Senior High School

Department of Education
Republic of the Philippines
SCHOOL DIVISION OFFICE
PASAY CITY

Fundamentals of Accountancy,
Business and Management I

ACCOUNTING CONCEPTS AND PRINCIPLES

Third Quarter – Module 2

Writer: Sandra H. Gali

Cover Illustrator: Sandra H. Gali
 FUNDAMENTALS OF ACCOUNTANCY, BUSINESS AND MANAGEMENT I
This is an 80-hour course offered in the ABM strand in the Senior High School. This course deals
with an introductory course in accounting, business, and management data analysis that will develop
students’ appreciation of accounting as a language of business and an understanding of basic accounting
concepts and principles that will help them analyze business transactions.

CONTENT

This is a self-instructional module for Senior High School (SHS) learners in the Department of
Education - Division of City Schools Pasay – Pasay City West High School under the Alternative Delivery
Mode or ADM. There are exercises to be accomplished in this particular module which are expected to
be submitted to the faculty or teacher during the face-to-face encounter in field or in classroom sessions
or other means of submission.

The exercises provided give emphasis in bridging the gap between theory and practice. SHS
learners are expected to analyze the concepts presented and apply these eventually in their work, for
those who are already have jobs. Before answering the exercises, the learners should have fully
understood the concepts presented. No one could stop the learners to read the modules as many times
as they desire.

Email:
[email protected]

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 FUNDAMENTALS OF ACCOUNTANCY, BUSINESS AND MANAGEMENT I
HOW TO USE THIS MODULE

Before starting the module, I want you to set aside other tasks that will disturb you while enjoying
the lessons. Read the simple instructions below to successfully enjoy the objectives of this kit.
Have fun!

Follow carefully all the contents and instructions indicated on every page of this module.

Write in your notebook the concepts about the lessons. Writing enhances learning which is important to
develop and keep in mind.

Perform all the provided activities in the module. Let your facilitator/guardian assess your answers using
the answer key card. Analyze conceptually the posttest and apply what you have learned.

Enjoy studying! What is this module all about?

PARTS OF THE MODULE

Expectations These are what you will be able to know after completing the lessons in the
module
Pre-test This will measure your prior knowledge and the concepts to be mastered
throughout the lesson.
Looking Back to This section will measure what learning and skills did you understand from the
your Lesson previous lesson.
Introduction This section will give you an overview of the lesson.
Brief Discussion This section provides a brief discussion of the lesson. This aims to help you
discover and understand new concepts and skills.
Activities This is a set of activities you will perform to process what you have learned from
the lesson
Remember This section summarizes the concepts and applications of the lessons.
Check your It will verify how you learned from the lesson.
Understanding
Assessment This will measure how much you have learned from the entire module.
References This is a list of all sources used in developing this module.
Answer keys This contains answers to all activities in this module.

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NAME: ___________________________________________ Score: ___________________

GRADE & SECTION __________________________ Teacher: ___________________

CONTENT: ACCOUNTING CONCEPTS AND PRINCIPLES

This module will help you to…

 Explain the varied accounting concepts and principles;ABM_FABM11-IIIb-c-15

 Solve exercises on accounting principles as applied in various cases; and ABM_FABM11-IIIb-c-16

Objectives: at the end of this lesson, the learners will be able to…
1. Identify the varied accounting concepts and principles as described;
2. Explain the varied accounting concepts and principles;
3. Solve exercises on accounting concepts and principles as applied in various cases; and
4. Exhibit sincerity in carrying out lesson tasks.

Let us start your journey in learning more on Accounting Concepts and Principles. I am
sure you are ready and excited to answer the Pretest. Smile and cheer up!

Directions: Read carefully and write the letter on the box the correct answer to the given
question/sentence.

1. Which of the following best describes the term “going concern”?

A. the ability of the entity to continue in operation for the foreseeable future.
B. the results of operations consistently show losses.
C. the potential to contribute to the flow of cash to the entity.
D. the inability to pay obligations of the company on time.

2. What is the quality of information that gives assurance that it is reasonably free of error and bias?
A. relevance C. understandability
B. reliability D. comparability

3. Changing the method of inventory valuation should be reported in the financial statements under what
enhancing quality of accounting information?
A. understandability C. reliability
B. relevance D. comparability

4. An item would be considered material when ____________________.

A. the expected benefits exceed the additional cost.
B. the impact on earnings is greater than 10%.
C. the standard definition of materiality is met.
D. the omission or misstatement of the amount would make a difference to the users.

5. The term “recognized” is synonymous with the term _____________.

A. realized C. recorded
B. allocated D. matched

6. Which of the following is an example of cause and effect association principle?

A. depreciation of fixed assets C. sales commission

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B. salaries of employees D. allocation of prepaid insurance

7. What principle supports, that assets acquired are initially recorded at original acquisition cost?
A. cost principle C. business entity principle
B. monetary unit principle D. disclosure principle

8. Which accounting principle requires financial statement information to be supported by independent and
unbiased evidence?
A. materiality principle C. objectivity principle
B. business entity principle D. going concern principle

9. What accounting principle states that revenue is recognized when earned regardless of when receive?
A. accounting entity principle C. matching principle
B. going concern principle D. accrual accounting principle

10. When information about two different entities engaged in the same industry has been prepared and
presented in similar manner, the information exhibits the enhancing characteristics of
____________________.
A. relevance C. understandability
B. reliability D. comparability

Great! You finished answering the questions. You may request your facilitator to check your work.
Congratulations and keep on learning!

LOOKING BACK TO YOUR LESSON:

Direction: Give the meaning of the following acronyms and its function.
1. PRC - ___________________________________________________________________________
2. PICPA___________________________________________________________________________
3. SEC -___________________________________________________________________________
4. PFRS -__________________________________________________________________________
5. PAS - ___________________________________________________________________________

RULE ME PLEASE!
Direction: Give your insights on the following questions. Write your answer on the blank.
1. At home, what are the rules or guidelines set by your parents? Do they allow you to go to computer
shop and stay there overnight and just go home the following morning?
Answer: _________________________________________________________________________.
2. At the school, give at least one rule set by the management inside the school premise.
Answer: ________________________________________________________________________.
3. Inside the classroom, give at least one rule set by your teacher in your class.
Answer: ________________________________________________________________________.
4. In your community, give at least one rule set by your barangay.
Answer: _______________________________________________________________________.

INTRODUCTION:
Not a single person in the world lived without following some rules. We have been subjected to rules all
our lives. In mathematics, there are multiple theorems and postulates to guide us in problem-solving. In
economics, we have ceteris paribus, which means all else is equal to isolate the effect of a single variable on an
economic outcome. In Law, there is “give him the benefit of the doubt unless proven guilty” to protect individuals
from being unfairly accused or convicted of a crime. At home, we are setting curfews to manage our children and

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keep them away from risky situations. These rules, concepts, principles, and assumptions are put in place to better
understand the concept and its limitations. Same with accounting, its process follows rules and principles, the
generally accepted accounting principles (GAAP), to serve as a guide in the study of accounting.

DISCUSSION:
Generally Accepted Accounting Principles (GAAP) are commonly followed and accepted sets of rules,
procedures, and guidelines adopted by Securities and Exchange Commission for reporting financial statements
formalized initially through the creation of the Accounting Standard Council which is now the Financial Reporting
Standard Council. The Financial Accounting Standard Board (FASB) uses GAAP as the foundation for its
comprehensive set of approved accounting methods and practices.
The main function of GAAP is to ensure that financial reporting is transparent and consistent from one generation
to another.

Features or characteristics of GAAP

 Relevance - Provide useful and meaningful information to the users as well as to the readers. The
information affects the decision of its users.
 Reliability - Must be verifiable, objective in nature, not influenced by a person, not be personally biased,
and should be error-free. It is trusted by users.
 Understandability - Presenting information clearly and concisely and accompanied by notes that give
clarity to a particular figure.
 Comparability - Ability to bring together for the purpose of noting the likeness and differences between
two or more periods or across entities.
The overall objective of financial reporting: to provide information that is useful for decision-making.

GENERALLY ACCEPTED ACCOUNTING PRINCIPLES:

ACCOUNTING/BUSINESS ENTITY PRINCIPLE

 The accounting entity is the business organization:
 Proprietorship
 Partnership
 Corporation
 Owner and business are two different entities having different liabilities. The transactions of the business
shall not be merged with the transaction of the owners.
 Purpose: to have a fair presentation of financial statements.
Ex: Payment of electric consumption at home is not an expense of the company but the owner, and should
not be reported as an expense of the company, in order to have a fair presentation of financial statements.
 Each business is an independent accounting entity.
Ex: Mr Henry owns a department store, a drug store, and a bank. Separate financial statements shall be
prepared for each business, in order to determine which business is profitable.
 Parent and subsidiary relationship – a consolidated statement usually made for practical and economic
purpose, the parent and the subsidiary are a “single economic entity”. The consolidation, however, does
not eliminate the legal boundary segregating the affiliated entities. Accounting will continue to be done
separately for each entity.
Ex: Mr Henry owns department stores, which have 12 branches. Each department store shall prepare
financial statements separately, and the parent company shall consolidate all those financial statements
for practical and single economic purposes.

GOING CONCERN ASSUMPTION PRINCIPLE

 Business may continue forever & will carry out its goal & plan in foreseeable future with no intention of
liquidation.
 It allows deferring the recognition of expenses in the future. It is the very foundation of cost principle.
Ex: A company rents a building for ₱10,000 per month. On Jan. 1, 2020, the company paid the rent for two
years in the amount of ₱240,000. Instead of recognizing the full amount as expense, the accountant can

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record part of it as an asset (prepaid expense). ₱120,000 is expense, another ₱120,000 is an asset for the
year 2020.
 Evidence that a company is NOT going concern:
 The result of operations consistently shows losses
 Inability to pay obligations of the company on time
 Loan defaults
 Suppliers do not sell on credit to the company
 Legal proceedings against the company

COST PRINCIPLE
 Assets should be recorded initially at the original acquisition cost. The original acquisition cost is called
the historical cost.
 Historical cost – purchase price as the value of an asset.
 This initial cost may be carried without change, may be changed by depreciation, amortization or
writeoff, or may be shifted to other categories as in the case of raw materials being converted into
finished goods.
 If the business has the intention to liquidate, accounting elements in Financial Statement is valued at
their fair market value which should be disclosed in the notes to Financial Statement.
Ex. A machine was purchased at a cost of ₱50,000. After a year, the market value of the same machine is
₱65,000. The machine must be recorded at cost which is ₱50,000 no matter how prices change over time.
But if the machine is to be disposed/sold, use the revaluation method of costing.

ACCRUAL ACCOUNTING PRINCIPLE

 revenue should be recognized when earned regardless of when received and expenses should be
recognized when incurred regardless of when paid.
 provides a better basis for assessing past and future performance than information solely about cash
receipts and payments during a period.
Ex: On August 20, the company sold merchandise on credit payable in 30 days. Revenue is recognized in
August, when the sale was occurred and not in September, when payment will receive.
 TERMS:
a. Accrued income – income is already earned but not yet collected.
b. Accrued expense – expense is already incurred but not yet paid.
c. Deferred income – income already received but not yet earned.
d. Prepaid expense – expense already paid but not yet incurred.

MATCHING PRINCIPLE
 Revenues of a business always come with expenses. No business can generate revenues without
incurring expenses.
 Expenses are recognized in the same period as the related revenue.
 The three applications of matching principle:
a. Cause and effect association – the expense is recognized when the revenue is already recognized.
It involves the simultaneous or combined recognition of revenue and expenses that result directly
and jointly from the same transaction or event. This is actually the “strict matching concept”.
Ex: In connection to the sale made in August, a salesman was entitled to a commission and a salary
was incurred to the management which are not yet paid at the end of the month. The commission
expense and salary expense should be recognized in August, though it is not yet paid since it is related
to the revenues.
Other examples: cost of goods sold, doubtful accounts, warranty expenses.
b. Systematic and rational allocation – some costs are expensed by simply allocating them over the
periods benefited. When economic benefits are expected to arise over several accounting periods
and the association with income can only be broadly or indirectly determined, expenses are
recognized on the basis of systematic and allocation procedures
Ex. Depreciation of fixed assets, amortization of intangibles, allocation of prepayments

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c. Immediate recognition – the cost incurred is expensed outright because of uncertainty of future
economic benefits or difficulty of reliably associating certain cost with future revenue.
Ex. Officers’ salaries, advertising expense, administrative and selling expenses, worthless intangibles,
amount to settle lawsuit, loss from disposal of building, loss from sale of investment, and casualty
loss.

MONETARY UNIT PRINCIPLE

 This is a fundamental accounting principle that assumes transactions and events are recorded in a common
monetary unit, typically the currency of the country where the financial statements are prepared.
Two aspects:
 Quantifiability – assets, liabilities, equity, income and expenses should be stated in terms of a single
monetary unit (where the country a business is operating)
Ex: An equipment was imported from US for $50,000 when the exchange rate was ₱50. The equipment
should be recorded at an equivalent amount of ₱2,500,000.
 Stability – the purchasing power of peso is constant. Its instability is insignificant and therefore may be
ignored.
Ex: An equipment imported from US 5 years ago for $50,000 at an exchange rate of ₱50 at the time of
purchase, but now the same equipment is selling at the same price but the exchange rate is ₱60, there is a
significant gap between historical and current replacement cost, the entity may choose revaluation model.

TIME PERIOD PRINCIPLE

 The indefinite life of a business is subdivided into accounting periods which are usually of equal length
for the purpose of preparing financial reports on financial position, performance and cash flows.
 Purpose: to enable them to make decisions at any point in the life of a business.
 A time period is called ACCOUNTING PERIOD, classified as follows:
 Calendar year – 12 months period starts from Jan 1 to Dec 31
 Fiscal year – 12 months period that starts from any month other than January.
 Interim Period – a business period within an accounting period. Ex. Weekly, monthly, quarterly,
semi-annually.

MATERIALITY PRINCIPLE
 Doctrine of convenience.
 The items are significant enough to affect the evaluation, decision and fairness of the financial statements.
 An item is material if its omission or misstatement could influence the economic decision that the users
make on the basis of the financial information about an entity.
 Depends on the relative size rather than absolute size – what is material for one entity may be immaterial
for another.
o Ex 1: small expenditures for tools are often expensed immediately rather than depreciated over
their useful lives to save on clerical costs of recording depreciation.
o Ex 2: the common practice of large entities of rounding amounts to the nearest pesos in their
financial statements.
 Factors:
o Size of the item – relation to the total of the group to which the item belongs (small expenditures
of tools over the total assets)
o Nature of the item – nature that affects economic decision (discovery of ₱20,000 bribe is a
material event even for a very large entity)

SUBSTANCE OVER FORM PRINCIPLE

 Information presented in the financial statements of a company should truthfully and faithfully represent
the financial condition and performance of the company.
 The economic substance of transactions and events are usually emphasized when economic substance
differs from legal form.
 When the substance differs from the legal form, follow the substance of the transaction.

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Ex: contract of lease with the provision of “transfer of ownership”. The real intent is an installment purchase
of the property. The periodic rental under a contract of lease is recognized as an expense. But the intention
of purchase makes the periodic payment of rent as installment payment representing interest and principal.

USE OF JUDGMENT AND ESTIMATES

 Accounting estimates are approximations made by accountants or management in the preparation of
financial statements and it does not undermine their reliability.
 Judgment used in making accounting estimates should be backed up by a reasonable basis. It is more
desirable to use less judgment in the accounting process because the use of judgment leads to more
subjective financial statements.
Ex 1: warranty expense – related to the revenues generated from the sale of goods but the company is not
entirely sure when warranties will be performed.
Ex 2: the life of property, plant, and equipment

OBJECTIVITY PRINCIPLE
 accounting measurement must be definite and verifiable.
 financial statements must be presented with supporting evidence that identifies the actual cost.
Ex. The reflected amount of sales in the income statement is ₱2,000,000, you can verify it by checking the
sales invoices issued by the company.

CONSERVATISM PRINCIPLE
 When alternatives exist, the alternative which has the least effect on equity should be chosen.
 In case of doubt, record any loss and do not record any gain.
 Also called Prudence - desire to exercise care and caution when dealing with the uncertainties in the
measurement process.
 In case of doubt, assets and income should not be overstated while liabilities and expenses should not be
understated.
Ex. Inventories are measured at lower of cost and net realizable value. The cost is ₱50,000 and the net
realizable value (NRV) is ₱42,000. Initially, the inventories are recorded at cost, but at the end of the
period, it is recorded at net realizable value, because the NRV is lower than cost. The difference is
recognized as provision for contingent loss.
NRV – cash amount that a company expects to receive when selling the inventory.

DISCLOSURE PRINCIPLE
 all relevant and material information should be reported in order that the Financial Statement would not
be misleading.
 Disclosure of any financial facts significant enough to influence the judgment of informed users.
 Notes to Financial Statement – provides a narrative description or disaggregation of the items presented
in the Financial Statement and information about items that do not qualify for recognition.
Ex: Under Property, Plant & Equipment, the building was reported in the amount of ₱25,000,000. It
consists of 2 buildings with different estimated lives. The life and quantity of the building were not shown
in the face of the Financial Statement but should be disclosed in the notes to Financial Statement.

GENERALIZATION
In this lesson, we have learned the features of generally accepted accounting principles. The different
accounting concepts and principles have been discussed as guidelines in preparing financial statements.

REMEMBER:
 Generally Accepted Accounting Principles – are standards that encompass the details, complexities, and
legalities of business and corporate accounting.

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ASSESSMENT:

Before we move on to the next journey, answer the following: (through google form)

1. Which accounting principle requires financial statement information to be supported by independent and
unbiased evidence?
A. business entity principle C. materiality principle
B. going concern principle D. objectivity principle
2. The company recorded an expense on the electricity and water consumptions at the time the bills arrived
though payment was not yet made. What principle supports the action of the company?
A. substance over form principle C. accounting entity principle
B. accrual accounting principle D. time period principle
3. Which of the following is an application of the systematic and rational allocation principle?
A. sales commission C. salaries of employees
B. advertising expense D. depreciation of fixed assets
4. Which of the following is an application of cause and effect association principle?
A. officers' salaries C. depreciation of fixed assets
B. allocation of insurance cost D. cost of goods sold
5. What accounting principle is being violated when the owner decided to ignore depreciation incurred this year
because the enterprise income is lot this year?
A. disclosure principle C. materiality principle
B. accrual accounting principle D. cost principle
6. The relatively stable economic, political and social environment supports ___________________.
A. business entity C. materiality
B. conservatism D. going concern
7. What principle is being violated when the owner believes it is foolish to report financial information on a yearly
basis. Instead, the owner believes that financial information should be disclosed only when significant new
information is available related to the company’s operations?
A. time period principle C. disclosure principle
B. materiality principle D. going concern principle
8. Which of the following is an application of immediate recognition?
A. depreciation C. doubtful accounts
B. amortization D. utilities expense
9. What principle is most applicable when the rent paid in advance is recorded as prepaid rent expense?
A. going concern C. monetary unit
B. materiality D. objectivity
10. What is the quality of information that gives assurance that it is reasonable free of error and bias?
A. relevance C. understandability
B. reliability D. comparability

Congratulations! Keep on learning!

References:

Cabrera, Ma. Elenita, Fundamentals of Accountancy, Business and Management 1 for SHS ABM Curriculum
Florendo, Joselito G., Fundamentals of Accountancy, Business and Management I
Roxas, Gregorio, Basic Accounting, Concepts, Principles, Procedures and Applications 3rd Edition 2010
Sangster, Alan, Gregg Stoner, and Patricia McCarthy 2007, The Market for Luca Pacioli’s Summa Arithmetica, Cardiff
Valix, Conrado, Peralta, Joselito, Financial Accounting vol 1 First part 2017 Edition