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UNIT 2 BASIC ACCOUNTING CONCEPTS AND THE FINANCIAL STATEMENTS

Part 1 TRUE OR FALSE

1. _________The term “accounting concepts” and “accounting principles” (and other similar
terms) are usually used interchangeably in practice . Collectively, these refer to a generally
accepted set of logical notions and procedures that serve as guide in recording and
communicating accounting information.

2. _________The separate entity concept contributes to the objective evaluation of the

3. _________In case of conflict, the requirements of the PFRS shall be subservient to those of
the framework

4. _________A reporting period that starts on May 1of the current year and ends on April 30 of
the following year is called a fiscal year period.

5. _________Financial statements are the means by which the information accumulated in and
processed by financial accounting is communicated to users on a periodic basis.

6. __________The use of financial statements prevent users from making errors in business
decisions that they make.

7. __________The accountant of an enterprise has the primary responsibility for the

8. __________The Framework is a Philippine Financial Reporting Standard.

9. __________Under the accrual basis, the effects of transactions and other events are
recognized when cash or its equivalent is received or paid and they are recorded in the
accounting records and reported in the financial statements of the periods to which these cash
inflows or outflows occur.

10. _________Understandability and comparability refer to content, while relevance and

11. _________Only large amounts are considered as material in nature.

13. __________An asset is a resource controlled by the enterprise as a result of past events and
from which future economic benefits are expected to flow from the enterprise.

14. ________Control, rather than ownership, is the main factor to consider in recognizing an
asset.

15. ________A liability is a present obligation of the enterprise arising from past events, the
settlement of which is expected to result in an outflow from the enterprise of resources
embodying economic benefits.

16. ________Equity is the residual interest in the liabilities of the enterprise after deducting all
the assets.

17. ________Income refers to increases in economic benefits during the accounting period in
the form of inflows or enhancements of assets or decreases of liabilities that result in increase
in equity, other than those relating to contributions from equity participants.

18. _________ Recognition is the process of incorporating in the financial statements an item
that meets the definition of an element and satisfies the criteria for recognition set out in the
Framework.

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19. __________Gains represent other items that meet the definition of income and always
arises in the course of ordinary activities of an enterprise.

20. __________Information about changes in financial position is provided in the financial

Part 2 Application of the Basic Accounting Concepts

Instruction: Fill in the blanks with the accounting concepts applied by the business:
During the year, you started a business of selling personalized mugs and T-shirts. You opened a
separate bank account for the business and deposited your initial investment of P250,000 to
this account. ( ______________________________)

The business acquired a printing machine. The regular selling price is P100,000. However, you
were able to acquire it at a discounted price of P90,000. You will record the machine at its
acquisition cost of P90,000 rather than the regular selling price.

( _______________________)

The business acquired initial inventory of mugs and t-shirts for a total cost of P50,000. You will
record the cost as an asset (i.e. inventory) rather than as an expense (_______________)

All the inventory was sold on credit for P300,000 (sold on credit means “pinautang in Filipino).
You will immediately record the credit sales as Accounts Receivable rather than waiting for
them to be collected (accounts receivable means listahan ng mga pinautang in Filipino).
(_______________________)

Also, you will now record the P50,000 cost of the Inventory as expense (___________)

You collected P290,000 out of the P300,000 total credit sales. You will deposit your collections
on the bank account of the business rather than your personal bank account.
(___________________________)

The debtor for the remaining P10,000 is in financial difficulty (debtor means “taong pinautang”
in Filipino). This has raised doubt on whether he can pay his account. You will immediately
recognize the doubtful account as expense
(________________________and____________________)
You withdrew cash of P80,000 from the business for your personal use. You will record this
transaction as a withdrawal of your investment from the business rather than as a business
expense. (_________________________)

At the end of the year, you prepared the financial statements of your business to determine,
among others, whether the business has earned profits. (__________________)

When preparing financial statements, you discovered that the business has $10. You will
translate this to Philippine peso using the current exchange rate. The amount that you will
report in the financial statements is the translated amount. (______________________)

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Also, you have found out that the regular selling price of a new printing machine increased from
P100,000 to P120,000. You will ignore this information. (________________________) and
will report the printing machine at its acquisition cost of P90,000 in the financial statements. It
is because you don’t intend or expect to close your business in the foreseeable time
(____________________)

During the year, the business bought a trash bin for P80. You expect to use this over several
years. However, because you deemed the cost as immaterial, you will record this as an expense
rather than an asset. (________________________)

Moreover, when you prepared the financial statements, you decided to include the cost of the
trash bin in a “Miscellaneous Expenses” account together with other immaterial expenses. You
don’t expect users of financial statements to benefit from reporting the immaterial cost
separately. (__________________________)
You will make a brief description of the “Miscellaneous Expenses” account in the notes to
financial statements, sufficient for users to understand the nature of this account.
(_____________________________)

You then adapted an accounting policy of expensing outright all acquisitions of equipment
costing P5,000 and below. You will apply this policy consistently in the future periods.
(__________________________)