ACCOUNTING CONCEPTS
AND PRINCIPLES
REFERENCES:
“Fundamentals of Accountancy, Business and Management 1 for
Senior High School”
By: Flocer Lao Ong
“Teaching Guide for Senior High School Fundamentals of
Accountancy, Business and Management 1”
By: Joselito Florendo
Carlsberg Andres
Arthur Barrido Jr.
Christopher Honorario
Lesson Objective:
• The learners should be able to know the
accounting concepts and principles that
they should strictly follow in actual business
practice.
•
• The learners should be able to identify and
analyze what goes wrong in given
situations in accordance to GAAP
standards learned in class.
Quick Review of Previous Lessons:
• Accounting is considered the language of
business.
• There are different forms of business
entities according to its organization and
operations.
• A business can be organized as sole
proprietorship, partnership, cooperation or
cooperative.
• A business can be operated as a service,
merchandising and manufacturing entity.
Accounting
Business
Organization
Operations
Service
Sole
Proprietorship
Partnership
Corporation
Cooperative
Merchandising
manufacturing
Petness First Petshop
Which items should
• Juan dela Cruz opened his pet shop business called
not be included as
Petness First Petshop. He opened a bank account for is
expenses?
Explain
business and deposited
P 500,000.
The business earned
P50,000, but he had doubts why.
with the recorded expense of
P70,000. He is not sure if he should include the following
items as expenses:
Salary expense
P20,000
Rent expense
10,000
Utilities expense (at home)
15,000
Utilities expense (at the store) 10,000
Insurance expense
5,000
Withdrawals (for personal use) 10,000
TOTAL
70,000
Correct Answers:
• Utilities expense (at home)-
should not be included; it is a
personal expense
• Withdrawals-should not be
included since the withdrawal is
for personal use
Generally Accepted Accounting Principles
(GAAP)
• These are broad, general statements or
“rules” and “procedures” that serve as
guides in the practice of accounting.
• These are standards, assumptions, and
concepts with general acceptability.
• These are measurement techniques and
standards used in the presentation and
preparation of financial statements.
Fundamental Concepts
•Entity Concept or
Business Entity Principle
•Periodicity or Time Period
Principle
•Going Concern
Entity Concept or Business Entity
Principle
• Regards the business enterprise as separate and distinct
from its owners and from other business enterprises.
• Examples:
• If the owner has a barber shop, the cash of the barber
shop should be reported separately from personal cash.
• The owner had a meeting with a prospective client. The
expenses that come with that meeting should be part of
the company’s expenses. If the owner paid for gas for his
personal use, it should not be included as part of the
company’s expenses.
Periodicity or Time Period Principle
• Is the concept behind providing financial accounting
information about the economic activities of an enterprise
for specified time periods. For reporting purposes, one
year is usually considered as one accounting period.
• Examples:
• Philippine companies are required to report financial
statements annually.
• The salary expenses from January to December 2015
should only be reported in 2015.
Accounting Period Classifications
a. Calendar Year-a twelve-month period that
starts on January 1 and ends on December
31.
b. Fiscal Year- a twelve-month period that
starts on any month of the year other than
January and ends twelve months after the
starting period, e.g., a business whose fiscal
year starts May 1, 2016 ends its fiscal year
on April 30, 2017.
Going Concern Principle
• Is a concept which assumes that the
business enterprise will continue to operate
indefinitely.
• Example:
• In preparing the financial statements of the
skin clinic and the spa, the accountant
assumes that the businesses will not close
or shut operations within the next years.
Quick Learning Check
_________________
are broad,
general statements or “rules” and
“procedures” that serve as guides in
the practice of accounting.
Answer: GAAP or Generally Accepted
Accounting Principles
• _______
regards the business
enterprise as separate and distinct
from its owners and from other
business enterprises.
• Answer:
Entity
Concept
Business Entity Principle
or
• What are the 2 accounting period
classifications?
Answers:
• Calendar Year
• Fiscal Year
• __________ is a concept which
assumes that the business
enterprise will continue to
operate indefinitely.
Answer:
Principle
Going
Concern
Basic Accounting Principles
• Monetary Unit Principle
• Objectivity Principle
• Cost Principle
• Accrual Accounting Principle
• Matching Principle
• Disclosure Principle
• Conservatism Principle
• Materiality Principle
• Consistency Principle
Monetary Unit Principle
• Amounts are stated into a single monetary
unit
• Examples:
• Jollibee should report financial statements
in pesos even if they have a store in the
United States
• IHOP should report financial statements in
dollars even if they have a branch here in
the Philippines.
Objectivity Principle
• Financial statements must be presented with
supporting evidence.
• Examples:
• When the customer paid Jollibee for their order,
Jollibee should have a copy of the receipt to
represent as evidence.
• When a company incurred a transportation
expense, a voucher should be prepared as
evidence.
Cost Principle
• Accounts should be recorded initially at
cost
• Examples:
• When Jollibee buys a cash register, it
should record the cash register at its price
when they bought it.
• When a company purchases a laptop, it
should be recorded at the price it was
purchased.
Accrual Accounting Principle
• Revenue should be recognized when earned regardless
of collection and expenses should be recognized when
incurred regardless of payment.
• On the other hand, cash basis principle in which revenue
is recorded when collected and expenses should be
recorded when paid. 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, it should record it as an expense even if it is
unpaid.
Matching Principle
• 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.
Disclosure Principle
• All relevant and material
information should be reported.
Example:
The company should report all
relevant information.
Conservatism Principle
•Also known as prudence. In
case of doubt, assets and
income should not be
overstated while liabilities
and expenses should not be
understated.
Example:
Assume Gold Guitar, Inc. is in the middle of a
patent lawsuit. GGI is suing Blue Guitar, Inc. for
patent infringement.
GGI anticipates losing the lawsuit instead of
winning it. If Blue Guitar, Inc. expects to lose the
suit; they should record the loss in the footnotes of
its financial statements. This would be the most
conservative approach because financial
statement users want to know if the company will
have to pay out a large some of money in the near
future.
Materiality Principle
• 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 3 years. Since an
eraser is immaterial relative to assets, it
should be recorded as an expense.
Consistency Principle
• Means that approaches used in reporting must be
uniformly employed from period to period to allow
comparison of results between time periods. Any
changes must be clearly explained.
Example:
If the straight line method of depreciation is being
used by the company, then the method should be
uniformly used by the company in computing its
annual depreciation.
Quick Recall of the Lesson
• Entity Concept or Business Entity Principle
• Periodicity or Time Period Principle
• Going Concern
• Monetary Unit Principle
• Objectivity Principle
• Cost Principle
• Accrual Accounting Principle
• Matching Principle
• Disclosure Principle
• Conservatism Principle
• Materiality Principle
• Consistency Principle
Choose one and explain
based on your own
understanding
Additional Learnings:
• International Financial Reporting
Standards (IFRS)- are pronouncements
issued by the International Accounting
Standards Board (IASB) that intend to
enhance the comparability of the financial
statements of all companies around the
world. In light of globalization, the IFRS will
provide a way for users of accounting
information to easily understand the results
of operations of companies all around the
globe.
• In the past, the function of IASB is
performed
by
the
International
Accounting Standards Committee
(IASC). The pronouncements of the
IASC
are
called
International
Accounting Standards (IAS). Up to this
day, the IASB still adheres to the IAS
in
addition
to
their
own
pronouncements-the IFRS.
• In the Philippines, the development of
accounting standards that will be used in the
country consider the pronouncements issued
by the USA Financial Accounting Standards
Board (FASB) and the IASB (Valix et.al
2013). The Philippines follows the standards
of both the IAS and IFRS. In contrast, USA
follows guidelines provided by then GAAP.
The Philippines is fully compliant with the
IFRS effective January 2005.
• The following factors are considered in the decision to
adapt the IFRS (Valix et. Al 2013):
1. Philippine organization’s support of international
accounting standards
2. Increasing internalization of businesses which greatly
calls for a common language for financial reporting.
3. Improvement of international accounting standards or
removal of free choices of accounting treatments
4. International accounting standards being recognized by
the World Bank, Asian Development Bank and World
Trade Organization
Philippine Financial Reporting Standards
(PFRS)
The Philippine Financial Reporting
Standards Council (FRSC) issues
standards to be used in the Philippines
in the form of Philippine Financial
Reporting Standards (PFRS).
The PFRS includes all of the following:
1. Philippine Financial Reporting Standards (PFRS)
which corresponds to International Financial
Reporting Standards (IFRS)
2. Philippine Accounting Standards (PAS) which
corresponds to International Accounting
Standards (IAS)
3. Interpretations of accounting standards issued by
the Philippine Interpretations Committee in
accordance with interpretations of the
International Financial Reporting Interpretations
Committee (IFRIC) and the Standing
Interpretations Committee