FUNDAMENTALS OF

ACCOUNTING BUSINESS
AND MANAGEMENT 1
The Basic Accounting Concepts and
Principles
1. Business entity principle (also known
as separate entity and economic entity
concept) states that the transactions
related to a business must be recorded
separately from those of its owners and
any other business
Example: ➢ If the owner has a
barber shop, the cash of the barber
shop should be reported separately
from personal cash.
2. Going concern principle implies that the
business entity will continue its operations
in the future and will not liquidate or be
forced to discontinue operations due to any
reason. A company is a going concern if no
evidence is available to believe that it will or
will have to cease its operations in
foreseeable future.
Example: ➢ When preparing financial
statements, you should assume that the
entity will continue indefinitely.
3. Time period principle (also known as
periodicity assumption and accounting time
period concept) states that the life of a
business can be divided into equal time
periods. These time periods are known as
accounting periods for which companies
prepare their financial statements to be used
by various internal and external parties.
Example: ➢ The salary expenses from January to
December 2015 should only be reported in
2015.
4. Monetary unit principle (also known as
money measurement concept) states that
only those events and transactions are
recorded in books of accounts of the
business which can be measured and
expressed in monetary terms. Amounts
should only be stated into a single monetary
unit.
Example: ➢ Jollibee should report financial
statements in pesos even if they have a store
in the United States.
5. Objectivity principle states that accounting
information and financial reporting should be
independent and supported with unbiased
evidence. This means that financial
statements must be presented with
supporting evidence. The objectivity principle
is aimed at making financial statements more
relevant and reliable.
Example: ➢ When the customer paid Jollibee for
their order, Jollibee should have a copy of the
receipt to represent as evidence.
6. Cost principle is an accounting
principle that records assets at their
respective cash amounts at the time the
asset was purchased or acquired. Assets
that are recorded can include short-term
and long-term assets, liabilities and any
equity, and these assets are always
recorded at their original cost.
Example: ➢ When Jollibee buys a cash
register, it should record the cash register at
its price when they bought it.
7. Accrual Accounting Principle is an accounting
method where revenue or expenses are recorded when
a transaction occurs rather than when payment is
received or made. The method follows the matching
principle, which says that revenues and expenses
should be recognized in the same period. Cash
accounting is the other accounting method, which
recognizes transactions only when payment is
exchanged. However, cash basis is not the generally
accepted principle today.
Example: ➢ When a barber finishes
performing his services he should
record it as revenue. When the
barber shop receives an electricity
bill, he should record it as an
expense even if it is unpaid.
8. Matching principle is a principle that
requires a company to match expenses
with related revenues in order to report
a company's profitability during a
specified time interval. Therefore, cost
should be matched with the revenue
generated.
Example: ➢ When you provide tutorial
services to a customer and there is a
transportation cost incurred related to
the tutorial services, it should be
recorded as an expense for that period.
Incurred means expense has
occurred and needs to be recognized
even though no payment was made.
9. Disclosure principle is a concept that requires a
business to report all necessary information about
their financial statements and other relevant
information to any persons who are accustomed to
reading this information. In other words, all relevant
and material information should be reported.
Example: ➢ The company should report all relevant
information.
10. Conservatism principle- is the general
concept of recognizing expenses and liabilities
as soon as possible when there is uncertainty
about the outcome, but to only recognize
revenues and assets when they are assured of
being received. In case of doubt, assets and
income should not be overstated while
liabilities and expenses should not be
understated.
Example: ➢ In case of doubt, expenses
should be recorded at a higher amount.
Revenue should be recorded at a lower
amount.
11. Materiality principle states that
financial reports only need to include
information that will be significant or
material to their users. In case of assets
that are immaterial to make a difference
in the financial statements, the company
should instead record it 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
QUIZ