REPUBLIC OF THE PHILIPPINES

DEPARTMENT OF EDUCATION
DIVISION OF CABADBARAN CITY

NORTHERN MINDANAO COLLEGES, INC.

Atega Street, Barangay 11 Poblacion, Cabadbaran City
8605 Agusan del Norte, Region XIII
NON-SECTARIAN
1946

Self-Learning Module for Fundamentals of Accountancy,

Business and Management 1
Quarter 1, Week 2

Name : ________________________________________
Grade and Section : ________________________________________
Date : ________________________________________

Introduction

Accounting concepts, principles, and assumptions are essential in the practice of accountancy.
Financial statements become more comparable and more useful to users if these concepts, principles,
and assumptions are followed by businesses. We can look at these as a set of rules that govern the
accounting process.

Directions for the User

Here are some reminders to guide as you go through this module:

1. Understand and follow the instructions carefully.

2. Accomplish the pretest to identify your preparedness about the lesson in this module.
3. Be honest in answering and checking your activity.
4. Read each lesson and do activities provided for you.
5. Demonstrate the activities to guide you in comprehending the lessons
6. Answer the posttest measure how much you have gained from the topics.

Pretest
True or False
Directions: Write ASSETS if the statement is True and LIABILITIES if the statement is False.

_______________ 1. GAAP stands for General Accounting and Auditing Principles.

_______________ 2. Accounting is an art and a discipline.
_______________ 3. Financial statements are prepared at the end of the 12-month period because of the
going concern assumption.
_______________ 4. Assets are usually valued under replacements cost
_______________ 5. Users of financial reports expect that accounting information is reliable, verifiable
and objective.

Objectives and Competencies

This module is designed for you. At the end of the module, you are expected to identify generally
accepted accounting principles.

Learning Competencies:
1. explain the varied accounting concepts and principles - ABM_FABM11-IIIb-c-15
2. solve exercises on accounting principles as applied in various cases -ABM_FABM11-IIIb-c-16

Procedure/Learning Experience
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ENGAGE: Activity 1: Think and Solve

Petness First Petshop

Juan dela Cruz opened his pet shop business called Petness First Petshop. He opened a bank account
for his business and deposited PHP500,000. The business earned PHP50,000 but he had doubts with the
recorded expense of PHP60,000. He is not sure if he should include the following items as expenses of
his business:
Salary expense 20,000
Rent expense 10,000
Utilities expense (at home) 15,000
Utilities expense (at the store) 10,000
Insurance expense 5,000
Withdrawals 10,000
TOTAL 60,000

Guide Questions:
1. On the accounts stated above, what account/s should not be included? Why?
2. How much is the total expenses of the business? Show your computation with the account names.

EXPLAIN: Lesson 3: Accounting Concepts and Principles

In the practice of financial accounting, basic assumptions are important to an understanding of

the manner in which date are presented. The following basic assumptions underlie the financial
accounting structure:

1. Business entity principle – a business enterprise is separate and distinct from its owner or investor.
Examples:
 If the owner has a barber shop, the cash of the barber shop should be reported separately from
personal cash.
 The owner had a business meeting with a prospective client. The expenses that come with that
meeting should be part of the company’s expenses. If the owner paid for gas for his personal
use, it should not be included as part of the company’s expenses.

2. Going concern principle – business is expected to continue indefinitely.

Example:
 When preparing financial statements, you should assume that the entity will continue indefinitely.

3. Time period principle – financial statements are to be divided into specific time intervals.
Example:
 Philippine companies are required to report financial statements annually.
 The salary expenses from January to December 2015 should only be reported in 2015.

4. Monetary unit principle – amounts are stated into a single monetary unit
Example:
 Jollibee should report financial statements in pesos even if they have a store in the United States.
 IHOP should report financial statements in dollars even if they have a branch here in the
Philippines

5. Objectivity principle – financial statements must be presented with supporting evidence.

Example:
 When the customer paid Jollibee for their order, Jollibee should have a copy of the receipt to
represent as evidence.
 When a company incurred a transportation expense, a voucher should be prepared as evidence.

6. Cost principle – accounts should be recorded initially at cost.

Example:
 When Jollibee buys a cash register, it should record the cash register at its price when they
bought it.
 When a company purchases a laptop, it should be recorded at the price it was purchased.

7. Accrual Accounting Principle – revenue should be recognized when earned regardless of collection
and expenses should be recognized when incurred regardless of payment. On the other hand, the cash
basis principle in which revenue is recorded when collected and expenses should
be recorded when paid. Cash basis is not the generally accepted principle today.
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Example:
 When a barber finishes performing his services, he should record it as revenue. When the barber
shop receives an electricity bill, it should record it as an expense even if it is unpaid.

8. Matching principle – cost should be matched with the revenue generated.

Example:
 When you provide tutorial services to a customer and there is a transportation cost incurred
related to the tutorial services, it should be recorded as an expense for that period.

9. Disclosure principle – all relevant and material information should be reported.

Example:
 The company should report all relevant information.

10. Conservatism principle – also known as prudence. In case of doubt, assets and income should not
be overstated while liabilities and expenses should not be understated.
Example:
 In case of doubt, expenses should be recorded at a higher amount. Revenue should be recorded
at a lower amount.

11. Materiality principle – in case of assets that are immaterial to make a difference in the financial
statements, the company should instead record it as an expense.
Example:
 A school purchased an eraser with an estimated useful life of three years. Since an eraser is
immaterial relative to assets, it should be recorded as an expense.

Self-check 1:
Multiple Choice
Directions: Read each statement and choose the letter of the correct answer. Shade the circle that
corresponds to the correct answer
OOOOO 1. The accounting guideline that requires financial statement information to be
A BCDE supported by independent, unbiased evidence other than someone's belief or
opinion is the:
a. Business entity principle b. Monetary unit principle
c. Going-concern principle d. Cost principle
e. Objectivity principle

OOOOO 2. The principle that requires every business to be accounted for separately and
A BCDE distinctly from its owner or owners is known as the:
a. Objectivity principle b. Business entity principle
c. Going-concern principle d. Revenue recognition principle
e. Cost principle

OOOOO 3. The rule that requires financial statements to reflect the assumption that the
A BCDE business will continue operating instead of being closed or sold, unless evidence
shows that it will not continue, is the:
a. Going-concern principle b. Business entity principle
c. Objectivity principle d. Cost Principle
e. Monetary unit principle

OOOOO 4. To include the personal assets and transactions of a business's owner in the
A BCDE records and reports of the business would be in conflict with the:
a. Objectivity principle b. Realization principle
c. Business entity principle d. Going-concern principle
e. Revenue recognition principle

OOOO 5. The objectivity principle:

A BCD
a. means that information is supported by independent, unbiased evidence
b. means that information can be based on what the preparer thinks is true
c. means that financial statements should contain information that is optimistic
d. means that a business may not re-organize revenue until cash is received

OOOO 6. Marian Mosely is the owner of Mosely Accounting Services. Which accounting
A BCD principle requires Marian to keep her personal financial
information separates from the financial information of Mosely Accounting Services?
a. Monetary unit principle b. Going-concern principle
c. Cost principle d. Business entity principle

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OOOO 7. Which of the following accounting principles would require that all goods and
A BCD services purchased be recorded at cost?
a. Going-concern principle b. Continuing-concern principle
c. Cost principle d. Business entity principle

OOOO 8. “GAAP” refers to

A BCD a. General Accounting and Auditing Principles
b. Guidelines for Accountants, Accounting Procedures
c. General Association of Accounting Practitioners
d. Generally Accepted Accounting Principles

OOOO 9. In case of assets that are immaterial to make a difference in the financial
A BCD statements, the company should instead record it as an expense. What accounting
principle is this?
a. Matching Principle b. Materiality Principle
c. Objectivity Principle d. Accrual

OOOO 10. Conservatism is best described as selecting an accounting alternative that

A BCD a. understates assets and/or net income
b. has the least favorable impact on owner’s equity
c. overstates, as opposed to understates, liabilities
d. is least likely to mislead users of financial information

ELABORATE: Activity 2: Recall and Answer

Directions: Indicate which principles are violated then briefly explain why.

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.

Self-check 2:
Matching. Match the following words with their definition. Write your answer in the space provided.

a. Going concern principle e. Time period principle h. Monetary unit principle

b. Objectivity principle f. Cost principle i. Accrual accounting principle
c. Matching principle g. Disclosure principle j. Conservatism principle
d. Materiality principle

_________________ 1. All relevant information should be included in the financial reports

_________________ 2. In case of doubt, assets and income should not be overstated.
_________________ 3. Assume that the company will continue indefinitely.
_________________ 4. All transactions should be supported by unbiased evidence.
_________________ 5. Expenses should be recorded in the period when the revenue is generated.
_________________ 6. Minimal costs incurred should be recorded as an expense.
_________________ 7. A Philippine company should report financial statements in pesos.
_________________ 8. A barber who performs services for a client should record revenue.
_________________ 9. Statement of Financial position should be recorded as of December 31, 2015.

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_________________ 10. A company that purchases furniture should record it at its acquisition price.

ACTIVITY 3: RESEARCH
Research about the Philippine Financial Reporting Standards. You will find out that the
PFRS is compose of many standards. Choose one standard and find out the process regarding
how that standard was created. Search also the reasons why there is a need for such a standard.
Write a 250-word essay documenting your research.

Post Test
A. Identification
Directions: Identify the accounting concepts or principles that suits the statement.

__________________ 1. Any personal transactions of its owner should not be recorded in the business
accounting book, and vice versa.
__________________ 2. When a customer paid your product, you should have a copy of that transaction
in the form of a duplicate receipt.
__________________ 3. All transactions in 2019 should only be reported in 2019.
__________________ 4. Preparations of projected income, sales and expenditures document for 2021.
__________________ 5. Your secretary prepares a financial statement in Peso even you have a branch
of your business abroad.
__________________ 6. Assets are recorded at cost, which equals the value exchanged at the time of
their acquisition.
__________________ 7. When you provide tutorial services to a customer and there is a transportation
cost incurred related to the tutorial services, it should be recorded as an expense for that period.
__________________ 8. In case of doubt, expenses should be recorded at a higher amount. Revenue
should be recorded at a lower amount.
__________________ 9. A school purchased an eraser with an estimated useful life of three years. Since
an eraser is immaterial relative to assets, it should be recorded as an expense.
__________________10. When a barber finishes performing his services, he should record it as revenue.
When the barber shop receives an electricity bill, it should record it as an expense even if it is
unpaid.

B. Essay/Discussion:
1. Briefly discuss the following:
a. Business Entity principle
b. Objectivity principle
c. Materiality principle
d. Cost principle
e. Matching principle

References:

Joselito G. Florendo. (May 2016) Fundamentals of Accountancy, Business and

Management 1. Rex Bookstore, Inc.

Rabo, Tugas, Salendrez. (2016) Fundamentals of Accountancy, Business and

Management 1. Vibal Group Inc.

Commission of Higher Education. (2016) Teaching Guide for Senior High School
Fundamentals of Accountancy, Business and Management 1. K to 12 Transition Program
Management Unit - Senior High School Support Team

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 Answer Key

Pre-test
1. Liabilities
2. Assets
3. Liabilities
4. Liabilities
5. Assets

Activity 1:
1. Utility Expense (at home) should not be included because it is a personal expense.
Withdrawal is not an expense.

2. Salary expense 20,000

Rent expense 10,000
Utilities expense (at the store) 10,000
Insurance expense 5,000
TOTAL 45,000

Self-check 1:
1.E, 2.B, 3.A, 4.B, 5.A, 6.D, 7.C, 8. D, 9. A, 10.B,

Activity 2:
1. G 2. J 3. A 4. B 5. C 6. D 7. H 8. I 9. E 10. F

Activity 3:
Answers may vary

Post Test
A. B.
1. business entity principle Answers may vary
2. objectivity principle
3. time period
4. going concern principle
5. monetary unit principle
6. cost principle
7. matching principle
8. conservatism principle
9. materiality principle
10. accrual accounting principle