Chapter 2: Accounting Concepts and Principles

ACCTG 101
Chapter 2: Accounting Concepts and Principles
Learning Objectives
1. Give examples of accounting concepts and principles.
2. Apply the concepts in solving accounting problems.
Basic Accounting Concepts – (cont’n)

1. Separate Entity Concept – the business is viewed as a separate entity, distinct from its owner(s).
Only the transactions of the business are recorded in the books of accounts. The personal
transactions of the business owner(s) are not recorded.
2. Historical Cost Concept (Cost principle) – assets are initially recorded at their acquisition cost.
3. Going Concern Assumption – the business is assumed to continue to exist for an indefinite period
of time.
4. Matching – some costs are initially recognized as assets and charged as expenses only when the
related revenue is recognized.
5. Accrual Basis of Accounting – income is recorded in the period when it is earned rather than
when it is collected, while expense is recorded in the period when it is incurred rather than when
it is paid.
6. Prudence – the observance of some degree of caution when exercising judgments under
conditions of uncertainty. Such that, if there is a choice between a potentially unfavorable outcome
and a potentially favorable outcome, the unfavorable one is chosen. This is necessary so that assets
or income are not overstated and liabilities or expenses are not understated.
7. Reporting Period – the life of the business is divided into series of reporting periods.
8. Stable Monetary Unit – Assets, liabilities, equity, income and expenses are stated in terms of a
common unit of measure, which is the peso in the Philippines. Moreover, the purchasing power of
the peso is regarded as stable. Therefore, changes in the purchasing power of the peso due to
inflation are ignored.
9. Materiality Concept – an item is considered material if its omission or misstatement could
influence economic decisions. Materiality is a matter of professional judgment and is based on the
size and nature of an item being judged.
10. Cost-benefit – the costs of processing and communicating information should not exceed the
benefits to be derived from the information’s use.
11. Full Disclosure Principle – information communicated to users reflect a balance between detail
and conciseness, keeping in mind the cost-benefit principle.
12. Consistency Concept – like transactions are accounted for in like manner from period to period.
Philippine Financial Reporting Standards (PFRSs)

 The PFRSs are Standards and Interpretations adopted by the FRSC. They consist of the following:
1. Philippine Financial Reporting Standards (PFRSs);
2. Philippine Accounting Standards (PASs); and
3. Interpretations
Qualitative Characteristics
Fundamental vs. Enhancing
 The fundamental qualitative characteristics are the characteristics that make information useful
to users.
 Fundamental Qualitative Characteristics
I. Relevance - information is relevant if it can affect the decisions of users.
Relevant information has the following:
o Predictive value – the information can be used in making predictions.
o Confirmatory value – the information can be used in confirming past
predictions.
o Materiality – is an ‘entity-specific’ aspect of relevance.
II. Faithful Representation - means the information provides a true, correct and complete
depiction of what it purports to represent.
Faithfully represented information has the following:
o Completeness – all information necessary for users to
understand the phenomenon being depicted is
provided.
o Neutrality – information is selected or presented
without bias.
o Free from error – there are no errors in the description
and in the process by which the information is selected
and applied.
 The enhancing qualitative characteristics are the characteristics that enhance the usefulness of
information
 Enhancing Qualitative Characteristics
I. Comparability – the information helps users in identifying similarities and differences
between different sets of information.
II. Verifiability – different users could reach consensus as to what the information purports
to represent.
III. Timeliness – the information is available to users in time to be able to influence their
decisions.
IV. Understandability – users are expected to have:
o Reasonable knowledge of business activities; and
o Willingness to analyze the information diligently.

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ACCTG 101

Chapter 2: Accounting Concepts and Principles

Basic Accounting Concepts – (cont’n)

Philippine Financial Reporting Standards (PFRSs)

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