This document discusses key accounting concepts and principles, including: - Accrual accounting, where transactions are recognized in the period they occur rather than when payment is made. - Matching principle, where expenses match related revenues in the same period. - Cost principle, where assets are recorded at their purchase price. - Use of estimates and judgment in accounting given some items cannot be precisely measured. - Prudence or conservatism, where higher estimates are used for expenses and lower estimates for revenues. - Substance over form, where the economic reality of transactions matters more than legal form.

1. Accounting Concepts and
Principles
FABM1

2. Objectives
1. Explain the varied
accounting concepts and
principles; and
2. Solve exercises on
accounting principles as
applied in various cases.
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3. Accrual Accounting
The effects of business transactions should be
recognized in the period in which they occurred. Income
should be recognize in the period when it is earned
regardless of when the payment is received. Expenses
should be recognized in the period when it is incurred
regardless of when the expenses are paid.
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4. Illustration
When a barber finishes performing
his services he should record it as
revenue. When the barber shop
receives an electricity bill, it should
record it as an expense even if it is
unpaid.
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5. Matching Principle
Under this principle, expenses are recognized in the
same period as the related revenue.
5

6. Illustration
When you provide tutorial services to
a customer and there is a
transportation cost incurred related
to the tutorial services, it should be
recorded as an expense for that
period.
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7. Cost Principle
Under this principle, all accounts should be recorded
initially at cost.
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8. Illustration
When Jollibee buys a cash register,
it should record the cash register at
its price when they bought it.
When a company purchases a
laptop, it should be recorded at the
price it was purchased.
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9. Use of Judgment and Estimates
Accounting estimates are approximations made by
accountants or the management in the preparation of
financial statements. The use of reasonable estimates
is an essential part of the preparation of financial
statements and does not undermine their reliability.
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10. Illustration
Some of the items in the company’s accounting records such as cash,
property, plant and equipment, accounts payable, etc. can be measured
precisely. But there are items in the accounting records that cannot be
exactly measured. Thus, these items require the use of accounting
estimates. For instance, warranty expense. A warranty is a guarantee made
by the seller to the buyer promising to repair or replace the thing sold if
necessary within a specified period of time. When a sellers sells goods,
there are revenues generated that are recorded in the company’s
accounting record. According to the matching principle, all related expenses
should be recorded in the same period the revenues are recognized. The
problem is, what amount of warranty the company should recognize in the
accounting records. Thus, the warranty expense in the company’s
accounting records is usually estimated based on historical data.
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11. Prudence
Prudence in accounting is also called conservatism.
Prudence means exercising care in decisions regarding
recognition of items in the accounting records. In case
of doubt, expenses should be recorded at a higher
amount. Revenue should be recorded at a lower
amount.
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12. Illustration
Some of the financial transactions are sometimes uncertain
when they occur (like the warranty expense in the previous
illustration). Nevertheless, we still have to report these
transactions if they pertain to a specific period. In reporting
these transactions, an accountant needs to apply the concept
of prudence.
Prudence would also be exercised in setting up, an allowance
for doubtful accounts or a reserve for obsolete inventory. In
both cases, a specific item that will cause an expense has not
yet been identified, but a prudent person would record a
reserve in anticipation of a reasonable amount of these
expenses arising at some point in the future.
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13. Substance Over Form
Information presented in the financial statements of a
company should truthfully and faithfully represent the
financial condition and financial performance of the
company. For this to be possible, an accountant should
look at the substance of every financial transaction
rather than its form.
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14. Illustration
A transaction where the substance differs from the legal form
is a lease. In a lease, the lessor allows the lessee to use the
former’s property in exchange of a periodic fee. However,
when the ownership of the property transfers to the lessee at
the end of the lease, the substance differ from the legal form.
In this case, the transaction is really a sale of property with
installment payment instead of a lease. The lessee will record
an asset and a liability in his/her accounting records instead of
recognizing an expense.
When the substance differ from the legal form, follow the
substance of the transaction. In the illustration given, the
substance is a sale of property in installment payments while
the legal form is a lease. 14

15. Going Concern Assumption
The going concern assumption states that the
operations of a business will not stop in the near future
and it will not be forced to liquidate its assets to pay off
its liabilities. The going concern assumption allows
accountants to defer recognition of expenses in the
future.
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16. Illustration
Company A rents a building for P100,000 per month. On
January 01, 2017, the company pay the rent for 2 years in the
amount of P2,400,000. Under the going concern assumption,
the company can recognize the part of the P2,400,000 that is
not yet incurred. On January 01, 2016, the company has yet
to used the building but already paid the rent. In this case, the
accountant can record an asset (prepaid expense) instead of
recognizing an expense immediately. If the entity is not a
going concern, there is no point recognizing the payment as
an asset since the company will not derived all benefits from
it.
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17. Monetary Unit Assumption
According to this principle, all business transactions
should be recorded in one single monetary unit.
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18. Illustration
Jollibee should report financial statements in pesos
even if they have a store in the United States.
IHOP should report financial statements in dollars
even if they have a branch here in the Philippines.
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19. Accounting Entity Assumption
According to accounting entity assumption, the
business is separate from the owners, managers, and
the employees operating the business. Likewise, if the
person owns multiple businesses, each business is
different from all the others. This means that if a person
has three businesses, then each business should keep
its own accounting records. The assets and liabilities of
each business should not be mixed up.
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20. Illustration
Jim, an owner of a pizza shop, decides to buy a new
delivery car. Since the company was low on cash, Jim
decided to pay for the car himself out of his personal
bank account. Jim intends to add the car to
the balance sheet of the pizza shop. The economic
entity principle requires Jim and his company to keep
activities separated, so the car must remain a
personal vehicle unless Jim contributes it to the
company or the company buys it from Jim personally.
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21. Time Period Assumption
This assumption states that the indefinite life of a company can
be divided into periods of equal length for the preparation of
financial reports. Normally, the period span for one year. Every
year, most businesses produce financial reports for the benefit
of the users of accounting information.
The accounting period may be a calendar year or a fiscal year.
A calendar year is a 12-month period that ends on December
31st. A fiscal year is a 12-month period that ends on any month
of the year.
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22. Illustration
The Meta company provides services valuing Php
2,500 to Beta company during the first quarter of the
year. The Beta company will pay the cash for these
services next quarter. According to time period
assumption, if Meta company prepares its financial
statements at the end of the first quarter of the year,
it must include this service revenue of Php 2,500 in
its income statement for the first quarter.
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23. Materiality Principle
In case of assets that are immaterial to make a difference in the
financial statements, the company should instead record it as
an expense.
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24. Illustration
A school purchased an eraser with an
estimated useful life of three years. Since an
eraser is immaterial relative to assets, it
should be recorded as an expense.
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25. Set of
Accounting
Standards
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26. GAAP
Generally Accepted Accounting
Principle
This consists of accounting
principles, standards, rules,
and guidelines that companies
follow to achieve consistency
and comparability in their
financial statements.
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27. IFRS
International Financial Reporting
Standards
these are pronouncements issued by the
International Accounting Standards
Board (IASB) that intend to enhance the
comparability of financial statements all
over the world. In light of globalization,
the IFRS will provide a way for users of
accounting information to easy
understand the results of operation of
companies all around the globe.
*Philippines is fully compliant with the
IFRS effective January 2005. 27

28. PFRS
Philippine Financial Reporting
Standards
The Philippine Financial Reporting Standards
Council (PFRSC) issues standards to be used
in the Philippines in the form of Philippine
Financial Reporting Standards (PFRS). The
PFRS includes the ff:
a. PFRS which corresponds to IFRS
b. PAS which corresponds to IAS
c. Interpretation of accounting standards
issued by the Philippine Interpretations
Committee in accordance with the
interpretations of the International Financial
Interpretations Committee (IFRIC) and the
Standing Interpretations Committee 28

29. THANK
YOU!
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