Chapter 4
Accounting
Concepts and
Principles
Learning Competencies
The learners should be able to……..
1. Explain the varied accounting concepts
and principles.
2. Solve exercises on accounting principles
as applied in various cases.
What is Accounting Concepts and
Principles
Accounting concepts and principles - are a set
of logical ideas and procedures that guide the
accountant in recording and communicating
economic information
❑They provide a general frame of reference by
which accounting practice can be evaluated
and they serve as guide in the development
of new practices and procedures
Basic Accounting Concepts
1. Separate entity concept – Under this concept, the
business is viewed as a separate person, distinct from its
owner(s).
2. Historical cost concept (Cost principle) – Under this
concept, assets are initially recorded at their acquisition cost.
3. Going concern assumption – Under this concept, the
business is assumed to continue to exist for an indefinite
period of time.
4. Matching (or Association of cause and effect) - are
initially recognized as assets and charged as expenses only
when the related revenue is recognized.
Basic Accounting Concepts
5. Accrual Basis of accounting – are recorded in the period
in which they occur rather than at the point in time when they
affect cash.
6. Prudence (or Conservatism) – the accountant observes
some degree of caution when exercising judgements needed in
making accounting estimates under conditions uncertainty.
7. Time Period (Periodicity of accounting period concept) – 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 measures,
which is the peso in the Philippines.
Basic Accounting Concepts
9. Materiality concept – it is a matter of professional judgment
and is based on the size and nature of an item being judged,
10. Cost-benefit (Cost constraint) – the cost of processing and
communicating information should not exceed the benefits to
be derived from it.
11. Full disclosure principle – it is related to both the concepts
of materiality and cost-benefit. The information communicated
to users reflect a series of judgmental trade-offs.
12. Consistency concept – a business shall apply accounting
policies consistently, and present information consistently from
one period to another.
Accounting Standards
➢ Accounting concepts and principles are either
explicit or implicit
❖Explicit concepts and principles are those that are
specifically mentioned in the Conceptual
Framework for Financial Reporting and in the
Philippine Financial Reporting Standards (PFRSs).
❖Implicit concepts and principles are those that are
not specifically mentioned in the foregoing but are
customarily used because of their general and
longtime acceptance within accountancy
profession.
Relevant Regulatory Bodies
1. Securities and Exchange Commission (SEC) - The SEC is
tasked with regulating corporations, including
partnerships.
2. Bureau of Internal Revenue (BIR) - The BIR is tasked in
collecting national taxes and administering the provisions of
the Tax Code.
3. Bangko Sentral ng Pilipinas (BSP) - The BSP is tasked in
regulating banks and other entities performing banking
functions.
4. Cooperative Development Authority (CDA) - the CDA is
tasked in regulating cooperatives.
Qualitative characteristics are the traits that make
information useful to users.
TWO CLASSIFICATION OF QUALITATIVE
CHARACTISTICS
1. Fundamental qualitative characteristics
2. Enhancing qualitative characteristics
Qualitative Characteristics of useful financial
information
1.Fundamental qualitative characteristics –
these refer to the essential characteristics
that information must have before it can be
included in the financial statements. They
consist of the following:
❑Relevance
❑Faithful representation
CLASSIFICATION OF QUALITATIVE
CHARACTISTICS
Relevance
➢ Information is considered relevant if it has the ability to affect
the decision making of the users. Without this ability,
information is deemed relevant and useless.
Elements of relevance:
❖ Predictive value – Information has a predictive value if users
can use it as an input in making predictions or forecasts of
outcomes of events.
❖ Confirmatory value (or Feedback value) – This concept is
related to the predictive value.
❖ Materiality – is an “entity-specific” aspect of relevance,
meaning it depends on the facts and circumstances
surrounding a specific entity.
CLASSIFICATION OF QUALITATIVE CHARACTISTICS
Faithful representation
➢ Information is faithfully represented if it is factual, meaning it
represents the actual effects of the events that have taken
place.
Elements of faithful representation
❖ Completeness – Information must be presented with sufficient
detail necessary for users to understand them.
❖ Neutrality – Information are selected or presented without
bias.
❖ Free from error – Free from error means information
presented in the financial statements must not be materially
misstated.
Qualitative Characteristics of financial information
2. Enhancing qualitative characteristics – these
characteristics support the fundamental
characteristics. They enhance the usefulness of
information. As such, they must be maximized. The
enhancing qualitative characteristics consist of the
following:
❑ Comparability
❑ Verifiability
❑ Timeliness
❑ Understandability
Enhancing qualitative Characteristics
❑ Comparability – it enables users to make comparisons
to identify and understand the similarities in, among
items.
❑ Verifiability – it enables different and independent
users to reach general agreement about what the
information intends to depict.
❑ Timeliness – information must be provided to users on
time to be capable of influencing their decisions.
❑ Understandability – information must be presented
clearly and concisely in order for users to understand
them.
