ACCOUNTING

CONCEPTS AND
PRINCIPLES
Create their own product.
Labor
Quality control
Managing inventory
Salons
Goods or merchandise bought form
suppliers
No production facilities
High conversion cost
Generally use their employees to provide
services to customers
Bookstores
Consumer products companies
Less conversion, time and effort
Buys finished or almost finished goods
Raw materials, labor, and overhead
Absence of inventory
Supermarkets
Inability to standardize services
Generally need production facilities
Law firms
Visible products
Accounting firms
Accounting concepts, principles, and
assumptions serve as the foundation of
accounting in order to avoid
misunderstanding and enhance the
understanding and usefulness of the
financial statements. (Valix et al. 2013)
Accounting standards to be discussed
are as follows:
1. Accrual accounting
2. Matching principle
3. Use of judgment and estimates
4. Prudence
5. Substance over form
6. Going concern assumption
Accounting standards to be discussed
are as follows:
7. Accounting entity assumption
8. Time period assumption
9. Generally Accepted Accounting
Principles (GAAP)
10. International Financial Reporting
Standards (IFRS) and Philippine Financial
Reporting Standards (PFRS)
Accrual Accounting

The effects of business transactions should

be recognized in the period in which they
occurred. Income should be recognized in
the period when earned regardless of when
the payment is receive. Expenses should be
recognized in the period when it is incurred
regardless of when the expenses are paid.
Matching Principle

Closely related to accrual accounting.

Expenses are recognized in the same period
as the related revenue.
Revenues of a business always come with
expenses.
No business can generate revenues without
incurring expenses.
Matching Principle

Thereis a cause-and-effect relationship

between revenues and expenses.
Use of Judgment and Estimates

Accounting estimates are approximations

made by accountants or the management
in the preparation of financial statements.
Use of reasonable estimates is an essential
part of the preparation of financial
statements and does not undermine their
reliability.
Use of Judgment and Estimates

Warranty expense is an item in the

accounting records that requires the use of
estimates.
Prudence

In the accounting sense is also called

conservatism.
“In the simplest words, conservatism means
in case of doubt, record any loss and do not
record any gain”. (Valix et al. 2013)
Prudence

Albeitprudence is the preferred course of

action when making judgments;
deliberately being too conservative is not
allowed in practice.
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.
A transaction where the substance differs
from the legal form is the lease.
Going Concern Assumption

States that the operations of a business will

continue indefinitely into the future.
This means that the operations of a business
will stop in the near future and will not be
forced to liquidate its assets to pay off its
liabilities.
Accounting Entity Assumption

The business (which can be sole

proprietorship, partnership, or corporation) is
separate from owners, managers, and
employees operating the business.
The main purpose of the accounting entity
assumption is for the fair presentation of the
financial statements of the company.
Time Period 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 periods span for one year.
Generally Accepted Accounting
Principles (GAAP)
Consists of accounting principles, standards,
rules, and guidelines that companies follow
to achieve consistency and comparability in
their financial statements.
Another feature of the GAAP is that it is
agreed upon by practitioners.
International Financial Reporting
Standards (IFRS)
Are pronouncements issued by the
International Accounting Standards Board
(IASB) that intend to enhance the
comparability of the financial statements of
all companies around the world.
Philippine Financial Reporting
Standards (PFRS)
The Philippine Financial Reporting Standards
Council (FRSC) issues standards to be used
in the Philippines in the form of Philippine
Financial Reporting Standards (PFRS).
The PFRS include all of the
following:
PFRS which corresponds to IFRS.
PAS which corresponds to IAS.
Interpretation of accounting standards
issued by the Philippine Interpretations
Committee in accordance with
interpretations of the IFRIC and the Standing
Interpretations Committee.
Quick Check
Time Period Assumption
The indefinite life of a company can be
divided into periods of equal length for
the preparations of financial reports.
Quick Check
Prudence
Income and assets are not overstated
and liabilities and expenses are not
overstated.
Quick Check
Accrual Accounting
Income should be recognized in the
period when it is earned regardless of
when the payment if received.
Quick Check
Accounting Entity Assumption
The business is separate from the owners,
managers, and employees operating the
business.
Quick Check
Matching Principle
Expenses are recognized in the same
period as the related revenue.
Quick Check
Use of Judgment and Estimates
Approximations made by accountants or
the management in the preparation of
financial statements.
Quick Check
Going Concern Assumption
It is assumed that the operations of a
business will continue indefinitely into the
future.
¼ Sheet of Paper
Joe, a business owner, incurs expenses for
the repair of his house. This expense
should not be reflected in the financial
statements of his business. It should be
considered as a personal expense.
¼ Sheet of Paper
Joey, a car salesman, rendered service
for a car company in December. Joey
was able to sell five cars in December.
However, he was paid by the company in
January of the next year. Joey’s salary will
be recorded as an expense of the car
company in December.
¼ Sheet of Paper
Acompany prepares financial reports
every year for the benefit of its
stockholders.
¼ Sheet of Paper
Acompany records warranty expense
even though it is not entirely sure when
warranties will performed.
¼ Sheet of Paper
Credit sales are recorded by a company
as revenues even though no cash is
received.
Answers
Joe, a business owner, incurs expenses for
the repair of his house. This expense
should not be reflected in the financial
statements of his business. It should be
considered as a personal expense.
Accounting Entity Assumption
Answers
Joey, a car salesman, rendered service
for a car company in December. Joey
was able to sell five cars in December.
However, he was paid by the company in
January of the next year. Joey’s salary will
be recorded as an expense of the car
company in December.
Matching Principle
Answers
A company prepares financial reports
every year for the benefit of its
stockholders.
Time Period Assumptions
Answers
A company records warranty expense
even though it is not entirely sure when
warranties will performed.
Use of Judgment and Estimates
Answers
Credit sales are recorded by a company
as revenues even though no cash is
received.
Accrual Accounting