Notes

LESSON 6 G, J, A, B, C, D, H, I, E, F

Business Entity Principle- a business enterprise is (separate and distinct from its owner or investor.)
EXAMPLE: If the owner has a barber shop, the cash of the barber shop should be reported separately from personal cash.

Going Concern Principle- business is expected to continue (indefinitely.)
EXAMPLE: When preparing financial statements, you should assume that the entity will continue indefinitely.

Time Period Principle- financial statements are to be divided into (specific time intervals.)
EXAMPLE: The salary expenses from January to December 2015 should only be reported in 2015. Philippine companies are required to report financial statements annually. The owner had a business meeting with a prospective client. The expenses that come with that meeting should be part of the company’s expenses. If the owner paid for gas for his personal use, it should not be included as part of the company’s expenses.

Monetary Unit Principle- amounts are (stated into a single monetary unit.)
EXAMPLE: Jollibee should report financial statements in pesos even if they have a store in the United States. IHOP should report financial statements in dollars even if they have a branch here in the Philippines

Objectivity Principle- financial statements must be presented with (supporting evidence.)
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.

Cost Principle- accounts should be (recorded initially at cost.)
EXAMPLE: When Jollibee buys a cash register, it should record the cash register at its price when they bought it. When a company purchases a laptop, it should be recorded at the price it was purchased.

Accrual Accounting Principle- (revenue should be recognized) when earned regardless of collection and expenses should be recognized when incurred regardless of payment. On the other hand, the cash basis principle in which revenue is recorded when collected and expenses should be recorded when paid. 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, it should record it as an expense even if it is unpaid.

Matching Principle- 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.

Disclosure Principle- all relevant and (material information should be reported.)
EXAMPLE: The company should report all relevant information.

Conservatism Principle- Also known as prudence. 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

Materiality Principle- 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.