Accounting Concepts and Principles

BASIC ACCOUNTING CONCEPTS:

1. GOING CONCERN ASSUMPTION
- Under this concept, the business is assumed to continue to exist for an indefinite
period of time. This is necessary for accounting measurements to be meaningful.
2. SEPARATE ENTITY CONCEPT
- Under this concept, the business is viewed as a separate person, distinct from its
owner(s). Only the transactions of the business are recorded in the accounting books.
The personal transactions of the business owner(s) are not recorded.
- The application of this concept is necessary so that the financial position (balance
sheet) and the performance of the business (income statement) can be measured
properly. By applying the separate entity concept, you can objectively know if the
business is really earning profits, or if it has the ability to do so.
3. HISTORICAL COST CONCEPT
- Also known as the Cost Principle. Under this concept, assets are initially recorded at
their acquisition cost.
4. MATCHING PRINCIPLE
- Under this concept, some costs are initially recognized as assets and charged as
expenses only when the related revenue is recognized. This is best viewed as
associating cause and effect.
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 expenses are recorded when it is incurred, rather than when it is
paid.
6. PRUDENCE OR CONSERVATISM
- Under this concept, the accountant observes some degree of caution when
exercising judgments needed in making accounting estimates under conditions of
uncertainty. Such that, if the accountant needs to choose between a potentially
 unfavorable outcome versus a potentially favorable outcome, the accountant
chooses the unfavorable one. This is necessary so that the assets or income are not
overstated and liabilities or expenses are not understated.
7. TIME PERIOD
- Also known as periodicity or accounting period concept. Under this concept, the life
of the business is divided into series of reporting periods.
- Managers need periodic information on the results of the operations for them to
properly perform their functions.
- A reporting period is usually 12 months. A 12-month accounting period is either a
calendar year period or a fiscal year period. A calendar year period starts on January
1 and ends on December 31 of the same year. A fiscal year period also covers 12
months but starts on a date other than January 1, e.g., July 1, 2017 to June 30, 2018.
- An accounting period that is shorter than one year is called an interim period.
8. STABLE MONETARY UNIT
- Under this concept, assets, liabilities, equity, income and expenses are stated in
terms of a common unit of measure. Moreover, the purchasing power of the peso is
regarded as stable. Therefore, changes in the purchasing power of the peso due to
inflation is ignored.
9. MATERIALITY CONCEPT
- This concept guides the accountant when applying accounting principles. This is
because accounting principles are applicable only to material items.
- 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 PRINCIPLE
- Under this concept, the cost of processing and communicating accounting
information should not exceed the benefits to be derived from it.
- Benefit > Cost
11.CONSISTENCY CONCEPT
 - Under this concept, a business shall apply accounting principles consistently, and
present information consistently, from one period to another. Meaning, similar
transactions shall be accounted for in a similar manner.
GENERALLY ACCEPTED ACCOUNTING PRINCIPLE
- The term “generally accepted” means that either:
a. The standard has been established by an authoritative accounting standard
setting body; or
b. The principle has gained general acceptance due to practice over time and has
been proven to be most useful.
- The process of establishing accounting standards is a democratic process in that a
majority of practicing accountants must agree with a standard before it becomes
implemented.
CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING
- This prescribes the accounting concepts that are meant to guide the accountant in
preparing and presenting financial statements.
QUALITATIVE CHARACTERISTICS OF USEFUL FINANCIAL INFORMATION
- These are the traits that make information useful to users. Without these
characteristics, information may be deemed useless.
These are broadly classified into two, namely:
1. FUNDAMENTAL QUALITATIVE CHARACTERISTICS – these refer to the essential
characteristics that information must have before it can be included in the financial
statements.
2. ENHANCING QUALITATIVE CHARACTERISTICS – these characteristics support the
fundamental characteristics. They enhance the usefulness of information. As such,
they must be maximized.
FUNDAMENTAL QUALITATIVE CHARACTERISTICS
1. RELEVANCE
- Information is considered RELEVANT if it has the ability to affect the decision making
of the users. Without this, information is deemed irrelevant and useless. It has the
following ingredients:
 a. PREDICTIVE VALUE – information has a predictive value if users can use it as an
input in making predictions or forecasts of outcomes of events.
b. CONFIRMATORY VALUE (OR FEEDBACK VALUE) – information has a confirmatory
value if users can use it to confirm their past predictions.
2. FAITHFUL REPRESENTATION
- Information is faithfully represented if it is factual, meaning it represents the actual
effects of events that have taken place. It has the following ingredients:
a. COMPLETENESS – information must be presented with sufficient detail necessary
for users to understand them.
b. NEUTRALITY – information are selected or presented without bias. Information
must not be manipulated to increase the probability that it will be received
favorably or unfavorably by the users.
c. Freedom From Error – information presented must not be materially misstated or
important information must not be omitted.
3. Verifiability
- Information is verifiable if it enables different and independent users to reach a
general agreement about what the information intends to depict.
4. Comparability
- Information has this characteristic if it enables users to make comparisons to identify
and understand the similarities in, and differences among items
5. Understandability
- Information must be presented clearly and concisely in order for users to understand
them. On the other hand, users are expected to have a reasonable knowledge of
business and economic activities and to review and analyze the information
diligently, sufficient for them to understand the information contained in the
financial statements.
6. TIMELINESS
- Information must be provided to users on time to be capable of influencing their
decisions.