LEARNING COMPETENCY:

1. Explain the varied accounting concept

and principles
Accounting practices follow certain guidelines
that encompasses the conventions, rules and
procedures necessary to define accepted
accounting practice at a particular time, which
stands for generally accepted accounting
principles (GAAP). It is exceedingly useful
because it attempts to standardize and
regulate accounting definitions, assumptions,
and methods. Because of GAAP, we are able to
assume that there is consistency from year to
year in the, methods used to prepare a
company’s financial statements.
The current set of principles that accountants use rest
upon some
underlying assumptions. The basic assumptions and
principles are considered GAAP and apply to most
financial statements. In addition to these concepts,
there are other, more technical standards accountants
must follow when preparing financial statements. The
accounting standards used in the Philippines are the
Philippine Accounting Standards (PAS) and Philippine
Financial Reporting Standards (PFRS). They are
adopted by the Financial Reporting Standards
Committee (FRSC).
Accounting concepts, principles and assumptions serve
as the
foundation of accounting of accounting in order to
avoid misunderstanding and enhance and enhance the
understanding and enhance the understanding and
usefulness of the financial statements (Valix et. Al.
2013)
Accounting Concepts are important ideas which
accountants
assume in recording business transactions. Examples
of accounting concepts are separate entity, going
concern, time period, accrual, and monetary unit.
These serve as the bedrock of accounting and they are
Accounting concepts are similar
throughout the nation. It helps;
1. The accounting information to be complete in
all aspects
2. The accounting information to be available for
the stakeholders on a
timely basis.
3. The accounting information to be
understandable by anyone.
4. Also, in presenting the accounting information
relevant to the analyzer.
1. Entity Concept: Business and Owners are treated
as separate entities through this concept. The most
basic concept in accounting. An accounting entity is an
organization or a section of an organization that stands
apart from other organizations and individuals as a
separate economic unit. The transactions of different
entities
should not be accounted for together. Each entity
should be evaluated
separately.
• The business is treated as a unit or entity separate
from its owners.
• Amount invested by the proprietor is shown as liability.
2. Dual Aspect Concept: Every business
transaction has two effects. Investing One
Million in business is treated in two ways,
Capital Account and Asset Account, Business’
asset is 1 Million while the company also owes
the person who invested 1 million is recorded
separately.

Under this concept;

Every debit entry there is a credit entry. Briefly
expressed under:
Assets + Liabilities = Capital
3. Periodicity Concept: An entity’s life can be
meaningfully subdivided into equal time periods for
reporting purposes. It will be aimless to wait for the
actual last day of operations to perfectly measure the
entity’s profit. This concept allows the users to obtain
timely information to serve as a basis on making
decisions about future activities. For the purpose of
reporting to outsiders, one year is the usual accounting
period. It is necessary too know at frequent intervals
“how things are going”. Twelve month period is usually
adopted for this purpose. This time period is
called Accounting Period.
a.) Calendar year, which starts on January 1 to December 31;
and,
b.) Fiscal year, which starts at any month of the year other
than January and ends twelve months after.
The time period assumption states that the economic life of a
business can be divided into artificial time periods.
Example: The economic life of a business may be divided into
months, quarters, and years.
4. Going Concern
This is an assumption made that the business shall run
forever and the forced sale value of assets is not valued.
It will continue for indefinite period. Financial statements
are normally prepared on the assumption that the
reporting entity is a going concern and will continue in
operation for the foreseeable future. Hence, it is
assumed that the entity has neither the intention nor
the need to enter liquidation or to cease trading. This
assumption
underlies the depreciation of assets over their useful
lives.
5. Monetary Unit concept
Every aspect of a business is recorded as money using
this concept. Only those transactions are recorded
which can be expressed in monetary terms.
For Example:
An efficient dedicated manager is definitely an asset to
the business, but since the monetary measurement is
not possible so it is not shown in the books of account.
The Philippine peso is a reasonable unit of measure
and that its purchasing power is relatively stable. It
allows accountants to add and subtract peso amounts
as though each peso has the same purchasing power
as any other peso at any time. This is the basis for
6. Cost Concept: The cost is considered to be the
same as what is paid in the beginning and never its
realizable value at a later point in time.
• Fixed Assets are recorded at cost price and are
systematically reduced by the process called
depreciation.
• These assets will disappear from balance sheet at
the end of their
economic life when they have been fully depreciated
and sold as scrap.
7. Accrual Accounting
The fundamental idea of accrual accounting can be
stated as follows: “The effects of business
transactions should be recognized in the period in
which they occurred. Income should be recognized in
the period when it is carried regardless of when
payment is received. Expenses should be recognized
in the period when it is incurred regardless of when
expenses are
earned
EXAMPLE:
Suppose Juana, a proprietress established a merchandising
business that sells
readyto-eat foods to different fast foods and carinderia in the
country. The
income from Juana’s business primarily comes from selling foods
to customers,
it can be for cash or credit. If the business was able to sell goods
for cash, this
will be recorded in the accounting records or book of accounts of
her business.
On the other hand, if the goods were sold on credit, the
transaction should still
be recorded in the accounting records as accounts receivable.
This is the essence of accrual accounting. An accountant does
8. Revenue Recognition Principle
• Revenue is considered earned of the day
• Transfer goods to customer in exchange of valuable
consideration.
• This is of great importance in stopping business from
inflating their profit.
• The accountant usually use dates
Revenue Recognition Principle. The revenue recognition
principle dictates that revenue should be recognized in the
accounting period in which it is earned. When a sale is
involved, revenue is recognized at the point of sale.

The point of sale is the time the goods are transferred or

delivered to the customer even if payment was not yet
received. It is also known as Accrual Accounting.
Full Disclosure Principle. The full disclosure principle
requires that circumstances and events that make a
difference to financial statement users be disclosed.
Compliance with the full disclosure principle is accomplished
through
✓ the data in the financial statements; and
✓ the notes that accompany the statements.
A summary of significant accounting policies is usually the
first note to the financial statements.
Historical Cost Principle. The historical cost principle dictates
that assets be recorded at their cost. Cost is used because it is
both relevant and reliable.
✓ Cost is relevant because it represents
a) the price paid;
b) the assets sacrificed; and
c) the commitment made at the date of acquisition.
✓ Cost is reliable because it is
a) objectively measurable;
b) factual; and
c) verifiable.
CONSTRAINTS
1. Materiality relates to an item’s impact on a firm’s overall
financial condition and operations. An item is material if it
changes the opinion/decision of a reasonable person upon
considering the amount and the nature of transaction.

2. Conservatism dictates that when in doubt, choose the

method that will be the least likely to overstate assets and
income. It is also known as prudence.
ADDITIONAL CONCEPTS
1. Use of Estimates and Judgements. It allows accountants
and management to use approximations in the preparation of
financial statements.

2. Objectivity. Financial statements and records of a company

should be unbiased and based on solid evidence.

3. Substance over Form. Economic substance of transactions

and events must be recorded in the financial statements rather
than just their legal form in order to present a true and fair view
of the affairs of the entity.
Directions: Read the given transaction below. Analyze, which of the
amounts
cited above do you think will be included in the business’ financial
reports?
Why and what are reasons for including them?
Mr. Susano, a business owner of a Travel Agency invested 100 Million
for
additional twenty Electric Jeepneys worth P2,000,000.00 which the
owner only
paid half and avail the Auto Loan from Suzuki Motors worth P
1,000.000.00.
He acquired a 1 hectare lot worth 15 Million for his automobiles,
construct a
small office spaces for his staff and installed solar panels and paid
10 Million
for the construction company including the labor and solar panel.
1. A Filipino company like Jollibee having store branches even
in the United States should report financial statements in
pesos.
2. The personal assets of the owner of a company will not
appear on the company's balance sheet.
3. The company reports in its balance sheet the value of the
land at the cost when the company acquires it even if the land
could be sold today at a significantly higher amount.
4. The company is planning to continue its operations
indefinitely.
5. When the accountant has to choose between two
acceptable alternatives, the accountant should select the
alternative that will report less profit, less asset amount, or a
greater liability amount.
6. There are no financial statements that are prepared
by Michael Go for his business. He explained that he will
prepare the statements when he closes the business,
which he predicts to take place after 20 years.
7. Guimaras Island Traders’ normal operating cycle ends
every December 31 of the year, thus its financial
statements are prepared on this basis.

8. A bus company having a total asset of P300,000,000

purchased a tool kit amounting to P12,000. The
company bookkeeper recorded the purchase as an
outright expense and did not include it to assets for
depreciation.
9. One of the big company’s famous endorsers is caught in a
scandal and many people stop buying the company’s
products in protest of the said endorser. The company does
not report any loss at all on its financial statements because
of which Accounting Guideline. Why?

10. Mr. G is the owner of the EFG Power Corporation. He

bought a brand new car and used it in all his business-
related transactions of EFG Corporation. The company surely
benefited from the car used by Mr. G but this was not
included in the Company’s Assets. Which accounting
principle/guideline prevents the corporation from reporting
the car as an asset? Why?
Case/Situation Accounting Guideline Explanation
Applied or violated
Case 1: A large company
with an average total
assets of ₱20,000,000
purchases a ₱2,500
digital camera and uses
it immediately instead of
recording it as an asset
and depreciating it over
its useful life. This
practice may be
acceptable because of
which Accounting
Guideline?
Case 2. A company sold
a merchandise of
₱8,000 to a customer
in December. The
company's sales terms
require the customer
to pay the company in
30 days. The
company's income
statement reported
the sale in December.
This is proper under
which Accounting
Guideline?
Case 3. In the early 2000s,
General Motors was
experiencing great
financial difficulties and
was ready to declare
bankruptcy and close
operations all over the
world. The Federal
government stepped in
and gave the company a
bailout as well as a
guarantee. The
intervention of the Federal
government indicated that
General Motors will still
operate in the future.
What Operating Guideline
is associated with this
case?
Case 4. During the middle
of the night a retailer's
store is vandalized. The
signage is spray-painted all
over, the windows are
broken, and some
merchandise is stolen. The
retailer's financial
statements will only report
a loss on the damaged
property. Sales lost due to
the time waited for the
repair of the store will not
be reported because of
what Accounting
Guideline?
Case 5. Jane, a
retailer, wishes to
report her
merchandise
inventory on its
balance sheet at its
retail value. This will
violate which
Accounting
Guideline