FABM1-Module-2 (1).pdf

Fundamentals of Accountancy, Business and Management 1 Quarter 3 Module 2: Accounting Concepts and Principles Fundamentals of Accountancy, Business and Management 1 Grade 11 Alternative Delivery Mode Quarter 3 Module 2: Accounting Concepts and Principles First Editi...

Fundamentals of Accountancy, Business and Management 1 Quarter 3 Module 2: Accounting Concepts and Principles Fundamentals of Accountancy, Business and Management 1 Grade 11 Alternative Delivery Mode Quarter 3 Module 2: Accounting Concepts and Principles First Edition, 2020 Republic Act 8293, section 176 states that: No copyright shall subsist in any work of the Government of the Philippines. However, prior approval of the government agency or office wherein the work is created shall be necessary for exploitation of such work for profit. Such agency or office may, among other things, impose as a condition the payment of royalties. Borrowed materials (i.e., songs, stories, poems, pictures, photos, brand names, trademarks, etc.) included in this module are owned by their respective copyright holders. Every effort has been exerted to locate and seek permission to use these materials from their respective copyright owners. The publisher and authors do not represent nor claim ownership over them. Published by the Department of Education Secretary: Leonor Magtolis Briones Undersecretary: Diosdado M. San Antonio SENIOR HS MODULE DEVELOPMENT TEAM Printed in the Philippines by Department of Education Schools Division of Bataan Author Office Address: : JudithBalanga Provincial Capitol Compound, S. Tabugan City, Bataan Telefax: Co-Author Language Editor (047) 237-2102 : Janelle Paola V. Arceo Co-Author Content E-mail Address: Evaluator [email protected] : Rose Darren G. Buenaventura Co-Author Illustrator : Marvin B. Hernandez Co-Author Layout Artist : Lawrence O. Munar Team Leaders: School Head : Marijoy B. Mendoza, EdD LRMDS Coordinator : Karl Angelo R. Tabernero SDO-BATAAN MANAGEMENT TEAM: Schools Division Superintendent : Romeo M. Alip, PhD, CESO V OIC- Asst. Schools Division Superintendent : William Roderick R. Fallorin, CESE Chief Education Supervisor, CID : Milagros M. Peñaflor, PhD Education Program Supervisor, LRMDS : Edgar E. Garcia, MITE Education Program Supervisor, AP/ADM : Romeo M. Layug Education Program Supervisor, Senior HS : Danilo S. Caysido Project Development Officer II, LRMDS : Joan T. Briz Division Librarian II, LRMDS : Rosita P. Serrano REGIONAL OFFICE 3 MANAGEMENT TEAM: Regional Director : May B. Eclar, PhD, CESO III Chief Education Supervisor, CLMD : Librada M. Rubio, PhD Education Program Supervisor, LRMS : Ma. Editha R. Caparas, EdD Education Program Supervisor, ADM : Nestor P. Nuesca, EdD Printed in the Philippines by the Department of Education Schools Division of Bataan Office Address: Provincial Capitol Compound, Balanga City, Bataan Telefax: (047) 237-2102 E-mail Address: [email protected]  Fundamentals of Accountancy, Business and Management 1 Quarter 3 Module 2: Accounting Concepts and Principles Introductory Message This Self-Learning Module (SLM) is prepared so that you, our dear learners, can continue your studies and learn while at home. Activities, questions, directions, exercises, and discussions are carefully stated for you to understand each lesson. Each SLM is composed of different parts. Each part shall guide you step-by-step as you discover and understand the lesson prepared for you. Pre-tests are provided to measure your prior knowledge on lessons in each SLM. This will tell you if you need to proceed on completing this module or if you need to ask the end of each module, you need to answer the post-test to self-check your learning. Answer keys are provided for each activity and test. We trust that you will be honest in using these. In addition to the material in the main text, Notes to the Teacher are also provided to our facilitators and parents for strategies and reminders on how they can best help you on your home-based learning. Please use this module with care. Do not put unnecessary marks on any part of this SLM. Use a separate sheet of paper in answering the exercises and tests. And read the instructions carefully before performing each task. If you have any questions in using this SLM or any difficulty in answering the tasks in this module, do not hesitate to consult your teacher or facilitator. Thank you.  What I Need to Know This module was designed and written so that you will be able to know and apply different accounting concepts and principles in various cases (ABM_FABM11-IIIb-c- 15- 16). At the end of this module, you are expected to: a. explain the varied accounting concepts and principles and b. solve exercises on accounting principles as applied in various cases. 1  What I Know Directions: Match the principles with their descriptions. Write the letter of your answers on a separate sheet of paper. a. Going Concern Principle f. Cost Principle b. Objectivity Principle g. Disclosure Principle c. Matching Principle h. Monetary Unit Principle d. Materiality Principle i. Accrual Accounting Principle e. Time Period Principle j. Conservatism 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. It is the assumption that the company will continue indefinitely. ____________________4. All transactions in the financial statement should be supported by unbiased evidence. ____________________5. It requires that the expenses incurred during a period be recorded in the same period in which the related revenues are earned. ____________________6. Minimal costs incurred that are immaterial to make difference in the financial statement should be recorded as an expense. ____________________7. A Philippine company should report financial statements in pesos. ____________________8. An apartment owner should record revenue for the rental even if the payment is not yet given to the owner. ____________________9. Statement of Financial position should be recorded as of December 31, 2020. ___________________10. A company that purchased furniture should record it at its acquisition price. 2  Lesson Accounting Concepts 1 and Principles Just as dancers have their concepts when it comes to dancing, and each of us has our own principles in life, accounting has different concepts and principles that must be applied in every transaction. In accounting, there are basis or assumptions every time we record a transaction. In order for the accountants and everyone who is involved to have a concrete and united answer, they need to follow the generally accepted rule for accounting. Professionals sometimes argue when they record a transaction differently but it doesn't mean that one of them is wrong. They may simply have different accounting concepts and principles. The purpose of accounting concepts and principles is to justify every action or way of recording transactions of the owners. There are different concepts and principles that may be applied and followed by the business. As you go on, these accounting concepts and principles will unfold. 3 Directions: Categorize the following terms whether they are internal or external users by writing them on their proper column in the given table. Write your answers on a separate sheet of paper. 1. Management 2. Creditors 3. Tax Authorities 4. Regulatory Authority 5. Employees 6. Owners 7. Customers 8. Investors Internal Users External Users Notes to the Teacher This module prepares students to identify accounting concepts and principles. 4  New Directions: Read the text and answer the questions that follow. Write your answers on a separate sheet of paper. Eyang Bookstore By Judith Tabugan Rhea Gajopo dreamed to have her own bookshop when she was young. She was a girl with big dreams even at a young age. She loves books so reading became her escapade as she grows. She finished her degree in Bachelor of Science in Education major in English Literature and aced the LET 2019. Yet, she felt incomplete and she wanted to pursue her childhood dream. So, she launched her own bookshop business called Eyang Bookstore with the initial investment of Php. 500,000.00. During the first year of operation the books of account reflected an income of Php 50,000.00 and expenses of Php. 30,000.00. She was doubtful of the recorded expenses, so she reviewed the list of recorded expenses. Observe the table below showing all her expenses. Expenses Amount Salary Expense Php 5,000.00 Rent Expense Php 5,000.00 Utilities Expense (at home) Php 10,000.00 Utilities Expense (at the store) Php 3,000.00 Insurance Expense Php 12,000.00 Withdrawals Php 5,000.00 Questions: 1. 2. expenses? Why? (5 points) 5  What Is It Let us now discuss and elaborate on what the accounting concepts and principles are. In doing financial reports and in recording business transactions, there are certain rules and principles that are to be followed. Here are the Accounting Concepts and Principles, (Ballada, 2017). 1. Materiality Principle This includes all assets that are immaterial to make a difference in the financial statements which the company should record as an expense. Example: Robi, an accounting clerk, purchased a friction pen. She estimated it to have a useful life up to three months. Since a friction pen is immaterial relative to assets, it should be recorded as an expense. 2. Going-Concern Principle This means that the business is expected to continue indefinitely. expecting it to continue that is why he still updates his books of account. 3. Time Period Principle The financial statements are usually divided into specific time intervals. The business should report the financial statements appropriate to a specific period. Example: Teresita is an accountant of ABC Company. Her boss requires her to prepare financial statements every month. 4. Monetary Unit Principle Any amount involved in the business is stated into a single monetary unit. Example: A fast food chain has branches all over the world but their financial statements must be reported in peso since they also have branch here in the Philippines. 5. Business Entity Principle In this principle, there is a separation and distinction of transactions between the business enterprise and its owner or investor. Example: Aling Babes, the owner of a mini grocery store, separates the assets and liability of her business from her personal transactions. All transactions of the business will be just in the business while her personal matters will be hers only. 6 6. Cost Principle This is an accounting principle wherein accounts should be recorded initially at cost as well as assets at their respective cash amounts at the time the asset was purchased. Example: When the owner of a sari-sari store buys a calculator, it should be recorded in the cash register at its price when it was bought. 7. Accrual Accounting Principle In this principle, revenue should be recognized when earned regardless of collection. Same goes with expenses which are recorded when incurred regardless of payment. But in the Cash Basis Principle, revenue is logged when collected, and expenses should be recorded when paid. A Cash Basis is not generally an accepted principle today. Example: When a painter finishes performing his services, he should record it as revenue even if his professional fee is still uncollected. When the painter has to pay his studio rent, he should record it as an expense even if it is unpaid. 8. Matching Principle In this principle, cost should be matched with the revenue generated. It requires that the expenses incurred during a period be recorded in the same period in which the related revenues are earned. Example: Siony sold the goods to her customers, the revenue increases and the inventories decrease. The reduction of the inventories in relation to revenues is called the cost of goods sold and it should be recorded in the period in which the revenues were earned. 9. Disclosure Principle All necessary, relevant, and material information should be reported in this principle for transparency. Example: Aleena bought a computer for her computer shop. She made sure that it was recorded on the financial reports. 10. Conservatism Principle This is also known as prudence. Assets and income should not be overstated while liabilities and expenses should not be understated. In case of doubt, expenses should be recorded at a higher amount. Revenue should be recorded at a lower amount. Example: Suppose an asset owned by Mico, like inventory was bought for Php 20,000.00 but can now be bought for Php 15,000.00. Then the company must immediately write down the value of the asset to at Php 15,000.00 because of the lower cost in the market. But if the inventory was bought for Php 20,000.00 and now has a market value of Php 25,000.00, it must still be shown as 7  Php 20,000.00 on the books because the gain is only recorded when the inventory or asset is sold. 11. Objectivity Principle In this concept, financial statements of an organization must be presented with supporting solid evidence and the intent behind this principle is to keep the management and the department of accounting from making financial statements that are affected by their opinions and biases. Example: Martimart Enterprise is trying to get a financing from Madas Bank for statements before it approves loan of the enterprise. The en prints out an income statement from its accounting system and mails it to the bank. Most likely, Madas Bank will reject this financial statement because an independent party did not prepare it. 8  Directions: Hunt for accounting principles in the letter grid. Write your answers on a separate sheet of paper. A M A T C H I N G B C R A V O E N B O U C A B U S I L O I S R V E Y T Y O U N I U N I T S O M U G N A C H I F O R E V E L E R T A L W A Y S P R I N C I P L E S T I M E P E R I O D D I S C L O S U R E What I Have Learned Directions: Identify the principle describe in each item. Choose your answers from the box. Write your answers on a separate sheet of paper. Going Concern Accrual Time Period Materiality Monetary Unit Conservatism Objectivity Disclosure Cost Matching ___________1. Cost should be matched with the revenue generated. ___________2. All relevant and material information should be reported. ___________3. This is also known as prudence. In this principle, assets and income should not be overstated while liabilities and expenses should not be understated in case of doubt. 9 ___________4. In this principle, assets that are immaterial to make a difference in the financial statements should be recorded as an expense. ___________5. This principle states that revenue should be recognized when earned regardless of collection and expenses and should also be recognized when incurred regardless of payment. ___________6. Accounts should be recorded initially at cost. ___________7. Financial statements must be presented with supporting evidences. ___________8. Amounts are stated into a single monetary unit. ___________9. Financial statements are to be divided into specific time intervals. ___________10. Business is expected to continue indefinitely. What I Can Do Directions: State what accounting principle has been applied on each number. Choose your answers from the box. Write your answers on a separate sheet of paper. Materiality Monetary unit Conservatism Cost Time period Revenue Recognition Objectivity Going Concern Disclosure Business entity 1. The owner of a supermarket made a transaction with her friends for personal use, he did not let his personal transaction intrude with his business. 2. Babu believes that his business operations will continue in spite of some difficulties. 3. Vilma, a veterinarian, performs a service on Bebang's pet dog without a payment being received. Vilma should not record the service revenue yet. 4. Aling Violeta bought a cash register for her grocery store and she recorded it on its price. 10 5. Mr. Lopez has his shoe branch in America and the financial records there are in dollars. 6. Ms. Maricar kept all the relevant information on the accounting firm she is working on and she ensured that everything was written and recorded on the financial reports. 7. Vien is a cashier in a supermarket. She ensures that all transactions are rightly recorded. 8. Charlie prepares financial statements yearly as what his boss wanted. 9. Dodong bought a building for the space of his business worth Php 200,000.00. After a month, the building cost Php 300,000.00. Dodong recorded Php 200,000.00 as the cost of his building. 10. An accounting clerk purchased a pen. Since a pen is immaterial relative to assets, she recorded it as an expense. 11  Assessment Directions: Choose the letter that corresponds to the correct answer. Write the letter of your answers on a separate sheet of paper. 1. The accounting guideline that requires financial statement information to be supported by independent, unbiased evidence other than someone's belief or opinion is the _______. A. objectivity principle B. monetary unit principle C. going-concern principle D. cost principle 2. The principle that requires every business to be accounted separately and 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 3. The rule that requires financial statements to reflect the assumption that the business will continue operating instead of being closed or sold, unless evidence shows that it cannot continue is the _______. A. going-concern principle B. business entity principle C. objectivity principle D. cost principle 4. To include the personal assets and transactions of a business' owner in the 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 5. The objectivity principle means _______. A. the information is supported by independent, unbiased evidence B. the information can be based on what the preparer thinks is true C. financial statements should contain information that is optimistic D. a business may not reorganize revenue until cash is received 12 6. Marian Mosely is the owner of Mosely Accounting Services. The accounting principle that requires Marian to keep her personal financial information separated from the financial information of Mosely Accounting Services is _______. A. monetary unit principle B. going-concern principle C. cost principle D. business entity principle 7. The accounting principle that requires all goods and services purchased to be recorded at cost is the _______. A. going-concern principle B. continuing-concern principle C. cost principle D. business entity principle 8. The business files for bankruptcy when it is not in the _______. A. going concern Principle B. matching principle C. materiality principle D. monetary unit principle 9. The statement that is correct in relation to Cost Principle is _______. A. cost is relevant. B. cost is reliable. C. only letter a is correct. D. letter a and b are correct. 10. Matching principle is important because proper matching of_____ and _____ gives a more accurate report. A. revenue and expenses B. cash and expenses C. cost and expenses D. value and expenses 11. The transactions of the business are separated from the personal transactions of the owner. This principle is stated by _______________. A. business entity B. matching principle C. objectivity D. going-concern 13 12. The business will run in an indefinite time. This principle stated is from ____. A. going-concern Principle B. conservatism C. accrual D. business entity 13. Conservatism is also known as _______. A. prudence B. patience C. frugality D. generosity 14. Mr. Pedro makes his financial reports monthly. What kind of principle his accountant performs _______ Principle. A. time period B. conservatism C. revenue recognition D. accrual 15. It requires the expenses incurred during a period to be recorded in the same period in which related revenues are earned. This refers to _______. A. matching principle B. objectivity principle C. conservatism principle D. materiality principle 14  Additional Activities Directions: Indicate which accounting principle is violated. Choose your answers from the box. Write your answers on a separate sheet of paper. Accrual accounting Business entity Time Period Accrual Going Concern Time period Business Entity Cost Materiality Matching 1. George bought a racing car and as an owner and a manager of his own company, he gave the receipt to the accountant who recorded it as an asset of the business. 2. A machine was purchased from Japan for 350,000 Yen and it was shown in the statement of financial position of the company. It was reported at that amount while all the other assets were reported in Philippine peso. 3. Henry Wong has no plan of preparing financial statements for his business. He has a prediction that his business will be closed after 20 years and that is the only time that he is going to prepare the statements. 4. Roger has a shoe store and operates a canteen. The statement of financial position shows that the assets of the canteen are reported in the statement of financial position of the shoe store. 5. A saw was bought by Mike Pacardo costing Php 1,000.00 and it was immediately recorded as an asset. 6. A shoe factory needed a machine for fast production, so they ordered it. Upon order, the machine was immediately listed as one of its assets. 7. Jenny has a sari-sari store. Whenever she and her family do not have anything to eat, she will get food from her sari-sari store without paying for it. 8. Mr. Sanchez has a kimchi business which he believes will only operate for two years because of lack of customers. 9. Ms. Tabugan is an accountant in JYP Bookstore and she prepares financial statements only whenever she wants. 10. Apple Salon performs a hair treatment on Mrs. Valdez on account (without payment) but Apple, the owner, did not record the service revenue. 15 18 References Anastacio, Ma. Flordeliza. Fundamentals of Financial Management (with Industry Based Perspective).( Manila: Rex Book Store, 2011). Gilbertson, Claudia. Fundamentals of Accounting. 8th ed. (Australia: Cengage Learning, 2010). Padillo, Nicanor Jr. Financial Statements Preparation, Analysis and Interpretation. (Manila: GIC Enterprises, 2011). Pefianco, Erlinda C. The Accounting Process: Principles and Problems. (Makati: Goodwill Trading, 1996). Young, Felina C. Principles of Marketing. (Manila: Rex Book Store, 2008). Teaching Guide for Senior High School, Fundamentals of Accountancy, Business and Management 1. (Quezon City: Commission on Higher Education, 2016). 19 For inquiries or feedback, please write or call: Department of Education Region III, Schools Division of Bataan - Curriculum Implementation Division Learning Resources Management and Development Section (LRMDS) Provincial Capitol Compound, Balanga City, Bataan Telefax: (047) 237-2102 Email Address: [email protected]