fundamentals of
accounting [FUNDAMENTAL CONCEPTS AND PRINCIPLES]
DEFINITION OF ACCOUNTING
•Accounting is the systematic
process of measuring and reporting
relevant financial information about
the activities of an economic
organization or unit.
•(AICPA) The art of recording,
classifying, and summarizing in a
significant manner under terms of
money, transactions and events,
which are in part at least of a
financial character, and interpreting
the results thereof.
•(PICPA) Accounting is a service
activity. Its function is to provide
quantitative information, primarily
financial in nature, about economic
entities, that is intended to be useful
in making economic decisions.
FOUR ASPECTS OF ACCOUNTING
1) RECORDING
-writing down of business
transactions chronologically in
the books of account as they
transpire/happen
2) CLASSIFYING
-sorting similar and related
business transactions into three
categories: ASSETS, LIABILITIES,
OWNER’S EQUITY
3) SUMMARIZING
-preparing financial statements
based in the previously recorded
transactions in the books of
account to meet the information
needs of the users
4) INTERPRETING
-to speak/act/define/represent
the qualitative and quantitative
information about the business
transactions in a language
comprehensible to the users of
the FS
-through this, users are able to
determine the financial standing
of the company, its stability, and
growth potential
-they use this for specific
business decisions
-this aspect of accounting shows
us that accounting is the
language of business
USERS OF FINANCIAL
INFORMATION/PARTIES
INTERESTED IN FINANCIAL
INFORMATION
1) INVESTORS/OWNERS/STOCKHOLDERS
-They provide the financial
resources to keep the business
running. They need the financial
information to decide whether to
invest or not. This all depends on
the estimated amount of income on
their investment.
2) GOVERNMENT
-For tax purposes and Securities
and Exchange Commission (SEC)
requirements.
 fundamentals of
accounting [FUNDAMENTAL CONCEPTS AND PRINCIPLES]
3) FINANCIAL INSTITUTIONS/
CREDITORS
-To determine the capacity of the
organization to pay its obligations
on time.
4) MANAGEMENT
-To set goals for the organization,
evaluate the progress, and use it as
a guide for future management
actions or decisions.
5) EMPLOYEES
-For employees to determine if they
have a future in the company
(company stability).
THREE TYPES OF BUSINESS
ORGANIZATION
1) SOLE PROPRIETORSHIP
-Owned and managed by only one
person
2) PARTNERSHIP
-Owned and managed by two or
more people who agree to contribute
money, property or industry to a
common fund for the purpose of
earning a profit
3) CORPORATION
-Managed by an elected board of
directors
-Unit of ownership is called “share
of stock”; investors are stockholders
•One Person Corporation
One Person Corporation is
a corporation with a
single stockholder, who must be a
natural person, trust, or an estate.
It must not be confused with
a corporation sole. The creation of a
One Person Corporation or OPC is
provided in Title XIII (Special
Corporations) of Republic Act No.
11232, also known as the “Revised
Corporation Code”. The guidelines,
as provided in SEC Memorandum
Circular No. 7, series of 2019.
THREE TYPES OF BUSINESS
OPERATIONS
1) SERVICE – a business operation
engaged in the rendering of services
Examples: dental clinic, barber shop,
laundry services, business services,
fitness facilities, hospitals, hotel &
lodging
2) TRADING/MERCHANDISING
- a business operation engaged in
buying and selling goods
-involved in the purchasing and
converting of raw materials to
finished goods
Examples: grocery, sari-sari store
3) MANUFACTURING – business
operation engaged in the production
of items to be sold
-involved in the purchasing and
converting of raw materials to
finished goods
Examples: shoe factory, food
processing
 fundamentals of
accounting [FUNDAMENTAL CONCEPTS AND PRINCIPLES]

1. ENTITY CONCEPT
•Many companies engage in more •the business enterprise is separate
than one type of bus. ops. They run and distinct from its owners
different departments or divisions 2. PERIODICITY
for different purposes. •the concept behind providing
EXAMPLES financial accounting information
about the economic activities of an
-TECH COMPANY produces phones enterprise for specified time periods
(MANUFACTURING) and then sells •one year is usually considered as
them through distribution centers one accounting period
(MERCHANDISING) then also Types of Accounting Periods
provides repairs & maintenance a) CALENDAR YEAR
(SERVICE) -starts on January 1 and
ends on December 31
-RESTAURANT combines
b) FISCAL YEAR
ingredients in making a meal
-starts on any month and
(MANUFACTURING) and also
ends twelve months after
provides a dining venue (SERVICE)
•NATURAL BUSINESS YEAR
and sell bottles of beverage
-any twelve-month period that
(MERCHANDISING)
ends when business activities
are at their lowest point

GENERALLY ACCEPTED 3. GOING CONCERN

ACCOUNTING PRINCIPLES (GAAP) •assumes that the enterprise will
continue to operate indefinitely
•broad, general statements or
“rules” and “procedures” that serve
as guides in the accounting practice BASIC PRINCIPLES
1) OBJECTIVITY PRINCIPLE
•standards, assumptions, and
•all business transactions
concepts with general acceptability
must be duly supported by
•measurement techniques and verifiable evidence
standards used in the presentation •official receipts, deposit slips
and preparation of financial 2) HISTORICAL COST
statements •all properties and services
acquired by the business
must be recorded at its
original acquisition cost
FUNDAMENTAL CONCEPTS
 fundamentals of
accounting [FUNDAMENTAL CONCEPTS AND PRINCIPLES]

3) ACCRUAL PRINCIPLE
•income is recognized at the
time it is earned, expenses are
recognized at the time they
are incurred (when they are
actually used and not when
they are payed)
4) ADEQUATE DISCLOSURE
•all material facts that will
significantly affect the
financial statements must be
indicated
•for example, if something was
purchased, it should be
recorded at its historical cost
but the current market value
may be included/indicated on
the FS (footnote/parenthetical)
5) MATERIALITY
•financial reporting must only
be concerned with information
significant enough to affect
decisions
6) CONSISTENCY
•approaches used in reporting
must be uniformly employed
or used from period to period
to allow comparison of results
between time periods (changes
must be clearly explained)