FUNDAMENTALS OF ABM 1

GENERALLY ACCEPTED ACCOUNTING PRINCIPLE

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. Example: Mr. Clark’s sushi business is experiencing difficulty, but he is still
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. 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 8 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 some expansion but the enterprise’s bank wants to see a
copy of its financial statements before it approves loan of the enterprise. The enterprise’s
bookkeeper 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.