FUNDAMENTALS OF

ACCOUNTING, BUSINESS &

MANAGEMENT 1
 ACCOUNTING
CONCEPTS AND
PRINCIPLES
OPENING CASE
Let us recall the transactions that JM Photocopying Center entered
into. The owner Jose Mercado invested P10,000.00 and borrowed
P50,000.00 to start his business. He purchased photocopying
machine for P30,000.00 and supplies for P10,000.00. He paid two
months rent for P10,000.00, salary for P4,000.00, and business permit
for P2,000.00. The business consumed electricity for P2,500.00
payable the following month. During the first month of business
operations, the photocopying service generated P10,000.00 revenue.
Which of the amounts cited above do you think will be included in
the business financial reports? What is your reason for including said
amounts?
GAAP
A widely accepted set of rules, concepts and principles referred to as
the GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP) governs
the application of accounting procedures. The GAAP has been
developed by the accounting professionals to guide preparers of
financial statements in recording and reporting financial information
regarding a business enterprise, hence aiding in the effective execution
of the accounting procedure and in communicating the financial
condition of the business.
UNDERLYING ACCOUNTING ASSUMPTIONS
In the practice of financial accounting, basic
assumptions are important to an understanding
of the manner in which data are processed and
presented.
as·sump·tion
• /əˈsəm(p)SH(ə)n/
• a thing that is accepted as true or as certain to happen, without
proof.
• the action of taking on power or responsibility.
Accounting assumptions defined as
rules of action or conduct which are
derived from experience and
practice and when they prove useful,
they become accepted principles of
accounting.
ECONOMIC ENTITY ASSUMPTION
• It assumes that all of the
business transactions are
separated from the business
owner’s personal transaction.
• Any personal transaction of
its owner should not be
recorded in the company’s
accounting book, and vice
versa, unless the owner’s
personal transaction involves
investing or withdrawing
resources from the business.
Example:
Mr. Alex Cruz, the owner of Bilis Serbisyo Shop,
asked his secretary to buy supplies for the school
project of his son using his own money. This is a
personal transaction of the owner and should not
be recorded in the accounting books of the
business.
ACCRUAL BASIS ASSUMPTIONS
It requires that all business transactions and other events are
recognized in the accounting records when they occur, rather
than when the cash or equivalent is received or paid.
It is assumed that revenue is recorded in the period it is
earned, regardless of the time the cash is received or
collected.
The same is true for expense. Expense is recognized and
recorded at the time it is incurred, regardless of the time that
cash is paid.
This assumption adheres to the revenue
recognition, matching, and cost principle.
GOING CONCERN ASSUMPTION
This assumes that the company will continue to exist long
enough to carry out its objectives and commitments and will
not liquidate in the foreseeable future. (indeterminate period)
Because of this assumption, assets are recorded at their
original acquisition costs and not based on their market
values. Assets are assumed to be used for an indefinite period
of time and not intended to be sold immediately. It also
allows the company to defer some of its prepaid expenses
until future accounting periods.
MONETARY UNIT ASSUMPTION
Economic activities of a Philippine entity are measured and
reported in Philippine peso. The peso is assumed to
remain relatively stable over the years in terms of
purchasing power. It disregards any inflation in the
economy in which the entity operates.

It assumes that only transactions that can be expressed in

terms of money are recorded. (Hence a memorandum
entry will be used for non-financial or non monetary
information)
Example
The purchase of equipment by Bilis Serbisyo
Repair Shop in 1980 is presented in the
statements along with the purchase of
equipment in 2014. Also, if the business
introduced a new repair service which cannot
be easily quantified in monetary units, then
these would not appear in the company’s
accounting records.
TIME-PERIOD ASSUMPTION
This assumption requires a business to complete the whole
accounting process of a business over a specific operating time
period. It may be monthly, quarterly or annually.
For an annual accounting period:
1. CALENDAR YEAR – 12-month period that ends on Dec. 31
2. FISCAL YEAR – 12-month period which may or may not end
on December 31
It is the accounting period which the company follows for tax
purposes
It is very important that the time interval (or period of
time) be shown in the heading of each financial
statement to indicated whether it covers a day, a week,
month, quarter, year or any specific period and the
date that marks the last day of such period.
• one week ended December 31, 2014
• the month ended December 31, 2014
• three months ended December 31, 2014
• the year ended December 31, 2014
 FUNDAMENTALS OF
ACCOUNTING, BUSINESS &
MANAGEMENT 1
 ACCOUNTING
CONCEPTS AND
PRINCIPLES
REVIEW
CHOOSE THE APPROPRIATE ACCOUNTING ASSUMPTION:
A. Economic Entity Assumption
B. Accrual Basis Of Assumption
C. Going Concern Assumption
D. Monetary Unit Assumption
E. Time Period Assumption
BASIC ACCOUNTING PRINCIPLES
The basic accounting principles are
detailed accounting rules and guidelines
that entities MUST follow when
measuring, recording and reporting
financial data. Applying these principles
enhances reliability, relevance and
consistency of financial information
which results to better understanding
and decision-making of users.
COST PRINCIPLE
Cost principle refers to
amount spent (cash or
cash equivalent) when an
item was originally
obtained (original cost),
whether that purchase The amounts shown in
happened last year or ten financial accounting
statements are
years ago; amounts are
referred to as
not adjusted upward for historical amounts.
inflation.
Question:

Which accounting
assumption is this principle
related to?
FULL DISCLOSURE PRINCIPLE
In the preparation of financial
statements, the accountant
should include sufficient
information to permit the
stakeholders to make an informed
judgment about the financial
condition of the enterprise.
MATCHING PRINCIPLE
This principle requires that
expenses be matched with
revenues. It means that in a
given accounting period, the
revenue recorded should have
its corresponding expense
recorded in order to show the
true profit of the business.
The use of accrual accounting procedures
assist the accountant in allocating
revenues and expense properly among
the accounting periods that comprise the
life of the business enterprise.
REVENUE RECOGNITION PRINCIPLE

Revenues are recognized as soon as goods

have been sold (delivered to the
customers) or a service has been
rendered regardless of when the money is
actually received. Revenue is recognized
when the earning process is virtually
complete and an exchange transaction
has occurred.
Question:
On June 25, Bilis Serbisyo Repair Shop
rendered service to a client for
P15,000. The service fee was
collected on July 4. When should the
service sales be recorded?
Answer:
The entity should record the revenue
of P15,000 in June, the time service
was rendered to the customer and not
the time cash was received.
MATERIALITY PRINCIPLE
Business transactions that may affect the
decision of a user of financial information are
considered important or material, and therefore,
must be reported properly.
The principle allows an accountant to violate
another accounting principle if an amount is
insignificant. Professional judgement is needed
to decide whether an amount is insignificant or
immaterial.
Example:
Purchase of a P300.00 paper puncher by a company.
The estimated useful life of the paper puncher is five
years. The matching principle directs the accountant
to expense the cost over the five-year period.
(Depreciation) The materiality guidelines allow his
company to violate the matching principle and to
expense the entire cost of P300.00 in the year it is
purchased. The justification is that no one would
consider it misleading if P300.00 is expensed in the
first year instead of P60.00 being expense in each of
the five years that it is used.
CONSERVATISM OR PRUDENCE
PRINCIPLE
This principle states that given two options in
the valuation of business transactions, the
amount recorded should be the lower rather
than the higher value. If a situation arises
where there are two acceptable alternative for
reporting an item, conservatism directs the
accountant to choose the alternative that will
result in less effect on net income and /or less
asset amount.
Similar to materiality principle, conservatism is
a modifying constraint that allows the
accountant to violate another accounting
principle if there are alternatives to be
selected.

MAJOR PRINCIPLE
OBJECTIVITY PRINCIPLE
This principle requires business
transaction to have some form of
impartial supporting evidence or
documentation. Also it entails that
bookkeeping and financial recording be
performed with independence, that is
free of bias and prejudice.
Example:
The purchase of merchandise from a vendor
requires an invoice to support the
transaction. This invoice should be approved
by the BIR and should state the nature of the
supplier, the description, quantity, and the
value of the goods purchased. Utility
expenses must be supported by statements
of account from utility companies like
Meralco and Cawadi.
OTHER CHARACTERISTICS OF
ACCOUNTING INFORMATION
•When financial reports are generated by
professional accountants, users expect
that the accounting information
presented is reliable and verifiable. The
consistency and comparability of the
accounting information reported are also
expected from the accountants.
•To be useful, financial
information must be relevant,
reliable and prepared in a
consistent manner.
 QUIZ
Identification:

1.Ensures that financial

information is reported at
regular intervals.
 QUIZ
Identification:

2. This assumption adheres to

the revenue recognition,
matching and cost principle.
 QUIZ
Identification:

3. The framework, rules and

guidelines of the financial
accounting profession with the
purpose of standardizing the
accounting concepts, principles
and procedures.
 QUIZ
Identification:
4. It requires that all business
transactions and other events are
recognized in the accounting
records when they occur rather
than when cash or its equivalent is
received or paid.
 QUIZ
Identification:

5. Any personal transaction of the

owner should not be recorded in
the business accounting books
and vice versa.
 QUIZ
Identification:

6. This assumes that a company will

continue to exist long enough to
carry out it objectives and
commitments and will not
liquidate in the foreseeable future.
 QUIZ
Identification:

7. The basic accounting principle

that leads accountants to
anticipate or disclose losses, but
does not allow a similar action for
gains.
 QUIZ
Identification:

8. Accountants are expected to

apply the same accounting
principles, procedures and
practices from year to year.
 QUIZ
Identification:

9. Important information to users of

financial statements should be
disclosed within the statement of
in the notes to the statement.
 QUIZ
Identification:

10. This principles allows errors or

violations of accounting valuation
involving immaterial and small
amounts of recorded business
transaction.
 Answer:
Identification:
1. Time period 6. Going concern
2. Accrual 7. Conservatism
3. GAAP 8. Consistency
4. Accrual Basis 9. Full Disclosure
5. Business entity 10. Materiality