Application.

Indicate which principles are violated in the following situations. Defend your
answer.

1. The owner-manager bought a printer for personal use. The invoice was given to the
accountant who recorded it as an asset of the business.
The principle violated in this situation is the ‘business entity principle.’ The printer
was bought for personal use, hence the printer and the business is no longer
incorporated. In a business enterprise, personal use is always separated from
the business’ assets and liabilities.
2. The statement of financial position of a company included an equipment purchased
from Japan for 350,000 yen. It was reported at that amount in the statement of financial
position while all the other assets were reported in Philippine pesos.
The principle violated in this situation is the ‘monetary unit principle.’ No matter
where you buy your equipment, the financial statement must state a single
monetary unit to have uniform information. Different currencies can have different
equivalents when converted into the currency of where your business resides.
3. No financial statements were prepared by Mr. STEC 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.
The principle violated in this situation is the ‘time period principle.’ It is really
impossible to make the financial statements when your business is about to close
most especially if it is going to take approximately 20 years. A business must
make their financial statements into specific time intervals to be on-track about
what goes in and out of your business.
4. Aside from owning a shoe store, Albert operates a canteen. The assets of the
canteen are reported in the statement of financial position of the shoe store.
The principle violated in this situation is the ‘business entity principle.’ Just as
what the situation stated, the owner merged the financial statements from the
assets of the canteen to the shoe store, which is not correct. As a business
owner, you must separate everything even if you are the owner. You must
separate the financial reports of the canteen from the financial reports of the
shoe store since both of these businesses have different transactions.
5. Purchased a hammer at a cost of PHP500. This was recorded as an asset and
expense to decrease its value by PHP50 per year for 10 years.
The principle violated in this situation is the ‘materiality principle.’ Since the
hammer purchased can be used for long-term and it is immaterial relative to
assets, the business should have just recorded it as an expense.
6. A food company ordered a machine needed in the assembly line of its production
department. Upon order, the machine was immediately listed as one of its assets. 
The principle violated in this situation is the ‘objectivity principle.’ The ordered
machine is an expense to the company and it must not be listed as one of its
assets. Upon ordering the machine needed in the assembly line of its production
department, there should be a receipt that can testify that it is an expense before
becoming an asset.
7. A will render massage services to a customer next month. Upon receipt of cash from
the customer, A recorded it as Sales in her accounting records.
The principle violated in this situation is the ‘accrual accounting principle.’ As long
as the massage services did not occur, there won’t be any recorded sales in the
accounting records whether or not it is already paid.