ACCOUNTING CONCEPTS AND

PRINCIPLES
1. What should be included as bookshop’s
expenses? Why?
2. What should not be included as bookshop’s
expenses? Why?
 Petness First Petshop

Juan dela Cruz opened his pet shop business called Petness First Petshop. He opened a bank account for his
business and deposited PHP500,000. The business earned PHP50,000 but he had doubts with the recorded
expense of PHP60,000. He is not sure if he should include the following items as expenses:

Salary expense 20,000

Rent expense 10,000
Utilities expense (at home) 15,000
Utilities expense (at the store) 10,000
Insurance expense 5,000
Withdrawals 10,000
TOTAL 60,000

What do you think should not be included as expenses?

 Salary expense – it should be included since it is related to
the operations of the business
 Rent expense – it should be included since the rent is for
the business
 Utilities expense (home) – should not be included; it is a
personal expense
 Utilities expense (store) – should be included; it is an
expense of the business
 Insurance expense – should be included since the
insurance is for the business
 Withdrawals – should not be included since the withdrawal
is for personal use
In doing financial reports and in recording business
transactions, there are certain rules and principles
that are to be followed.
 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:
A school purchased an eraser with an estimated useful life of three
years. Since an eraser is immaterial relative to assets, it should be
recorded as an expense.
 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.
Going concern principle
 This means that the business is expected to
continue indefinitely
Example: When preparing financial statements, you
should assume that the entity will continue
indefinitely.
 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.
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 :
 Philippine companies are required to report financial statements annually.
 The salary expenses from January to December 2015 should only be reported in
2015.
 Teresita is an accountant of ABC Company. Her boss requires her to prepare
financial statements every month.
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.
Business entity principle
 In this principle, there is a separation and distinction of
transactions between the business enterprise and its owner or
investor.
Examples :
 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.
Cost principle
 Thisis 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.
 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.
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.
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.
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.
 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.
 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:
 When the customer paid Jollibee for their order, Jollibee
should have a copy of the receipt to represent as evidence.
 When a company incurred a transportation expense, a voucher
should be prepared as evidence.