NU LAGUNA

INTEGRATED
ACCOUNTING
FUNDAMENTALS
COURSE MATERIAL NO. 2

DEVOTA NORMITA M. COMIA, CPA, MBA

COURSE INSTRUCTOR
2 INTEGRATED ACCOUNTING FUNDAMENTALS

ACCOUNTING CONCEPTS
AND PRINCIPLES 2

LEARNING OUTCOMES
LESSON OUTLINE
Here’s what I will teach you in this course
material:
Basic Accounting
Concepts The various accounting concepts and principles
Apply in real world situation the basic
accounting concepts and principles
Accounting Principles

Accounting Standards

Philippine Financial RESOURCES NEEDED

Reporting Standards For this lesson, you would need the following
resources:

Fundamentals of Accounting by Win Lu Ballada

·Accounting Principles.ppt
INTEGRATED ACCOUNTING FUNDAMENTALS 3

STARTING POINT
PRETEST

Listed below are several items and phrases

associated with basic accounting concepts and
principles. You are to pair each item from List A
with the item in List B.

List A
TABLE OF CONTENTS
A. Matching principle
B. Periodicity
C. Historical cost principle 3 Start up Activity
D. Materiality
E. Accrual principle 4 I am Puzzled!
F. Going concern assumption
G. Stable monetary unit
H. Business entity concept
5 Accounting Concepts

I. Full disclosure principle

J. Prudence
7 Accounting Principles

List B
8 Accounting Standards

1.The business is separate from its owners and

other business 9 Key Terms

9
2.A common denominator in Philippine peso
3.A practical justification for some accounting
Post Test
choices.
4.The entity will continue indefinitely
5.Record expenses in the period related
12 References

revenue is recognized
6.The original transaction value upon
acquisition.
7.An information that could decisions should be
reported.
8.The life of the business can be divided into
artificial time
periods.
9.Criteria usually satisfied at point of sale.
10.Concerns the relative size of an item and its
effect on
decisions.
4 INTEGRATED ACCOUNTING FUNDAMENTALS

ACCOUNTING CONCEPTS AND PRINCIPLES

Key Point
I will discuss in this module the different accounting concepts and principles that will guide
accountants in the recording and communicating economic information to users. Accounting
concepts and principle provide reasonable assurance that information communicated to users
are prepared in a proper manner.

I AM PUZZLED!!!

ACROSS

1. ______ Period
2. Associating cause &
effect
3. Revenue is recorded
when earned
4. Stable ______ unit

DOWN

5.Relative amount or
nature of an item
6. Business _______
concept
INTEGRATED ACCOUNTING FUNDAMENTALS 5

ACCOUNTING
CONCEPTS
The following are the basic accounting concepts:

A. Underlying Assumptions
1. Business entity concept
Under this concept, the business is viewed as a person (artificial being) separate and
distinct from its owner(s) or other businesses. So, only the transactions that affects the
business as a person is recorded in its books.
Failure to apply this concept is the most common error of business organizations. Personal
transactions of the owner(s) should not be recorded in the books of accounts. The use of this
concept is necessary so that the financial condition and operating performance of the
business can be measured reliably.
Application: You can apply this concept by recording personal transactions of owner(s) as
withdrawal of capital. Every business must have its own separate books even if there is only
one owner.

2. Going concern assumption

This assumption anticipates that a business entity will continue to operate or exist
indefinitely, in the absence of information to the contrary. Accountants realize that the
going concern does not always hold since there are many business failures. However,
businesses are begun with the hope of long life and many achieve that goal.
Application: This assumption is critical to many accounting principles. For example, the
assumption provides justification for measuring many assets based on their historical costs.
If only it will be known that the business will stop operations in the near future, assets will
not be measured at historical costs but at their current liquidation values.

3. Periodicity (Time period)

The need for timely periodic information of users relates to this concept of time period. Since
it is presumed that the life of the business is infinite, such life should be divided into
meaningful periods for financial reporting.
Application: Financial statements are prepared and communicated on a monthly, quarterly,
semi-annually or annually basis to users for they might need a timely information for their
decisions.
6 INTEGRATED ACCOUNTING FUNDAMENTALS

4. Stable monetary unit

This concept requires that assets, liabilities, equity, income and expenses are stated or
measured in terms of a common unit of measure, which is the Philippine peso (Php). It is
further assumed that the purchasing power of the Php is regarded to be stable.
Application: Financial statements would be difficult to use if assets were listed as “three
machines and 2,000 square meters of land”.

APPLICATION OF THE
CONCEPTS
Below is a sample financial statement.
Comment on how the basic accounting
concepts were applied in this statement ?

NIKHOLI EVENTS MANAGEMENT

Statement of Financial Position
As of December 31, 20XX
INTEGRATED ACCOUNTING FUNDAMENTALS 7

ACCOUNTING
PRINCIPLES
1. Accrual principle
Economic events are recorded in the period which they occur (happen) rather than the point
in time when cash is received or paid.

2. Matching (Associating cause and effect)

This concept states that expenses(cause) are recorded only when the related
revenue(effect) is recognized.

3. Prudence (Conservatism)
Accountants should observe some degree of caution when exercising judgments
needed in making accounting estimates under uncertainty. A choice between
unfavorable outcome versus a favorable one is needed under this uncertainty, the
accountant should choose the unfavorable outcome for the business.

4. Materiality concept
An item is considered material (important/relevant) if its omission or misstatement could
effect economic decisions. Materiality is a matter of professional judgment and is usually
based on the size or nature of the item.

5. Historical cost concept

Assets are recorded and will stay recorded at their acquisition cost, unless revalued or the
going concern is abandoned.

6. Cost-benefit principle
The cost of processing and communication accounting information should not exceed the
benefits to be derived from it.

7. Full disclosure principle

Information that is communicated to users reflect a series of judgmental trade-offs. The
trade-offs relates to:
a. Sufficient detail to disclose matters that make a difference to users (materiality).
b. Sufficient condensation to make the information understandable, keeping in mind the
cost of preparing the information and using it (cost-benefit).
8 INTEGRATED ACCOUNTING FUNDAMENTALS

8. Consistency principle
The business should apply accounting policies, present information consistently from one
accounting period to another. Accounting changes can be done only if the change is
required by the standard or the change would result to a more relevant and reliable
information. Accounting change, if any, should be properly disclosed (full disclosure).

ACCOUNTING
STANDARDS

Accounting concepts and principles are either explicit or implicit. Explicit are those specifically
mentioned in the Conceptual Framework for Financial Reporting and Philippine Financial
Reporting Standards (PFRS). Implicit concepts and principles are those not specifically
mentioned in the foregoing but are customarily used because of their general and longtime
acceptance within the accountancy profession. The standards provide a more detailed
application of the concepts. They also prescribe which principle or practice is most appropriate
for specific economic transactions. Accounting standards also require the information that
should be included in financial reports and how this information is presented in the financial
statements and reports.

PHILIPPINE FINANCIAL REPORTING STANDARDS (PFRS)

The Philippine Financial Reporting Standards are standards and interpretations adopted by the Financial
Reporting Standards Council (FRSC). They consists of the following:

1. Philippine Financial Reporting Standards

2. Philippine Accounting Standards
3. Interpretations
The PFRS are issued by the Financial Reporting Standards Council, which is th official accounting
standard setting body in the Philippines. The PFRS are patterned from the International Financial
Reporting Standards (IFRS) which are issued by the International Accounting Standards Board
(IASB). This means that the accounting standards used here are similar to those used in other
countries.
INTEGRATED ACCOUNTING FUNDAMENTALS 9

CRITICAL THINKING
Why do you think that is it important that all businesses must follow the
accounting standards in reporting to external users?

SUMMARY
The different accounting concepts and principles(assumptions and postulates) will guide
accountants in the recording and communicating economic information to users. Accounting
concepts and principle provide reasonable assurance that information communicated to users
are prepared according to standards. The standards prescribes which principle or practice is
most appropriate for specific economic transactions. Accounting standards also require the
information that should be included in financial reports and how this information is presented in
the financial statements and reports. This is to optimize the usefulness of accounting
information. The standards are similar to those used by other countries.

KEY TERMS
business entity concept Accrual principle Historical cost principle
Going concern Matching principle Cost benefit principle
Periodicity Prudence Full disclosure principle
Stable monetary unit Materiality concept Consistency principle

POSTTEST
APPLICATION
A. You are to identify the accounting concepts and principle being applied in each
statement.

1. Juan dela Cruz is the sole owner of Rome Store. Juan borrowed P500,000 to construct his
personal residence. The debt was not recorded in the books of Rome Store.

2. Florida Computers, Inc. distributed an annual report to its stockholders which includes the
annual financial report.

3. Sydney Company lists land on its financial statement at P600,000, its original purchase price
even though the land is now worth P3,000,000.
10 INTEGRATED ACCOUNTING FUNDAMENTALS

4. Berlin Services records revenue when services are rendered to customers, even cash is to be
collected after 30 days.

5. Bangkok Factory, a multi billion food processor, purchased some tools at a cost of P1,000.
The tools will be used for a number of years, yet the company recorded the purchase as an
expense immediately.

6. Liquidation values are not normally reported in the financial statements although many
businesses do incur losses.

7. Doha Store uses the same depreciation method from year 2015 until the current year.

8. Perak Hospital changed its inventory system into a more meaningful one. The business
reported this change and its effect in its current financial report.

B. You are to identify the accounting concepts and principles that was violated in each of
the following situations.

1. Batangas Balisong Company is involved in a major lawsuit involving injuries sustained by some
of its employees in the factory. The company is being sued for P5 Million and is not insured. The
suit is not reported in the most recent financial statement because no settlement has been
reached.

2. Manila Pizza and Laguna Events are both owned by Nathan Makisig. Nathan uses one set of
books of accounts for both businesses.

3. The Cebu Holdings, Inc. purchased a large machine for P3M, a very material amount, to be
used in its operations and recorded the purchase as an expense.

4. Camiguin Island Resorts has not prepared financial reports for over three years.

5. Quezon Longanisa recorded its sale of products in yen for its Japanese customers.

6. The La Union Surfers delivered surfing boards to its major customer in December 2019 but
recorded the sale on January 2020 when the cash was received.

7. The Cagayan de Oro Store adjusted the valuation of all the assets and liabilities to reflect
the purchasing power of the peso.
INTEGRATED ACCOUNTING FUNDAMENTALS 11

MULTIPLE CHOICE. Select the letter of the best answer.

1. The relatively stable economic, political and economic environment supports the use of:
a. Going concern
b. Prudence
c. Materiality
d. Periodicity

2. In depreciating the cost of an asset, accountants are more concerned with:

a. Full disclosure
b. Matching principle
c. Business entity concept
d. Stable monetary unit

3. The primary objective of the matching principle is to:

a. Provide full disclosure
b. Record expenses in the period that related revenues are recognized
c. Provide timely information for decision makers
d. Promote comparability between financial statements of different periods

4. The primary objective of the consistency principle is to:

a. Provide full disclosure
b. Record expenses in the period that related revenues are recognized
c. Provide timely information for decision makers
d. Promote comparability between financial statements of different periods

5. Which of the following underlying concept serves as the basis for preparing financial
statements at regular interval?
a. Business entity concept
b. Periodicity
c. Prudence
d. Consistency principle

6. Proper application of accounting principle is most dependent upon the:

a. Professional judgment of the accountant
b. Existence of specific guidelines
c. Oversight of regulatory body
d. External audit function

7. The concept of business entity is applicable to:

a. Only to the legal aspect of business organizations
b. Only to the economic aspect of business organizations
c. Only to business organizations
d. Whenever accounting is involved
12 INTEGRATED ACCOUNTING FUNDAMENTALS

8. Which of the following statement is incorrect?

a. The accrual method, which builds directly with the revenue recognition and matching
principles ignore the timing of cash receipts when recording revenue.
b. Accountants prepare financial report at arbitrary points in time during the lifetime of
a business in accordance with the concept of periodicity.
c. In accordance with the going concern concept, it is assumed that the life of th
business is indefinite.
d. In accordance with the concept of unit of measure, accountants usually revise the
amounts to reflect the changing power of money due to inflation or deflation.

9. The accrual basis of accounting is based primarily on:

a. Prudence and consistency
b. Matching and consistency
c. Revenue realization and matching
d. Prudence and revenue realization

10. Which of the following term best describes an asset recorded at its original purchase
price?
a. Going concern
b. Cost benefit concept
c. Historical cost principle
d. Periodicity

REFERENCES
Millan, Zeus Vernon B. (2019) Financial Accounting & Reporting. Bandoline Enterprise.

Ballada, Win Lu (2019) Fundamentals of Accounting. Domdane Books.

Kimwell, Mercedes B. (2002) Constructive Accounting (2002) GIC Enterprises and Co., Inc.

Stice, Earl and Stice, James (2013) Intermediate Accounting. Cengage Learning