Professional Documents
Culture Documents
2. PERIODICITY ASSUMPTION
“It refers to the time span when the accountant has to prepare the Financial Statements”
Also known as “ Time Period Assumption”
It means that the economic activities of an accounting entity are divided into various artificial time periods for
financial reporting purposes.
General Rule: 1 year= 1 accounting period/cycle
Example: Separate financial reports are prepared yearly for the skin clinic and the spa of Dr. Teng. Hence, Dr. Teng
can measure the income of the two businesses annually.
1. OBJECTIVITY PRINCIPLE
States that all business transactions that will entered In the accounting records must be duly supported by
verifiable evidence (O.R., S.I., C.I, etc.)
Example: Payments must be supported by official receipts and bank deposits must be supported by deposit slips.
2. HISTORICAL COST
That all properties and services acquired by the business must be recorded at their original acquisition cost.
Example: Land bought in 2001 for two million pesos should be recorded at two million pesos even though its market
value in the year 2016 is already three million pesos.
4. ADEQUATE DISCLOSURE
That the accountant should include all of the sufficient information needed so that the readers of the financial
statements will have informed judgement.
Example: Land bought at two million pesos in 2001 should be recorded at historical cost in the 2016 financial
statements. However, the current market value of three million pesos in the year 2016 may be indicated in the
financial statements for the year 2016 in the form of a footnote or parenthetical note.
5. MATERIALITY
means that financial reporting is only concerned with information significant enough to affect decisions. This
refers to the relative importance of an item or event. An item is considered significant if knowledge of it would
influence prudent users of the financial statements.
In accounting, materiality refers to the impact of an omission or misstatement of information in a company’s
financial statements on the user of those statements. If it is probable that users of financial statements would have
altered their actions if the information had not been omitted or misstated, then the item is considered to be
material.
The concepts of materiality is usually used in audit not in accounting.
Example: Items of insignificant amount such as paper clips can be charged outright to expenses.
6. CONSISTENCY
Means that approaches used in reporting must be uniformly employed from period to period to allow comparison
of results between time periods. Any changes must be clearly explained.
Example: If the straight line method of depreciation is being used by the company, then the method should be
uniformly used by the company in computing its annual depreciation.
8. MATCHING PRINCIPLE
Means that expenses are matched to the income earned during the period.
Example: Gasoline expense is charged to the period when the service was rendered or the goods delivered.
9. CONSERVATISM PRINCIPLE
Means that in situations where there are two possibilities, choose the one that will have the least favorable effect
on the financial statements. This principle is also called Prudence.
Example: Bad debts expense is recognized as possible losses due to the uncollectability of certain accounts
receivables.