Accounting Principles and Examples

    Accounting Principles and Examples 1. Revenue Recognition Principle The revenue recognition principle dictates that revenue should be recognized when it is earned, regardless of when the cash is received. For example, a company that provides services to a client in January but receives payment in February should recognize the revenue in its financial statements for January. This principle ensures that financial statements accurately reflect the company's performance during a specific period. 2. Matching Principle The matching principle states that expenses should be recognized in the same period as the related revenues. For instance, if a company sells products in January, the cost of goods sold associated with those products should also be recognized in January. This principle aims to accurately match expenses with revenues to provide a clear picture of the company's profitability for a given period. 3. Conservatism Principle The conservatism principle suggests that when faced with uncertainty, a company should choose the option that is least likely to overstate its financial position or performance. For example, if a company is uncertain about the collectibility of accounts receivable, it should recognize bad debt expense to ensure that its financial statements are not overly optimistic. This principle helps maintain the reliability and credibility of financial reporting. Journal Entries for Transactions 1. June 1: Sara invested SAR 10,000 cash in her business to start operations. - Cash (Asset) | SAR 10,000 Common Stock (Equity) | SAR 10,000 2. June 6: Sara purchased inventory for SAR 6,000 on credit from a supplier. - Inventory (Asset) | SAR 6,000 Accounts Payable (Liability) | SAR 6,000 3. June 12: Sara purchased inventory for SAR 2,000 cash from a supplier. - Inventory (Asset) | SAR 2,000 Cash (Asset) | SAR 2,000 4. June 15: Sara borrowed SAR 15,000 from a bank. - Cash (Asset) | SAR 15,000 Loan Payable (Liability) | SAR 15,000 5. June 31: Sara paid SAR 4,000 cash to the supplier for the inventory purchased on credit earlier in the month. - Accounts Payable (Liability) | SAR 4,000 Cash (Asset) | SAR 4,000 Financial Statements Preparation Income Statement United Co. Income Statement For the Year Ended December 31 Revenue Earned SR 72,000 Expenses: Supplies Expense SR 3,400 Rent Expense SR 6,000 Wages Expense SR 22,000 Net Income SR 40,600 Statement of Retained Earnings United Co. Statement of Retained Earnings For the Year Ended December 31 Retained Earnings, Beginning SR 11,155 Net Income SR 40,600 Dividends SR 36,000 Retained Earnings, Ending SR 15,755 Balance Sheet United Co. Balance Sheet As of December 31 Assets: Cash SR 7,000 Accounts Receivable SR 475 Supplies SR 2,500 Equipment SR 17,000 Total Assets SR 26,975 Liabilities: Accounts Payable SR 1,220 Loan Payable SR 15,000 Total Liabilities SR 16,220 Equity: Common Stock SR 10,000 Retained Earnings SR 15,755 Total Equity SR 25,755 Total Liabilities and Equity SR 42,975

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