ACCOUNTING CONCEPT AND
PRINCIPLES
LUIS C. VIRAY
ACCOUNTING CONCEPTS AND PRINCIPLES
It deals with set of logical
ideas and procedures that
guide the accountant in
recording and communicating
economic information.
It serves as a guide in the
development of new
accounting practices and
ACCOUNTING CONCEPTS AND PRINCIPLES
It provides reasonable
assurance that information
communicated to users is
prepared in a proper way.
Correct Records
Correct Process
Correct Information
BASIC ACCOUNTING CONCEPT AND PRINCIPLES
1. Separate Entity Concept – The
business is viewed as a separate
person, distinct from its owner(s).
Only the transaction of the business
are recorded in the books of
accounts. The application of the
separate entity concept is
necessary so that the financial
position and financial performance
of a business can be measured
BASIC ACCOUNTING CONCEPT AND PRINCIPLES
Separate Entity Concept.
1.
Business as your Friend
Money invested is owned by the
Business
All personal consumption and usage
of money will considered withdrawal
of your investment.
All personal transactions are not
recorded in the book of accounts.
BASIC ACCOUNTING CONCEPT AND PRINCIPLES
2. Historical Cost
Concept (Cost
Principle) - Under this
concept, assets are
initially recorded at
their acquisition cost.
BASIC ACCOUNTING CONCEPT AND PRINCIPLES
3. Going Concern Assumption – Under this
concept, the business is assumed to
continue to exist for an indefinite period of
time. Assets are measured at historical
cost. This is necessary for accounting
measurements to be meaningful. The
opposite of going concern is liquidating
concern. This is the case if the business
intends to end its operation (bankruptcy).
The assets of liquidating concern are
measured at net selling price.
BASIC ACCOUNTING CONCEPT AND PRINCIPLES
4. Matching (Association of
Cause and Effect) - Under
this concept, some costs
are initially recognized as
assets and charged as
expenses only when related
revenue recognized.
BASIC ACCOUNTING CONCEPT AND PRINCIPLES
5. Accrual Basis of Accounting – Under
the accrual basis of accounting,
economic events are recorded in the
period in which they occur rather than
at the point in time when they affect
cash. Thus, income is recorded in the
period when it is earned rather than
when it is collected, while expense is
recognized in the period when it is
incurred rather than when it is paid.
BASIC ACCOUNTING CONCEPT AND PRINCIPLES
6. Prudence (Conservatism) – Under
this concept, the accountant observes
some degree of caution when
exercising judgments needed in
making accounting estimates under
conditions of uncertainty. (For
example potential favorable outcome
vs. potential unfavorable outcome,
accountant chooses unfavorable
outcome in consideration to assets
BASIC ACCOUNTING CONCEPT AND PRINCIPLES
7. Time Period (Periodicity,
Accounting Period,
Reporting Period Concept) –
Under this concept, the life
of the business is divided
into series of reporting
periods.
Instead of waiting until the life of
the business ends before profit is
determined, the life of the business is
divided into series of equal short
periods called “reporting periods”.
A reporting period is usually 12
months, although it can be longer or
shorter. A 12 month accounting period
is either a calendar year period or a
fiscal year period.
CALENDAR YEAR VS. FISCAL YEAR
A calendar year period starts on
January 1 and ends on December 31 of
the same year.
A fiscal year also covers 12 months but
starts on a date other than January 1,
e.g., July 1, 2019 to June 30, 2020.
An accounting period that is shorter than
12 months is called an “interim
period”. An interim period can be a
month, a quarter (3 months) or a
BASIC ACCOUNTING CONCEPT AND PRINCIPLES
8. Stable Monetary Unit –
Under this concept, assets,
liabilities, equity, income
and expenses are stated in
terms of a common unit of
measures, which is the Peso
in the Philippines.
BASIC ACCOUNTING CONCEPT AND PRINCIPLES
9. Materiality Concept –
Under this concept,
accounting principles are
applicable only to material
items. Materiality is a
matter of professional
judgment and is based on
BASIC ACCOUNTING CONCEPT AND PRINCIPLES
9. Materiality Concept
Rounding-Off (Financial
Reports)
Exact Centavos (Records)
Centavos as an immaterial
(You buy worth P99.90)
BASIC ACCOUNTING CONCEPT AND PRINCIPLES
10. Cost Benefit (Cost
Constraint) – Under this
concept, the cost of
processing and
communicating information
should not exceed the
benefits to be derived from
BASIC ACCOUNTING CONCEPT AND PRINCIPLES
11. Full Disclosure Principle
– This concept is related to
both the concepts of
materiality and cost benefit
which communicate
information in a series of
judgment.
BASIC ACCOUNTING CONCEPT AND PRINCIPLES
11. Full Disclosure Principle
Sufficient detail to disclose
matters that make a difference
to users
Sufficient consideration to
make the information
understandable, keeping in
mind the cost of preparing and
BASIC ACCOUNTING CONCEPT AND PRINCIPLES
12. Consistency Concept-
This concept requires a
business to apply
accounting policies
consistently, and present
information consistently
from one period to another.
RECITATION
PLUS 1 POINT
OR
MINUS 1 POINT
APPLICATION OF THE BASIC ACCOUNTING CONCEPTS
During the month of February
2024, you are carefully
considering the location of your
business and based on your
assessment there are factors
that may affect the business
operation so you decided to look
(PRUDENCE)
for other location.
APPLICATION OF THE BASIC ACCOUNTING CONCEPTS
For the month of March 2024,
one of your partner, ask about
the choice of your business
location and you inform them
that you decided to look for
other location and it is final.
(CONSISTENCY)
APPLICATION OF THE BASIC ACCOUNTING CONCEPTS
YOU CALLED A MEETING AND YOU
INFORM ALL YOUR PARTNERS ABOUT
THE REASONS FOR CHANGING THE
BUSINESS LOCATION AND SOME OF
THE REASONS ARE HIGH COST AND
LOWER NUMBER OF POSSIBLE
CUSTOMERS.
(FULL DISCLOSURE)
APPLICATION OF THE BASIC ACCOUNTING CONCEPTS
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
P250,000.00 to this account.
(SEPARATE ENTITY CONCEPT)
APPLICATION OF THE BASIC ACCOUNTING CONCEPTS
As an owner, all your
personal transactions are
not recorded in the books
of accounts and it is
recorded under owners
withdrawal.
APPLICATION OF THE BASIC ACCOUNTING CONCEPTS
The business acquired a printing
machine. The regular price is
P100,000.00; however, you were
able to acquire it at a discounted
price of P90,000.00. You will
record this transaction at
acquisition cost of P90,000.00
(HISTORICAL COST CONCEPT)
APPLICATION OF THE BASIC ACCOUNTING CONCEPTS
The business acquired initial
inventory of mugs and t-
shirts for a total cost of
P50,000.00. You will record
the cost as an asset rather
than as expense.
(MATCHING CONCEPT)
APPLICATION OF THE BASIC ACCOUNTING CONCEPTS
All the inventory was sold on
credit for P300,000.00. You
will immediately record the
credit sales as an accounts
receivable rather than
waiting for them to be
collected.
APPLICATION OF THE BASIC ACCOUNTING CONCEPTS
Also, you will now
record the P50,000.00
cost of the inventory as
expense.
(MATCHING CONCEPT)
APPLICATION OF THE BASIC ACCOUNTING CONCEPTS
YOUR COMPANY HAS AN OBLIGATION,
YOUR MONTHLY ELECTRIC BILL WORTH
P15,000.00, AND YOU RECORDED THIS
AS AN EXPENSE IN YOUR BOOK OF
ACCOUNTS ALTHOUGH IT IS NOT
SETTLED YET.
(ACCRUAL BASIS)
APPLICATION OF THE BASIC ACCOUNTING CONCEPTS
You collected P290,000.00 out
of the P 300,000.00 total credit
sales. You will deposit the
collection to the bank account
of the business rather than to
your personal account.
(SEPARATE ENTITY CONCEPT)
APPLICATION OF THE BASIC ACCOUNTING CONCEPTS
The debtor, for the remaining
P10,000.00 is in financial
difficulty. This has raised doubt
on whether he can pay his
account. You will recognized
the doubtful account as an
expense.
APPLICATION OF THE BASIC ACCOUNTING CONCEPTS
You withdrew cash of
P80,000.00 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.
(SEPARATE ENTITY CONCEPT)
APPLICATION OF THE BASIC ACCOUNTING CONCEPTS
At the end of the YEAR
2024, you prepared the
financial statements of your
business to determined,
among others, whether the
business has earned profit.
(TIME PERIOD)
APPLICATION OF THE BASIC ACCOUNTING CONCEPTS
When preparing financial
statements, you discovered
that the business has
$10.00. You will translate
this to Philippine peso using
the current exchange rate.
(STABLE MONETARY UNIT)
APPLICATION OF THE BASIC ACCOUNTING CONCEPTS
You will report the
printing machine at its
acquisition cost of
P90,000.00 in the
financial statement.
(HISTORICAL COST)
APPLICATION OF THE BASIC ACCOUNTING CONCEPTS
You think negatively,
and you assume your
business will close in
two years time.
(LIQUIDATING CONCERN)
APPLICATION OF THE BASIC ACCOUNTING CONCEPTS
In reality, you applied stable
monetary unit and historical
cost because you don’t
intend or expect to close
your business in the
foreseeable time.
(GOING CONCERN)
APPLICATION OF THE BASIC ACCOUNTING CONCEPTS
During the year, the business
bought a trash bin for P80.00.
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
financial statements, you decided to
include the cost of trash bin in a
miscellaneous expense account
together with other immaterial
expense. You don’t expect users of
financial statements to benefits 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 financial
statements, sufficient for the
users to understand the nature
of this account.
APPLICATION OF THE BASIC ACCOUNTING CONCEPTS
You then adopted an
accounting policy of expensing
outright all acquisitions of
equipment costing P5,000.00
and below. You will apply this
policy consistently in the future
periods.
