Fundamentals of Accountancy,

Business and Management 1

Third Quarter – Module 2

ACCOUNTING
CONCEPTS AND
PRICIPLES
MELC: Explain the varied accounting concepts and principles and solve
exercises on accounting principles as applied in various cases.
I. INTRODUCTION

Accounting is the spoken language of transactions. The human brain cannot

store endless information. And so accounting takes the charge of keeping the records
of all the transactions made within a firm.

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 prepares of financial statements in recording and reporting
financial information regarding a business enterprise, hence aiding 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.

DISCUSSION OF CONCEPTS

⮚ UNDERLYING ACCOUNTING ASSUMPTIONS

Basic Assumptions Underlie the Financial Accounting Structure

1. Entity Assumption. All of the business transactions of a sole

proprietorship separate from the business owner's personal transactions.

2. Monetary Unit Assumption. Economic activities of a Philippine

entity are measured and reported in the Philippine peso.

3. Accrual Basis Assumption. It is assumed that revenue is recorded

in the period it is earned, regardless of the time the cash is received or
collected.

4. Going Concerned Assumption. This assumption assumes that the

business in question will likely continue operating in the foreseeable future. It
assumes that the company will not go bankrupt and will be able to meet its
obligations and objectives.

5. Time-Period Assumption. The accounting practices and methods

used by a company should be maintained and reported for specific periods of
time. These periods should also be consistent each year that the business is
in operation. Time periods can be monthly, quarterly, biannually, or annually
but must be consistent so that records can be compared over set time periods.
⮚ PRINCIPLES OF ACCOUNTING

Basic Accounting Principles

1. Cost Principles. A business should record their assets, liabilities and

equity at the original cost at which they were bought or sold. The real value
may change over time (e.g. depreciation of assets/inflation) but this is not
reflected for reporting purposes.

2. Full Disclosure Principles. Any important information that may

impact the reader’s understanding of a business’s financial statements should
be disclosed or included alongside to the statement.

3. Matching Principles. The concept that each revenue recorded

should be matched and recorded with all the related expenses, at the same
time.

4. Revenue Recognition Principles. Companies should record their

revenues when it is recognized, or in the same time period of when it was
accrued (rather than when it was received).

5. Materiality Principles. An item is considered ‘material’ if it would

affect or influence the decision of a reasonable individual reading the
company's financial statements. This concept states that accountants must
be sure to include and report all material items in the financial statement.

6. Conservatism or Prudence Principle. In situations where there are

two acceptable solutions for reporting an item, the accountant should ‘play it
safe’ by choose the less favorable outcome. This concept allows accountants
to anticipate future losses, rather than future gains.

7. Objectivity Principles. This principle requires business transactions

to have some form of impartial supporting evidence or documentation.
 ⮚ NORMAL BALANCES AND INCREASES AND DECREASES

It is important that you master the normal balances of each major

account and two of the contra-asset accounts.

Normal Increase Decrease

Balance Through Through

Assets Debit Debit Credit

Liabilities Credit Credit Debit

Owner’s
equity :

▪ Owner, Credit Credit Debit

Capital

▪ Owner,
Debit Debit Credit
Drawing

Revenues Credit Credit Debit

Expenses Debit Debit Credit

Contra-asset
accounts:

▪ Allowance for Credit Credit Debit

Doubtful
Accounts
Credit Credit Debit
▪ Accumulated
Depreciation
 PART II. ACTIVITIES
ACTIVITY I: IDENTIFICATION

DIRECTIONS: The terms or cases labelled A- L are the ones being described in
the sentence numbered 1-12. Match each accounting assumption or principle with the
correct sentence and write the letter on the space provided.

a. accrual basis assumption g. matching principle

b. conservatism or prudence principle h. materiality principle
c. cost principle i. monetary unit assumption
d. economic entity assumption j. objectivity principle
e. full disclosure principles k. revenue recognition principle
f. going concern assumption l. time period assumption

_________1. The life of an economic entity can be divided into artificial time periods for the purpose of
providing periodic reports on the economic activities of the entity.
_________2. 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 enterprise.
_________3. It is assumed that revenue is recorded in the period it is earned, regardless of the time the
cash is received or collected.
_________4. It entails that bookkeeping and financial recording be performed with independence, that is free of bias
and prejudice.
_________5. Antonio Bake Shop bought one freezer for P 55,000, but it could have been purchased at P 50,000 from
another vendor. The shop should record the transaction at P 55, 000 because that is the amount given exchange
for the freezer.
_________6. Losses and costs are recorded when they are probable and can be reasonably estimated, while gains are
recorded only when they are realized.
 _________7. Professional judgment is needed to decide whether an amount is insignificant or immaterial.
_________8. Assets are assumed to be used for an indefinite period of time and not intended to be sold immediately.
_________9. Mr. Antonio Ferrer, the owner of Antonio Bake Shop, bought equipment for the school project of his
daughter using his own money. This is personal transaction of the owner and should not be recorded in the
accounting books of the business.
_________10. Any non-financial or non-monetary information that cannot be measured in terms of money are not
recorded in the accounting books.
_________11. Sales salaries expense should be reported in the period when the sales were made and not reported in
the period when the salaries were paid.

_________12. On July 16, Ginhawa Massage Spa rendered service to a client for P3, 000. The service fee was
collected on August 1. The entity should record the revenue of P3, 000 in July, the time service was rendered to
the client, and not the time cash was rendered.

Activity 2: INCREASE or DECREASE

DIRECTIONS: Indicate any change(s), INCREASE or DECREASE, or both words to

show the effect on the total assets, liabilities, and capital using the accounting
transaction below.

ASSETS LIABILITIES CAPITAL

Example: The owner made an initial investment in the INCREASE INCREASE

business.

1. Received the amount borrowed from bank

2. Additional investment in the business
3. Cash withdrawal for personal use
4. Bought delivery van on account
5. Sales from customers on account
6. Received cash from customers
7. Paid employees’ salaries
8. Paid amount due bank
 PART 3. SUMMATIVE EVALUATION

A. WRITTEN OUTPUT
1. APPLICATION
DIRECTIONS: Let’s apply the basic accounting concepts and principles. Kindly identify the concept or
principle that corresponds to each statement. Choose from the box below.
1. The business acquired a clothing machine. The regular selling price is Php 210,000.00; however,
you were able to acquire it at a discounted price of Php 180,000.00. You will record the machine at its
acquisition cost of Php180,000.00. ___________________________.
2. The business acquired initial inventory of cakes and pastries for the total cost of Php 35,000.00. You
will record the cost as an asset (i.e. inventory) rather than as expense. _______________________.
3. During the year, you started a business of selling cakes and pastries. You opened a separate bank
account for the business and deposited your initial investment of Php 100,000.00 to this account.
______________________.
4. The inventories were sold on credit for Php 550,000.00. You will immediately record the credit
sales as accounts receivable rather than waiting for them to be collected. ___________________________.
5. Also, you will now record the Php 80,000.00 cost of inventory as expense.
_________________________ .

2. PROBLEM ON TRASACTION ANALYSIS

1-3. During the month of July, the MMTC Enterprises completed the following transactions:

___________ a. Received an additional investment

___________ b. Recorded salaries paid to employees for the first half of the month
___________ c. Paid rent in advance
 Required: Indicate the effect of each transaction on the accounting equation by the
appropriate number for the following list:
1. Increase in one asset, decrease in another asset
2. Increase in an asset, increase in liability
3. Increase in an asset, increase in capital
4. Decrease in an asset, decrease in liability
5. Decrease in asset, decrease in capital

4-5. During the month of October, the Antonio’s Corporation completed the following transactions:
___________ a. Paid rent for November and December
___________ b. Earned service revenue, receiving cash

Required: Indicate the effect of each transaction on the accounting equation by the
appropriate number for the following list:
1. Increase in one asset, decrease in another asset
2. Increase in an asset, increase in liability
3. Increase in an asset, increase in capital
4. Decrease in an asset, decrease in liability
5. Decrease in asset, decrease in capital

B. PERFORMANCE TASK
1. OH WORD! OH MEANING!
DIRECTIONS: Please define briefly the following accounting concepts and principles. (2 points each)
1. Going concern principle
2. Time period principle
3. Monetary unit principle
4. Objectivity principle
5. Disclosure principle

2. ESSAY
DIRECTIONS: Please discuss the following questions briefly and concisely.
Rubrics in Checking Essays:
Content = 30%, Understanding/Application = 25%, Original Thinking = 25%,
Structure = 10% and Grammar = 10%.
 Recall a specific industry in your community that you’ve visited previously. Cite at least 3
situations that encountered in which accounting concepts and principles were properly applied or in some cases,
were violated in your community. (5 points for each situation)

REFERENCES:

A. F.Tugas, H. Salendrez, J. Rabo. Fundamentals of Accountancy, Business and

Management 1 Textbook. Vibal Group Inc.

B. https://www.accountingcoach.com/accounting-basics/explanation

C. Andres, C.S., et al.(2016) ‖Teaching Guide for Senior High School Fundamentals
of Accountancy, Business and Management 1‖ – Published by Commission on Higher
Education in collaboration with the Philippine Normal University

D. Ferrer R.C. et.al. (2017). Fundamentals of Accountancy, Business and Management part 1,
Bandolin Enterprise, (Publishing and Printing) Bakekang Sur, Baguio City

KEY ANSWER FOR THE ACTIVITIES:

ACTIVITY I: IDENTIFICATION

1. l
2. e
3. a
4. j
5. c
6. b
7. h
8. f
9. d
10. i
11. g
12. k

Activity 2: INCREASE or DECREASE

1. Increase in Assets, Increase in Liabilities
2. Increase in Assets, Increase in Capital
3. Decrease in Assets, Decrease in Capital
4. Increase in Assets, Increase in Liabilities
5. Increase in Assets, Increase in Liabilities
6. Increase in Assets, Increase in Capital
7. Decrease in Assets, Decrease in Capital
8. Decrease in Assets, Decrease in Liabilities