Accounting concepts

and principles
Learning Objectives:

➢ Give examples of accounting concepts and principles

➢ Apply the concepts in solving accounting problems
 Accounting concepts and principles - (assumptions or
postulates) are a set of logical ideas and procedures that guide the
accountant in recording and communicating economic information.
Basic Accounting Concepts:
a) Standards (PFRS)
b) Conceptual Framework for Financial Reporting
c) general acceptance in the profession

Accounting is constantly changing and new concepts are

continuously emerging.

Concepts and Principles

Questions and Answers

What is the entity concept?

A. A boundary is drawn around each organization. This means personal assets and
expenses are not part of the company
B. You have to report accounting info at regular intervals
C. You only use GAAP for things that really make a difference or are significant to the
company
D. Assume the business will continue to operate for the foreseeable future

Concepts and principles

Separate entity concept
The entity concept in accounting refers to the idea that a business is treated as a separate entity
from its owners or shareholders. This means that personal assets and expenses of the owners are
not considered as part of the company's financial records. The entity concept ensures that the
financial statements of the business provide an accurate representation of its financial position
and performance by excluding any personal transactions or assets of the owners.

Concepts and Principles

Questions and Answers

What is the matching principle?

A. You stick with the same accounting principles and approach from one period to the
next
B.Record revenue when a service is provided to the customer, whether or not you collect
the money due at that moment
C. Accountants identify and measure all expenses incurred during the period and match
the expenses against revenues earned
D. You must report enough information for insiders to make an informed decision about
the company

Concepts and principles

Matching principle
The matching principle in accounting refers to the practice of identifying and measuring all
expenses incurred during a specific period and matching them against the revenues earned in that
same period. This principle ensures that expenses are properly allocated and recognized in the
same period as the corresponding revenue, providing a more accurate representation of the
company's financial performance. By matching expenses with revenues, the matching principle
helps to provide a clearer picture of the profitability and financial health of the company.

Concepts and Principles

Questions and Answers

Which concept states that “ You have to report accounting

information at regular intervals?
A. Separate entity principle
B. Conservatism
C. Reliability
D. Time-period

Concepts and principles

Time period
The concept of Time-Period states that accounting information should be reported at regular
intervals. This means that financial statements should be prepared and presented at specific time
intervals, such as monthly, quarterly, or annually. This allows for the timely and accurate reporting
of financial information, enabling stakeholders to make informed decisions based on the current
financial position and performance of the entity.

Concepts and Principles

Questions and Answers

Reporting numbers without having to reflect the calculation of

inflation is which of the following concepts?
A. Stable-monetary unit
B. Time-period
C. Materiality
D. Separate entity

Concepts and principles

Stable monetary unit
The concept of reporting numbers without considering inflation is known as the stable monetary
unit concept. This concept assumes that the currency used to measure financial transactions
remains stable over time and does not change in value due to inflation or deflation. It allows for
easier comparison of financial information across different time periods and ensures that the
reported numbers are not distorted by changes in the purchasing power of the currency.

Concepts and Principles

Questions and Answers

Which principle states that one must "report enough information

for outsiders to make informed decisions about the company?
A. Consistency
B. Disclosure
C. Matching
D. Revenue

Concepts and principles

Disclosure
Disclosure is the principle that states that one must "report enough information for outsiders to
make informed decisions about the company." This means that companies should provide
transparent and accurate information about their financial performance, operations, and any
other relevant information that may impact stakeholders' decisions. By practicing disclosure,
companies can promote trust and confidence among investors, creditors, and other external
parties who rely on this information to assess the company's financial health and make informed
decisions.

Concepts and Principles

Questions and Answers
____________ accounting requires you to take note of both
cash collected and as well as accounts receivable.
Accrual basis accounting requires you to take note of both cash collected and accounts
receivable. This means that you need to record revenue when it is earned, regardless of
when the cash is actually received. This allows for a more accurate representation of a
company's financial position and performance, as it takes into account revenue that has
been earned but not yet received in cash. By tracking both cash and accounts receivable,
accrual accounting provides a more comprehensive view of a company's financial
transactions.

Concepts and principles

Which principle/guideline requires a company's balance sheet to report its land at the amount the
company paid to acquire the land, even if the land could be sold today at a significantly higher
amount?

Historical Cost Economic entity Monetary unit

Historical cost concept (example)

Si Nena ay bata pa Co., purchased a building amounting to P20,000 in 2000. However, in the
current market, the value of the building is P20,000,000. What amount (cost) should the building
be reflected in the balance sheet? (Note: cost is different from carrying value)

Concepts and principles

Which principle/guideline justifies a company violating an accounting principle because the
amounts are immaterial?

Materiality
When an amount is so small/immaterial an accountant may decide to ignore an accounting
principle. For example, a large company might purchase a $300 digital camera to be used for
the next five years. The matching principle would call for an expense (depreciation) of $60 per
year for five years. Most accountants would violate the matching principle and expense the
entire $300 in the year it is acquired. The rationale is that the decision makers would not be
misled by the small differences of $240 in the year purchased and $60 per year in each of the
following four years.

Concepts and principles

Basic and most common concepts and principles
1 Separate entity concept

2 Historical cost concept (Cost principle*)

3 Going concern assumption

4 Matching

5 Accrual basis

6 Prudence (conservatism)
Concepts and Principles
Basic and most common concepts and principles
7 Time period

8 Stable monetary unit

9 Materiality concept

10 Cost-benefit
1 Full disclosure principle
1
12 Consistency concept
Concepts and Principles
 Philippine Financial
Reporting Standards
(PFRSs)

The PFRSs are Standards and Interpretations adopted by the

FSRSC. They consist of the following:
1. Philippine Financial Reporting Standards (PFRSs);
2. Philippine Accounting Standards (PASs); and
3. Interpretations

Concepts and principles

 Relevant regulatory
bodies

1. Securities and Exchange Commission (SEC) - www.sec.gov.ph

2. Bureau of Internal Revenue (BIR)
- The Bureau of Internal Revenue is mandated by law to assess and collect all national
internal revenue taxes, fees and charges, and to enforce all forfeitures, penalties and
fines connected therewith, including the execution of judgements in all cases decided in
its favor by the Court of Tax Appeals and the ordinary courts (Sec. 2 of the National
Internal Revenue Code of 1997).

Concepts and principles

 Relevant regulatory
bodies

3. Bangko Sentral ng Pilipinas (BSP) - The BSP's main responsibility is to

formulate and implement policy in the areas of money, banking and credit with the primary
objective of preserving price stability. Price stability refers to a condition of low and stable
inflation.
4. Cooperative Development Authority (CDA) - mandated by law to promote
the viability and growth of cooperatives as instruments of equity, social justice and sustainable
economic development.

Concepts and principles

 Qualitative
I. Fundamental Qualitative Characteristics Characteristics
i. Relevance (Predictive Value, Confirmatory Value, Materiality)
ii. Faithful Representation (Completeness, Neutrality,
Free from error)

II. Enhancing Qualitative Characteristics

i. Comparability
ii. Verifiability
iii. Timeliness
iv. Understandability
Concepts and principles
 Fundamental vs. Enhancing
• The fundamental qualitative characteristics are the
characteristics that make information useful to users.
• The enhancing qualitative characteristics are the
characteristics that enhance the usefulness of information

Concepts and principles

 Relevance
• Information is relevant if it can affect the decisions of users.
• Relevant information has the following:
a. Predictive value – the information can be used in making predictions
b. Confirmatory value – the information can be used in confirming past
predictions

Materiality – is an ‘entity-specific’ aspect of relevance.

Concepts and principles

 Faithful representation
• Faithful representation means the information provides a true, correct and complete
depiction of what it purports to represent.
• Faithfully represented information has the following:
a. Completeness – all information necessary for users to understand the phenomenon being
depicted is provided.
b. Neutrality – information is selected or presented without bias.
c. Free from error – there are no errors in the description and in the process by which the
information is selected and applied.

Concepts and principles

 Enhancing Qualitative Characteristics
1. Comparability – the information helps users in identifying similarities and
differences between different sets of information.
2. Verifiability – different users could reach consensus as to what the
information purports to represent.
3. Timeliness – the information is available to users in time to be able to
influence their decisions.
4. Understandability – users are expected to have:
a. reasonable knowledge of business activities; and
b. willingness to analyze the information diligently.

Concepts and principles

 APPLICATION OF CONCEPTS
PROBLEM 5: Multiple Choice

Concepts and principles