PRINCIPLES OF GAAP

GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

Business/ Economic Entity Assumption

•The business entity concept provides that the accounting
for a business or organization be kept separate from the
personal affairs of its owner, or from any other business or
organization. This means that the owner of a business should
not place any personal assets on the business balance sheet.
The balance sheet of the business must reflect the financial
position of the business alone. Also, when transactions of the
business are recorded, any personal expenditures of the owner
are charged to the owner and are not allowed to affect the
operating results of the business.
Monetary Unit Assumption
•An economic entity’s accounting records include only
quantifiable transactions. Certain economic events that affect
a company, such as hiring a new chief executive officer or
introducing a new product, cannot be easily quantified in
monetary units and, therefore, do not appear in the company’s
accounting records. Furthermore, accounting records must be
recorded using a stable currency. Businesses in the Philippines
usually use pesos for this purpose.
Hence: any non-financial or non-monetary information that
cannot be measured in terms of money is not recorded in the
accounting books.

Full Disclosure Principle

•The full disclosure principles states that any and all
information that affects the full understanding of a
company’s financial statements must be include with the
financial statements. Some items may not affect the ledger
accounts directly. These would be included in the form of
accompanying notes. Examples of such items are outstanding
lawsuits, tax disputes, and company takeovers.
TIME PERIOD ASSUMPTION
This assumption requires a business to complete the whole
accounting process of a business over a specific operating
time period. It maybe monthly, quarterly or annually. A
calendar year is a 12-month period that ends on Dec. 31. A
fiscal year is a twelve-month period which may or may not end
on December 31

REVENUE RECOGNITION PRINCIPLE

The principle states that revenues are recognized as soon as
goods have been sold (delivered to the customers) or service
has been rendered, regardless of when the money is actually
received.

Matching Principle
This principle requires that expenses be matched with
revenues. It means that in a given accounting period, the
revenue recorded should have its corresponding expense
recorded, in order to show the true profit of the business
Cost Principle
Refers to the amount spent (cash or the cash equivalent) when
an item was originally obtained, whether that purchased
happened last year or ten years ago. All assets should be
valued and recorded based on the actual cash equivalent or
original cost of acquisition

GOING CONCERN ASSUMPTION

In the absence of contrary information, a business entity is
assumed to remain in existence for an undetermined period of
time. This assumes that a company will continue to exist long
enough to carry out its objectives and commitments and will
not liquidate in the foreseeable future.

Accrual Business Assumption

It requires that all business transactions and other events are
recognized in the accounting records when they occur, rather
than when the cash is received or paid.
 ELEMENTS OF ACCOUNTING

Assets are the things of value owned by the business and

expected to benefit the business in future years. These are
any physical things tangible, or intangible rights and privileges
owned and enjoyed by the business, which are not value.
The following are assets, arranged according to liquidity or asset's
convertible to cash.

Current assets - resources that could be realized or

converted to cash easily or consumed during the normal
operation of the business.

Examples of such are as follows:

Cash - any medium of exchange that the bank will accept at

face value. It includes coins and other currencies, checks, bank
deposits, money orders, and bank drafts. If some money of the
business is deposited in the bank, there will be two cash
accounts: Cash in Bank and Cash on Hand.
Accounts Receivable - are claims against debtors or customers
for merchandise sold or services rendered on the account.
Notes Receivable - are claims against debtors or customers for
merchandise sold or services rendered on account evidenced
by a written promise to pay later.
Supplies - are goods used in the operations of the business.
Store Supplies - supplies used in the store like tapes, boxes,
empty bottles, bins, etc.
Office Supplies - supplies customarily used in the office such as
folders, clips, bond papers & stationeries, fasteners, etc.
Shop Supplies - supplies used in the shop like, in a printing
shop, ink, toners, oil, etc.
Prepaid Assets - are expenses paid in advance but services for
such are not yet received.
Prepaid Insurance - Prepayment or advance payment of
insurance may be one year, two years, or up to ten full years.
Prepaid Rent - Prepayment or advance payment of rent may be
one month, two months, or up to one whole year.
Prepaid Tax - Prepayment or advance payment of tax.
Prepaid Advertising - Prepayment or advance payment of
advertising may be one year, two years, or up to ten full years.
Fixed Assets - Tangible assets that are relatively
permanent in nature. These are usually subject to depreciation
except for land. Examples of such are as follows:

Furniture and Fixtures - include shelves, tables & chairs, display

cases, desks, filing cabinets, air conditioner, etc.
Office Equipment - includes adding machines, copiers, fax
machines, computers, typewriters, telephone, and counters.
Delivery Equipment - consists of automobiles, tricycles,
pushcarts, trucks, jeepneys, and other means for delivery
purposes.
Building - the structure where the business operations are
conducted.
Land - the lot on which the building is located or any vacant,
productive piece of land.

Intangible assets - rights and privileges enjoyed by the

business. Examples of these are as follows:
Goodwill - the patronage given by the general public and
customers to a business because of its quality products, good
human relations, outstanding services, good location, affordable
prices, etc.
Franchise - the right awarded by the government for the use of
public property like bus, jeepney, broadcasting, etc.
Copyrights - right to receive due credit and acknowledgment
protected by the law for literary, intellectual, scientific, and
creative works.

Liability Accounts
Liabilities are the creditor's equities or interests in the business.
These are the debts incurred by the business enterprise or
simply the economic obligations.

Current liabilities - liabilities that will be due within a

relatively short period of time. The following are examples of
such:

Accounts Payable - the amount owed to creditors for goods

purchased or services received but not yet paid.
Notes Payable - the amount owed to creditors for goods
purchased or services received but not yet paid evidenced or
supported by a written promise to pay later.
Salaries & Wages Payable - amount due to the
employees/skilled workers for their services rendered but not
yet paid.
Rent Payable - amount due to lessor for unpaid use of a
property.
Interest Payable - interest on money borrowed incurred but not
yet paid at the end of the period.
Taxes and Licenses Payable - amount due to the government
for unpaid taxes and licenses needed to operate a business.
Utilities Payable - amount payable to utility companies such as
Meralco, Maynilad, Manila Water, PLDT, Globeline, etc.

Long-term liabilities - liabilities that will be due for a

relatively long period of time. The following are examples of
such:
Mortgage Payable - amount due to creditors on loan secured by
collateral.
Bonds Payable - indebtedness, usually of the government from
the sale of bonds to the public.

Capital Accounts
The owner's equity or capital represents the interest of the
owner in the business or simply the right of the owner over the
assets of the business. This is the amount that would remain
after the total liabilities are deducted from the total assets of the
business.
Examples of the accounts are as follow:
Owner's, Capital - claims of the owner over the business or debt
of the business to the owner.
Owner's, Withdrawal/Drawing - owner's withdrawal of assets
from the business.

Income Accounts
Revenue or income is the inflow of assets resulting from the sale
of goods or rendering of services for a fee. It is also known as
the profit of the company; hence, the gross increase in capital
resulting from the conduct of business. Examples of accounts
are as follows:

Service Revenue - the income of businesses that render services

for a fee.
Professional fee - the income of professionals like teachers,
physicians, dentist lawyers, engineers, architects, etc.
Talent fee - the income of a performer or artist like movie
actors and actresses, directors, scriptwriters, etc.
School fees - the income of a school comprised of tuition and
other fees.
Commissions income - revenue earned from a commission in
discharging of transactions.
Admission income - the revenue earned from the sale of
concert tickets, fashion shows, etc.
Salaries & Wages income - the income of employees/skilled
workers.
Interest income - the income of a person lending money for
interest.
Sales - the income from the sale of merchandise.
Note that each type of business has its own source of income.

Expense Accounts
Expenses are the costs of doing business. These refer to any
decrease in the owner's proprietorship resulting from the
conduct of business. It is incurred whenever an asset is spent or
used to help produce the revenues of the enterprise. Examples
of accounts are as follows:

Advertising Expense - the amount paid for the advertisement

appeared in different media - print (e.g. broadsheets, magazines,
leaflets/flyers, book sidebars, etc.), conventional broadcast (e.g.
radio, television, etc.), and innovative broadcast (e-mail,
websites, etc.)
Salaries Expense - the amount paid for the salary of employees.
Supplies Expense - the amount paid for the purchase of supplies
and their consumption.
Rent Expense - the amount paid for the use of another person's
property.
Taxes & Licenses Expense - amount paid for the privilege to
operate a business (e.g. business permits, health & sanitation
certificates, etc.)
Transportation Expense - the amount paid for transportation. If
the business enterprise maintains automobiles and other
delivery equipment, the account title is known as gas & oil.
Gas & oil Expense - the amount paid for the purchase of petrol
products.
Utility Expense - the collective term for distinct titles.
Light & Water Expense - the amount paid for the consumption
of light and water.
Telephone and Telegraph Expense - the amount paid for the
receipt of telephone and telegraph services.
Wage Expense - the amount paid for the wage of laborers.
Interest Expense - the amount paid for the interest incurred by
the use of borrowed money.
Miscellaneous Expense - the amount paid for miscellaneous
spending.
Depreciation Expense - amount allocated for the decrease in
the value of fixed assets, except for the land, through wear and
tear, deterioration, and the passage of time.
 Business Transactions

A business transaction is an event that has some effect on the

resources of a firm or on the source of the firms' asset.
Any activity that involves the buying and selling of goods
and services or the exchange of one value to another
value considered and presumed as equal is known as a
business transaction. It is also an activity that involves a
change of values. Normally, a transaction involves a value
received and a value parted with, which this topic will be
discussed later.

When the transaction is between a business and an outsider, it

is called an external transaction.
ex: An example of it is a purchase of office supplies from the
National Bookstore.
Transactions that happen within the business that does not
involve outsiders are called internal transactions.
ex: An example of it is office supplies being used daily in the
operations of the business.
The evidence of a transaction that describes the essential
facts of the transaction is the source document. Examples of
the source documents are receipts of services performed or
bills received from suppliers for items purchased, cash register
tapes, sales tickets, notes given or received. Each source
documents initiates the process of recording a transaction.

The Value Received and Value Parted With

Normally, a business transaction has something of value

gained (value received) in exchange for something given
off (value parted with). They must be verifiable and
measurable in terms of money. For every value received,
there is a corresponding value parted with. A business
transaction may be expressed in the following equation:

VALUE RECEIVED VALUE PARTED WITH

 Example of such transactions using proper account titles from Dr.
Malabanan Dentistry.
1. Purchased tables worth Php 5,000 in cash.

VALUE RECEIVED VALUE PARTED WITH

Furniture & Fixtures Php 5,000 Cash Php 5,000
Explanation: The business purchased tables (something of value gained) which is
under asset accounts of furniture & fixtures, On the other hand, cash is
something value given off because that is the medium of exchange to be able to
receive the table.

2. Received P3,000 cash from various clients for dental services.

VALUE RECEIVED VALUE PARTED WITH

Cash Php 3,000 Professional's Fee Php 3,000
Explanation: The business receives cash (something of value gained) which is
under asset accounts, in exchange for the professional's fee (something of value
given off), which is under income accounts, because that is the worth of services
agreed.

3. A customer named Tee Mone receives dental services worth Php 3,000
on the account.

VALUE RECEIVED VALUE PARTED WITH

Accounts Receivable Php 3,000 Professional's Fee Php 3,000
 Explanation: The business did not receive cash as payment but instead it is a
claim to your customer (something of value gained) which is under asset
accounts, in exchange for the professional's fee (something of value given off),
which is under income accounts, because that is the worth of services agreed.

4. Paid Meralco, Maynilad, and Smart postpaid worth Php 12,000.

VALUE RECEIVED VALUE PARTED WITH

Utilities Expense Php 12,000 Cash - Php 12,000
Explanation: The business receives services from the utilities mentioned in the
transaction (something of value gained) which is under expense account, cash is
something value given off because that is the medium of exchange to be able to
pay the utilities.

5. Purchased additional equipment for the business worth Php 30,000 and
wrote a promissory note to the seller.

VALUE RECEIVED VALUE PARTED WITH

Equipment Php 30,000 Notes Payable Php 30,000
Explanation: The business acquired equipment from a seller (something of value
gained), but instead of paying it in cash, a promissory note is given stating a
promise to pay on a certain period. Based on the transaction above, the value of
the promissory note above is notes payable which are under a liability account.

6. Mr. Malabanan made an additional cash capital to his business worth

Php 50,000.

VALUE RECEIVED VALUE PARTED WITH

Cash - Php 50,000 Malabanan, Capital - Php 50,000
Explanation: The business receives additional cash from its owner, this is a
business transaction, wherein the business increases its interest over the
business. The value received from its owner is cash and the value given off is the
interest of the owner over the business.

Journalizing/ Debit and Credit Principles

JOURNALIZING is the process of recording business
transactions in the book of original entries called the journal.
Journal is called the book of original entry because it is
where transactions are first recorded. Transactions are
recorded in the journal in chronological order, that is according
to the date of the transactions of occurrence.

DOUBLE-ENTRY BOOKKEEPING is a method of

recording business transactions that recognize the dual effect of
a transaction, this means that for every debit entry there is a
corresponding credit entry with an equal amount.
The Journal
•It is a permanent chronological record of business transaction.
•It is where the day-to-day transactions of the business are
recorded for the first time.
•It is also called the book of original entry.
•Journalizing is the process of entering or recording a
transaction to the general journal.
Steps of Writing the Journal
1) Date Column
It is where the date of transaction to be journalized is
written.
• The date is very important in determining the
occurrence of the transaction. It is part of the formal
accounting.
• The year is written in small figures on the top of
the first line, first sub column.
• Under the date is the month of the first transaction
written on the same line.
• The specific day of the transaction is written on the
right sub-column of the date column. It is repeated
for every transaction on the same day.

2) Description Column
Debit row
• The first line of any entry must show the account
debited.
• It is written on the leftmost side of the description
column.
• Its corresponding debit amount is recorded under
the debit column, of the same line.
 Credit row
• The second line must show the account credited.
• The credit account is written with a half-inch
indention to the right.
• Its corresponding credit amount is recorded under
the credit column of the same line.

EXPLANATION ROW
• A short explanation must follow below the line for
credit account.
• The explanation for the transaction is written with
full indention to the right.
• The explanation must fully describe the transaction
yet in an acceptable language.

3) Posting reference column

This column shows the account number of the
account titles debited or credited.
• No number appears in this column until the posting
process is observed. Some business refer to this as
the folio.
 4) Debit Column
The debit column shows the amount of the the of
title the as line same the on-entry debit debited.
account

5) Credit Column
The credit column shows the amount of the credit
entry on the same lines as the title of the credited.
account

Advantages of a journal
1. The journal is an information bank of all the transactions of
the business enterprise.
2. The journal serves as the diary of the business enterprise.
3. It serves as the bridge to posting process.
4. The journal is a time-saving device since the explanation is
given each entry.
5. There is a check and balance.