In this module, you will be able to

• explain the various accounting concepts and principles; and

• apply accounting concepts and principles in real-life situations. _

The purpose of a common language is to promote understanding among people of

different origins. Accounting, as the language of business, serves this same purpose. The
various users of accounting information come from different walks of life, so it is imperative .
that they understand one common language in order to utilize the information. _This common
language in business is called the generally accepted
accounting principles. These principles, concepts, or Big _
standards serve as the ground rules that govern how
accountants record , classify, summarize, interpret , and
Idea
communicate financial information. Accounting experts The generally accepted
accounting principles serve
have developed these principles over the years to set
as the common language in
or define the accepted accounting practices consistent business that define the accepted
with the system of financial reporting that will be able accounting practices understood
to adapt to a constantly changing business environment. by accountants and users of
With these principles , it is hope_d that misunderstandings accounting information.
will be prevented between accountants and users of
accounting information.

In the Philippines, the body that sets the accounting standards is the Financial Reporting
Standards Council (FRSC). It was established by the Board of Accountancy in 2006 by virtue
of the Implementing Rules and Regulations of RA 9298 or the Philippine Accountancy Act
of 2004. FRSC issued the accounting standards referred to in the Philippines .today as the
generally accepted accounting principles. .

Extend Your Knowledge

Visit http://picpa.corn.ph/frsc.html?article=About%20FRSC%20and%20PIC&
page=FRSC (last ac d 26
cesse on July 2016) and learn about the history of FRSC.
How does FRSC co t 'b t h
n n u e to t e advancement of the accounting profession?

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 · ·· An-importa t · . . (i ·
.' , · , : .· · n accountmg assuJIIption is that -the_enterprise will c.on!inue;1ts o~erat.~~~,:
mdefimtely .. This is called the assumption ;f
go.ing·.conce;n. 'R~l~ted ) ~·,th:i~..a~-~Uf!1Pti
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are
. . the. .basic account"mg concepts of accountmg
. entity,. monetary umt, . time
· . pe~10 · d of1,;
penod1c1ty, and accrual basis. , . : :· :
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Assumption of c ·oing Concern I • ' •· 1 •

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The assumption of going concern tells that the business will continue to operate at ari'
indefinite period of time. With this assumption, accountants prepare the financial statement~~
with the notion that the organization will continue to exist in the future, unless evidence shows·
otherwise. This is one reason why assets (acquired goods, services, and any other resources)
and liabilities (payables) are identified or grouped as either current or long te~m. Without thi~
1
assumption, assets and liabilities will be classified only as current-meani~g they need t6.be
used up or paid within one year-and there is nothing to be classified a's long term.

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Why is it assumed that .the business entity will continue to operate indefinitely?
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What is the effect of this assumption on accounting procedures? . ,. • ' t .

Accoun ting Entity Concept

The concept of accounting entity recogmzes
an economic or business entity as an individual
An economic or busine'ss entity 1
accounting entity, and it is separated from its owners,
is an individual accounting entity.
managers , and employees. The entity, therefore, has its
Its income and expenses ·.~ust hot
own identity and should have its own accounting apart be ·combined with the earnings .arid .
from the people involved in it. This is why the personal expenses of its owners, managers,
transactions of the owners, managers, and e.mployees and employees. : I . \ ,' I q ~

of a business organization are not accounted for in the

entity's financial statements. For example, if the owner purchases a computer unit for his
or her personal use with his or her own money, it must not be recorded in the financial
statement because it is not a transaction of the business organization. However, if the company
buys computer units for its employees, then it can be recorded as a business transaction of .
the organization.

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 Recall a time when you were tr.us~ed with a budget or fund. What are the•.
. 't? R te your answer to the concept
challenges that you encountered in managing 1 • eaI . .
· f th's concept in relation to your
of accounting entity. Explain -the importance o 1 ·

experience.

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Monetary Unit Concept

As mentioned in the previous modules, money is
the unit of measurement used in accounting. Under
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the monetary unit concept, business activities that are
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financial in nature are recorded with the corresponding Money is the unit · of
amounts expressed in the country 's currency-in our measurement used in business.

case, the Philippine peso. Money is quantifiable and is

the generally recognized or accepted medium of exchange. This is why both accountants and
business owners have chosen to use money as the common unit of measure1nent to quantify
business transactions.
However, money has no constant value because its value changes over time due to
different economic events, such as inflation. The monetary unit concept tells that 1noney is
stab.le, although in reality it is not. In accounting, economic events that change the purchasing
power of money are ignored . This is so to ensure objectivity in data recording in the financial
statements.

Why is money consider .ed as the common unit of m~asui·'em t · ·.b .' · ,··,_. ? : ·
· ~ · · · · . en 1n us1ness . .
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 Time Period or Periodicity Concept f .~ • ' ·..·.

The concept of time period or periodicity tells

that the business entity's indefinite time of existence
Big
is .divided into time periods or accounting periods .Idea ·
with equal lengths. Usually, this time period is 12 Th'ere is ·a ne~d for ti~ely .reports
months long, which can be classified as calendar of the. entity's financial 'transactions.
period or fiscal (or financial) period. The ~alendar ' This;is ·why accounting .reports are
done quarterly_or annually, based on
period refers to the time from I January to 31
a calendar or fiscal year.
Decem~er. The fiscal period happens anytime of : ·· ' ·'
the year depending on the preference 'of the business entity. Most entities choose calendar
7ear as their accounting period. However, other entities choose fiscal ye'ar to align with the
closing of their normal operation. For example, ~o .st universities and schools .follow a fiscal
year from I April to 31 March the following year. · · ·1 • i •
Accounting periods are specified b~cause of the need fo.r timely reports of the entity's
business transactions. In fact, aside from annual reports, quarterly reports of financial
activities can also be made; although, of course, business transacdons are assumed to be
continuous based on the going concern assumption.

1. Why is there a need to divide the indefinite period of operation o~ a business entity
into calendar year and fiscal year?

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2. Why do some businesses choose fiscal year as basis for their accounting period
instead of the calendar year?

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Accrual Concept J ,I J '

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.. The accrual basis of accounting tells that revenue or inc~me ,is recognized . when it is
• t • • • . . • • '

earned regardless of when it is received, and expense is recogni~e? when it is incurred

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regardless of when it is paid. This concept differenti~tes inco~e fro~ qash co~lectiori~, and
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expenses from cash payments. ·

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. . The following accounting principles are related;to the 'accrual concept:~ · ·'.r~,.·.~·/J'.Jtt~f:'.:,
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r: Revenue Recognition Principle ; . , . . . , ' -. . , ' .- . · · :' · ,-, . }j,'f
Rf!veliu.e or income is the inflow .of asset fr<;>~the sale q~goods.and serv1ces..R~v.enu,~ /:~
O

is
usu~lly e~rne'd ov~~'time and is not re~ei;yed,immed~ately ~fter ~00~~ and ~er':'~C~~.. ~(
have been delivered. This is why, in t~i~principle, revenue ts recognized wh~~,1~ , !~
earned regardless' of w-hen it is rec~ive~. A~.co1:1 _nt~nts, therefore, record income 1 ~~~~
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;
' -the sale of goods and services.has qf e~ fully ~~~e .~lrea~y ~wenthoug~ payment, ~as n9f
been collected yet. · -• ··
_ ~or exa'mple, · a publishing company .has BiCJ·..
• 1. , delivered educational i:nagazines_
to a ~lient scho,ol Idea ·,,. '..r:
in March. The school, however, will on~y make '
11n , accounting, ' business ,
' , . 50% ·payment in June, and the full payµient in transactions · must be ' recorded :
October. The income for this transaction should be •
at once when income is' earned
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recognized by the publishing company in its March or expenses are incurred_ eyen
though 'no actual money is
record even if the collection of payment will only
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received or paid yet.
happen in Jµne and October.
Expense Recognition Principle
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Expense refers to the consumption of resources. It is an outflow of asset. While
· - reyenue increases equity (value qf _assets .ab9ve any liabilities) ; expense decreases
'.
it. Some expenses are payable not at an in·stant after the asset has been consumed.
However, the expense recognition principle requires accountants to record an expense
when it is already incurred whether or not payment has been made already ~
Take for example the utility bills that a household pays. Utilfty biils are .normally
due for payment days after the consumption has been made, such that an electric
consumption for January can be paid on ·the first week of February. However, in
accounting, the recording of the electric consumption must be done in January even
though the payment is made in February.

o Matching Principle
The principle of matching is established in recognition of the fact that there is a
cause-and-effect relationship between revenue and expense. Accountants must record
properly all the expenses incurred to generate revenues. By doing this, ,tpey : can
determine th~ ~et inco~e .or _n_e!_l~ss ?f ~1p~rt_ic1:1lar
. b~s~nes.s operation _. Generally, the
total expenses
. . are deducted
. from the
,, total .revenue
" to determine 1'f th. er e 1s
· ne
· t 1nco
·· me -
or net loss. If the total revenue is great~r -thari the tot~I expens .es th ·. - t · · . -· ,:.· '/ :
-· · .. . . . -; ·:: -, · , , ,, •, . . , ere 1s ne income . ....-:
. But if the total expenses are greater than the total revenue there 1·s; t ··: · 1 -;', 1 .;, .\ ; i

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 . Other :acco~nting concepts or.principles that accountants can apply. w·hen:it~ey
~ak~ financial reports that are relevant to the decisions of users of account.mg
information include the materiality, objectivity or reliability, cost, and conservatism
concepts.

Ma teriality Concept
The materiality concept or principle indicates that accountants should disregard
accounting standards for trivial matters or for those transactions that are not important to
influence decisions. In contrast, this concept also tells that all important matters must be
recorded and disclosed. Important matters are those that affect the financial decis 'ions of
the users of accounting information. Although the materiality concept does not 'provide a
definitive guidance as to which are considered material and immaterial, it requires good
judgment from accountants . As a general rule an item is considered material if knowle .dge
of it would affect the decision of users of financial statements.

Access the Web and find out what accounting professionals use as guiding principle
in considering which financial information is material and which one is immaterial.
Report your findings to class. Provide examples.

Objecti vity or Reliability Concept

In module I, it was discussed that objectivity is one of the core values that is important
in accounting . The objectivity or reliability concept guides accountants in presenting
information free from biases as evidenced by documents . .Documents that serve as
evidence include official receipts, vouchers, invoices, and the like. These documents must
be verifiable and 1nust be understood by users .

Cost Concept
Also known as the historical cost convention, the cost concept tells that resources
acquired must be recorded in reference to the acquisition price ·and 'that the.re must ·be
no adjustment in value at a later per1od. Therefore , the value of assets is recorded at their
original cost.

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What.Have I Learned So,,Far?..t ,, • •I'
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Compare the cost concept and materiality concept in terms of the decisions used ·in .
recording data in the financial statements.

Conservatism Concept . '

Accountants apply the conservatism concept when they choose the worst case scenario
for the company when it is faced with significant uncertainties about an accounting
problem. This leans to the direction of caution so that the users of financial information
will not have false expectations. Thus, in recognizing assets, the lowest in the available
options is preferable to be recorded. Likewise, in recognizing liabilities, the highest in th~
available options is preferable to be recorded. Lastly, for revenues, expenses, gains, and
losses, the one to be recorded when in doubt is that which has the least favorable effect
on the net income.

Cite real-life experiences where you were able to apply the accounting concepts
or principles discussed in this module. How did these help you in managing your
finances?

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Identify the accounting concept or principle that should b e use d in · eac h situation.
· ·
·Write your answer on the blank. . ·
. .
------- 1. The accountant
. gathers a 11th e o ffi cial
· receipts,
. · .'
vouchers,
and mvoices
· fior a particular
· period and records · -theth ,
objectively.

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~------- 2. A typhoon hit the city and destroyed many establishtiie~ts~_~:;'J'-

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Supermarket R, upon inventory, reports a loss··,_· or ··'.
P'50 000.00. It has a net inc01ne of P'l5 000 000.00.
-------- 3. The accountant records income as soon as the salespeople ,
report the delivery of goods to the clients.
--:------- ·- ·_·_· 4. The accountant receives the utility billing statements for .
June and includes them in the financial statemen.t for the ·
same month .
________ 5. The accountant finishes the financial statement for the
year after the 12-month fiscal period and begins with the
new fiscal year.
_________ 6. All transactions are recorded in pesos .
.-- - ------ 7. The accountant returns to the employees the receipts of the
personal transactions they m~de during working hours.
--- -----=-=--- --'--- - 8. The accountant groups the current and long-tenn liabilities
and assets in the financial statements.
_________ 9. The accountant records the value of the acquired computer ::·
units at the prevailing price.
'
________ 10. The accountant records contingent liability that the
company might incur in a legal battle 'with its•employees
to indicate that the con1pany might have to pay. out the
employees.

You have leam .ed in this · module the b·asic concepts · or principles on accounting.
Search on the Internet other accounting principles that are related to the basic principles
discussed in the module. Particularly , research on the following:
I . Consistency concept 3. Dual effect concept
2. Disclosure concept 4. Realization concept -

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~ . .. - BEYOND
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WALLS 4.3 Apply It in ltcal Life

You are the treasurer of a youth organization in your community. The officers of the
organization will meet next week. You are tasked to report about the financial status of
the organization during the meeting. You will create a PowerPoint presentation to show
the organization's cash flo~ for the last three months. Apply the appropriate concepts
or principles of accounting that you learned in doing the report. Your report 'should be
accurate, detailed, and easy to understand.

In this module, you learned about the assumption of going concern, and the
concepts of accounting entity, monetary unit, periodicity, and accrual in accounting.
In relation to the accrual concept are the revenue recognition, expense recogn~tion,
and matching principles. Other important accounting concepts or principles such as
the materiality, objectivity and reliability, cost, and conservatism concepts were also
explained. These concepts serve as a guide in accomplishing any accounting tasks.
You will learn other related accounting concepts and principles as you do actual
recording and classifying of accounts in the next modules.

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