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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?
• The owner used properties of the business to pay off his
personal expenses.

• The owner of the business established another outlet of his


business. During the month, he transferred goods from his main
office to his new outlet.
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.
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
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 3rd 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 3rd 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 the
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 CONCEPTS
1. Realization concept
2. Matching concept
3. Duality concept
REALIZATION CONCEPT
Income is recognized when it is realized or earned. Income is
said to be realized when one of the contracting party
performed his obligation on the contract, thus have established
a right to demand from the other party.
Realization of income from sale of goods
Income from the sale of goods is realized when ownership to
the goods passes to the customer.

The ownership to the goods transfers to the customer depending


on the following shipping terms:
a. FOB shipping point – ownership of the goods transfers to the
buyer at the moment the goods leaves the premises of the
seller
b. FOB destination – ownership to the good transfers to the
buyer upon arrival at the warehouse of the buyer
Realization of income from sales of service

Income from the sale of services is realized when services are


rendered based on the extent of completion.
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
RECOGNITION OF EXPENSES
Expenses are recognized in the income statement when a
decrease in future economic benefits related to a decrease in
an asset or an increase of a liability has arisen that can be
measured reliably. This means, in effect, that recognition of
expenses occurs simultaneously with the recognition of an
increase in liabilities or a decrease in assets (for example, the
accrual of employee entitlements or the depreciation of
equipment)
Expenses may be recognized using:
a. Direct association or matching of cost against revenues or
cause and effect association
b. Systematic and rational allocation
c. Immediate recognition
Direct association or matching of cost against the revenues or
cause and effect association

Examples:
1. Goods purchased are expensed as “cost of sales” in the
period the sales income is recognized.
2. Sales agent’s commission expense is recognized when the
related sales is reported as income.
Systematic and rational allocation

Example 1 – Items or properties, plants and equipment


In January 1, 2016, ABC Company acquired a piece of
equipment for Php40,000 cash. The equipment is expected to
serve the company for 5 years after which it can be sold at
scrap value of Php10,000.
Systematic and rational allocation

Example 2 – Supplies
In July 1, 2016, ABC paid worth Php30,000 supplies. Supplies
worth Php8,000 was used in 2016 while the rest was used in
2017.