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ABM 1 Module 4 Accounting Concepts and Principles
ABM 1 Module 4 Accounting Concepts and Principles
In the Philippines, the body that sets the accounting standards is the Financial Reporting
Standards Council (FRSC). It was established by the Board of Accountancy in 2006 by virtue
of the Implementing Rules and Regulations of RA 9298 or the Philippine Accountancy Act
of 2004. FRSC issued the accounting standards referred to in the Philippines .today as the
generally accepted accounting principles. .
Visit http://picpa.corn.ph/frsc.html?article=About%20FRSC%20and%20PIC&
page=FRSC (last ac d 26
cesse on July 2016) and learn about the history of FRSC.
How does FRSC co t 'b t h
n n u e to t e advancement of the accounting profession?
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· ·· An-importa t · . . (i ·
.' , · , : .· · n accountmg assuJIIption is that -the_enterprise will c.on!inue;1ts o~erat.~~~,:
mdefimtely .. This is called the assumption ;f
go.ing·.conce;n. 'R~l~ted ) ~·,th:i~..a~-~Uf!1Pti
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. . the. .basic account"mg concepts of accountmg
. entity,. monetary umt, . time
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penod1c1ty, and accrual basis. , . : :· :
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Why is it assumed that .the business entity will continue to operate indefinitely?
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Recall a time when you were tr.us~ed with a budget or fund. What are the•.
. 't? R te your answer to the concept
challenges that you encountered in managing 1 • eaI . .
· f th's concept in relation to your
of accounting entity. Explain -the importance o 1 ·
experience.
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Why is money consider .ed as the common unit of m~asui·'em t · ·.b .' · ,··,_. ? : ·
· ~ · · · · . en 1n us1ness . .
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1. Why is there a need to divide the indefinite period of operation o~ a business entity
into calendar year and fiscal year?
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2. Why do some businesses choose fiscal year as basis for their accounting period
instead of the calendar year?
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.. The accrual basis of accounting tells that revenue or inc~me ,is recognized . when it is
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regardless of when it is paid. This concept differenti~tes inco~e fro~ qash co~lectiori~, and
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. . The following accounting principles are related;to the 'accrual concept:~ · ·'.r~,.·.~·/J'.Jtt~f:'.:,
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r: Revenue Recognition Principle ; . , . . . , ' -. . , ' .- . · · :' · ,-, . }j,'f
Rf!veliu.e or income is the inflow .of asset fr<;>~the sale q~goods.and serv1ces..R~v.enu,~ /:~
O
is
usu~lly e~rne'd ov~~'time and is not re~ei;yed,immed~ately ~fter ~00~~ and ~er':'~C~~.. ~(
have been delivered. This is why, in t~i~principle, revenue ts recognized wh~~,1~ , !~
earned regardless' of w-hen it is rec~ive~. A~.co1:1 _nt~nts, therefore, record income 1 ~~~~
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' -the sale of goods and services.has qf e~ fully ~~~e .~lrea~y ~wenthoug~ payment, ~as n9f
been collected yet. · -• ··
_ ~or exa'mple, · a publishing company .has BiCJ·..
• 1. , delivered educational i:nagazines_
to a ~lient scho,ol Idea ·,,. '..r:
in March. The school, however, will on~y make '
11n , accounting, ' business ,
' , . 50% ·payment in June, and the full payµient in transactions · must be ' recorded :
October. The income for this transaction should be •
at once when income is' earned
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recognized by the publishing company in its March or expenses are incurred_ eyen
though 'no actual money is
record even if the collection of payment will only
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received or paid yet.
happen in Jµne and October.
Expense Recognition Principle
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Expense refers to the consumption of resources. It is an outflow of asset. While
· - reyenue increases equity (value qf _assets .ab9ve any liabilities) ; expense decreases
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it. Some expenses are payable not at an in·stant after the asset has been consumed.
However, the expense recognition principle requires accountants to record an expense
when it is already incurred whether or not payment has been made already ~
Take for example the utility bills that a household pays. Utilfty biils are .normally
due for payment days after the consumption has been made, such that an electric
consumption for January can be paid on ·the first week of February. However, in
accounting, the recording of the electric consumption must be done in January even
though the payment is made in February.
o Matching Principle
The principle of matching is established in recognition of the fact that there is a
cause-and-effect relationship between revenue and expense. Accountants must record
properly all the expenses incurred to generate revenues. By doing this, ,tpey : can
determine th~ ~et inco~e .or _n_e!_l~ss ?f ~1p~rt_ic1:1lar
. b~s~nes.s operation _. Generally, the
total expenses
. . are deducted
. from the
,, total .revenue
" to determine 1'f th. er e 1s
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or net loss. If the total revenue is great~r -thari the tot~I expens .es th ·. - t · · . -· ,:.· '/ :
-· · .. . . . -; ·:: -, · , , ,, •, . . , ere 1s ne income . ....-:
. But if the total expenses are greater than the total revenue there 1·s; t ··: · 1 -;', 1 .;, .\ ; i
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. Other :acco~nting concepts or.principles that accountants can apply. w·hen:it~ey
~ak~ financial reports that are relevant to the decisions of users of account.mg
information include the materiality, objectivity or reliability, cost, and conservatism
concepts.
Ma teriality Concept
The materiality concept or principle indicates that accountants should disregard
accounting standards for trivial matters or for those transactions that are not important to
influence decisions. In contrast, this concept also tells that all important matters must be
recorded and disclosed. Important matters are those that affect the financial decis 'ions of
the users of accounting information. Although the materiality concept does not 'provide a
definitive guidance as to which are considered material and immaterial, it requires good
judgment from accountants . As a general rule an item is considered material if knowle .dge
of it would affect the decision of users of financial statements.
Access the Web and find out what accounting professionals use as guiding principle
in considering which financial information is material and which one is immaterial.
Report your findings to class. Provide examples.
Cost Concept
Also known as the historical cost convention, the cost concept tells that resources
acquired must be recorded in reference to the acquisition price ·and 'that the.re must ·be
no adjustment in value at a later per1od. Therefore , the value of assets is recorded at their
original cost.
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What.Have I Learned So,,Far?..t ,, • •I'
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Compare the cost concept and materiality concept in terms of the decisions used ·in .
recording data in the financial statements.
Accountants apply the conservatism concept when they choose the worst case scenario
for the company when it is faced with significant uncertainties about an accounting
problem. This leans to the direction of caution so that the users of financial information
will not have false expectations. Thus, in recognizing assets, the lowest in the available
options is preferable to be recorded. Likewise, in recognizing liabilities, the highest in th~
available options is preferable to be recorded. Lastly, for revenues, expenses, gains, and
losses, the one to be recorded when in doubt is that which has the least favorable effect
on the net income.
Cite real-life experiences where you were able to apply the accounting concepts
or principles discussed in this module. How did these help you in managing your
finances?
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Identify the accounting concept or principle that should b e use d in · eac h situation.
· ·
·Write your answer on the blank. . ·
. .
------- 1. The accountant
. gathers a 11th e o ffi cial
· receipts,
. · .'
vouchers,
and mvoices
· fior a particular
· period and records · -theth ,
objectively.
You have leam .ed in this · module the b·asic concepts · or principles on accounting.
Search on the Internet other accounting principles that are related to the basic principles
discussed in the module. Particularly , research on the following:
I . Consistency concept 3. Dual effect concept
2. Disclosure concept 4. Realization concept -
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WALLS 4.3 Apply It in ltcal Life
You are the treasurer of a youth organization in your community. The officers of the
organization will meet next week. You are tasked to report about the financial status of
the organization during the meeting. You will create a PowerPoint presentation to show
the organization's cash flo~ for the last three months. Apply the appropriate concepts
or principles of accounting that you learned in doing the report. Your report 'should be
accurate, detailed, and easy to understand.
In this module, you learned about the assumption of going concern, and the
concepts of accounting entity, monetary unit, periodicity, and accrual in accounting.
In relation to the accrual concept are the revenue recognition, expense recogn~tion,
and matching principles. Other important accounting concepts or principles such as
the materiality, objectivity and reliability, cost, and conservatism concepts were also
explained. These concepts serve as a guide in accomplishing any accounting tasks.
You will learn other related accounting concepts and principles as you do actual
recording and classifying of accounts in the next modules.
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