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6. ACCOUNTING CONCEPTS AND PRINCIPLES

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12 views15 pages

6. ACCOUNTING CONCEPTS AND PRINCIPLES

Uploaded by

rogellemae.gayol
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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ACCOUNTING CONCEPTS

AND PRINCIPLES
Learning Objectives

 will be able to enumerate the


principles of accounting;
differentiate each principle; and,
apply the accounting principle in a
business setting
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 do you think should not be included as expenses?


 Salary expense – it should be included since it is
related to the operations of the business
 Rent expense – it should be included since the rent
is for the business
 Utilities expense (home) – should not be included; it
is a personal expense
 Utilities expense (store) – should be included; it is
an expense of the business
 Insurance expense – should be included since the
insurance is for the business
 Withdrawals – should not be included since the
withdrawal is for personal use
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.
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 :
 Philippine companies are required to report
financial statements annually.
 Thesalary expenses from January to
December 2015 should only be reported in
2015.
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.
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.
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.
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
allrelevant 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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