Fundamentals of accountancy,

business and management 1

Week 3
Let’s have a recap on week 2 topic
 Branches of Accounting
Recap activity:

•?
Forms of Business
•?

Types of Business Activities

•?
Recap activity:

Types of Business Activities

Forms of Business
Branches of Accounting • Sole • Servicing
• Financial Proprietorship • Merchandising
• Management • Partnership • Manufacturing
• Government • Corporation
• Audit • Cooperative
• Cost
• Tax
• Education
• Research
Share your house rules!
Share t o us at least five house rule in your home and why it
is need t o follow.

House
Rule Purpose
Lesson Objectives
At the end of this lesson, you as a learner will
have to
 Enumerate the Principles of accounting found in
the generally accepted accounting principles
(GAAP) being used internationally;
 Differentiate each principle; and
 Apply the accounting principle in a daily life.
Lesson proper
+ Pa rt icipa t e a ct ively
+ List en ca refully
+ Avoid unnecessa ry noise
+ Be rea dy for our quiz.
Accounting Concepts, Principles and Assumptions
Account ing concept s, principles a nd a ssum pt ions
a re im port a nt beca use t hey guide a ccount a nt s in
t he proper a nd a ccura t e prepa ra t ion of fina ncia l
st a t em ent s. Hence, int erna l a nd ext erna l users of
fina ncia l st a t em ent s a re a ble t o com pa re t he
perform a nce of a com pa ny in different periods,
t he perform a nce of va rious com pa nies, a nd t he
perform a nce of a com pa ny in rela t ion t o t he
indust ry.
To visualized.
Accounting

Business

Organization Operations
•Sole •Servicing
•Corporation
Proprietorship •Merchandising
•Cooperative
•Partnership •Manufacturing

Accounting Principles
Accounting Concepts, Principles and Assumptions
GAAP (Generally Accept ed Account ing
Principles) - Being a set of a ccount ing
concept s, principles, rules a nd guidelines,
GAAP governs t he a pplica t ion of a ccount ing
procedures. It is very useful beca use it
a im s t o st a nda rdize a s well a s regula t e
a ccount ing definit ions, a ssum pt ions, a nd
m et hods
Accounting Concepts, Principles and Assumptions
PAS (Philippine Account ing St andards)
a nd PFRS (Philippine Fina ncia l Report ing
St a nda rds) a re ot her a ccount ing
st a nda rds a dopt ed in t he Philippines.
The IFRS (Int erna t iona l Fina ncia l Report ing
St a nda rds) is a n int erna t iona l a ccount ing
st a nda rd used a s guide in t he form ula t ion of
PFRS a nd ot her st a nda rds.
Economic Entity Assumption.
It assumes that the business entity is separate from its
owners. In that, the transactions of the business are separate
from the transactions of its owners. Also called as Business
Entity Principle / Separate Entity.
Example: Ismael is one of the owners of a bike parts store in
their municipality. In June, his son asks him to buy for him a new
smart phone. This transaction was personal, so it was not
recorded in the accounting books of the bike parts store
although Ismael is one of its owners.
Going Concern Assumption.
It assumes the business is entity is going to continue existing
and operating in the indefinite future. It supposes that the
business will be able to perform its objectives and
commitments and will not liquidate.
Example: Good Shoes is a small shop that Ana owns. In
January, she paid the monthly rent of her shop. She also gave
the building owner rent payments for February to December in
advance. Because of Going Concern Assumption, the shop’s
accountant didn’t record the advance payment as expense but
as an asset from where it can derive future benefits. After all, the
shoe shop will still be operating in the future.
Monetary Unit Assumption.
It assumes that accounting only records business
transactions and events that can be expressed in terms of
money. Here in the Philippines, businesses measure and
report activities in Philippine peso, amounts are stated into a
single monetary unit
Example :
 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
Accrual Basis Assumption.
It requires that revenue is recorded in the period it is
earned, regardless of the time the cash is received or collected.
It also requires that expense is recognized and recorded at the
time it is incurred, regardless of the time that cash is paid.
Adheres to the revenue recognition, matching, & cost
principles.
Example: ABM Trading is an enterprise that supplies
masks, face shields and sanitizing agents to small and medium
businesses. In January 2023, its customer CC Pharmacy
purchased 50 boxes of mask on credit. ABM Trading recorded the
sales of 50 boxes of mask even though it wasn’t paid in cash yet.
Time-Period Assumption.
It requires a business to complete its whole accounting process over a
specific period of time. Artificially, the business can divide its
life into shorter operation time periods like monthly, quarterly, or
annually. For annual acct’g period, it may follow Calendar or Fiscal
year. A calendar year is 12-month period that ends on December 31. A
fiscal year is a 12-month period which may or may not end on
December 31. It is the acct’g period a company follows for tax purpose.
Example: CHABBY is an online store that sells infant and toddler
garments and essentials. Every six months, the company prepares
financial statements to evaluate its performance. Even though
CHABBY will continue to operate in the indefinite future, it can divide its
life into shorter periods
Objectivity Principle.
It entails that bookkeeping and financial recording be
performed without bias and prejudice. This is achieved
by the business through having impartial supporting
evidence or documentation to business transactions
Example :
 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.
It states that all assets acquired should be valued and
recorded by the company based on the actual cash
equivalent or original cost of acquisition, not the
prevailing market value or future value.
Example :
+ When Red Ribbon 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.
Matching Principle.
It requires that revenue be matched with
expense, where if a company records revenue during
an accounting period, corresponding expense should
also be recorded.
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.
Full Disclosure Principle.
It states that the financial statements of the company should
contain sufficient information to allow the stakeholders to
draw appropriate judgment and make informed decisions
about the enterprise. All relevant and material information
should be reported.
Example: It is important to investor or lender to know
information in financial statement. The company usually lists
its significant acct’g policies as the first note to its financial
statements.
Conservatism Principle.
Also known as prudence. It states that if there are two
options to choose from in the valuation of a business
transaction, the lower amount should be recorded and not the
higher amount. Apparently, the option of lower amount gives
less effect on net income, or less effect on asset amount.
Example: In case of doubt, expenses should be recorded at a
higher amount. Revenue should be recorded at a lower
amount. Also, income should not be overstated while
liabilities and expenses should not be understated.
Materiality Principle.
This states that business transactions that may affect the decision of a
user of financial information are considered important or material, and
thus must be reported properly. Professional judgment is needed
to decide whether an amount is significant or immaterial.
Example: Ten thousand pesos may not be material to Ayala
Corporation, but that same figure is quite material to a small business.
Immaterial item is the purchase of a ₱300 paper puncher by a
company. Estimated useful life is 5yrs. The materiality guideline allows
this co. to violate the matching principle and to expense the entire cost
of ₱300 in the year it is purchased. No one could consider it misleading
if ₱300 is expensed in the first year instead of ₱60 in each of the 5
years that it is used.
Relevance.
a relevant information helps users of the
financial statement provide a decision
correctly, be it in present situations or future
circumstances. These decisions are based
on past performance of the organization and
correct past mistakes.
Reliability.
Information is reliable if a user of the
information can depend on it to be accurate
and faithfully represented. Material
omissions in financial statements can
reduce the reliability of information
contained in the reports.
Faithful Representation
The financial statements should contain
faithfully represented transactions and
events during a period. Faith representation
means that these transactions and events
should be accounted for in their true
economic substance rather than its legal
form.
Think and Share
In t his lesson, you have learned t he different
rules t ha t govern t he a ccount ing pra ct ice. It is
sa id t ha t t he new lessons you lea rn cha nge your life
for t he bet t er. Now com e up wit h a self-
im provem ent pla n t ha t a pplies a ny of t he
a ccount ing principles a nd a ssum pt ions you’ve m et in
t his m odule. On your a nswer sheet , copy t he t a ble
given a nd fill it out . An exa m ple is provided for your
help.
P.T.1: INDIVIDUAL IMPROVEMENT PLAN
Will do Accounting
Assumption/Concept/Principle
Applied
Example: From now on I will make it a habit to Time Period Assumption
make a listing on my everyday to-dos to organize
my activities and check how I do daily.
1.
2.
3.
4.
5.
6.
Performance task 2. What I Need To Do.
1. Choose 4 principle/ a ssum pt ion/ concept
discussed a nd Think of one rea l- life exa m ples of
it .
2. Int erview a business owner a round your
com m unit y a nd a sk t hem a bout t heir a ccount ing
pra ct ices. You should ident ify if t here ha s been
a ny viola t ion of t he a ccount ing principles.
Student Reflection for the Week
I underst and t hat …

I Rea lized t ha t ..
Thank you for participating today!
Any quest ions?
Cla rifica t ions?

Prepa re for a QUiZ next m eet ing.