ACCOUNTING CONCEPTS AND PRINCIPLES
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP)

Encompasses the conventions, rules, and procedures necessary to define accepted accounting
practice at a particular time

These principles provide the general framework for determining what information is included in
the financial statements and how this information is to be prepared and presented

These accounting principles, standards, and procedures issued by the Financial Accounting
Standards Board (FASB)

As applied in the Philippines:

A. Philippine financial reporting standards (PFRS)
-- adopted from the IFRS (International Financial Reporting Standards)

B. Philippine accounting standards (PAS)
-- adopted from the IAS (International Accounting Standards)
THE STANDARD SETTING PROCESS IN THE PHILIPPINES
Before 1981, the Philippines did not have a formal process for the development of accounting
practices, it was only in late 1981, when the Philippine Institute Of Certified Public Accountants (PICPA)
organized the Accounting Standards Council that formalized the standards setting process in the
Philippines.
ACCOUNTING STANDARDS COUNCIL (ASC)

It was formed on November 18,1981- to study the standard setting process in the Philippines

The ASC was composed of 8 members, representing the following organizations :
1.
PICPA - Philippine Institute Of Certified Public Accountants
2.
SEC - Securities and Exchange Commission
3.
BSP - Bangko Sentral ng Pilipinas
4.
BOA - Board of Accountancy
FUNDAMENTAL CONCEPTS/UNDERLYING ASSUMPTIONS
1. ACCOUNTING ENTITY CONCEPT

“ The business is treated as a person separate and distinct from the owner or investor”

It is also known as the “economic entity assumption or business entity concept”

The personal transactions of the owner are separate from that of the business he/she owns.
2. PERIODICITY ASSUMPTION

“It refers to the time span when the accountant has to prepare the Financial Statements”

Also known as “ Time Period Assumption”

It means that the economic activities of an accounting entity are divided into various artificial time
periods for financial reporting purposes.

General Rule: 1 year= 1 accounting period/cycle
Example: Separate financial reports are prepared yearly for the skin clinic and the spa of Dr. Teng.
Hence, Dr. Teng can measure the income of the two businesses annually.
3 CLASSIFICATION OF ACCOUNTING PERIODS

Calendar Year- 12-month period that starts on January 1 and ends on December 31.

Fiscal Year- 12 month period that starts on any month of the year other than January and
ends twelve months after the starting period.

Natural Business Year- is any twelve month period that ends when business activities are
their lowest point (lean/slack season)
3. GOING CONCERN ASSUMPTION

“The business is continuing concern or that it has an indefinite existence”

It is also known as “ continuity assumption”

Businesses are established with the intention that the business will survive and continue
indefinitely, and that company closure is not imminent.
Example: In preparing the financial statements of the skin clinic and the spa, the accountant assumes
that the business will not close or shut operations within the next years.
BASIC ACCOUNTING PRINCIPLES
1. OBJECTIVITY PRINCIPLE

States that all business transactions that will entered In the accounting records must be duly
supported by verifiable evidence (O.R., S.I., C.I, etc.)
Example: Payments must be supported by official receipts and bank deposits must be supported by
deposit slips.
2. HISTORICAL COST

That all properties and services acquired by the business must be recorded at their original
acquisition cost.
Example: Land bought in 2001 for two million pesos should be recorded at two million pesos even
though its market value in the year 2016 is already three million pesos.
3. ACCRUAL BASIS OF ACCOUNTING

“ Revenue or income is recognized when earned such as when goods are delivered or when
services have been rendered, regardless of collection. Expenses are recognized when incurred
regardless of payment”

The term “total expenses” is not the same with “total cash payments”, and the term “total income”
is different from “total cash receipts”
4. ADEQUATE DISCLOSURE

That the accountant should include all of the sufficient information needed so that the readers of
the financial statements will have informed judgement.
Example: Land bought at two million pesos in 2001 should be recorded at historical cost in the 2016
financial statements. However, the current market value of three million pesos in the year 2016 may be
indicated in the financial statements for the year 2016 in the form of a footnote or parenthetical note.
5. MATERIALITY

means that financial reporting is only concerned with information significant enough to affect
decisions. This refers to the relative importance of an item or event. An item is considered
significant if knowledge of it would influence prudent users of the financial statements.

In accounting, materiality refers to the impact of an omission or misstatement of information in a
company’s financial statements on the user of those statements. If it is probable that users of
financial statements would have altered their actions if the information had not been omitted or
misstated, then the item is considered to be material.

The concepts of materiality is usually used in audit not in accounting.
Example: Items of insignificant amount such as paper clips can be charged outright to expenses.
6. CONSISTENCY

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.
7. MONETARY UNIT PRINCIPLE

Means that money is used as a unit measurement and only business transactions that has monetary
value are recorded using a single currency.


“ all business transactions are recorded & expressed in peso amounts”
It is also known as “measurement in terms of money assumption”
Example: A machine imported from the United States is recorded in Philippine peso although
purchased in dollars. The dollar exchange rate was used to convert the cost of the machine from dollars
to peso.
8. MATCHING PRINCIPLE

Means that expenses are matched to the income earned during the period.
Example: Gasoline expense is charged to the period when the service was rendered or the goods
delivered.
9. CONSERVATISM PRINCIPLE

Means that in situations where there are two possibilities, choose the one that will have the least
favorable effect on the financial statements. This principle is also called Prudence.
Example: Bad debts expense is recognized as possible losses due to the uncollectability of certain
accounts receivables.