Lesson 5 Accounting Concepts and Principles

 

 Fundamentals of ABM 1: Lesson 5   Accounting Concepts and Principles 

 

Chapter 4 Accounting Concepts and Principles

Learning ompetencies The learners should be able to……………. 1. Explain Explain the va varie ried d acco account unting ing co conce ncepts pts and principles. 2. Solve Solve ex exer ercis cises es on acc accoun ountin ting g princi principle pless as applied in various cases.

Chapter 4: Accounting Concepts and Principles (by: Ferrer & Millan)

 

CCOUNTING CONCEPTS & PRINCIPLES  #A CCOUNTING 

Set of logical ideas and procedures that guide the accountant in recording and communicating economic information.



Provide general frame of reference by which accounting practice can be evaluated



Serve as guide in the development of new practices and procedures



Provide reasonable assurance that information communicated to users is prepared in a proper way

 

Basic Accounting Concepts 1. Separate entity concept

7. Time Period

2. Historical cost concept

8. Stable monetary unit

3. Going concern assumption 4. Matching

9. Materiality concept 10. Cost-benefit

5. Accrual Basis

11. Full disclosure principle

6. Prudence (or Conservatism)

12. Consistency concept

Chapter 4: Accounting Concepts and Principles (by: Ferrer & Millan)

 

1. SEPARATE/BU BUSI SINE NESS SS EN ENTI TIT TY PR PRIN INCI CIPL PLE E 





a business enterprise is separate and distinct from its owner or investor. personal transactions of the owner should NOT be included in the business transactions  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. expenses come with that meeting shouldThe be part of thethat company’s expenses. If the owner  paid for gas for his personal use, u se, it should not be included as part of the company’s expenses.

 

2. HIS IST TOR ORIC ICA AL CO COST ST PRIN INC CIP IPL LE 



purchased assets are recorded using the invoice price and any invested asset is recorded at its fair market value

asset at costaccounts should be recorded initially  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.

 

3. GOING CON ONCE CERN RN PR PRIN INCI CIPL PLE E 



business is expected to continue indefinitely

business doestonot have any intention to cease due liquidity issues and profitability issues  Examples: When preparing financial statements, you should assume that the entity will continue indefinitely

 

4. M ATCHING PRINCIPLE cost should be matched with the revenue generated  all costs and expenses that are 

incurred in the production of revenues must be recognized and reported in the same accounting period  Examples: 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.

 

5. A CCR C CRUA UAL L BASI SIS S PRIN INC CIP IPL LE 

revenue should be recognized when earned regardless of collection and

expenses should be recognized incurred regardless of payment.when  Examples: When a he barber finishes his services should recordperforming it as revenue. When the barber shop receives an electricity bill, it should record it as an expense even if it is unpaid.

 

PROBLEM 1:

On June June 1, 2018 2018,, Rol Rolly ly re rend nder ered ed various electrical services on



account repair the nting motor vehicl veh icle e of ofto Ryven Ryv en amou amounti ng to ₱ 12 000. 

 In the situation, did2018? Rolly realize an income on June 1,  Similar Similarly ly,, did Ryven Ryven incur repair repair expense expense on the same date?

 

6. CONS ONSERV ERVATI ATISM SM PR PRINC INCIPL IPLE E 

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

be overstated while liabilities and expenses should not be understated.  Examples: In case of doubt, expenses should be recorded at a higher amount. Revenue should be recorded at a lower amount.

 

7. TIME PER ERIO IOD D PR PRIN INCI CIP PLE 

financial statements are to be divided into specific time intervals.



Examples: - Philippine companies are required to report financial statements

annually. - The sala salary ry expens expenses es from from Janu January ary to December 2015 should only be reported in 2015.

 

8. STABLE MONETARY  UNI NIT T PR PRIN INCI CIPL PLE E 

amounts are stated into a single monetary unit.



Examples: - Jollibee should report financial statements in pesos even if they have

a store in the United States. States. - IHOP should should report report finan financia ciall statements in dollars even if they have a branch here in the Philippines

 

9. M ATERIAL  ATERIALITY  ITY  CONSTRAINT

case of assets that are immaterial to make a difference in the financial statements, the company should instead record it as an expense.  Examples: - A  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.

 

10. COST-BENEFIT CONSTRAINT 

states that the benefit from securing the financial information should

outweigh the related cost  Examples: -Miscellaneous Expenses

 

11. FULL-DISCLOSURE PRINCIPLE 

all significant, relevant and material information should be reported.



Examples: -The company should report all relevant information.

 

12. CONSISTENCY  PRINCIPLE 

a business shall apply accounting policies and present information

consistently.  accounting policies can be changed if it is required by a standard or the change would result to more relevant and more reliable information.

 

13. OBJECTIVITY  PRINCIPLE 

financial statements must be presented with supporting evidence Examples: -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.

 

PROBLEM 2: INDICATE WHICH

PRINCIPLES ARE VIOLATED

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.

 

PROBLEM 3: INDICATE WHICH

PRINCIPLES ARE VIOLATED

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.

 

PROBLEM 4: INDICATE WHICH

PRINCIPLES ARE VIOLATED

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.

 

PROBLEM 5: INDICATE WHICH

PRINCIPLES ARE VIOLATED

 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.

 

PROBLEM 6: INDICATE WHICH

PRINCIPLES ARE VIOLATED

 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.

 

PROBLEM 7: INDICATE WHICH

PRINCIPLES ARE VIOLATED

 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.

 

SCHEDULES FOR BMATH &FABM1

 December 5  - FA FABM BM 1 Ch Cha apt pter er 4   December 9  - FABM 1 1st Battery Exam 