LESSON 1

Varied accounting concepts

& principles
OBJECTIVES:
1.Define terms related to varied accounting
concepts and principles.
2.Apply the appropriate accounting concepts and
principles in analyzing business transactions.
3.Appreciate the importance of understanding and
applying the different accounting concepts and
principles in analyzing business transactions
 The Basic Accounting
Concepts and Principles
 1. Business entity principle
(also known as separate entity
and economic entity concept)
•It states that the transactions
related to a business must be
recorded separately from those
of its owners and any other
business.
•Accounting is called the language
of business.
•It communicates the financial
condition and performance of a
business to interested users for
decision-making purposes.
•The Generally Accepted
Accounting Principles (GAAP) is a
widely accepted set of rules,
concepts and principles that
governs the application of
accounting procedures.
• The GAAP has been developed by the
accounting professionals to guide preparers
of financial statements in recording and
reporting financial information regarding a
business enterprise, hence aiding in the
effective execution of the accounting
procedure and in communicating the
financial condition of the business.
In other words, while recording
transactions in a business, we take into
account only those events that affect that
particular business; the events that affect
anyone else other than the business entity
are not relevant and are therefore not
included in the accounting records of the
business.
Example:
•If the owner has a barber shop,
the cash of the barber shop
should be reported separately
from personal cash.
2. Going concern principle
•It 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.
•A company is a going concern if no
evidence is available to believe that
it will or will have to cease its
operations in foreseeable future.
•In other words, the going concern
concept assumes that businesses
will have a long life and not close
or be sold in the immediate future.
Example:
•When preparing financial
statements, you should assume
that the entity will continue
indefinitely.
 3. Time period principle
(also known as periodicity assumption and accounting time period concept)
•It states that the life of a business
can be divided into equal time
periods.
•These time periods are known as
accounting periods for which
companies prepare their financial
statements to be used by various
internal and external parties.
•The length of accounting period to
be used for the preparation of
financial statements depends on the
nature and requirement of each
business as well as the need of the
users of financial statements.
•Normally, an accounting period
consists of a quarter, six months or
a year.
Example:
•The salary expenses from
January to December 2015
should only be reported in 2015.
4. Monetary unit principle (also known as
money measurement concept)
•It 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.
•Amounts should only be stated into
a single monetary unit.
•Therefore, an information that
cannot be expressed in terms of
money is useless for financial
accounting purpose and is therefore
not recorded.
Example:
•Jollibee should report financial
statements in pesos even if they
have a store in the United States.
5. Objectivity principle
•It states that accounting
information and financial reporting
should be independent and
supported with unbiased evidence.
• This means that financial
statements must be presented
with supporting evidence.
• The objectivity principle is aimed
at making financial statements
more relevant and reliable.
Example:
•When the customer paid Jollibee
for their order, Jollibee should
have a copy of the receipt to
represent as evidence.
6. Cost principle
•It is an accounting principle that
records assets at their respective
cash amounts at the time the asset
was purchased or acquired.
•Assets that are recorded can
include short-term and long-term
assets, liabilities and any equity,
and these assets are always
recorded at their original cost.
Example:
•When Jollibee buys a cash
register, it should record the cash
register at its price when they
bought it.
7. Accrual Accounting Principle
•It is an accounting method where
revenue or expenses are recorded
when a transaction occurs rather
than when payment is received or
made.
•The method follows the matching
principle, which says that revenues
and expenses should be recognized
in the same period.
•Cash accounting is the other
accounting method, which
recognizes transactions only when
payment is exchanged.
•However, cash basis is not the
generally accepted principle today.
Example:
•When a barber finishes performing his
services he should record it as revenue.
•When the barber shop receives an
electricity bill, he should record it as an
expense even if it is unpaid.
8. Matching principle
• It is a principle that requires a company
to match expenses with related
revenues in order to report a company's
profitability during a specified time
interval.
• Therefore, cost should be matched with
the revenue generated.
Example:
•When you provide tutorial services to
a customer and there is a
transportation cost incurred related to
the tutorial services, it should be
recorded as an expense for that period.
•Incurred means expense has
occurred and needs to be
recognized even though no
payment was made.
9. Disclosure principle
•It is a concept that requires a
business to report all necessary
information about their financial
statements and other relevant
information to any persons who are
accustomed to reading this
information.
•In other words, all relevant and
material information should be
reported.
Example:
•The company should report all
relevant information.
10. Conservatism principle
•It is the general concept of
recognizing expenses and liabilities
as soon as possible when there is
uncertainty about the outcome, but
to only recognize revenues and
assets when they are assured of
being received.
•In case of doubt, assets and income
should not be overstated while
liabilities and expenses should not
be understated.
Example:
•In case of doubt, expenses should
be recorded at a higher amount.
Revenue should be recorded at a
lower amount.
11. Materiality principle
•It states that financial reports only
need to include information that
will be significant or material to
their users.
•In case of assets that are immaterial
to make a difference in the
financial statements, the company
should instead record it as an
expense.
Example:
•A school purchased an eraser with an
estimated useful life of three years.
•Since an eraser is immaterial relative
to assets, it should be recorded as an
expense
 LESSON 2
Application of
AccountingPrinciples
OBJECTIVES:
1.Identify the generally accepted accounting
principles;
2.Solve exercises on accounting principles as
applied in various cases; and
3.Appreciate the importance of understanding and
applying the different accounting concepts and
principles in analyzing business transactions.
•The importance of these concepts
and principles lies in the fact that
they are related to the entire
financial accounting process while
they affect directly the way the
financial reports are prepared.
• Accountants need to apply professional
judgments while preparing financial
reports, these concepts and principles
help them to ensure that they are not
being misled and that providing a true
and fair view of financial statements is
being accomplished.
• The accounting concepts and principles
is of great help and assistance to the
professional accountants to consider
and apply what is best in the interests
of the users of financial information in
case an accounting concept or principle
leads to create conflict with that of
another.
•In addition, after you acquire a
good knowledge of accounting
principles, most accounting topics
will make more sense to help you
perform the related activities in a
more professional manner.
• Thus, the accounting concepts and
principles are important for
accountants, as they need to abide by
them every time they involve in
analyzing, recording, summarizing,
reporting and interpreting financial
transactions of a business.
The given situation is related to
accounting concepts and principles.
Let's try to apply these principles
now in analyzing business
transactions.
SITUATION 1:
•The accountant return to the
employees the receipts of the
personal transaction they made
during working hours.
In this scenario, we can say that this
relates to the Business Entity Principle,
which states that the transactions related
to a business must be recorded
separately from those of its owners and
any other business.