertainty. Such that, if the accountant needs to
choose between a potentially unfavorable outcome versus a
potentially favorable outcome, the accountant chooses the
unfavorable one. This is necessary so that assets or income are not
overstated and liabilities or expenses are not understated.

Prepared by: Ivy Beatrice A. Alias, CPA

 Time Period
•Under this concept, the life of the business is divided into series of reporting periods.
Users of information need timely periodic information. Thus instead of waiting until
the life of the business ends before profit is determined, the life of the business is
divided into series of equal short periods called reporting period ( or accounting
period).A reporting period is usually 12 months, although it can be longer or shorter.
•Calendar Year Period- starts on January 1 and ends on December 31of the same year.
•Fiscal Year Period- covers 12 months but starts on a date other than January 1 , e.g.
July 1,2019 to June 30, 2020.
•Interim Period- accounting period that is shorter than 12 months, can be a month,
quarter (3 months), or a semi annual period (6 months)

Prepared by: Ivy Beatrice A. Alias, CPA

 Stable Monetary Unit
• Under this concept, assets, liabilities, equity,
income and expenses are stated in terms of a
common unit of measure, which is peso in the
Philippines. More over, the purchasing power of
the peso is regarded as stable. Therefore, changes
in the purchasing power of the peso due to
inflation are ignored.
Prepared by: Ivy Beatrice A. Alias, CPA
 Materiality Concept
• This concept guides the accountant when applying accounting principles.
This is because accounting principles are applicable only to material
items.
• An item is considered material if its omission or misstatement could
influence economic decisions. Materiality is a matter of professional
judgement and is based on the size and nature of an item being judged.

Prepared by: Ivy Beatrice A. Alias, CPA

 Cost Benefit
• Under this concept, the cost of processing and
communicating information should not exceed
the benefits to be derived from it.

Prepared by: Ivy Beatrice A. Alias, CPA

 Full Disclosure Principle
• This concept is related to both the concepts of materiality and cost-benefit.
Under the full disclosure principle, information communicated to users
reflect a series of judgmental trade-offs. The trade-offs strive for:
• Sufficient detail to disclose matters that make a different to user, yet
• Sufficient condensation to make the information understandable, keeping in mind
the costs of preparing and using it.

Prepared by: Ivy Beatrice A. Alias, CPA

 Consistency concept
• Under this concept, a business shall apply accounting policies
consistently, from one period to another. This means that like transactions
must be accounted for in like manner.
• Accounting policies used this year shall be the same accounting policies
used last year. This, however, does not mean that a business cannot
change its accounting policies. Accounting policies can be changed if it
required by a standard or the change would result in more reliable
information. Any change in accounting policy must be disclosed.

Prepared by: Ivy Beatrice A. Alias, CPA

 Accounting Standards
• Accounting concepts and principle are either explicit or
implicit.
• Explicit concepts and principles are those that are specifically
mentioned in the Conceptual Framework for Financial
Reporting and in the Philippine Financial Reporting Standards
(PFRSs).
• Implicit are those that are not specifically mentioned in the
foregoing but are customarily used because of their general and
longtime acceptance within the accountancyPrepared
profession.
by: Ivy Beatrice A. Alias, CPA
 Accounting Standards

• The accounting Standard in the Philippines are represented by

the Philippine Financial Reporting Standards (PFRSs) These
standards are patterned from the International Financial
Reporting Standards which are issued by the International
Accounting Standard Board (IASB).
• Traditionally, accounting standards were refereed to as the
generally accepted accounting principles (GAAP).

Prepared by: Ivy Beatrice A. Alias, CPA

Philippine Financial Reporting Standards (PFRSs)
 PFRS are the Standards and Interpretation adopted by the Financial Reporting Standards
Council (FRSC: they are the official accounting standard setting body in the
Philippines)which consist of the following:
i.Philippine Financial Reporting Standards (PFRSs)
ii.Philippine Accounting Standards
iii.Interpretations
 Just like basic accounting concepts, the standards serve as guide when recording and
communicating accounting information. The difference is that standards provide a more
detailed application of concepts. They also prescribe which principle is most appropriate
for specific economic information that should be included in financial reports and how
this information is presented.

Prepared by: Ivy Beatrice A. Alias, CPA

 Philippine Financial Reporting Standards
(PFRSs)
For the Financial statement to be useful, they must be prepared
using reporting standard that are generally acceptable.
The term “generally acceptable” means that either:
1.The standard has been established by an authoritative
accounting standard setting body; or
2.The principle has gained general acceptance due to practice
over time and has been proven to be most useful.

Prepared by: Ivy Beatrice A. Alias, CPA

 Relevant regulatory bodies
Other than the FRSC, the following affect the accounting policies used by
businesses and their financial reporting:
1.Securities and Exchange Commission (SEC)
Tasked with regulating corporations and partnerships to file audited
financial statements.
2.Bureau of Internal Revenue (BIR)
Tasked in collecting national taxes and administering the provisions of the
Tax Code. Although the provisions of the Tax Code do not always reflect the
goals of financial reporting, they do at times influence the choice of
accounting methods and procedure.

Prepared by: Ivy Beatrice A. Alias, CPA

 Relevant regulatory bodies

3.Bangko Sentral ng Pilipinas (BSP)

Tasked in regulating banks and other entities
performing banking functions. The BSP influences the
selection and application of accounting policies by
these businesses.
4.Cooperative Development Authority (CDA)
Tasked in regulating Cooperatives. The CDA the
selection and application of accounting policies by
cooperatives.
Prepared by: Ivy Beatrice A. Alias, CPA
The Conceptual Framework for Financial
Reporting
Just like standards, it also prescribes accounting
concept meant to guide the accountant in preparing
and presenting financial statements. However, it is
not a standard rather it serves as general frame of
reference in the application or development of the
standard.

Prepared by: Ivy Beatrice A. Alias, CPA

Qualitative Characteristic of Useful Financial
Information
This is among the concepts that was stated in
Conceptual Framework.
Qualitative characteristics are traits that makes
information useful to users, without these
characteristics information may be deemed useless.

Prepared by: Ivy Beatrice A. Alias, CPA

 Qualitative Characteristic of Useful Financial
Information
I.Fundamental - refer to the essential characteristics that information must have before it can be
included in the financial statements.
a)Relevance- refers to the ability of the information to affect the decision making of the users.
i.Predictive Value- an information has a predictive value if users can use it as an input in
making predictions or forecasts of outcomes of events.
ii.Confirmatory Value (or Feedback value)- information has confirmatory value if users can
use it to confirm their past transactions.
iii.Materiality (“entity-specific” aspect of relevance)- 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.

Prepared by: Ivy Beatrice A. Alias, CPA

Qualitative Characteristic of Useful Financial Information
b)Faithful Representation- information is faithfully represented if it is factual, meaning it represents
the actual effect of events that have taken place.
i.Completeness- information must be presented with sufficient detail necessary for users to
understand them. Important information must not be omitted.
ii.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.
iii.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 errors means there are no errors in the description and the process by
which the information is selected and applied.

Prepared by: Ivy Beatrice A. Alias, CPA

Qualitative Characteristic of Useful Financial Information
II.Enhancing
a) Comparability
Information about a reporting entity is more useful if it can be compared with a similar
information about other entities and with similar information about the same entity for another
period or another date. Comparability enables users to identify and understand similarities in, and
differences among, items
b) Verifiability
Verifiability helps to assure users that information represents faithfully the economic
phenomena it purports to represent. Verifiability means that different knowledgeable and
independent observers could reach consensus, although not necessarily complete agreement, that a
particular depiction is a faithful representation.

Prepared by: Ivy Beatrice A. Alias, CPA

 Qualitative Characteristic of Useful Financial Information
c) Timeliness
Timeliness means that information is available to decision-makers in time to be
capable of influencing their decisions.
d) Understandability
Classifying, characterizing and presenting information clearly and concisely
makes it understandable. While some phenomena are inherently complex and
cannot be made easy to understand, to exclude such information would make
financial reports incomplete and potentially misleading. Financial reports are
prepared for users who have a reasonable knowledge of business and economic
activities and who review and analyze the information with diligence.

Prepared by: Ivy Beatrice A. Alias, CPA

 REFERENCE
• Ballada, W. & Ballada, S. (2019). Basic Financial Accounting and
Reporting.
Manila: DomDane Publishers
• Millan, Z.V.B. (2018). Financial Accounting and
Reporting(Fundamentals).
Baguio: Bandolin Enterprise
• Conceptual Framework for Financial Reporting (2018) Retrieved from
https://www.iasplus.com/en/standards/other/framework .