FINANCIAL ACCOUNTING

&
REPORTING
(Fundamentals)

ZEUS VERNON B. MILLAN

Chapter 2: Accounting Concepts and
Principles (FAR by: Millan)
 Chapter 2
Accounting Concepts and Principles

Learning Objectives
1. Give examples of accounting concepts and
principles.
2. Apply the concepts in solving accounting
problems.

Chapter 2: Accounting Concepts and

Principles (FAR by: Millan)
 Basic Accounting Concepts
1. Separate entity concept 7. Time Period
2. Historical cost concept 8. Stable monetary unit
3. Going concern assumption 9. Materiality concept
4. Matching 10. Cost-benefit
5. Accrual Basis 11. Full disclosure principle
6. Prudence (or Conservatism) 12. Consistency concept

Chapter 2: Accounting Concepts and Principles (FAR by: Millan)

Basic Accounting Concepts – (cont’n)
• Separate entity concept – The business is viewed as
a separate entity, distinct from its owner(s). Only the
transactions of the business are recorded in the
books of accounts. The personal transactions of the
business owner(s) are not recorded.
• Historical cost concept (Cost principle) – assets are
initially recorded at their acquisition cost.
• Going concern assumption – The business is
assumed to continue to exist for an indefinite period
of time.
• Matching – Some costs are initially recognized as
assets and charged as expenses only when the
related revenue is recognized.
Chapter 2: Accounting Concepts and Principles (FAR by: Millan)
Basic Accounting Concepts – (cont’n)
• Accrual Basis of accounting – income is recorded in
the period when it is earned rather than when it is
collected, while expense is recorded in the period
when it is incurred rather than when it is paid.
• Prudence – The observance of some degree of
caution when exercising judgments under conditions
of uncertainty. Such that, if there is a choice between
a potentially unfavorable outcome and a potentially
favorable outcome, the unfavorable one is chosen.
This is necessary so that assets or income are not
overstated and liabilities or expenses are not
understated.
Chapter 2: Accounting Concepts and Principles (FAR by: Millan)
Basic Accounting Concepts – (cont’n)
• Reporting Period – The life of the business is
divided into series of reporting periods.
• Stable monetary unit – Assets, liabilities,
equity, income and expenses are stated in
terms of a common unit of measure, which
is the peso in the Philippines. Moreover, the
purchasing power of the peso is regarded as
stable. Therefore, changes in the purchasing
power of the peso due to inflation are
ignored.
Chapter 2: Accounting Concepts and Principles (FAR by: Millan)
Basic Accounting Concepts – (cont’n)
• Materiality concept – An item is considered
material if its omission or misstatement
could influence economic decisions.
Materiality is a matter of professional
judgment and is based on the size and
nature of an item being judged.
• Cost-benefit – The costs of processing and
communicating information should not
exceed the benefits to be derived from the
information’s use.
Chapter 2: Accounting Concepts and Principles (FAR by: Millan)
Basic Accounting Concepts – (cont’n)
• Full disclosure principle – Information
communicated to users reflect a balance
between detail and conciseness, keeping in
mind the cost-benefit principle.
• Consistency concept – Like transactions are
accounted for in like manner from period to
period.

Chapter 2: Accounting Concepts and Principles (FAR by: Millan)

 Philippine Financial Reporting
Standards (PFRSs)
The PFRSs are Standards and Interpretations
adopted by the FRSC. They consist of the
following:
1. Philippine Financial Reporting Standards
(PFRSs);
2. Philippine Accounting Standards (PASs);
and
3. Interpretations
Chapter 2: Accounting Concepts and Principles (FAR by: Millan)
 Qualitative Characteristics
I. Fundamental Qualitative Characteristics
i. Relevance (Predictive Value, Confirmatory Value, Materiality)
ii. Faithful Representation (Completeness, Neutrality,
Free from error)

II. Enhancing Qualitative Characteristics

i. Comparability
ii. Verifiability
iii. Timeliness
iv. Understandability
Chapter 2: Accounting Concepts and Principles (FAR by: Millan)
 Fundamental vs. Enhancing
• The fundamental qualitative characteristics
are the characteristics that make
information useful to users.
• The enhancing qualitative characteristics
are the characteristics that enhance the
usefulness of information

Chapter 2: Accounting Concepts and Principles (FAR by: Millan)

 Relevance
• Information is relevant if it can affect the
decisions of users.
• Relevant information has the following:
a. Predictive value – the information can be used
in making predictions
b. Confirmatory value – the information can be
used in confirming past predictions

Materiality – is an ‘entity-specific’ aspect of

relevance.
Chapter 2: Accounting Concepts and Principles (FAR by: Millan)
 Faithful representation
• Faithful representation means the information provides a true,
correct and complete depiction of what it purports to represent.
• Faithfully represented information has the following:
a. Completeness – all information necessary for users to
understand the phenomenon being depicted is provided.
b. Neutrality – information is selected or presented without
bias.
c. Free from error – there are no errors in the description and in
the process by which the information is selected and applied.

Chapter 2: Accounting Concepts and Principles (FAR by: Millan)

Enhancing Qualitative Characteristics
1. Comparability – the information helps users in
identifying similarities and differences between
different sets of information.
2. Verifiability – different users could reach consensus as
to what the information purports to represent.
3. Timeliness – the information is available to users in
time to be able to influence their decisions.
4. Understandability – users are expected to have:
a. reasonable knowledge of business activities;
and
b. willingness to analyze the information diligently.
Chapter 2: Accounting Concepts and Principles (FAR by: Millan)
 APPLICATION OF
CONCEPTS

PROBLEM 3: FOR CLASSROOM DISCUSSION

Chapter 2: Accounting Concepts and Principles (FAR by: Millan)

 QUESTIONS????
 REACTIONS!!!!!

Chapter 2: Accounting Concepts and

Principles (FAR by: Millan)
END

Chapter 2: Accounting Concepts and

Principles (FAR by: Millan)