ABM11

FUNDAMENTALS
OF ACCOUNTANCY,
BUSINESS, AND
MANAGEMENT 1
MODULE 2
2ND SEMESTER
Lesson 3
Accounting Concepts and
Principles
 LESSON 3:
Accounting
Concepts and
Principles
Learning Outcome(s):
At the end of the lesson,
the learners are able to enumerate
the principles of accounting;
differentiate each principle; and
apply the accounting principle in
a business setting.

Fundamentals of Accountancy, Business, and Management 1 – Module 2 2

 Accounting

Business

Organization
Operations
s

Sole
Proprietorshi Merchandisi Manufacturi
Partnership Corporation Service
p ng ng

Fundamentals of Accountancy, Business, and Management 1 – Module 2 3

 Forms of
Business
Organization
Sole
Proprietorship Partnership Corporation

owned by one owned by owned by

person partners (two or shareholders
more persons)

Fundamentals of Accountancy, Business, and Management 1 – Module 2 4

 Types of Business
According to
Merchandis Manufactur
Activities
Service ing ing
This type of business
This type of This type of buys raw materials and
business offers business buys at uses them in making a
professional skills, wholesale and later new product, therefore
advice and sells the products combining raw materials,
consultations. at retail. labour and expenses into
a product for sale later
on.
Fundamentals of Accountancy, Business, and Management 1 – Module 2 5
 Activity 3.1
Analyze the given situation below then answer the question that follows.
Petness First Petshop
Juan dela Cruz opened his pet shop business called Petness First Petshop. He opened a bank
account for his business and deposited PHP 500,000. The business earned PHP 50,000 but he had
doubts with the recorded expense of PHP 60,000. He is not sure if he 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
What do you think should not be included as expenses? Why?
______________________________
_____________________________________________________________________________
____
Fundamentals of Accountancy, Business, and Management 1 – Module 2 6
 GENERALLY ACCEPTED ACCOUNTING
PRINCIPLE
Generally accepted accounting principles
(GAAP) refer to a common set of accounting
principles, standards, and procedures issued by the
Financial Accounting Standards Board (FASB).

Fundamentals of Accountancy, Business, and Management 1 – Module 2 7

 GENERALLY ACCEPTED ACCOUNTING
PRINCIPLE

...as applied in the Philippines

Philippine Financial Reporting Standards (PFRS)
Philippine Accounting Standards (PAS)

Fundamentals of Accountancy, Business, and Management 1 – Module 2 8

 ACCOUNTING CONCEPTS AND PRINCIPLES
Business Entity Principle
 a business enterprise is separate and distinct from its
owner or investor.
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.
Fundamentals of Accountancy, Business, and Management 1 – Module 2 9
 ACCOUNTING CONCEPTS AND PRINCIPLES

Accrual Accounting Principle Cash vs Accrual Accounting

Cash Accrual

 Revenue is recorded when earned. Revenue Received Earned

 Expenses are recorded when it happens. Expenses Paid Incurred

Regardless of when cash is received or paid.

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.

Fundamentals of Accountancy, Business, and Management 1 – Module 2 10

 ACCOUNTING CONCEPTS AND PRINCIPLES

Going Concern Principle

 business will continue operating indefinitely
until the foreseeable future, and that company
closure is not imminent.
Example:
 When preparing financial statements, you should
assume that the entity will continue indefinitely.

Fundamentals of Accountancy, Business, and Management 1 – Module 2 11

 ACCOUNTING CONCEPTS AND PRINCIPLES

Time Period Principle

 financial statements are to be divided into specific
time intervals.
• Calendar Year (January 1 – December 31)
• Fiscal Year (Any starting point +12months)
Example :
 Philippine companies are required to report financial
statements annually.
 The salary expenses from January to December 2019 should
only be reported in 2019.

Fundamentals of Accountancy, Business, and Management 1 – Module 2 12

 ACCOUNTING CONCEPTS AND PRINCIPLES

Monetary unit principle

 amounts are stated into a single monetary unit.

Example :
 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.

Fundamentals of Accountancy, Business, and Management 1 – Module 2 13

 ACCOUNTING CONCEPTS AND PRINCIPLES

Objectivity Principle
 financial statements must be presented with
supporting evidence.
Example :
 When the customer paid Jollibee for their order,
Jollibee should have a copy of the receipt to
represent as evidence.
 When a company incurred a transportation expense,
a voucher should be prepared as evidence.

Fundamentals of Accountancy, Business, and Management 1 – Module 2 14

 ACCOUNTING CONCEPTS AND PRINCIPLES

Cost Principle
 accounts should be recorded initially at cost.

Example :
 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.
Fundamentals of Accountancy, Business, and Management 1 – Module 2 15
 ACCOUNTING CONCEPTS AND PRINCIPLES

Matching Principle
 cost should be matched with the revenue
generated.
Example:
 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.
Fundamentals of Accountancy, Business, and Management 1 – Module 2 16
 ACCOUNTING CONCEPTS AND PRINCIPLES

Disclosure Principle
 all relevant and material information should be
reported.
Example:
 The company should report all relevant
information.

Fundamentals of Accountancy, Business, and Management 1 – Module 2 17

 ACCOUNTING CONCEPTS AND PRINCIPLES

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.
Example:
 In case of doubt, expenses should be
recorded at a higher amount. Revenue
should be recorded at a lower amount.
Fundamentals of Accountancy, Business, and Management 1 – Module 2 18
 ACCOUNTING CONCEPTS AND PRINCIPLES

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.
Example:
 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.
Fundamentals of Accountancy, Business, and Management 1 – Module 2 19
ACTIVITY 3.2
Answer the following multiple choice questions:

1. The accounting guideline that requires financial statement

information to be supported by independent, unbiased
evidence other than someone's belief or opinion is the:
a. Business entity principle
b. Monetary unit principle
c. Going-concern principle
d. Cost principle
e. Objectivity principle
Fundamentals of Accountancy, Business, and Management 1 – Module 2 20
ACTIVITY 1
Answer the following multiple choice questions:

2. The principle that requires every business to be

accounted for separately and distinctly from its owner or
owners is known as the:
a. Objectivity principle
b. Business entity principle
c. Going-concern principle
d. Revenue recognition principle
e. Cost principle
Fundamentals of Accountancy, Business, and Management 1 – Module 2 21
ACTIVITY 1
Answer the following multiple choice questions:
3. The 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, is the:
a. Going-concern principle
b. Business entity principle
c. Objectivity principle
d. Cost Principle
e. Monetary unit principle
Fundamentals of Accountancy, Business, and Management 1 – Module 2 22
ACTIVITY 1
Answer the following multiple choice questions:

4. To include the personal assets and transactions of a

business's owner in the records and reports of the business
would be in conflict with the:
a. Objectivity principle
b. Realization principle
c. Business entity principle
d. Going-concern principle
e. Revenue recognition principle
Fundamentals of Accountancy, Business, and Management 1 – Module 2 23
ACTIVITY 1
Answer the following multiple choice questions:
5. The objectivity principle:
a. means that information is supported by independent,
unbiased evidence
b. means that information can be based on what the
preparer thinks is true
c. means that financial statements should contain
information that is optimistic
d. means that a business may not re-organize revenue until
cash is received
Fundamentals of Accountancy, Business, and Management 1 – Module 2 24
ACTIVITY 1
Answer the following multiple choice questions:

6. Marian Mosely is the owner of Mosely Accounting Services.

Which accounting principle requires Marian to keep her
personal financial information separate from the financial
information of Mosely Accounting Services?
a. Monetary unit principle
b. Going-concern principle
c. Cost principle
d. Business entity principle
Fundamentals of Accountancy, Business, and Management 1 – Module 2 25
ACTIVITY 1
Answer the following multiple choice questions:

7. Which of the following accounting principles would require

that all goods and services purchased be recorded at cost?
a. Going-concern principle
b. Continuing-concern principle
c. Cost principle
d. Business entity principle

Fundamentals of Accountancy, Business, and Management 1 – Module 2 26

ACTIVITY 3.3
Choose the answer inside the box and write it before the number.
Going concern principle Cost principle Disclosure principle
Time period principle Accrual accounting principle Conservatism principle
Monetary unit principle Matching principle Materiality principle
Objectivity 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, 2019.
_____________________ 10. A company that purchases furniture should record it at its acquisition price.
Fundamentals of Accountancy, Business, and Management 1 – Module 2 27
QUIZ #3
Indicate which principles are violated on the space 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.
____________ 6. A food company ordered a machine needed in the assembly line of its
production department. Upon order, the machine was immediately listed as
one of its assets.
Fundamentals of Accountancy, Business, and Management 1 – Module 2 28
THANKS!
Does anyone have any questions?