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Note 6

The document outlines key accounting principles such as the business entity principle, going concern principle, and matching principle, among others, which guide the recording and reporting of financial transactions. It provides a case study of Petness First Petshop, illustrating how to differentiate between business and personal expenses and apply these principles in practice. The document emphasizes the importance of accurate financial reporting and adherence to established accounting standards.

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7 views2 pages

Note 6

The document outlines key accounting principles such as the business entity principle, going concern principle, and matching principle, among others, which guide the recording and reporting of financial transactions. It provides a case study of Petness First Petshop, illustrating how to differentiate between business and personal expenses and apply these principles in practice. The document emphasizes the importance of accurate financial reporting and adherence to established accounting standards.

Uploaded by

bellecalo09
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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FABM 1 – NOTE 6

Accounting Concepts and Principles

Learning objectives

Be able to enumerate the principles of accounting; differentiate each principle; and, apply the accounting
principle in a business setting.

Sample case:

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:

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

What should not be included as expense?

• Business entity principle – a business enterprise is separate and distinct from its owner or investor.
Examples :
o If the owner has a barber shop, the cash of the barber shop should be reported separately from
personal cash.
o 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.

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


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

• Time period principle – financial statements are to be divided into specific time intervals.
Example :

o Philippine companies are required to report financial statements annually.


o The salary expenses from January to December 2015 should only be reported in 2015.

• Monetary unit principle – amounts are stated into a single monetary unit
Example :
o Jollibee should report financial statements in pesos even if they have a store in the United States.
o IHOP should report financial statements in dollars even if they have a branch here in the Philippines
• Objectivity principle – financial statements must be presented with supporting evidence.
Example :
o When the customer paid Jollibee for their order, Jollibee should have a copy of the receipt to
represent as evidence.
o When a company incurred a transportation expense, a voucher should be prepared as evidence.

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


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

• 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.
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.

• 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.

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


Example:
The company should report all relevant information.

• 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.

• 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.

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