Unit 4:Accounting Concepts and Principles

4.1 Introduction to Accounting Concepts and Principles

Questions to Ponder
1. As mentioned in the situation above, what steps in accounting did Mr. Harry fail to
observe?
Mr. Harry failed to separate his personal and business expenditures; he only records
transactions once these are paid; he only recognizes revenue once the customer settled
their account; he does not note the date of every transaction; and he does not fully
understand the importance of invoices, receipts, and vouchers.

2. What would be the outcome if Mr. Harry continues these practices?

Answers may vary. If Mr. Harry continues with these practices and does not follow basic

accounting principles, his business transactions would be disorganized, and his financial

reports would be inaccurate. Inaccuracies in financial reports may provide wrong

information as he makes business decisions. His income and tax declaration statement

might not be accurate, and he may be held legally liable for it. This situation would also

affect his credibility in transacting with other businesses.

3. How can accounting concepts and principles affect business decisions?

Answers may vary. Accounting helps businesses track their operations and analyze the

financial health of the company. Accounting concepts and principles affect how a

business presents financial data to its users, thus affecting how owners, investors, and

lenders make decisions for the company.

Check Your Progress

1. Choose one accounting concept or principle discussed and explain how it can affect
the decisions of users.
Answers may vary. The time period principle states that businesses must report their
financial transactions over a standard period. For instance, users of accounting
information can compare product performance every month, quarter, or year. Managers
can determine specific periods when sales usually increase or decrease; thus, allowing the

4.1 Introduction to Accounting Concepts and Principles 1

Unit 4:Accounting Concepts and Principles
company to allocate resources and deploy human resources efficiently.

2. After learning about the different accounting concepts and principles, what do you
think are the challenges that businesses face when implementing the rules and
regulations in a business and reporting financial data?
Answers may vary. Accounting concepts and principles ensure that a company’s financial
report is complete, consistent, and comparable. One challenge for businesses is to
maintain objectivity when reporting its financial data. Naturally, managers want to
project that their business is healthy and stable to encourage partnerships, investments,
and other expansion activities.

Try This

A. Identification. Determine the accounting principle described in the statement.

Write the correct answer in the provided space before the number.

objectivity principle 1. Transactions without solid evidence are biased and

irrelevant.

time period 2. The Statement of Financial Position should be

principle prepared periodically.

cost principle 3. A company that purchases equipment should record it

at its acquisition price.

disclosure principle 4. All relevant information should be included in the

financial reports.

conservatism 5. In case of doubt, assets and income should not be

principle overstated.

accrual accounting 6. A company received a water bill and recorded it as an

principle expense even if it is not yet paid.

matching principle 7. Expenses should be recorded in the same period when

the revenue is generated.

monetary unit 8. An entity should report financial transactions that can

4.1 Introduction to Accounting Concepts and Principles 2

Unit 4:Accounting Concepts and Principles
principle be recognized in currency terms.

going concern 9. A business is assumed to continue indefinitely.

principle

revenue recognition 10. A lawyer who performs services for a client should
principle record revenue even if the client hasn’t paid yet.

B. True or False. Write true if the statement is correct; otherwise, write false.

false 1. Every business can choose whether or not to record financial reports
using accounting principles and concepts.

true 2. When recording an asset, acquisition cost must be recorded instead of

the current market value.

false 3. A business transaction is recorded as revenue only when the client

settles the invoice, and the company receives the payment.

true 4. The determination of materiality relies on the judgment of the

accounting professionals

false 5. All companies start their fiscal year in January and end in December.

Practice Your Skills

Identify what concepts and principles are violated in the following business scenarios and
explain why.

1. The owner of Shop Bike bought a computer set for personal use and gave the
invoice to the accountant of the business, who recorded it in the asset account.
What concept or principle has been violated? Justify your answer.
The transaction violated the business entity concept because the company is a separate
entity from the owner. The accountant should have recorded the invoice to the asset
account of the owner.

4.1 Introduction to Accounting Concepts and Principles 3

Unit 4:Accounting Concepts and Principles
2. Rafaela did not prepare financial statements for her business. She explained that
she would only prepare the reports when she terminates her company which is
projected after ten years. What concept or principle has been violated? Justify your
answer.
The transaction violated the time period principle because no financial statements were
made in a standard period of time. The company of Rafaela should record all financial
transactions timely and regularly.

3. Darwin rendered a service to a client. He emailed the invoice to the client, but he
didn’t record the revenue until the client settled its payable. What concept or
principle has been violated? Justify your answer.
The transaction violated the revenue recognition principle because Darwin did not record
revenue after a service had been rendered. Darwin should have recorded a revenue even
if the client has not settled its obligations.

4. ABC and Co. posted its initial annual report. The company's external auditor is
preparing to audit the financial statements. The external auditor discovered that the
company does not issue business documents to clients because they do not mind
requesting one. What concept or principle has been violated? Justify your answer.
The business violated the objectivity principle because its financial statements are not
supported by any evidence. ABC and Co. should insist on issuing a business document to a
client even if the client does not request it.

5. Erwin, the owner of the Manila shop, invested a computer set and air condition unit
in the business, which he acquired a year ago for ₱32,000.00 and ₱12,000.00,
respectively. The current market value of the computer set is ₱30,000.00 while the
air condition unit is ₱9,500.00. The bookkeeper recorded the two pieces of
equipment invested by Erwin with a combined amount of ₱39,500.00. What
concept/principle is violated? Justify your answer.
The transaction violated the cost principle because the bookkeeper used the current
market value to record an asset that was acquired prior. Erwin’s bookkeeper should
record the investment of equipment at a cost which is ₱44,000.00.

4.1 Introduction to Accounting Concepts and Principles 4

Unit 4:Accounting Concepts and Principles
Challenge Yourself

Distinguish the concepts and principles applied in each scenario and explain why.

1. Helga is the type of person who doesn’t spend more than what she is earning. She
always makes sure to keep invoices or receipts every time she purchases
necessities. Helga uses these documents to support her expenditures that are listed
in her accounting journal. This way, she was able to track her expenses and budget
her finances well. What concept or principle is evident in Helga’s practices?
Helga’s actions adhere to the objectivity principle because she always keeps copies of
invoices and receipts from her purchases. These documents will support her financial
data’s reliability and accuracy.

2. Ford owns three food stalls that sell burgers, fries, and refreshments. It is located in
three different malls. Though his stalls bear the same name and offer the same
menu, he treats them as three separate entities. He prepares three financial reports
every end of the week, one for each of his stalls. What principle is evident in Ford’s
practice?
Ford’s actions adheres to the business entity concept because he treats his three stalls as
three different entities. The business entity concept requires a company to record the
transactions of every business and the owner into separate accounting books.

3. Omar and Mona co-own a marketing service business. The owners' strategy is to
minimize startup costs and focus on the operating cost of the firm. Omar and Mona
agree to donate at least one asset to the business. Omar contributed a computer he
bought a year ago for ₱30,000.00, while Mona donated a printer she purchased two
years ago for ₱10,000.00. The business's bookkeeper is confused about the
amounts to be recorded since both equipment donated by the owners are already
depreciated. Mona insisted on recording the current value of the equipment, but
Omar objected and instructed the financial officer to use the acquisition cost
instead. What concept/principle is evident in Omar’s scenario?
Omar’s initiative to record the acquisition price rather than the current market value
follows the cost principle. The principle states that assets must be recorded using their
historical cost, disregarding the depreciation that results in an asset’s current value.

4.1 Introduction to Accounting Concepts and Principles 5