Accounting Principles and Concepts

1. Accounting Principles and Concepts
• Accounting is referred to as “the language of business”
because it communicates the financial condition and
performance of a business to interested users.
• In order to become effective in carrying out the accounting
procedure, as well as in communication, there is a widely
accepted set of rules, concepts and principles that governs
the application of the accounting. These concepts and
principles are referred to as the Generally Accepted
Accounting Principles or GAAP.
• In this article, you will learn and familiarize yourself with the
accounting principles and concepts relevant in the
performance of the accounting procedures. It is a necessity to
learn and understand it because you need to apply these
concepts and principles during the accounting process.

2. Guidelines on Basic Accounting Principles and
Concepts
GAAP, is the framework and guidelines of the accounting
profession. Its purpose is to standardize the accounting
concepts, principles and procedures.
Here are the basic accounting principles and concepts:
1. Business Entity
• A business is considered a separate entity from the owner(s)
and should be treated separately. Any personal transactions
of its owner should not be recorded in the business
accounting book unless the owner’s personal transaction
involves adding and/or withdrawing resources from the
business.

3. 2. Going Concern
• It assumes that an entity will continue to operate indefinitely. In this basis,
generally, assets are recorded based on their original cost and not on
market value. Assets are assumed to be held and used for an indefinite
period of time or during its estimated useful life. And that assets are not
intended to be sold immediately or liquidated.
3. Monetary Unit
• The business financial transactions recorded and reported should be in
monetary unit, such as US Dollar, Canadian Dollar, Euro, etc. Thus, any
non-financial or non-monetary information that cannot be measured in a
monetary unit are not recorded in the accounting books, but instead, a
memorandum will be used.
4. Historical Cost
• All business resources acquired should be valued and recorded based on
the actual cash equivalent or original cost of acquisition, not the prevailing
market value or future value. Exception to the rule is when the business is
in the process of closure and liquidation.

4. 5. Matching
• This principle requires that revenue recorded, in a given accounting
period, should have an equivalent expense recorded, in order to show the
true profit of the business.
6. Accounting Period
• This principle entails a business to complete the whole accounting process
over a specific operating time period.
• Accounting period may be monthly, quarterly or annually. For annual
accounting period, it may follow a Calendar or Fiscal Year.
7. Conservatism
• This principle states that given two options in the amount of business
transactions, the amount recorded should be the lower rather than the
higher value.
8. Consistency
• This principle ensures similar and consistent accounting procedures is
used by the business, year after year, unless change is necessary.
• Consistency allows reliable comparison of the financial information
between two accounting periods.

5. 9. Materiality
• Business transactions that will affect the decision of a user are
considered important or material, thus, must be reported properly.
This principle states that errors or mistakes in accounting
procedures, that which involves immaterial or small amount, may
not need attention or correction.
10. Objectivity
• This principle states that the recorded amount should have some
form of impartial supporting evidence or documentation. It also
states that recording should be performed with independence,
that’s free from bias and prejudice.
11. Accrual Accounting
• This principle requires that revenue should be recorded in the
period it is earned, regardless of the time the cash is received. The
same is true for expense. Expense should be recognized and
recorded at the time it is incurred, regardless of the time that cash
is paid. This is to show the true picture of the business financial
performance.

6. ENRICHMENT ACTIVITY
Accounting principles. Indicate which principles are violated.
1. 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.
2. 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.
3. 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.
4. 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.
5. 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.
6. 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.

7. Types of Business According to Activities
3 types of business organizations:
• Service Business
This type of business offers professional skills, advice and consultations.
Examples: barber shops and beauty parlors, repair shops, banks, accounting and
law firms
• Merchandising Business
This type of business buys at wholesale and later sells the products at retail. They
make a profit by selling the merchandise or products at prices that are higher than
their purchase costs. This type of business is also known as "buy and sell".
Examples are: book stores, sari-sari stores, hardware stores
• Manufacturing Business
This type of business buys raw materials and uses them in making a new product,
therefore combining raw materials, labour and expenses into a product for sale
later on.
Examples are: shoe manufacturing businesses, car manufacturing plants
Additional information:
• There are businesses that may be classified under more than one type of business.
A bakery, for example, combines raw materials in making loaves of bread
(manufacturing), sells hot pan de sal (merchandising), and caters customers’
orders in small coffee table servings of ensaymada and hot coffee (service).

8. Assets invested by the owner
July 1 - Paolo Reyes started a delivery service on July 1, 2013. The
following transactions occurred during the month of July. He invested
PHP800,000 cash and Cars amounting to PHP200,000
Borrowings from the bank
July 2 – Reyes borrowed PHP100,000 cash from PNB for use in his
business.
Asset purchased for cash
July 7 – Bought tables and chairs from Orocan and paid PHP45,000 cash