CHAPTER 6.

ACCOUNTING CONCEPTS AND PRINCIPLES 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.
 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:
 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

OBJECTIVITY PRINCIPLE – financial statements must be presented with

In order for business entities to determine their financial performance, supporting evidence.
accounting is needed. There are different forms of business entities Example:
according to its organization and operations. A business can be organized  When the customer paid Jollibee for their order, Jollibee should
as a sole proprietorship, a partnership or corporation. A business can be have a copy of the receipt to represent as evidence.
operated as a service, merchandising and manufacturing entity.  When a company incurred a transportation expense, a voucher
Sometimes we want to determine our performance compared to similar should be prepared as evidence.
companies, however, since there are a lot of ways and assumptions to
present financial reports, we need to have a generally accepted rule for COST PRINCIPLE – accounts should be recorded initially at cost.
accounting. Example:
 When Jollibee buys a cash register, it should record the cash
BUSINESS ENTITY PRINCIPLE – a business enterprise is separate and register at its price when they bought it.
distinct from its owner or investor.  When a company purchases a laptop, it should be recorded at the
Examples: price it was purchased.
 If the owner has a barber shop, the cash of the barber shop should be
reported separately from personal cash. ACCRUAL ACCOUNTING PRINCIPLE – revenue should be recognized
 The owner had a business meeting with a prospective client. The when earned regardless of collection and expenses should be recognized
expenses that come with that meeting should be part of the when incurred regardless of payment. On the other hand, the cash basis
company’s expenses. If the owner paid for gas for his personal use, it principle in which revenue is recorded when collected and expenses should
should not be included as part of the company’s expenses. be recorded when paid. Cash basis is not the generally accepted principle
today.
FUNDAMENTALS OF ABM 1- ACCOUNTING CONCEPTS AND PRINCIPLES ecbmalana
Example: c. Going-concern principle
 When a barber finishes performing his services he should record it d. Cost principle
as revenue. When the barber shop receives an electricity bill, it e. Objectivity principle
should record it as an expense even if it is unpaid. 2. The principle that requires every business to be accounted for
separately and distinctly from its owner or owners is known as the:
a. Objectivity principle
b. Business entity principle
MATCHING PRINCIPLE – cost should be matched with the revenue c. Going-concern principle
generated. d. Revenue recognition principle
Example: e. Cost principle
 When you provide tutorial services to a customer and there is a 3. The rule that requires financial statements to reflect the assumption
transportation cost incurred related to the tutorial services, it that the business will continue operating instead of being closed or sold,
should be recorded as an expense for that period. unless evidence shows that it will not continue, is the:
a. Going-concern principle
DISCLOSURE PRINCIPLE – all relevant and material information should b. Business entity principle
be reported. c. Objectivity principle
Example: d. Cost Principle
 The company should report all relevant information. e. Monetary unit principle
4. To include the personal assets and transactions of a business's owner in
CONSERVATISM PRINCIPLE – also known as prudence. In case of the records and reports of the business would be in conflict with the:
doubt, assets and income should not be overstated while liabilities and a. Objectivity principle
expenses should not be understated. b. Realization principle
Example: c. Business entity principle
 In case of doubt, expenses should be recorded at a higher amount. d. Going-concern principle
Revenue should be recorded at a lower amount. e. Revenue recognition principle
5. The objectivity principle:
MATERIALITY PRINCIPLE – in case of assets that are immaterial to a. means that information is supported by independent, unbiased
make a difference in the financial statements, the company should instead evidence
record it as an expense. b. means that information can be based on what the preparer
Example: thinks is true
 A school purchased an eraser with an estimated useful life of three c. means that financial statements should contain information that
years. Since an eraser is immaterial relative to assets, it should be is optimistic
recorded as an expense. d. means that a business may not re-organize revenue until cash
is received
6. Marian Mosely is the owner of Mosely Accounting Services. Which
PRACTICE accounting principle requires Marian to keep her personal financial
A. Concept check. Use the following multiple choice questions for information separate from the financial information of Mosely Accounting
practice. Answer the following multiple choice questions. Services?
1. The accounting guideline that requires financial statement information a. Monetary unit principle
to be supported by independent, unbiased evidence other than someone's b. Going-concern principle
belief or opinion is the: c. Cost principle
a. Business entity principle d. Business entity principle
b. Monetary unit principle
FUNDAMENTALS OF ABM 1- ACCOUNTING CONCEPTS AND PRINCIPLES ecbmalana
7. Which of the following accounting principles would require that all goods
and services purchased be recorded at cost? ENRICHMENT
a. Going-concern principle Provide local examples. Use the activity below.
b. Continuing-concern principle Accounting principles. Indicate which principles are violated.
c. Cost principle
d. Business entity principle 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.
B. Matching. Match the following words with their definition:
a. Going concern principle b. Objectivity principle 2. The statement of financial position of a company included an equipment
c. Matching principle d. Materiality principle purchased from Japan for 350,000 yen. It was reported at that amount in
e. Time period principle f. Cost principle the statement of financial position while all the other assets were reported
g. Disclosure principle h. Monetary unit principle in Philippine pesos.
i. Accrual accounting principle j. Conservatism principle
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.
___________________ 1. All relevant information should be included in
the financial reports
4. Aside from owning a shoe store, Albert operates a canteen. The assets
___________________ 2. In case of doubt, assets and income should not
of the canteen are reported in the statement of financial position of the
be overstated.
shoe store.
___________________ 3. Assume that the company will continue
indefinitely.
5. Purchased a hammer at a cost of PHP500. This was recorded as an
___________________ 4. All transactions should be supported by
asset and expense to decrease its value by PHP50 per year for 10 years.
unbiased evidence.
___________________ 5. Expenses should be recorded in the period
6. A food company ordered a machine needed in the assembly line of its
when the revenue is generated.
production department. Upon order, the machine was immediately listed
___________________ 6. Minimal costs incurred should be recorded as
as one of its assets.
an expense.
___________________ 7. A Philippine company should report financial
statements in pesos.
EVALUATION
___________________ 8. A barber who performs services for a client
Homework activity:
should record revenue.
1. Think of two real life examples for each principle discussed.
___________________ 9. Statement of Financial position should be
2. Interview a business owner and ask them about their accounting
recorded as of December 31, 2015.
practices. You should identify if there has been any violation of the
___________________ 10. A company that purchases furniture should
accounting principles.
record it at its acquisition price.

FUNDAMENTALS OF ABM 1- ACCOUNTING CONCEPTS AND PRINCIPLES ecbmalana