CHAPTER 2:

ACCOUNTING
CONCEPTS AND
PRINCIPLES
LEARNING OBJECTIVES:

1. Give example of accounting

concepts and principles.
2. Apply the concepts in solving
accounting problems.

Chapter 2: Accounting Concepts and Principles

 BASIC ACCOUNTING
CONCEPTS
1. Separate entity concept
2. Historical cost concept
3. Going concern assumption
4. Matching
5. Accrual Basis of accounting
6. Prudence (or Conservatism)
7. Time Period
8. Stable monetary unit
9. Materiality concept
10. Cost-benefit ( Cost constraint)
11. Full disclosure principle
12. Consistency concept

Chapter 2: Accounting Concepts and Principles

 Basic Accounting Concepts -
(cont'n)
Separate entity concept- The business is
1. Separate entity viewed as a separate entity, distinct from its
owner(s). Only the transactions of the
concept business are recorded in the books of
accounts. The personal transactions of the
Historical cost concept- assets are 2. Historical cost concept business owners) are not recorded.
initially recorded at their acquisition
cost. (Cost principle)

Going concern assumption - The business

3. Going concern is assumed to continue to exist for an
assumption indefinite period of time.

Matching - Some costs are initially

recognized as assets and charged as
4. Matching
expenses only when the related revenue
is recognized. May

Chapter 2: Accounting Concepts and Principles

 Basic Accounting Concepts -
(cont'n)
Accrual Basis of accounting - income is
5. Accrual Basis of recorded in the period when it is earned
rather than when it is collected, while
Prudence - The observance of some accounting expense is recorded in the period when it is
degree of caution when exercising incurred rather than when it is paid.
judgments under conditions of uncertainty.
Such that, if there is a choice between a 6. Prudence
potentially unfavorable outcome and a
potentially favorable outcome, the
unfavorable one ..
Reporting Period- The life of the business
7. Reporting Period is divided into series of reporting periods.
Stable monetary unit - Assets, liabilities,
equity, income and expenses are stated in
terms of a common unit of measure, which is the
8. Stable Monetary Unit
peso in the Philippines. Moreover, the purchasing
power of the peso is regarded as stable. May
Therefore, changes in the purchasing power of the
peso due to inflation are ignored.

Chapter 2: Accounting Concepts and Principles

 Basic Accounting Concepts -
(cont'n)
Materiality concept- An item is considered
material if its omission or misstatement
9. Materiality concept could influence economic decisions.
Materiality is a matter of professional
Cost-benefit- The costs of processing and judgment and is based on the size and
communicating information should not nature of an item being judged.
exceed the benefits to be derived from the
10. Cost-benefit
information's use.
Full disclosure principle - information
11. Full disclosure communicated to users reflect a balance
principle between detail and conciseness, keeping
in mind the cost-benefit principle.
Consistency concept- Like transactions are
accounted for in like manner from period to 12. Consistency concept
period. May

Chapter 2: Accounting Concepts and Principles

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

Chapter 2: Accounting Concepts and Principles

RELEVANT REGULATORY BODIES
Other than the Financial Reporting Standards Council (FRSC), the following also affect
the accounting policies used by businesses and their financial reporting:

01
Securities and Exchange Commission (SEC) - The SEC is
tasked with regulating corporations, including
partnerships. The SEC requires corporations and
partnerships to file audited financial statements
03
Bangko Sentral ng Pilipinas (BSP) - The BSP is tasked in
regulating banks and other entities performing banking
functions. The BSP influences the selection and
application of accounting policies by these businesses.

02
Bureau of Internal Revenue (BIR) - The BIR is tasked in
collecting national taxes and administering the
provisions of the Tax Code. Although the provisions of
the Tax Code do not always reflect the goals of financial
reporting, they do at times influence the choice of

04
accounting methods and procedures. Cooperative Development Authority (CDA) - the CDA is
tasked in regulating cooperatives. The CDA influences
the selection and application of accounting policies by
cooperatives.
Qualitative Characteristics- are traits that determine wether an item of
information is useful to users.
I. Fundamental Qualitative Characteristics
Relevance (Predictive Value, Confirmatory Value, Materiality)
Faithful Representation (Completeness, Neutrality, Free from error)
II. Enhancing Qualitative Characteristics
Comparability
Verifiability
Timeliness
Understandability
Chapter 2: Accounting Concepts and Principles
The fundamental qualitative characteristics are the
characteristics that make information useful to users.

The enhancing qualitative characteristics are the characteristics

that enhance the usefulness of information

Chapter 2: Accounting Concepts and Principles

Relevance
Information is relevant if it can affect the decisions of users.
Relevant information has the following:
Predictive value - the information can be used in making predictions
about future outcomes.
Confirmatory value (or Feedback value)- the information can be used
in confirming past predictions
Materiality- is an 'entity-specific' aspect of relevance.

Chapter 2: Accounting Concepts and Principles

Faithful representation
Information is faithfully represented if it is factual, meaning it represents the
actual effects of events that have taken place.

Faithfully represented information has the following:

Completeness- all information necessary for users to understand the
phenomenon being depicted is provided.
Neutrality- information is selected or presented without bias.
Free from error - there are no errors in the description and in the
process by which the information is selected and applied.
Chapter 2: Accounting Concepts and Principles
Comparability - the information helps users inidentifying similarities
and differences between different sets of information.
Verifiability- different users could reach consensus as to what the
information purports to represent.
Timeliness- the information is available to users in time to be able to
influence their decisions.
Understandability - information is understandable if it presented in a
clear and concise manner. On the other hand, users are expected to
have a reasonable knowledge of business activities and willingness to
analyze the information diligently.
Chapter 2: Accounting Concepts and Principles
Chapter 2: Accounting Concepts and Principles