Senior High School

Fundamentals of Accountancy, Business and

Management 1
Quarter 3 - Module 2:

Accounting Concepts and Principles

Department of Education — Republic of the Philippines

Fundamentals of Accountancy, Business and Management 1 - Senior High School

Alternative Delivery Mode

Quarter 3 - Module 2: Accounting Concepts and Principles

First Edition, 2020

Republic Act 8293, Section 176 states that “No copyright shall subsist in

any work of the Government of the Philippines. However, prior approval of the government agency or office wherein the work is created shall be necessary for

exploitation of such work for profit. Such agency or office may, among other things, impose as a condition on the payment of royalties.”

Borrowed materials (i.e., songs, stories, poems, pictures, photos, brand

names, trademarks, etc.) included in this book are owned by their respective copyright holders. Every effort has been exerted to locate and seek permission t

use these materials from their respective copyright owners. The publisher and authors do not represent nor claim ownership over them.

Published by the Department of Education - Region X - Northern Mindanao

Development Team of the Module

Writers: Ken Witty V. Sabaldana, MBA

Sweet Francess B. Mabelin

Jonarose M. Cagampang

Content Editor: Kristine T. Antique

Language Editor: Rosela Jane E. Prodenciado, MALE

Proofreader: Rosela Jane E. Prodenciado, MALE

Illustrator: Eduardo W. Monares

Layout Artist: Maricel M. Martir, MBM

Chairperson: Dr. Arturo B. Bayocot, CESO III

Regional Director

Co-Chairpersons: Dr. Victor G. De Gracia Jr. CESO

Assistant Regional Director

Jonathan S. dela Peña, PhD, CESO V

Schools Division Superintendent

Rowena H. Para-on, PhD

Assistant Schools Division Superintendent

Mala Epra B. Magnaong, Chief ES, CLMD

 Members: Neil A. Improgo, PhD, EPS-LRMS; Bienvenido U. Tagolimot, Jr., PhD, EPS-ADM; Erlinda G. Dael, PhD, CID Chief; Dr.

Lindo M. Cayadong, SEPS/ABM In-charge;

Celieto B. Magsayo, LRMS Manager; Loucile L. Paclar, Librarian II;

Kim Eric G. Lubguban, PDO II

Regional Evaluator:

Printed in the Philippines by

Department of Education- Alternative Delivery Mode (Deped-ADM)

Office Address: Masterson Avenue, Upper Balulang, Zone 1, Cagayan de Oro City

Cagayan de Oro, Lalawigan ng Misamis Oriental

Telephone Nos.: (088) 881-3094 | Text: 0917-8992245

E-mail Address: [Link]@[Link]

Senior High School

Fundamentals of Accountancy, Business

and Management 1
 Quarter 3 - Module 2:

Accounting Concepts and Principles

This instructional material was collaboratively developed and reviewed by educators from public and private schools, colleges, and

universities. We encourage teachers and other education stakeholders to email their feedback, comments, and recommendations to the

Department of Education at action@[Link].

We value your feedback and recommendations.

Department of Education — Republic of the Philippines

 Table Of Contents

Introduction ---------------------------------------------------------------------- 1

Pre-test ---------------------------------------------------------------------- 3

Lesson ---------------------------------------------------------------------- 4

Post-test ---------------------------------------------------------------------- 15

Answer Key ---------------------------------------------------------------------- 17

Reference ---------------------------------------------------------------------- 19
 What I Need To Know

For the Learners

This is an introductory course in accounting, business and management data analysis that will develop your appreciation of

accounting as language of business and an understanding of basic accounting concepts and principles that will help you analyze
Module Content
business transactions.

This
Goodmodule in Fundamentals
Job! Thank of Accountancy,
you for completing Business
Module 1. You areand
nowManagement
ready for the1 next
for the 21st century
lesson, learners
Accounting is designed
Concepts to make learning
and Principles.
more engaging
You need and meaningful
to learn to ABM Senior
more effectively. GoodHigh
luck!School learners in the flexible and blended learning environments.

This module will let you know the accounting concepts and principles. Here, you are going to identify generally accepted accounting

principles.

Learning is fun!. So enjoy your journey as you unfold the most interesting and worthwhile activities in accounting.

These are the competencies included in this module:

 Explain the varied accounting concepts and principles

(ABM_FA BM11- IIIb-c-15); and

 Solve exercises on accounting principles as applied in various cases (ABM_FA BM11- IIIb-c-16).

General Instructions

To do well in this module, you need to remember the following:

1. Read texts carefully;

2. Answer questions with all honesty;

3. Review your answers;

4. Follow instructions given;

5. Do the tasks given and do not delay in submitting requirements;

6. Feel free to communicate with your teacher;

7. Remember to review every time you are done answering the activities; and

8. Have fun as you learn.

What I Know

Instructions: Choose carefully the letter that best describes your answer.
 Write your answer on the space provided before the number.

____1) Which accounting guideline that requires financial statement information to be supported by independent, unbiased evidence

other than someone's belief or opinion?

a. Business entity principle

b. Monetary unit principle

c. Going-concern principle

d. Cost principle

e. Objectivity principle

____2) What principle that requires every business to be accounted for separately and distinctly from its owner or owners?

a. Objectivity principle

b. Business entity principle

c. Going-concern principle

d. Revenue recognition principle

e. Cost principle

____3) What rule that requires financial statements to reflect the assumption that the business will continue operating instead of being

closed or sold, unless evidence shows that it will not continue?

a. Going-concern principle

b. Business entity principle

c. Objectivity principle

d. Cost Principle

e. Monetary unit principle

____4) What is the principle that include the personal assets and transactions of a business's owner in the records and reports

of the business would be in conflict with?

a. Objectivity principle

b. Realization principle

c. Business entity principle

d. Going-concern principle

e. Revenue recognition principle

____5) What is objectivity principle?

a. information is supported by independent, unbiased evidence

b. information can be based on what the preparer thinks is true

c. financial statements should contain information that is optimistic

d. a business may not re-organize revenue until cash is received

Lesson Accounting Concepts and Principles

Week 2_9 hrs

 What’s In

Activity 1. Review

Directions: Complete the statement. Write your answer on the lines provided.

In the previous lesson I learned that ______________________________________

____________________________________________________________________________________________________________________

__________________

What’s New

Activity 2

Instructions: Answer the question below. Write your interpretations on the lines provided.

What is your understanding on the given concept map about accounting principles?

____________________________________________________________________________________________________________________

____________________________________________________________________________________________________________________

_______________________________________________________________________________________________________
 What Is It

Guidelines on Basic Accounting Principles and Concepts

Generally Accepted Accounting Principles (GAAP) is the Framework

and guidelines of accounting profession. Its purpose is to standard

accounting concepts, principles and procedures.

Basic accounting principles and concepts:

Business entity principle

– a business enterprise is separate and distinct from its owner

or investor. Any personal transactions of its owner should not be recorded in the business accounting book unless the owner’s personal

transaction involves adding and/or withdrawing resources from the business.

Examples :
 If the owner has a barber shop, the cash of the barber shop should be reported separately from personal cash.

 The owner had a business meeting with a prospective client. The expenses that come with that meeting should be part of the

company’s expenses. If the owner paid for gas for his personal use, it should not be included as part of the company’s expenses.

Going concern principle

– business is expected to continue indefinitely. On this basis, generally, assets are recorded based on their original cost and not on market

value. Assets are assumed to be held and used for an indefinite period of time or during its estimated useful life. Those assets are not intended to

be sold immediately or liquidated.

Examples:

Possible losses from the closure of business cannot be anticipated in the accounts.

Prepayments, depreciation provisions may be carried forward in the expectation of proper matching against the revenues of future periods.

Fixed assets are recorded at historical cost.

Time period principle

– financial statements are to be divided into specific time intervals.

Examples :
 Philippine companies are required to report financial statements annually.
 The salary expenses from January to December 2015 should only be reported in 2015.

Monetary unit principle

– are amounts stated into a single monetary unit. The business

financial transactions recorded and reported should be in the monetary unit,

such as Philippine Pesos, US Dollar, Euro, etc. Thus, any non-financial or

non-monetary information that cannot be measured in a monetary units are

not recorded in the accounting books, but instead, a memorandum will be

used.

Examples :
 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

Historical Cost
 All business resources acquired should be valued and recorded based on the actual cash equivalent or original cost of acquisition, not the

prevailing market value or future value. The exception to the rule is when the business is in the process of closure and liquidation.

Example:

The cost of fixed assets is recorded at the date of acquisition cost. The acquisition cost includes all expenditure made to prepare the asset

for its intended use. It includes the invoice price of the assets, freight charges, insurance, and installation cost of any.

Matching principle

– cost should be matched with the revenue generated. This principle requires that revenue recorded, in a given accounting period, should

have an equivalent expense recorded, in order to show the true profit of the business.

Examples:

 Recording of doubtful account expense should be done when the revenue was earned.

 Advanced payment from clients must be recorded in the month when the services were rendered.

 Expenses incurred in generating revenues should be recorded at the time when revenue was earned.

Accounting Period

This principle entails a business to complete the whole accounting process over a specific operating time period. Accounting period may be

monthly, quarterly or annually. For annual accounting period, it may follow a Calendar or Fiscal Year.

Example:

The owner can monitor the results of the business operations periodically either monthly, quarterly, or annually to check whether it is

profitable or not.

Conservatism principle

– also known as prudence. In case of doubt, assets and income should not be

overstated while liabilities and expenses should not be understated. The principle of

conservatism gives guidance on how to record uncertain events and estimates. The

principle of conservatism states that one should always consider an error on the most

conservative side of any transaction. This means minimizing profits by recording uncertain

losses or expenses and not recording uncertain or estimated gains.

Example:

Assume gold guitar, Inc. is in the middle of a patent lawsuit. GGI is suing Blue Guitar,

Inc. for patent infringement and anticipates winning a large settlement. Since, the settlement is not certain, GGI did not record the gain on the

financial statements. Why? Because GGI might not actually see this gain. It might not win, or they might not win as much as it expected. Since a

large winning settlement might skew the financial statements and mislead the users, the gain is left off the books.

Consistency Principle

The consistency principle states that companies should use the same accounting treatment for similar events and transactions over time.

The consistency principle does not state that business always have to use the same accounting method forever.

Example:

Bob’s Computers, a computer retailer, has historically used FIFO for valuing its inventory. In the last few years, the business has become

quite profitable and Bob’s accountant suggests that Bob switches to the LIFO inventory system to minimize taxable income. According to the

consistency principle, Bob’s Computers can change accounting methods for a justifiable reason. Minimizing taxes as a justifiable reason is

debatable.

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. The materiality concept, also called the materiality constraint, states that financial information is material to the financial statements if it

would change the opinion or view of a reasonable person. In other words, all important financial information that would sway the opinion of a

financial statement user should be included in the financial statements.

The concept of materiality is relative in size and importance.

Examples:

 A large company has a building in the typhoon area during Yolanda Storm. The company building is destroyed and after a lengthy

battle with the insurance company, the company reports an extraordinary loss of P10,000,00. The company has net income of

P10,000,000.00 The materiality concept states that this loss is immaterial because the average financial statement user would not be

concerned with something that is only 1% of net income.

 A school purchased an eraser with an estimated useful life of three years. Since an eraser is immaterial relative assets, it should be

recorded as an expense.

Objectivity principle

– financial statements must be presented with supporting evidence. The objectivity

principle states that accounting information and financial reporting should be independent

and supported with unbiased evidence. This means that accounting information must be

based on research and facts, not merely preparer’s opinion. The objectivity principle is

aimed at making financial statements more relevant and reliable.

Example:

 A company is trying to get financing for an extra plant expansion, but the

company’s bank want to see a copy of its financial statements before it will

allow a loan to the company any money. The company’s bookkeeper prints

out an income statement from its accounting system and mails it to the bank.

Most likely the bank will reject this financial statement because an independent party is not the one who prepare. In other words, this

income statement violates the objectivity principle.

 When the customers paid Jollibee for their order, Jollibee should have a copy of the receipt to represent as evidence.

Revenue Recognition Principle

- The revenue recognition principle states that revenue should be recognized and recorded when it is realized or realizable and when it is

earned.

Example:

Bob’s Billiards, Inc. sells a pool table to a bar company on December 31 for P85,000.00 The pool table was not paid for until January 15 and it was

not delivered to the bar until January 31. According to the revenue recognition principle, Bob’s should not record the sale in December. Even

though the sale was realizable in that the sale for P85,000.00 was initiated, it was not earned until January when the pool table was delivered.

Cost principle

– accounts should be recorded initially at cost.

Examples :
 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.

Accrual Accounting Principle

 – revenue should be recognized when earned regardless of collection and expenses should be recognized when incurred regardless of

payment. On the other hand, the cash basis principle in which revenue is recorded when collected and expenses should be recorded when paid.

Cash basis is not the generally accepted principle today.

Example:

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.

Disclosure principle

– all relevant and material information should be reported.

Example:

The company should report all relevant information.

Qualitative Characteristics of Financial Information

RELEVANCE

The concept of relevance implies that financial statements can have predictive value and feedback value. This means the financial

statements are accurate and can be used to predict future company performance.

3 main characteristics of relevant accounting information: predictive value, feedback value, and timeless.

PREDICTIVE VALUE

Predictive value refers to the fact that quality financial information can be used base predictions, forecast, and projections on. Financial

analysts and investors can use past financial statements to chart performance trends and make predictions about future performance and

profitability.

FEEDBACK VALUE

Quality information has a feedback value when it can confirm or correct previous expectations. In other words, users can examine financial

information and confirm or adjust their predictions made on previous performance trends. Based on the feedback, users can make future

decisions.

TIMELESS

Timeless is one of the most important factors in relevant information. Out of date information

does not do investors or creditors any good when they are trying to make current and future

decisions. Financial reporting must be timely and current in order to be used by investors and

creditors.

RELIABILITY

The concept of reliability implies that financial information can be verified by many source

with evidence and that all financial information is presented. In other words, the favorable and

unfavorable financial information are presented in the financial statements.

Three main attributes that all reliable financial information has: verifiability, representational

faithfulness, and neutrality.

VERIFIABILITY

Financial information is verifiable when multiple, independent measures are used to come up with the same result.

REPRESENTATIONAL FAITHFULNESS

Representational faithfulness simply means that the financial statements represent reality or what actually happened during the year.

NEUTRALITY

Finally, in order for financial statements to be reliable they must be neutral. By definition, financial statements that are prepared by company

management are somewhat biased because the management want to see the company improve.

COMPARABILITY

Comparability is a quality of accounting information that addresses the usability of financial information. Information that is prepared using

the same measurement techniques and reported in a similar and can be judged side by side other similar financial information.

Comparability is extremely important to the end users of financial statement.

What’s More

Activity 3

Directions: Match the following accounting principles with their definition. Write the letter of your answer in the space provided.

a. Going concern principle e. Time period principle h. Monetary unit principle

b. Objectivity principle f. Cost principle i. Accrual accounting principle

c. Matching principle g. Disclosure principle j. Conservatism principle

d. Materiality principle

___________________ 1. All relevant information should be included in the financial reports

___________________ 2. In case of doubt, assets and income should not be

overstated.

___________________ 3. Assume that the company will continue indefinitely.

___________________ 4. All transactions should be supported by unbiased evidence.

___________________ 5. Expenses should be recorded in the period when the revenue is

generated.

___________________ 6. Minimal costs incurred should be recorded as an expense.

___________________ 7. A Philippine company should report financial statements in pesos.

___________________ 8. A barber who performs services for a client should record revenue.

___________________ 9. Statement of Financial position should be recorded as of December 31,

2015.

___________________ 10. A company that purchases furniture should record it at its acquisition price.
 What I Have Learned

Activity 4

Directions: Accounting principles. Indicate which principles are violated. Write your analysis on the line provided.

1. The owner-manager bought a computer for personal use. The invoice was given to the accountant who recorded it as an asset of the
business.

___________________________________________________________________

2. The statement of financial position of a company included an equipment purchased from Japan for 350,000 yen. It was reported at that
amount in the statement of financial position while all the other assets were reported in Philippine pesos.

___________________________________________________________________
3. No financial statements were prepared by Michael Go for his business. He explained that he will prepare the statements when he closes the
business, which he predicts to take place after 20 years.

___________________________________________________________________

4. Aside from owning a shoe store, Albert operates a canteen. The assets of the canteen are reported in the statement of financial position of the
shoe store.

___________________________________________________________________

5. Purchased a hammer at a cost of PHP500. This was recorded as an asset and expense to decrease its value by PHP50 per year for 10 years.
___________________________________________________________________

What I Can Do

Activity 5

Instructions: Answer the questions below. Write your answer on the lines provided.

Petness First Petshop

Jonarose opened her pet shop business called Petness First Petshop. She opened a bank account for her

business and deposited PHP500,000. The business earned PHP50,000 but she had doubts with the recorded

expense of PHP60,000. She is not sure if she should include the following items as expenses:

Salary expense 20,000

Rent expense 10,000

Utilities expense (at home) 15,000

____________________________________________________________________________________________________________________
Utilities expense (at the store) 10,000
____________________________________________________________________________________________________________________

_______________________________________________________________________________________________________
Insurance expense 5,000

Withdrawals 10,000

TOTAL 60,000
____________________________________________________________________________________________________________________

__________________

____________________________________________________________________________________________________________________

__________________

Activity 6

Instructions: Solve the following exercises. Write your answer on the lines provided.

Question 1: Andy runs a real estate development firm. Five years ago, he purchased a piece of land for P250,000. This year, an appraiser tells

Andy that the land is worth P300,000. At what value should Andy report the land on his balance sheet? Why?

____________________________________________________________________________________________________________________

____________________________________________________________________________________________________________________

____________________________________________________________________________________________________

Question 2: Andy is the sole owner of his firm. In June, he moves P30,000 from his business checking account to his personal checking account. If

Andy wants his financial records to be in accordance with GAAP, should he record the transaction or not? Why?

____________________________________________________________________________________________________________________

____________________________________________________________________________________________________________________

____________________________________________________________________________________________________

Self-Check!

Great job! You have completed Module 2 successfully! Before going to the next lesson, check the icon that best shows your learning experience.

I have understood the lesson well and I can even teach what I learned to others.

I have understood the lesson but there are still other things that I need to review and relearn.

If you checked the

I need tofirst
do icon, you are
additional ready
work to for
belesson
able [Link] the lesson. I need help in some tasks.

If you have checked the first icon, you can proceed to the next module. If you have checked the second icon, you need to review the

things that you need to relearn. If you have checked the third icon, it would be best if you read more and ask help from your teacher, parents or

peers in clarifying the lessons that you find it difficult. Be honest so that you will truly improve.
 Additional Activity

After doing the activities:

I noticed _______________________________

Assessment
A question I have is _______________________________

Directions: Give at least one real life example for each principle given below. Write your example on the lines provided.
I’m not sure _______________________________
Business Entity Principle

I realized _______________________________
____________________________________________________________________________________________________________________

_____________________________________________________________________________________

Objectivity Principle

____________________________________________________________________________________________________________________

_____________________________________________________________________________________

Cost Principle

____________________________________________________________________________________________________________________

_____________________________________________________________________________________

Accrual Accounting Principle

____________________________________________________________________________________________________________________

_____________________________________________________________________________________

Materiality Principle

____________________________________________________________________________________________________________________

_____________________________________________________________________________________
 CONGRATULATIONS

FOR COMPLETING THIS MODULE!