CHAPTER 4

ACCOUNTING
CONCEPTS &
PRINCIPLES
FUNDAMENTALS OF ACCOUNTANCY, BUSINESS,
AND MANAGEMENT 1
LESSON OBJECTIVES:
•Explain the varied
accounting concepts and
principles
•Solve exercises on
accounting principles as
applied in various cases
ACCOUNTING CONCEPTS/PRINCIPLES

•assumptions or postulates
•Set of logical ideas and
procedures that guide the
accountant in recording and
communicating economic
information
ACCOUNTING CONCEPTS/PRINCIPLES
•Provide a general frame of
reference by which accounting
practices can be evaluated
•Serve as guide in the
development of new practices
and procedures
 BASIC ACCOUNTING CONCEPTS

•Separate entity concept

•Historical cost concept
•Going concern assumption
•Matching Principle
•Accrual Basis of Accounting
•Prudence
 BASIC ACCOUNTING CONCEPTS

•Stable monetary concept

•Materiality concept
•Full disclosure principle
•Consistency concept
 Separate Entity Concept
•Identity Concept
•“Business is viewed as a separate
person, distinct from its owners”.
•Only the transactions of the
business are recorded in the
books of accounts.
 Historical Cost Concept
•Cost Principle
•Assets are initially recorded at
their acquisition cost

Ex. On Feb 14, 2020, ABM Co. purchased a

delivery vehicle amounting to P275,000.
Going Concern Assumption
•“The business is assumed to
continue to exist for an indefinite
period of time”.
•Necessary for accounting
measurements to be meaningful
 Matching Principle
•Association of cause and effect
•Some costs are initially recorded
as assets and charged as expenses
only when the related revenue is
recognized
•For every income, there is an
expense
Accrual Basis of Accounting
•Under this principle, economic
events are recorded in the period
in which they occur rather than at
the point in time when they affect
cash.
Accrual Basis of Accounting
•Income is recorded when it is
earned rather when it is collected.
•Expense is recognized at the
period when it is incurred rather
when it is paid.
 Prudence (Conservatism)
•Accountant observes some
degree of caution when exercising
judgements needed in making
accounting estimates under
conditions of uncertainty.
 Time Period (Periodicity
Concept)
•Accounting period or Reporting
period
•“The indefinite life of the business
if divided into series of reporting
periods”.
 Time Period (Periodicity
Concept)
•Calendar year period – starts on
January 1, ends on Dec 31 of the
same year
•Fiscal year period – starts on a
date other than Jan 1 and ends 12
months after of the same year
 Stable Monetary Unit
•Stated in terms of a common unit
of measure (Philippine peso)
 Materiality Concept
•Guides the accountant in applying
accounting principles
•An item is considered material if
its omission or misstatement
could influence economic
dexisions.
•Matter of professional judgment
Cost-Benefit Principle (Cost
constraint)
•The cost of processing and
communicating information
should not exceed the benefits to
be derived from it.
 Full disclosure principle
•Related to the concepts of
materiality and cost-benefit
•“Sufficient detail to disclose
matters that make a difference to
users, yet sufficient condensation
to make the information
understandable at lesser cost”
 Consistency Concept
•Consistent application of
accounting policies from one
period to another.
 ACCOUNTING STANDARDS
•Philippine Financial Reporting
Standards (PFRS)
•Philippine Accounting Standards
•Interpretations
For financial statements to be
useful, they must be
prepared using reporting
standards that are generally
acceptable.
APPLICATION OF THE BASIC
ACCOUNTING CONCEPTS
During the year, you started a
business of selling personalized mugs
and tshirts. You opened a separate
bank account for the business and
deposited your initial investment of
Php250,000 to this account.
APPLICATION OF THE BASIC
ACCOUNTING CONCEPTS
The business acquired a printing
machine. The regular selling price is
Php100,000. 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 at the regular selling
price.
APPLICATION OF THE BASIC
ACCOUNTING CONCEPTS
The business acquired initial
inventory of mugs and tshirts for a
total cost of P50,000. You will record
the cost as an asset rather than an
expense.
APPLICATION OF THE BASIC
ACCOUNTING CONCEPTS
All the inventory was sold on credit
for P300,000. You will immediately
record the credit sales as accounts
receivable rather than waiting for
them to be collected.
APPLICATION OF THE BASIC
ACCOUNTING CONCEPTS
Also, you will now record the
Php50,000 cost of inventory as
expense.
APPLICATION OF THE BASIC
ACCOUNTING CONCEPTS
You collected Php290,000 out of the
Php300,000 total credit sales. You
will deposit the collections to the
bank account of the business rather
than to your personal account.
APPLICATION OF THE BASIC
ACCOUNTING CONCEPTS
The debtor for the remaining
P10,000 is in financial difficulty. This
has raised doubt on whether he can
pay his account. You will immediately
recognize the doubtful account as
expense.
APPLICATION OF THE BASIC
ACCOUNTING CONCEPTS
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 a business
expense.
APPLICATION OF THE BASIC
ACCOUNTING CONCEPTS
At the end of the year, you prepared
the financial statements of your
business to determine, among
others, whether the business has
earned profit.
APPLICATION OF THE BASIC
ACCOUNTING CONCEPTS
When preparing the 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.
 APPLICATION OF THE BASIC
ACCOUNTING CONCEPTS

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 report the
machine at its acquisition cost of P90,000
in the F/S. This is because you don’t
intend or expect to close your business in
the foreseeable time.
 APPLICATION OF THE BASIC
ACCOUNTING CONCEPTS
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.
 APPLICATION OF THE BASIC
ACCOUNTING CONCEPTS
Moreover, when you prepared the
F/S, you decided to include the cost of
the trash bin in a “Miscellaneous
Expense” account together with other
immaterial expenses. You don’t
expect users of the F/S to benefit from
reporting the immaterial cost
separately.
 APPLICATION OF THE BASIC
ACCOUNTING CONCEPTS
You will make a brief description of
the “Miscellaneous Expense”
account in the notes to F/S,
sufficient for users to understand
the nature of this account.
 APPLICATION OF THE BASIC
ACCOUNTING CONCEPTS
You then adopted an accounting
policy of expensing outright all
acquisition of equipment costing
P5,000 and below. You will apply
this policy consistently in the
future periods.