Program and Year: BSA 1 WEEK 2 ACC 101 – FINANCIAL ACCOUNTING AND REPORTING

Activity 2 (Assignment)

Instructions: Discuss how you can apply the basic accounting concepts listed below to grow your
business. Your answers must be practical, meaning they are applicable in real-life settings. Don’t copy
the provided definitions. Use your imagination and be creative. Limit you answers to 3-5 sentences only.
(3 points each)

1. Separate Entity Concept

Under Separate entity concept, the business activities are considered separate from the owner.
For example, Mr. X purchase equipment for personal use, it is recorded in the book of accounts
as withdrawals. The applications of separate entity concept is necessary so that the financial
position and the financial performance of the business can be measured properly. By applying
this concept, you can objectively know if the business is really earning profits, or if it has the
ability to do so. In this case, you will determine if your business is growing or experiencing
liquidation.

2. Time period

Time period helps business owners to know the periodic information on the results of the
business operations for them to properly perform their functions. Reporting period is useful for
the business firm to determine its financial performance immediately and the owner will not
have to wait until the life of the business ends before determining the profit. At the end of the
year, businesses prepare financial statement to determine whether the business earned profit
or not. In this case, managers and other users can make economic decisions that will help the
business to grow.

3. Historical Cost Concept

Accounting is concerned with past events and it requires consistency and comparability that is

why accounting transactions requires to be recorded at their historical costs. For instance, Mr. X
purchased printing machine. The regular selling price is Php5,000 regardless of the change of the
price of the printing machine in the future, it will be recorded as Php5,000. Even if it increases to
Php7,000, its acquisition cost in the financial statement is still Php5,000. It is important in every
business financial statement because market values change so often allowing the reporting of
assets and liabilities at current values distort the whole fabric of accounting and it has the
tendency to make accounting information unreliable to users. Additionally, applying historical
cost concept will prevent overstating of asset value.
4. Materiality Concept

Materiality is a matter of judgement. An item that is considered material by one business is not
always considered material by other businesses. For example, your business purchases a trash
bin for Php100. Because you deemed the cost as immaterial, you will record this as an expense
rather than an asset. Material items are communicated to users in a more detailed manner
compared to immaterial items. This will help businesses to focus on important or material things
that will contribute to business progress.

5. Matching

The matching concept is an accounting practice wherein businesses recognize the revenues and
their related expenses in the same accounting period. For instance, when the business sells
goods, the revenue then increases resulting to decrease in inventory. The reduction to
inventories corresponds to revenue is called cost of goods sold and it is recorded in the period in
which the revenues are earned. The purpose of matching concept is to avoid misstating earnings
for a period. Reporting revenues without stating the expenses could result in overstated profit
which is not good for the business.

6. Accrual Basis of Accounting

Under accrual basis of accounting, the income is recognized in the period when it is earned
rather than when it is collected while expense is recognized when it incurred rather than when it
is paid. For example, your business purchases an equipment on account, it is now then recorded
as accounts payable. Applying accrual basis of accounting helps the businesses to recognized
revenue and expenses when they incurred. It will also show the overall financial health of your
business.

7. Going Concern

It is an assumption that the business will continue for an indefinite period of time. Going
concern concept is applicable to the company’s business as a whole. For instance, one of your
business branch experience liquidation, this doesn’t mean that your business is no longer a
going concern. It is vital in business operations because it gives the firm the ability to make
prepayments or accrue expenses. Additionally, it is helpful for the users to make economic
decisions for the future growth of the company.