Name: Maureen D.

Belleza
236- FINANCIAL ACCOUNTING AND REPORTING

Illustrative Cases:
1. Goods are sold on August 10, 2019 for P25,000 but payment will be received on September
09, 2019. The sales revenue is recorded in August 2019.
 The concept that is applied in this example is ACCRUAL BASIS OF
ACCOUNTIING. Wherein economic events are recorded in the period in which
they occur rather than at the point in time when the affect cast. Thus, income is
recognized in the period when it is earned rather than when it is collected, while
expense is recognized in the period when it is incurred rather than when it is paid.
In the given example the goods are sold on August 10, 2019 amounting to
P25,000 but the payment will be received on September 9, 2019. The sales
revenue is recorded in August 2019. Accrual accounting gives a fairer picture of
the business’ real obligations, including those transactions that have been
committed to but not yet completed. In accrual accounting both credits and debits
are booked as soon as they are created. Similarly, money committed to a purchase
is considered spent when committed.

2. Mr. Accounting started business investing P300,000. He purchased furniture for P150,000
and goods intended for sale P50,000 and P100,000 remains on hand. After on month of
operation, he takes away goods costing P5,000 and cash of P15,000. The transaction was
recorded as his drawings.
 The concept that applied to this example is SEPARATE ENTITY CONCEPT.
Wherein only the transactions of the business are recorded in the books of
accounts. Mr. Accounting invested cash, equipment and supplies in the business,
after its one month operation he takes away goods amounting to P50,000 and cash
amounting to P15,000 and recorded as his drawings. The goods and cash that Mr.
Accounting takes away from the business is recorded as his drawing of his
investment, therefore the money he invested to the business is now owned by the
business. The significance of separate entity concept states that we should always
separately record the transactions of a business and its owner. Otherwise, there is
a considerable risk that the transactions of the two will become intermingled. The
concept is essential to separately measure the performance of a particular business
in terms of profitability and cash flows etc. It is also helps in assessing the
financial position of each and every business separately on a particular date.
4. XY Company purchased a machine for P250,000. An amount of P2,500 was spent on
transporting the machines to the factory site. In addition P2,000 were spent on installation. The
total amount at which the machine will be recorded in the books of account would be the sum of
all these items. The market price of the machine is P300,000.
 The concept that is applied in this example is HISTORICAL COST
CONCEPT. Under this concept, assets are initially recorded at their acquisition
cost. Acquisition costs provide a reflection of the true amount paid for fixed
assets before sales tax is applied. Just like in the given example Xy company
recorded the original cost amounting to P254,500. The significance of this
concept is easy to use and simple to apply as it is not required to reference to
market values. Financial items are recorded in financial reporting based on the
original cost of the items, therefore the users can compare the current cost and the
original cost of the assets.