Accounting concepts

and principles
Accounting concepts and principles
serve as rules and guidelines that
businesses must follow when preparing
their financial reports. It ensures that a
company's report is complete,
consistent, and comparable. These
guidelines help the users of accounting
information read and analyze a
company's financial data.
THE CONCEPTS
AND
PRINCIPLES
BUSINESS ENTITY
states that the business's
financial transactions must be
recorded separately from those
of its owners and other
businesses. This concept
requires owners to recognize
their businesses as separate
entities.
MONETARY UNIT
states that a business only records
transactions expressed in terms of a
currency. Information that cannot
be quantified or measured in terms
of money is useless for accounting
purposes and should not be
recorded.
GOING CONCERN
the assumption that a business entity
would continue its operations
indefinitely. It means that users of
accounting information can assume
that the company has the stability
and capacity to meet its obligations.
TIME PERIOD
states that businesses should
report their financial transactions
over a standard period.
Depending on the business, the
period could be weekly, monthly,
quarterly, semi-annually, or
annually. Generally, one
accounting period is equal to one
year.
OBJECTIVITY
states that financial reports must be
based on solid evidence such as
income statements and business
documents. This concept keeps the
business from producing
opinionated or biased financial
statements. Financial information
should be relevant and reliable
COST
states that acquired assets,
liabilities, and equity investments
should be recorded at their original
cost. Thus, the amount recorded in
the accounting books will not take
inflation or depreciation into
account.
ACCURAL ACCOUNTING
states that the revenue and expenses of a
business are recorded when incurred
rather than when payment is received or
made. This principle allows current cash
flows to be combined with expected cash
flows for the business to see the big
picture of its current financial position.
REVENUE
RECOGNITION
guides businesses on how and when
revenue is to be recognized. If the
company follows accrual accounting,
revenue will be recognized when it is
realized and earned, i.e., when the
customer has received the goods or
services, not when payment is received.
MATCHING PRINCIPLE
states that a business should report
revenues together with the related
expenses in the same reporting
period. This principle allows
businesses to report the cause-and-
effect relationship of a specific
transaction
FULL DISCLOSURE
states that financial reports
should include all relevant and
information that would affect the
users of accounting information’s
understanding of the financial
statements.
CONSERVATISM
states that assets and revenue should not be
overstated while liabilities and expenses
should not be understated. In the case that the
accountant of a business has given two
possible outcomes when dealing with an
accounting issue, the concept allows the
accountant to choose the one that has the least
possible chance of income.
MATERIALITY PRINCIPLE
states that companies deal with
significant information. Therefore,
insignificant items are not considered
business-critical. For instance, if a minor
transaction will have no significant effect
on the net profit or loss of the company,
then the company may record it
immediately as an expense.
 Application of
Accounting Concepts
and Principles
The Securities and Exchange Commission (SEC) is a
government agency mandated to regulate corporations
and financial institutions. It is also established to protect
the public from investing in scams and other related
fraudulent business activities.
BUSINESS ENTITY
CONCEPT
states that the business’s financial
transactions must be recorded
separately from those of its
owners and other businesses.
MONETARY UNIT
CONCEPT
states that a business only
records transactions
expressed in terms of a
currency.
GOING CONCERN
PRINCIPLE
is the assumption that a business
entity would continue its
operations indefinitely
TIME PERIOD PRINCIPLE

states that businesses should

report their financial transactions
over a standard period of time,
which could be weekly, monthly,
quarterly, semi-annually, or
annually.
OBJECTIVITY PRINCIPLE
states that financial reports
must be based on solid evidence
such as income statements and
business documents.
COST
states that acquired assets,
liabilities, and equity
investments should be
recorded at their original cost
ACCRUAL ACCOUNTING
states that the revenue and
expenses of a business are
recorded when incurred rather
than when payment is received
or made.
 REVENUE RECOGNITION
guides businesses on how and when revenue is
to be recognized
MATCHING PRINCIPLE
states that a business should report
revenues together with the related
expenses in the same reporting
period.
FULL DISCLOSURE
states that financial reports
should include all relevant and
necessary information that
would affect the users of
accounting information’s
understanding of the financial
statements
CONSERVATISM
states assets and revenue
should not be overstated while
liabilities and expenses should
not be understated
MATERIALITY PRINCIPLE
states that companies can
ignore some accounting
standards if the impact of
an immaterial asset is
negligible.
Accounting
Equation
BUSINESS TRANSACTIONS

• affect a company's assets,

liabilities, and equity. To record
these transactions, you first need
to identify how each activity
impacts these accounts.
ACCOUNTING EQUATION
According to the Dual Aspect
Concept every transaction has
two aspect.
ACCOUNTING EQUATION

The above concept of the accounting forms an equation that is

called accounting equation.

The basic accounting equation expresses the relationship

between assets, liabilities, and equity. It states that assets
should equal the sum of liabilities and equity. In equation
form, it is expressed as:

ASSETS = LIABILITIES + OWNER’SEQUITY

ACCOUNTING EQAUTION

The accounting equation is a

fundamental element of the
balance sheet and the foundation
of double-entry bookkeeping.
BALANCE SHEET
A financial statement that
reports a company’s assets,
liabilities, and shareholder
equity at a specific point of
time.
DOUBLE-ENTRY ACCOUNTING
every financial transaction has equal and
opposite effects in at least two different
accounts.
ASSETS
• Assets are resources owned
by the business.

• They are things of value

used in carrying out such
activities as production and
exchange.
LIABILITIES
• Liabilities are claims against
assets.

• They are existing debts and

obligations.

• Liabilities due within 12 months

are considered short-term or
current. Long-term liabilities are
due at least 12 months out.
OWNER’S EQUITY
• Owner’s Equity is equal to
total assets minus total
liabilities.

• Owner’s Equity is the value

of the owner’s investment in
the business after subtracting
the liabilities.
OWNER’S EQUITY
•expanded accounting equation details
the transactions that affect the owner's
equity.
Assets = liabilities + capital + revenues – expenses - drawings
 Elements of owner’s equity in an expanded
accounting equation.
Capital Expenses
or paid-in capital are are expenditures incurred in
the investments made the course of business
by the investor or operations. Examples
include expenses on
business owners to the
salaries, office supplies,
business. utilities, and the internet.
Revenues Drawings
are income or earnings derived
are the money withdrawn from
from the services rendered to the
the business account for
clients or the delivery of goods
personal use (in
or products to the customers.
sole proprietorship). In
Examples include sales,
corporations, this element is
professional fees, and service
replaced by dividends.
revenues.
Normal Balance of Accounts
The normal balance indicates where each type of account
increases in value. A journal entry is composed of debit and
credit.
DEBIT & CREDIT
• The terms debit and credit mean left and right, respectively.

• The act of entering an amount on the left side of an account is

called debiting the account and making an entry on the right
side is crediting the account.

• When the debit amounts exceed the credits, an account has a

debit balance; when the reverse is true, the account has a credit
balance.
 Real or permanent accounts
accounts that the balances are carried over to the next accounting period

Temporary or nominal accounts

accounts that the balances are closed to income
summary accounts before the next accounting period.
APPLICATION OF
ACCOUNTING
EQUATIONS
 Every business should be familiarized with analyzing
business transactions by connecting them to the
different accounting concepts and principles.
Companies should also learn to examine if the
transactions affect accounts and are balanced using the
accounting equation. This way, a business can provide
an accurate financial report that will determine the
entity's profitability.
SIMPLE CASES ILLUSTRATING THE
ACCOUNTING EQUATION
the concepts and principles
related to the accounting
equation, you can start
analyzing simple cases
where it could be applied.
 CASH INFLOW FROM
INVESTMENT OR SALES
Cash inflow, either due to the
owner's investment or sales from a
service rendered, increases the
assets and the equity of a business.
ITEM PURCHASE ON CASH
BASIS
a transaction can cause an increase and a
decrease within the same major account. An
example is when a business purchases an
item paid in cash. It decreases the amount of
cash, which is part of a business’s assets, and
at the same time increases other types of
assets or resources owned by the business.
PURCHASE OF AN ITEM ON
ACCOUNT/CREDIT
You now understand that any property or resource
with monetary value that is acquired by a
company increases the entity’s assets. However,
not all assets acquired by the company were paid
in cash. In some instances, the business may opt to
purchase them on account. These kinds of
purchases affect the accounting equation
differently.
PAID DEBTS
Paying off debts can decrease a
company’s resources and at the
same time decrease its liabilities.
PAID OBLIGATIONS
Paying off debts can decrease
a company’s resources and at
the same time decrease its
liabilities.