Fundamentals

of Accountancy,
Business and
Management 1
Prepared by
Ru b yro sa Na za l
 Lesson
Accounting Concepts
and Principles
Take note!
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.
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. 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.
5. 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.
6. 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.
7. 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.
8. 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.
9. 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 Php 20,000.00 on the
books because the gain is only recorded when the inventory or asset is sold.
10. 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.