Fundamentals of Accountancy,

Business and Management 1

“MODULE 2”
JUMPSTART!
Directions: Read carefully the questions and choose the letter of the correct
answer and write it on a separate sheet of paper.
1. “The owner of a business takes goods from inventory for his personal use”. The transaction here is
an example of what accounting concept?
A. Accrual Concept B. Business Entity Concept
C. Going Concern Concept D. Substance over form Concept

2. Below are statements about Accounting Concepts. Which of the following

described the feature of consistency of presentation?
A. Firms in the same industry must account for similar items in the same way.
B. Firms may never change the way in which they prepare their accounts.
C. In preparing the accounts of a firm, one should normally account for similar
items in the same way from one accounting period to the next.
D. All of the above
3. A business transaction with an omission or misstating information which
can influence and affect the decision of the users of financial statements. Which of the following
accounting principle described the given situation?
A. Adequate Disclosure
B. Expense Recognition Principle
C. Historical Cost
D. Materiality Principles

4. Which of the following statements best explain the entity concept?

A. Accounts must be prepared for every firm.
B. Because a firm is separate and distinct from its owners, those owners
cannot have access to its assets unless the firm ceases to trade.
C. The financial affairs of a firm and its owner are always kept separate for
the purpose of preparing accounts.
D. All of the above.
5. Which of the following accounting concepts states that an accounting
transaction should be supported by sufficient evidence to allow two or more
qualified individuals to arrive at essentially similar conclusion?
A. Matching Concept
B. Objectivity Concept
C. Periodicity Concept
D. Stable Monetary Unit
LET’s START
THE
DISCUSSION!
DISCOVER!
As we start, let us be reminded that accounting is the language of
business. It communicates the financial condition and performance of a
business to interested users for decision-making purposes.

These are established principles by humans which has been developed by

the accounting professionals to guide preparers of financial statement in
recording and reporting financial information regarding a business enterprises
 Accounting practices follow certain guidelines that encompasses the
conventions, rules and procedures necessary to define accepted accounting
practice at a particular time, which stands for generally accepted accounting
principles (GAAP). It is exceedingly useful because it attempts to standardize
and regulate accounting definitions, assumptions, and methods. Because of
GAAP, we are able to assume that there is consistency from year to year in the
methods used to prepare a company’s financial statements.
 The current set of principles that accountants use rest upon some
underlying assumptions. The basic assumptions and principles are considered
GAAP and apply to most financial statements. In addition to these concepts,
there are other, more technical standards accountants must follow when
preparing financial statements. The accounting standards used in the
Philippines are the Philippine Accounting Standards (PAS) and Philippine
Financial Reporting Standards (PFRS). They are adopted by the Financial
Reporting Standards Committee (FRSC).
Accounting standards are set by a nation’s financial authorities to
streamline the accounting process. This indeed helped many countries
understand the economic growth of any company in a in a structured manner.
Fundamental
Concepts
of Accounting
 Accounting concepts, principles and
assumptions serve as the foundation of
accounting of accounting in order to avoid
misunderstanding and enhance and enhance
the understanding and enhance the
understanding and usefulness of the
financial statements.
 Accounting Concepts are important ideas which
accountants assume in recording business
transactions. Examples of accounting concepts are
separate entity, going concern, time period, accrual,
and monetary unit. These serve as the bedrock of
accounting and they are also known as
postulates or accounting assumptions, according to
Valencia, E. and Roxas, GF.
(2014).
 Business growth is measured by the financial aspect of an
organization that has achieved over a period. The revenue
generated, the cost
reduced, the expenses incurred are all covered under one
umbrella called accounting.
The clarity in the maintenance of accounts gives clarity to
the growth of the organization. Maintaining accounting
standards becomes inevitable under the law too.
Accounting concepts are the guidelines or rules to be
followed while recording the data for accounting purposes.
They may also be called postulates which are to be followed
during accounting processes.
 Accounting concepts are similar throughout the
nation. It helps;
1. The accounting information to be complete in all aspects
2. The accounting information to be available for the
stakeholders on a timely basis.
3. The accounting information to be understandable by
anyone.
4. Also, in presenting the accounting information

There are many more aspects of following the accounting concepts. However, the
four stated accounting are the primary of all
 ENTITY
CONCEPT
1. Entity Concept: Business and Owners are treated as
separate entities through this concept.

The most basic concept in accounting. An accounting

entity is an organization or a section of an organization that
stands apart from other organizations and individuals as a
separate economic unit. The transactions of different entities
should not be accounted for together. Each entity should be
evaluated separately
• The business is treated as a unit or entity
separate from its owners.
• Amount invested by the proprietor is shown
as liability.
• Amount paid for personal expenses of
proprietor are shown as drawings from capital
or the proprietor.
 DUAL
ASPECT
CONCEPT
2. Dual Aspect Concept :Every business transaction has two
effects. Investing One Million in business is treated in two
ways, Capital Account and Asset Account, Business’ asset is 1
Million while the company also owes the person who invested
1 million is recorded separately.

Under this concept; Every debit entry there is a credit

entry. Briefly expressed under:
Assets + Liabilities = Capital
PERIODICIT
Y CONCEPT
3. Periodicity Concept: An entity’s life can be meaningfully
subdivided into equal time periods for reporting purposes. It will be
aimless to wait for the actual last day of operations to perfectly
measure the entity’s profit. This concept allows the users to obtain
timely information to serve as a basis on making decisions about
future activities. For the purpose of reporting to outsiders, one year is
the usual accounting period.

It is necessary too know at frequent intervals “how things are

going”. Twelve month period is usually adopted for this purpose. This
time period is called Accounting Period.
 GOING
CONCERN
3. Going Concern: This is an assumption made that the business
shall run forever and the forced sale value of assets is not valued.
It will continue for indefinite period.

Financial statements are normally prepared on the assumption

that the
reporting entity is a going concern and will continue in operation
for the foreseeable future. Hence, it is assumed that the entity has
neither the intention nor the need to enter liquidation or to cease
trading. This assumption underlies the depreciation of assets over
their useful lives.
 MONEY
MEASURME
NT
CONCEPT
4. Money Measurement Concept: Every aspect of a business is recorded
as money using this concept. Only those transactions are recorded which
can be expressed in monetary terms.

For Example:
An efficient dedicated manager is definitely an asset to the business,
but since the monetary measurement is not possible so it is not shown in the
books of account.
The Philippine peso is a reasonable unit of measure and that its
purchasing power is relatively stable. It allows accountants to add and
subtract peso amounts as though each peso has the same purchasing power
as any other peso at any time. This is the basis for ignoring the effects of
inflation in the accounting records.
 COST
CONCEPT
6. Cost Concept: The cost is considered to be the same as
what is paid in the beginning and never its realizable
value at a later point in time.
• Fixed Assets are recorded at cost price and are
systematically reduced by the process called depreciation.
• These assets will disappear from balance sheet at the end
of their economic life when they have been fully
depreciated and sold as scrap.
 ACCRUAL
ACCOUNTIN
G
7. Accrual Accounting : The fundamental idea of
accrual accounting can be stated as follows: “The
effects of business transactions should be recognized
in the period in which they occurred. Income should
be recognized in the period when it is carried
regardless of when payment is received. Expenses
should be recognized in the period when it is incurred
regardless of when expenses are earned.
EXAMPLE:
Suppose Juana, a proprietress established a merchandising business that
sells readyto-eat foods to different
fast foods and carinderia in the country. The income from Juana’s business
primarily comes from selling foods to customers, it can be for cash or credit. If
the business was able to sell goods for cash, this will be recorded in the
accounting records or book of accounts of her business. On the other hand, if the
goods were sold on credit, the transaction should still be recorded in the
accounting records as accounts receivable. This is the essence of accrual
accounting. An accountant does not have to wait for a cash to be received or for
cash to paid before he or she records a business transaction. Because of accrual
accounting, use of accounts such as accounts receivable, accounts payable,
prepaid expenses, deferred income, and accrued income are possible.
REALISATI
ON
CONCEPT
8. Realisation Concept
• Revenue is considered earned of the day
• Transfer goods to customer in exchange of
valuable consideration.
• This is of great importance in stopping business
from inflating their profit.
• The accountant usually use dates
MATCHING
CONCEPT
9. Matching Concept
• Profit is must important factor for the
proprietor to keep the business activities.
• Revenue and their related expense in the same
accounting period.
• Purpose of matching concept is to avoid
misunderstanding
 Accounting standards are set by a nation’s financial authorities to streamline the
accounting process. This indeed helped many countries understand the economic
growth of any company in a structured manner.

Financial reporting is made easily understandable by these rules and regulations.

It is a surprise to note that, accounting standards have also assumptions involved in it.

Financial reporting and accounting standards have their guidelines and

procedures. Unbiased, clear accounting is the order of the day, and it is achieved
following the strict guidelines.

On these lines, the two most prominent terms that revolve around the finance
department are Accounting concepts and Accounting principles.

They both are interrelated, however, there are certain critical differences in them
which help the standards of the data
ACCOUNTING
CONCEPTS VS.
ACCOUNTING
PRINCIPLES
 The main difference between Accounting
Concepts and Accounting Principles is;
Accounting concepts are the important
conventions with which the accounting data is
recorded based on certain assumptions whereas
Accounting principles are the rules to be followed
while reporting financial data. The former is the
data recorder while the latter is the data presenter.
1. The main purpose of accounting concepts is to record data by
the accountant while the accounting principles are to report the
financial data based on GAAP norms.
2. Accounting Principles are considered internal for the process
it follows to record the data, while accounting principles are also
internal but the report has to be presented externally as well.
3. Accounting concepts are to be followed first to record data
while accounting principles are followed later to report the
finance data.
4. Accounting concepts help in giving complete clarity on the
finance data while accounting principles are required to be
followed to report the finance data for legal compliance.
Comparison Table Between Accounting Concepts and
Accounting Principles (in Tabular Form)
PARAMETER OF ACCOUNTING ACCOUNTING
COMPARISON CONCEPT PRINCIPLES

Meaning/Definition Accounting concepts are Accounting Principles

the assumptions upon are the rules to be
which the accounting followed while reporting
data is recorded. the final data.

Purpose The purpose is to record The purpose is to report

data based on the financial data based on
concepts regulatory norms.
 PARAMETER OF ACCOUNTING ACCOUNTING
COMPARISON CONCEPT PRINCIPLES

Usage Accounting concepts are Accounting principles are

purely internal as the internal aspects that need to
companies record data as be presented to the external
per the concepts bodies for
verification.

Hierarchy of Accounting concepts Accounting principles

process precede accounting succeed the accounting
principles concepts.

Major Outcome Accounting concepts help Accounting principles must

in giving clarity to the follow GAAP norms to even
data recorded for making avail for a bank loan and it is
the financial statements legal
 BASIC
PRINCIPLES OF
ACCOUNTING
OBJECTIVI
TY
PRINCIPLE
S
 The objectivity principle in accounting states that
financial statements should be objective i.e. the
accounting information should be unbiased and free
from any external or internal influence. This helps
financial statements to be trustworthy and be useful for
evaluation.
 Accounting records and statements are based on the most
reliable data available so that they will be as accurate and as
useful as possible. Reliable data are verifiable when they can be
confirmed by independent observers. Ideally, this principle
requires business transactions to have some form of impartial
supporting evidence or documentation. Accounting records are
based on information that flows from activities documented by
objective evidence. Without this principle, accounting records
would be based on whims and opinions and is therefore subject
to disputes.
 Falsifying accounting statements, such as
entering fictitious orders and then
increasing accounts receivable, is a breach
of the Objectivity Principle. The accounts
that you are entering in your books must be
objective and verifiable.
 COST PRINCIPLE/
HISTORICAL COST
PRINCIPLE
 It requires that assets be recorded at the
original purchase price, rather than their
current market value. It refers to the amount
spent (cash or the cash equivalent) when an
item was originally obtained, whether that
purchased happened last year or ten years ago;
amounts are not adjusted upward for inflation.
When an asset you purchased a year ago may
suddenly gain value for a variety of reasons,
the cost principle maintains that the asset
value remains the same as its original, or
purchase, cost regardless of later changes in
market value. It has little impact.
 REVENUE
RECOGNITION
PRINCIPLE
Revenue is at the heart of all business performance. As a result,
analyst prefer that the revenue recognition policies for one
company are also standard for the entire industry.

Having this standard guideline helps to ensure that an apples-

to-apples comparison can be made between made between
companies when reviewing line items on the income statement.
It should remain constant over time as well, so historical
financials can be analyzed and reviewed for seasonal trends or
inconsistencies.
 Revenue is to be recognized and determines how to
account for it in the accounting period, when goods are
delivered or services are rendered or performed.

The revenue-generating activity must be fully or

essentially complete for it to be included in revenue
during the respective accounting period. Also, there
must be a reasonable level of certainty that earned
revenue payment will be received.
 Five Steps Needed To Satisfy The Updated
Activities
Revenue Recognition Principle:
● Ask lesson
1. Identify thecontract with the customer.
● Correct homework
2. Identify thecontractual performance ●obligations.
Send homework for tomorrow
3. Determine the amount of consideration/price for the transaction.
4. Allocate the determined amount of consideration/price to the
contractual obligations.
5. Recognize revenue when the performing party satisfies the
performance obligation.
 EXPENSE
RECOGNITION
PRINCIPLE
Expenses should be recognized in
the accounting period in which
goods and services are used up to
produce revenue and not when the
entity pays for those goods and
services.
 ADEQUATE
DISCLOSURE OR
FULL DISCLOSURE
PRINCIPLE
Requires that all relevant information
that would affect the user’s
understanding and assessment of the
accounting entity disclosed in loothe
financial statements.
MATERIALITY
PRINCIPLE
 Financial reporting is only concerned with the
information that is significant enough to affect
evaluations and decisions. Materiality depends on
the size and nature of the item judged in the
particular circumstances of its omission. In
deciding whether an item or an aggregate of the
items is material, the nature and the size of the
item are evaluated together. Depending the
circumstances, either the nature or the size of the
item could be the determining factor.
CONSISTENCY
PRINCIPLE
 The consistency principle is the accounting principle
that requires an entity to apply the same accounting
methods, policies, and standards for preparing and
reporting its financial statements. It should be followed
consistently in future accounting periods. Firms should
use the same accounting method from period to period
to achieve comparability over time within a single
enterprise. However, changes are permitted if
justifiable and disclosed in the financial statements.
 This principle is most frequently ignored when the
managers of a business are trying to report more revenue
or profits than would be allowed through a strict
interpretation of the accounting standards.

The main objective of the consistency principle is to

avoid any intention from management using an
inconsistency approach to manipulate the financial
information to ensure their financial statements look
healthy.
Per revised Philippine Accounting Standards (PAS) No.1,
Presentation of Financial Statements, the presentation and
classification of items in the financial statements should be retained
from one period to the next unless:

It is apparent, following a significant change in the nature of the

entity’s operations or a review of its financial statement presentation,
that another presentation or classification would be more appropriate
having regard to the criteria for the selection and application of
accounting policies in Philippine Standards (PAS) No.8, Accounting
Policies, Changes in Accounting Estimates and Errors; or a
Philippine Financial Reporting Standards (PFRS) requires
a change in presentation.
ACTIVITY
TIME!
ACTIVITY 1 (CONCEPT IDENTIFCATION
EXERCISE)
Directions: Read the given transaction below. Analyze, which of the amounts cited above do
you think will be included in the business’ financial reports? Why and what are reasons for
including them?

Mr. Susano, a business owner of a Travel Agency invested 100 Million for additional
twenty Electric Jeepneys worth P2,000,000.00 which the owner only paid half and avail the
Auto Loan from Suzuki Motors worth P 1,000.000.00. He acquired a 1 hectare lot worth 15
Million for his automobiles, construct a small office spaces for his staff and installed solar
panels and paid 10 Million for the construction company including the labor and solar
panel. Secured all the Permit and Licenses worth P69,000.00.

During the first month of operation, he then paid the Salaries and Wages of his three office
staffs and twenty-five drivers worth P80,000. Paid Insurance for his employees worth
29,000. The business consumed water worth P28,000.

For one month, the business generated P1,000,000.00 revenue.

GAUGE!
Multiple Choice. Read and understand the following problems, choose the letter of
the best answer. Write the chosen letter on separate of paper.
1. A company requires that expenses must be matched with revenues.
A. Accrual Concern Concept B. Going Concern Concept
C. Materiality Principle D. Matching Principle

2. Aling gempot sold a piece of cupcake to her neighbor. Apparently, her customer is
out cash so Aling gempot had to consider it as credit but still recorded it in her
books. What concept of accounting was observed?
A. Accrual Concern Concept B. Going Concern Concept
C. Materiality Principle D. Matching Principle
3. Gale started a business assuming that it will not enter into a liquidation and the
business will run forever.
A. Accrual Concern Concept B. Going Concern Concept
C. Materiality Principle D. Matching Principle

4. A professional judgement is needed to decide if an amount is insignificant or

immaterial.
A. Accrual Concern Concept B. Going Concern Concept
C. Materiality Principle D. Matching Principle

5. An entrepreneur considers the original amount of the item bought

regardless of the time of purchase to be shown in the financial statements.
A. Economic Entity Concept B. Historical Cost Principle
C. Monetary Unit Concept D. Time Period Concept
7. A fundamental concept that uses a Philippine peso for economic activities which
allows the accountants to add and subtract peso amounts as though each peso has the
same purchasing power as any other peso at any time.
A. Economic Entity Concept B. Historical Cost Principle
C. Monetary Unit Concept D. Time Period Concept

8. The life of a business may be reported either monthly or yearly depending on the
period of the business.
A. Economic Entity Concept B. Historical Cost Principle
C. Monetary Unit Concept D. Time Period Concept
9. Sufficient information must be disclosed in the financial statements.
A. Full Disclosure
B. Monetary Unit Concept
C. Objectivity
D. Time

10. In order to Bookkeeping must be free of bias and prejudice

A. Full Disclosure
B. Monetary Unit Concept
C. Objectivity
D. Time
THANK YOU FOR
LISTENING!