BASIC ACCOUNTING

CONCEPTS AND
PRINCIPLES
 BASIC ACCOUNTING ASSUMPTIONS
1.Going concern assumption
2.Accounting entity
3.Periodicity assumption / Accounting period assumption
4.Accrual
5.Monetary unit
GOING CONCERN CONCEPT
Financial statements are prepared on the assumption that the
entity will continue in operation into the foreseeable future
without the need or intention to stop operation.

If there is significant doubt that the business will continue in

operations, the going concern assumption is forgone and
financial statements will be prepared under a Terminating
Concern basis.
ABC Proprietorship purchased an equipment with a purchase
cost of Php100,000. The equipment can be sold for Php70,000
if the company is liquidated.

How much should the equipment be recorded in the

accounting books?
ACCOUNTING ENTITY CONCEPT
An entity is an object of accounting. Accounting presents
financial information regarding an entity. An entity can be a
business, a person, or organization or the government.

A business is a separate accounting entity from its owners.

Hence, in preparing financial reports about the business,
transactions of the owners are excluded.
A businessman sets-up a merchandising business by investing
Php100,000 cash to the business. He used the Php80,000 cash
to purchase goods for sale, and used the rest to pay Php10,000
rent of the business premises, Php10,000 for local business
taxes. He also paid Php5,000 tuition fee of his children,
Php10,000 salaries of his household help and sold his car for
Php150,000 earning him Php15,000 gain.

What transactions should be included in the financial books of

the business?
PERIODICITY ASSUMPTION/
ACCOUNTING PERIOD ASSUMPTION
The presumed indefinite life of the business is broken into
distinct equal time periods called “accounting period” over
which the financial performance and financial condition of the
business are accounted and reported to users of the financial
statements.

Income is not measured from the start-up of business up to its

dissolution, but is rather reported every accounting period.
The length of the accounting period can either be:
1. Weekly
2. Monthly
3. Quarterly
4. Semi-annually
5. Annually
 ACCRUAL BASIS
The concept of accrual is an offshoot of the accounting period
assumption. Under the accrual method, income are recorded in
the accounting period they are earned regardless of when they
are collected whereas expenses are recorded in the period
incurred regardless of when they are paid.

CASH ACCURALS

Revenue Received Earned

Expenses Paid Incurred

 The accrual basis or method of reporting income or expense has the
following terms:

a. Accrued income – an income that is already earned but is not yet

collected
b. Accrued expense – an expense that is already incurred but not yet paid
c. Deferred income – an income that is already received but not yet
earned
d. Prepaid expense – an expense that is already paid but not yet incurred

CASH ACCURALS

Revenue Received Earned

Expenses Paid Incurred

DEF Company rendered rental accommodation services priced
at Php20,000 to a client in year 2016. The rental will be paid
by the client in 2017.

James Enterprise pays employee salaries on the 3 rd and 18th day

of the month. James Enterprise shall pay Php30,000 salaries on
July 3 next month.
James Enterprise pays employee salaries on the 3 rd and 18th day
of the month. James Enterprise shall pay Php30,000 salaries on
July 3 next month.

James Enterprise shall split the Php30,000 salaries expense as

follows:

Expense Days Computation

Amount
For June June 19 – June 30 12 days/15days x 30,000 Php 24,000
For July July 1 – July 3 3 days/15days x 30,000 6,000
Php 30,000
Mr. Lessor reports financial statements annually using the
calendar accounting period. He received Php120,000 advanced
rental from a lessee for one year covering October 1, 2016 to
September 30, 2017.

How much rental income should be recorded at the end of the

Year 2016?
Only Php30,000 shall be recognized as rental income in Year 2016. The Php90,000
portion of the advanced income shall be considered as a liability or debt (unearned
income) because it is not yet earned.
HIJ Enterprise paid Php15,000 for a one year fire insurance of
its building covering August 1, 2016 to July 30, 2017.

At December 31, 2016, the Php15,000 payment must be

analyzed for its expired (expense) and unexpired component.

Only the Php6,250 expired portion of the Php15,000 pre-paid expense is an expense
in 2016. The unexpired balance of Php8,750 is still an asset (prepaid insurance) in
2016.
MONETARY OR MEASUREMENT
CONCEPT
Only financial transactions are recorded and reported in terms
of money such as the Peso. Non-financial information is not
recorded but information relevant to users of financial
statements is noted via a memo entry in the books.

Please note: Only transactions or events that pertains to the

business entity is recorded.
The business paid Php10,000 for business licenses. 3 days
later, the business registration was compete. The business
executed a contract to lease a commercial space for Php20,000
a month. Two days later the business paid Php40,000 advanced
rental deposit.

Only the following monetary transactions shall be recorded:

a. Payment of Php10,000 business expense, not the completion of business
registration
b. The payment of Php40,000 advanced rental not the contract signing for the lease
contract
OTHER ACCOUNTING
PRINCIPLES
1.Cost concept
2.Full disclosure concept
3.Matching concept
4.Revenue recognition
5.Materiality
6.Conservatism
7.Objectivity
COST PRINCIPLE
Amounts shown in financial reports are historical cost
FULL DISCLOSURE PRINCIPLE
Sufficient information for informed judgments.
MATCHING CONCEPT
The matching concept relates to the timing of recognition of an
expense. It postulates that expenditure shall be expensed in the
accounting period the benefits of the expenditure are realized
by the entity. An expenditure is an outflow of resources or an
obligation requiring future outflow of resources.
TYPES OF EXPENDITURES
1. Capital expenditures – these are expenditures that benefits
future accounting periods. These are recorded in accounting as
assets.
2. Period expenditures – these are expenditures that benefits only
the current accounting period. These are recorded as expense.
Examples of capital expenditures:
a. Supplies
b. Inventory
c. Equipment
d. Land
e. Building
f. Prepaid expense
Examples of period expenditure:
a. Salaries
b. Utilities
c. Rent
d. Interest
e. Cost of sales
REVENUE RECOGNITION PRINCIPLE

• Recognize revenue when goods sold or services are

rendered, regardless of cash receipt.
MATERIALITY

• In accounting, materiality refers to the impact of an omission or

misstatement of information in a company’s financial statements on
the user of those statements. If it is probable that users of the
financial statements would have altered their actions if the
information had not been omitted or misstated, then the item is
considered to be material.
CONSERVATISM

• If there are two acceptable alternatives in a situation,

choose the alternative that will result in lesser income
or resource.
OBJECTIVITY
• Recording and reporting process should be
performed with independence which is free from
bias.