Republic of the Philippines

Department of Education
REGION VIII – EASTERN VISAYAS

Division of Northern Samar

FUNDAMENTALS OF ABM I

FUNDAMENTAL ACCOUNTING CONCEPTS AND PRINCIPLES

CONCEPTUAL FRAMEWORK
 Outlines the objectives of financial reporting and the qualities of good
accounting information, precisely defines commonly used terms such as
assets, liabilities, equity, revenue and expenses, and provides guidance
about appropriate recognition and reporting.
 Broadly, the conceptual framework consists of the following:
 Objectives – to provide information useful investors, creditors and
others.
 Qualitative Characteristics – to require relevant, reliable and
comparable information.
 Elements – to define items that financial statements can contain.
 Recognition and measurement – to set criteria for an item to be
recognized as an element; and how to measure.
ACCOUNTING CONCEPTS AND PRINCIPLE (ASSUMPTIONS)
 Set of logical ideas and procedures that guide the accountant in recording
and communicating economic information.
 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.
ACCORDING TO WIN BALLADA:
FUNDAMENTAL CONCEPTS
 ENTITY 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 entity.
Simply put, the transactions of different entities should not be
accounted for together. Each entity should be evaluated separately.
 PERIODICITY CONCEPT
 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.
 STABLE MONETARY UNIT CONCEPT

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  The Philippine peso is a reasonable unit of measure and that its
purchasing power is relatively stable. It allows accountant to add
and subtract 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.
 GOING CONCERN
 Financial statements are normally prepared on the assumptions 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 assumptions underlies the depreciation of
assets over their useful lives.
ACCORDING TO MA. ELENITA B.CABRERA et.,al

ACCOUNTING ASSUMPTIONS
 GOING CONCERN ASSUMPTIONS
 The assumptions that the entity will continue operations indefinitely
into the future. It can be abandoned if there are evidences
supporting the contrary.
 ACCOUNTING ENTITY ASSUMPTIONS
 The accounting assumptions that the business is an entity separate
and distinct from the owners, managers, and employees. Personal
transactions of owners, managers, and employees should not distort
the results of company operations.
 TIME PERIOD ASSUMPTIONS
 The assumptions that the indefinite life of a company can be divided
into multiple time periods with equal lengths. The result of this is
the periodic presentation of a company’s financial statements.
 Calendar year
 A 12 month period that ends on any month
 A 12 month period that ends on December 31
 MONETARY UNIT ASSUMPTIONS
 Means that we can express transactions and events in monetary units.
Money is the common denominator in business.
BASIC PRINCIPLE
1. OBJECTIVITY PRINCIPLE
 Accounting records and statements are based on the most reliable data
available so that they will be as accurate as possible. Reliable data
are verifiable when they can be confirmed by independent observers.
Ideally, Accounting records are based on information that flows from
activities documented by independent observers. Ideally, 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.
2. HISTORICAL COST
 This principle states that acquired assets should be recorded at
their actual cost and not what management thinks they are worth as at
reporting date.

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 3. REVENUE RECOGNITION PRINCIPLE
 Revenue is to be recognized in the accounting period when goods are
delivered or services are rendered or performed.
4. EXPENSE RECOGNITION PRINCIPLE
 Expense 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.
5. ADEQUATE DISCLODURE
 Requires that all relevant information that would affect the user’s
understanding and assessment of the accounting entity be disclosed in
the financial statements.
6. MATERIALITY
 Financial reporting is only concerned with information that is
significant enough to affect evaluations and decisions.
 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 items is material, the
nature and size of the item are evaluated together depending on the
circumstances, either the nature or the size of the item could be the
determining factor.
7. CONSISTENCY PRINCIPLE
 The firm 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 statement.
8. ACCRUAL ACCOUNTING
 An accounting basis wherein income is recognized when earned and
expenses are recognize when incurred irrespective of the timing of
cash receipt or payments. Accrual accounting results in more accurate
financial statements.
9. CASH BASIS OF ACCOUNTING
 Opposite of the accrual basis of accounting; recognizes income when
cash is received and recognize expense when cash is paid.
10. MATCHING PRINCIPLE
 A concept closely related to accrual accounting which states that
expenses should be recorded in the same period as the related
revenues.
11. ACCOUNTING JUDGEMENT AND ESTIMATES
 Not all items in a company’s accounting records can be determined
precisely. This is the reason why estimates are used
 Estimates are determined using professional judgment, study of
historical data, and through research.
12. PRUDENCE OR CONSERVATISM
 Means exercising care in decisions regarding recognition of items in
the accounting records. In case of doubt, recognize liabilities and
expense and do not recognize assets and income.
QUALITATIVE CHARACTERISTICS
 The traits that determine whether an item of information is useful to
users. Without these characteristics, information may be deemed useless.

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QUALITATIVE CHARACTERISTICS OF USEFUL INFORMATION
 FUNDAMENTAL QUALITATIVE CHARACTERISTICS
 RELEVANCE
 Information is relevant if it can affect the decisions of users.
Relevant information has the following aspects:
 Predictive Value
o Information has a predictive value if it can help
users to make predictions about future outcomes.
 Confirmatory Value or Feedback
o This concept is related to the predictive value.
Information has a confirmatory value if it can help
users confirm their past predictions
 Materiality
o An ‘entity-specific’ aspect of relevance, meaning it
depends on the facts and circumstances surrounding a
specific entity.
 FAITHFUL REPRESENTATION
 Faithfully represented if it is factual. Faithfully represented
information has the following aspects:
 Completeness
o All information necessary for users to have a
complete understanding of the financial statements is
provided.
 Neutrality
o Information is selected or presented without bias.
Information is not manipulated to increase its
favorability or decrease its unfavorability.
 Free from error
o The information is not materially misstated. This
does not mean, however, that accounting information
must be perfectly accurate in all respects because
some accounting information necessarily needs to be
estimated.
o Free from error means there are no errors in the
description and in the process by which the
information is selected and applied.
 ENHANCING QUALITATIVE CHARACTERISTICS
 COMPARABILITY
 Information is comparable if it can help users identify
similarities and differences between different sets of
information. Unlike, the other qualitative characteristics,
comparability does not relate to only one item because a
comparison requires at least two items.
 VERIFIABILITY
 Information is verifiable if different users could reach general
agreement as to what the information intends to represent
 TIMELINESS
 Information is timely if it is available to users in time to be
able to influence their decisions.
 UNDERSTANDABILITY

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  Information is understandable if it is presented in a clear and
concise manner. On the other hand, users are expected to have a
reasonable knowledge of business activities and a willingness to
analyze the information diligently.

References:
 Ma. Elenita Balatbat Cabrera.,et. Al, Fundamentals of Accountancy, Business
& Management I, Philippines: GIC Enterprise & Co., Inc.
 Zeus Vernon Millan.,et.al, Fundamentals of Accountancy, Business &
Management I,Bandolin Enterprise

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