Accounting Concepts and Principles

– Accounting Concepts and Principles
– Chapter 5
– Learning Objectives
1. identify generally accepted accounting principles;
2. describe the basic assumptions and principles of accounting;
3. explain the application of the basic principles of accounting; and
4. solve exercises on accounting principles as applied in various cases
– Introduction
 Accounting is called the language of business.
– Generally Accepted Accounting Principles (GAAP)
– Philippine Accounting Standards (PAS)
– Philippine Financial Reporting Standards (PFRS)
– Financial Reporting Standards Committee (FRSC)
– Accounting Concepts
 Are important assumptions or ideas which accountants observe in recording business

transactions in the books of accounts. It may refer to an assumption, or an abstract idea that
governs accounting practice.
– Underlying Accounting Assumptions
1. Economic Entity Assumption
 It assumes that all of the business transactions are separate from the
business owner’s personal transactions.
 Any personal transaction of its owners should not be recorded in the

company’s accounting book, and vice versa, unless the owner’s personal
transaction involves investing or withdrawing resources from the
business.
2. Accrual Basis Assumption
 It assumed that revenue is recorded in the period it is earned,

regardless of the time the cash is received or collected.
 The revenue of an enterprise includes not only those cash receipts from
revenue transactions during a financial period, but also the income
earned but not yet received (accrued income).
 Expenses, on the other hand, include not only the cash that a business pays out
in this period but also the expenses outstanding (accrued expense).
3. Going Concern Assumption
 It assumes that the business entity will continue operating indefinitely.
 This assumes that a company will continue to exist long enough to carry
out its objectives and commitments and will not liquidate in the
foreseeable future.
 Liquidating Concern- refers to the valuation of accounting elements in the

financial statements is valued at their fair market value which should be
disclosed in the notes to financial statements.
 Because of this assumption, assets are recorded at their original acquisition

costs and not based on their market values.
4. Monetary Unit Assumption
 It assumes that only transactions that can be expressed in terms of

money are recorded. Hence, any non-financial or non-monetary
information that cannot be measured in terms of money are not
recorded in the accounting books.
5. Time-Period Assumption
 This assumption requires a business to complete the whole accounting

process of a business over a specific operating time period. It may be
monthly, quarterly, or annually.
 It may follow a calendar year or fiscal year.
 A Calendar year is a twelve-month period that ends on December 31.
 A Fiscal year is a twelve-month period which may or may not end on

December 31.
– Basic Accounting Principles
 The actions that will best accomplish the objectives of accounting. It refers to a doctrine, which
is the basis of all other rules, procedures and methods used in accounting practice.
1. Cost principle
 Cost refers to the amount spent (cash or the cash equivalent) when an item
originally obtained, whether that purchase happened last year or ten years ago;
amounts are not adjusted upward for inflation.
 Historical Cost Amounts- refers to the amounts shown in financial statements.
 Acquisition Cost- is the most objective and verifiable basis upon which to
account for assets and liabilities of a business enterprise.
2. Full Disclosure Principle
 If certain information is important to an investor or lender using the

financial statements, that information should be disclosed within the
statement or in the notes to the statement.
3. Matching Principle
 This principle requires that expenses be matched with revenues. It

means that in a given accounting period, the revenue recorded should
have its corresponding expense recorded, in order to show the true
profit of the business.
4. Revenue Recognition Principle
 Revenues are recognized as soon as goods have been sold (delivered to

the costumer) or a service has been rendered, regardless of when the
money is actually received.
5. Materiality Principle
 This principle allows an accountant to violate another accounting

principle if an amount is insignificant . Professional judgment is needed
to decide whether an amount is insignificant or immaterial.
6. Conservatism or Prudence Principle
 This principle states that given two options in the valuation of business
transactions, the amount recorded should be the lower rather than the
higher value. Conservatism helps the accountant break a tie while
remaining unbiased and objective.
 The basic accounting principle of conservatism leads accountant to

anticipate or disclose losses, but it does not allow a similar action for
gains.
 In other words, do not anticipate income but rather provide for future
loss.
7. Objectivity Principle
 This principle requires business transactions to have some form of

impartial supporting evidence or documentation. Also, it entails that
bookkeeping and financial recording be performed with independence,
that is free of bias and prejudice.

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– Accounting Concepts and Principles

1. identify generally accepted accounting principles;

2. describe the basic assumptions and principles of accounting;

3. explain the application of the basic principles of accounting; and

4. solve exercises on accounting principles as applied in various cases

 Accounting is called the language of business.

– Generally Accepted Accounting Principles (GAAP)

– Philippine Accounting Standards (PAS)

– Philippine Financial Reporting Standards (PFRS)

– Financial Reporting Standards Committee (FRSC)

 Are important assumptions or ideas which accountants observe in recording business

– Underlying Accounting Assumptions

1. Economic Entity Assumption

 Any personal transaction of its owners should not be recorded in the

2. Accrual Basis Assumption

 It assumed that revenue is recorded in the period it is earned,

3. Going Concern Assumption

 It assumes that the business entity will continue operating indefinitely.

 Liquidating Concern- refers to the valuation of accounting elements in the

 Because of this assumption, assets are recorded at their original acquisition

4. Monetary Unit Assumption

 It assumes that only transactions that can be expressed in terms of

 This assumption requires a business to complete the whole accounting

 It may follow a calendar year or fiscal year.

 A Calendar year is a twelve-month period that ends on December 31.

 A Fiscal year is a twelve-month period which may or may not end on

– Basic Accounting Principles

 Historical Cost Amounts- refers to the amounts shown in financial statements.

2. Full Disclosure Principle

 If certain information is important to an investor or lender using the

 This principle requires that expenses be matched with revenues. It

4. Revenue Recognition Principle

 Revenues are recognized as soon as goods have been sold (delivered to

 This principle allows an accountant to violate another accounting

6. Conservatism or Prudence Principle

 The basic accounting principle of conservatism leads accountant to

 This principle requires business transactions to have some form of

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