FABM 1 REVIEWER By Sir LK/Sir Don/ SIR E.

• Business entity principle – a business enterprise is separate and distinct from its
owner or investor.
Examples :
o If the owner has a barber shop, the cash of the barber shop should be reported
separately from personal cash.
o 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.
• 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 :
o Philippine companies are required to report financial statements annually.
o The salary expenses from January to December 2015 should only be reported in
2015.
• Monetary unit principle – amounts are stated into a single monetary unit
Example :
o Jollibee should report financial statements in pesos even if they have a store in the
United States.
o 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 :
o When the customer paid Jollibee for their order, Jollibee should have a copy of the
receipt to represent as evidence.
35
o When a company incurred a transportation expense, a voucher should be prepared
as evidence.
• Cost principle – accounts should be recorded initially at cost.
Example :
o When Jollibee buys a cash register, it should record the cash register at its price
when they bought it.
o 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.

1. Introduce the types of major accounts: Assets, Liabilities, Owner’s Equity, Income
and Expense.
• Define Assets, Liabilities, Owner’s Equity, Income and Expense
• Assets are the resources owned and controlled by the firm.
• Liabilities are obligations of the firm arising from past events which are to be
settled in the future.
• Equity or Owner’s Equity are the owner’s claims in the business. It is the residual
interest in the assets of the enterprise after
deducting all its liabilities.
• Income is the increase in economic benefits during the accounting period in the
form of inflows of cash or other assets or decreases
of liabilities that result in increase in equity. Income includes revenue and gains.
• Expenses are decreases in economic benefits during the accounting period in the
form of outflows of assets or incidences of
liabilities that result in decreases in equity.

2. Assets
Discuss the difference between Current vs. Non-Current Assets, and Tangible vs.
Intangible Assets.
• Current Assets are assets that can be realized (collected, sold, used up) one year
after year-end date. Examples include Cash, Accounts
Receivable, Merchandise Inventory, Prepaid Expense, etc.
• Non-current Assets are assets that cannot be realized (collected, sold, used up)
one year after year-end date. Examples include Property,
Plant and Equipment (equipment, furniture, building, land), long term investments,
etc.
• Tangible Assets are physical assets such as cash, supplies, and furniture and
fixtures.
• Intangible Assets are non-physical assets such as patents and trademarks
Discuss the account titles used for Asset Accounts. Define each account and
differentiate one from the other.

Current Assets
• Cash is money on hand, or in banks, and other items considered as medium of
exchange in business transactions.
• Accounts Receivable are amounts due from customers arising from credit sales or
credit services.
• Notes Receivable are amounts due from clients supported by promissory notes.
• Inventories are assets held for resale
• Supplies are items purchased by an enterprise which are unused as of the
reporting date.
• Prepaid Expenses are expenses paid in advance. They are assets at the time of
payment and become expenses through the passage of
time.
• Accrued Income is revenue earned but not yet collected
• Short term investments are the investments made by the company that are
intended to be sold immediately

Non-Current Assets
• Property, Plant and Equipment are long-lived assets which have been acquired for
use in operations.
• Long term Investments are the investments made by the company for long-term
purposes
• Intangible Assets are assets without a physical substance. Examples include
franchise and copyright.

3. Liabilities
Liabilities are the debts and obligations of the company to another entity.
• Discuss the differences of Current vs. Non-Current Liabilities.
Current Liabilities. Liabilities that fall due (paid, recognized as revenue) within one
year after year-end date. Examples include Accounts Payable, Utilities Payable and
Unearned Income.
Non-current Liabilities are liabilities that do not fall due (paid, recognized as
revenue) within one year after year-end date. Examples include Notes Payable,
Loans Payable, Mortgage Payable, etc.
• Discuss the Account Titles used for Liability Accounts. Define each account and
differentiate one from the other.

Current Liabilities
Accounts Payable are amounts due, or payable to, suppliers for goods purchased on
account or for services received on account.
Notes Payable are amounts due to third parties supported by promissory notes.
Accrued Expenses are expenses that are incurred but not yet paid (examples:
salaries payable, taxes payable)l
Unearned Income is cash collected in advance; the liability is the services to be
performed or goods to be delivered in the future.

Non-Current Liabilities
Loans Payable
Mortgage Payable

4. Owner’s Equity
• Discuss what Owner’s Equity is.
Owner’s Equity is the residual interest of the owner from the business. It can be
derived by deducting liabilities from assets.
• Discuss the Account Titles used for Equity Account. Define each account and
differentiate one from the other.
Capital is the value of cash and other assets invested in the business by the owner of
the business.
Drawing is an account debited for assets withdrawn by the owner for personal use
from the business.

5. Income
• Discuss what Income is.
Income is the Increase in resources resulting from performance of service or selling
of goods.
• Discuss where Income increases and decreases in the accounting equation.
Income increases equity.
• Give examples of Income Accounts.
Service revenue for service entities, Sales for merchandising and manufacturing
companies

6. Expense
• Discuss what Expense is.
Expense is the decrease in resources resulting from the operations of business
• Discuss where Expense increases and decreases in the accounting equation.
Expenses decreases Equity in the accounting equation
• Give examples of Expense Accounts
Salaries Expense, Interest Expense, Utilities Expense