FABM 1

MODULE 4
ACCOUNTING CONCEPTS AND PRINCIPLES
ACCOUNTING CONCEPTS AND PRINCIPLES

1. Business Entity Principle (Accounting Entity Assumption) - a

business enterprise is separate and distinct from its
owner or investor.
The main purpose of the accounting entity assumption
is for the fair presentation of the financial statements of the
company.
ACCOUNTING CONCEPTS AND PRINCIPLES
2. GoingConcern Principles (Going Concern Assumption) - business is expected to
continue indefinitely.
The following items are evidence that a company is not a going concern:
1. The results of operations consistently show losses.
2. Inability to pay obligations of the company in time
3. Loan defaults
4. Suppliers do not sell on credit to the company
5. Legal proceedings against the company
ACCOUNTING CONCEPTS AND PRINCIPLES

3. Time Period Principle (Time Period Assumption) - financial statements are

to be divided into specific time intervals.
The time period principle states that the indefinite life of a company can be
divided into periods of equal length for the preparation of the financial
reports.
The accounting period of a business may be a calendar-year or a fiscal year.
Calendar year is a 12-month period that ends on December 31.
Fiscal year is a 12-month period that ends on any month of the year.
ACCOUNTING CONCEPTS AND PRINCIPLES

4. Monetary Unit Principle - amounts are

stated into a single monetary unit. This
means that you only record business
transactions that can be expressed in terms
of a currency.
ACCOUNTING CONCEPTS AND PRINCIPLES

Objectivity principle - financial statements

must be presented with supporting evidence.
It is the concept that the financial statements
of an organization be based on solid
evidence.
ACCOUNTING CONCEPTS AND PRINCIPLES

Cost principle – accounts should be recorded

initially at cost. The cost principle is
an accounting principle that records assets at
their respective cash amounts at the time the
asset was purchased or acquired
ACCOUNTING CONCEPTS AND PRINCIPLES

 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.
ACCOUNTING CONCEPTS AND PRINCIPLES

Matching principle – cost should be matched with

the revenue generated. The matching principle is
closely related to accrual accounting. Under the
Matching principle, expenses are recognized in the
same period as the related revenue.
ACCOUNTING CONCEPTS AND PRINCIPLES

Disclosure principle – all relevant and material

information should be reported. It is a concept that
requires a business to report all necessary information
about their financial statements and other relevant
information to any persons who are accustomed to
reading this information.
ACCOUNTING CONCEPTS AND PRINCIPLES

 Conservatism principle (Prudence) - also

known as prudence. In case of doubt, assets
and income should not be overstated while
liabilities and expenses should not be
understated.
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.
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP)

The 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.
GAAP
INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS)

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 to 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:
1. Philippine Financial Reporting Standards (PFRS) which corresponds to International
Financial Reporting Standards (IFRS)
2. Philippine Accounting Standards (PAS) which corresponds to international Accounting
Standards (IAS)
3. Interpretations of Accounting standards issued by the Philippine Interpretations
Committee in accordance with interpretations of the International Financial Reporting
Interpretations Committee (IFRIC) and the Standing Interpretations Committee.