Fundamental

Accounting Concepts
FINANCIAL ACCOUNTING AND REPORTING
Basic Accounting Principles
Underlying Assumption:

GOING
CONCERN
ASSUMPTION

This means that the business will

continue to operate indefinitely, unless
otherwise stated
 Basic Accounting Principles (Other
Concepts)
it means “revenue
or income” is
recognized when Accounting
Accrual Basis
earned regardless Entity Concept
when received ; Other
and “expense” Concepts
are recognized Monetary Unit
when incurred Time Period
Assumption
regardless of
when paid”
Basic Accounting Principles (Other
Concepts)
This means that
the business
Accounting entity as one
Accrual Basis
Entity Concept accounting entity,
Other separate and
Concepts distinct from the
Monetary Unit owners of that
Time Period business.
Assumption
 Basic Accounting Principles (Other
Concepts)

It means that the

indefinite life of the Accounting
entity is subdivided Accrual Basis
Entity Concept
into time period Other
that has equal Concepts
length for reporting
purposes (e.g. Monetary Unit
Time Period
monthly, quarterly, Assumption
annually)
Basic Accounting Principles (Other
Concepts)
Quantifiability –
records should be
Accounting stated in terms of
Accrual Basis
Entity Concept money and its
Other currency
Concepts Stability –
Monetary Unit purchasing power
Time Period of the currency is
Assumption
stable and any
inflation should be
ignored
Basic Accounting Principles (Other
Principles)
➢ Matching Principle
➢ Revenue Recognition Principle
➢ Expense Recognition Principle
➢ Historical Cost Principle
➢ Objectivity Principle
➢ Adequate Disclosure Principle
➢ Materiality Principle
➢ Consistency Principle
Conceptual Framework for Financial
Reporting
CONCEPTUAL
FRAMEWORK
Fundamental Qualitative Qualitative Enhancing Qualitative
Characteristics Characteristics Characteristics

Predictive Value Comparability

Relevance Confirmatory Value
Materiality Verifiability

Faithful Completeness Timeliness

Representation Neutrality
Free from Error Understandability
Elements of
Accounting
ACCOUNTS
Accounts - descriptive storage unit used to collect and store information of
similar nature
Example: Cash, Accounts Payable, Service Revenue

Chart of Accounts - is a list of all the accounts used by a business. Account

numbers are assigned to the accounts to facilitate recording, cross-referencing,
and retrieval of information.
Elements of Accounting

Elements of
Accounting

Asset Liabilities Capital/Equity

Elements of Accounting
Cash Asset Long Term
Investments
Cash Equivalents
Property, Plant
Accounts
Current Noncurrent and Equipment
Receivable Asset Asset
Accumulated
Notes Receivable • Controlled by the enterprise Depreciation
(resources)
Allowance for
• From past transactions or Intangibles
Bad debts
event
Inventories • Provides future economic
benefits
Prepaid Expenses • Its cost can be measured
reliably
Elements of Accounting
Liabilities
Accounts Payable Mortgage
Payable
Notes Payable Current Noncurrent
Liabilities Liabilities
Accrued
Expenses Bonds Payable
• A present obligation
Unearned • Arises from past transaction
Revenue or event
• Settlement requires an
Current Portion outflow of resources (use of
of Long-term cash to pay accounts
Liability payable)
Elements of Accounting

Capital/Equity

Initial/additional
Withdrawals Income Expense
Contributions
Elements of Accounting
Accounts can also be classified either as:

1. BALANCE SHEET ACCOUNTS

These refer as “permanent or real” accounts because these will not be
closed at the end of the accounting period.
Example: Asset and Liability accounts
Elements of Accounting
Accounts can also be classified either as:

2. INCOME STATEMENT ACCOUNTS

These refer as “temporary or nominal” accounts because these will be
closed at the end of the accounting period
Example: Withdrawals, Income and Expense account
Basic Accounting Equation

A=L+C
Where;
A = Asset
L = Liabilities
C = Capital
Expanded Accounting Equation
C = Initial/additional Contribution (+)

A=L+C W = Withdrawal/Drawings (-)

I = Income (+)

E = Expense (-)

A=L+C–W+I-E
Double-Entry Bookkeeping
❑ Transaction is recorded in at least two accounts
❑ Each account has Debit (DR) and Credit (CR) side ; hence, each side should
be equal (DR = CR)
❑ Each transaction has “value received” and “value parted with”
❑ An accounting tool is also used to facilitate the recording of transaction called
“T-Account”, wherein DR = LEFT and CR = RIGHT
❑ Normal Balance is the side of the account where it is usually recorded, thus
any increase to that account are recorded to its normal balance (side).
Therefore, any decrease is recorded in its opposite.
T-Account
Debit (Dr) Credit (Cr)

A= L+C
A= L+C–W+I-E
T-account (Normal Balance)
Debit (Dr) Credit (Cr)

A – Asset L – Liabilities
W – Withdrawal C – Capital
E – Expenses
I – Income
In Journalizing
Increased Decreased
Asset Debit Credit
Liability Credit Debit
Capital (Investment) Credit Debit
Withdrawal Debit Credit
Income Credit Debit
Expense Debit Credit
Effects of Transactions on Account
❖ Increase in one account, decrease in another account
❖ Increase in one account, increase in another account
❖ Decrease in one account, decrease in another account
Effects of Transaction on Accounts
Increase in one account, decrease in another account

Example:
Buying of equipment on a cash basis.

Increase in asset (equipment).

Decrease in asset (cash).
Effects of Transaction on Accounts
Increase in one account, increase in another account

Example:
Rendering of service to customers.

Increase in asset (cash).

Increase in income (service revenue).
Effects of Transaction on Accounts
Decrease in one account, Decrease in another account

Example:
Payment of liability.

Decrease in asset (cash).

Decrease in liability (accounts payable).
Example:
Ms. Abog invested P50,000 to the business.

What accounts were affected?

ASSETS = LIABILITIES CAPITAL
Owner’s investment P50,000 P50,000
Example:
Purchase equipment on account, P15,000

What accounts were affected?

ASSETS = LIABILITIES CAPITAL
Owner’s investment P50,000 = P50,000
Purchase of equipment 15,000 = P15,000
Total 65,000 = 15,000 50,000
Example:
Rendered service to a customer, P2,500
What accounts were affected?

ASSETS = LIABILITIES CAPITAL

Owner’s investment P50,000 = P50,000
Purchase of equipment 15,000 = P15,000
Rendered service 2,500 = 2,500
Total 67,500 = 15,000 52,500
Example:
Rendered service to a customer on credit, P3,000
What accounts were affected?

ASSETS = LIABILITIES CAPITAL

Owner’s investment P50,000 = P50,000
Purchase of equipment 15,000 = P15,000
Rendered service 2,500 = 2,500
Rendered service on 3,000 = 3,000
account
Total 70,500 = 15,000 55,500
Example:
Received billing on utilities, amount still unpaid, P1,300.
What accounts were affected?
ASSETS = LIABILITIES CAPITAL
Owner’s investment P50,000 = P50,000
Purchase of equipment 15,000 = P15,000
Rendered service 2,500 = 2,500
Rendered service on account 3,000 = 3,000
Utilities = 1,300 (1,300)
Total 70,500 = 16,300 54,200
Example:
Received payment from previously billed customer, P3,000. What accounts were
affected?
ASSETS = LIABILITIES CAPITAL
Owner’s investment P50,000 = P50,000
Purchase of equipment 15,000 = P15,000
Rendered service 2,500 = 2,500
Rendered service on account 3,000 = 3,000
Utilities 1,300 (1,300)
Collection 3,000 =
(3,000)
Total 70,500 = 16,300 54,200
Example:
Paid the utilities expense.
ASSETS = LIABILITIES CAPITAL
Owner’s investment P50,000 = P50,000
Purchase of equipment 15,000 = P15,000
Rendered service 2,500 = 2,500
Rendered service on account 3,000 = 3,000
Utilities 1,300 (1,300)
Collection 3,000 =
(3,000)
Payment of utilities (1,300) = (1,300)
Total 69,200 = 15,000 54,200
Example:
Ms. Abog withdraw P2,000 from the business for personal use.
ASSETS = LIABILITIES CAPITAL
Owner’s investment P50,000 = P50,000
Purchase of equipment 15,000 = P15,000
Rendered service 2,500 = 2,500
Rendered service on account 3,000 = 3,000
Utilities 1,300 (1,300)
Collection 3,000 =
(3,000)
Payment of utilities (1,300) = (1,300)
Owner’s withdrawal (2,000) (2,000)
Total 67,200 = 15,000 52,200
 Identifying and

Accounting Analyzing Business

Transactions

Cycle Reversing Entries Recording in the

Journals

Post-Closing Trial Posting to the

Balance Ledger

Unadjusted Trial
Closing Entries
Balance

Financial Adjusting Journal

Statements (FS) Entries
Adjusted Trial
Balance