Lesson: Fundamental Concepts and Principles

What is Accounting?
Accounting is the systematic process of measuring and reporting relevant financial information
about the activities of an economic organization or unit. Its underlying purpose is to provide financial
information. It is capable of being expressed in monetary terms.

The American Institute of Certified Public Accountants (AICPA) defines accounting as the art of
recording, classifying, and summarizing in a significant manner under terms of money,
transaction and events, which are in part at least of a financial character, and interpreting the
results thereof.

The Philippine Institute of Certified Public Accountants (PICPA) defines accounting as 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

PARTIES INTERESTED IN THE FINANCIAL INFORMATION

1.) Investors/Owners/Stockholders

- These people provide the financial resources to keep the business going. These parties decide
whether to invest or not depending on the estimated amount of income on their investment.

2.) Government

- Financial information is important for tax purposes and in compliance with the Security and
Exchange Commission requirements.

3.) Financial Institutions/ Creditors

- Before extending credit, financial institutions use financial information to determine the
capacity of the business organization yo pay its obligation.

4.) Management

- Organizational managers use financial information to set goals for their companies.

5.) Employees

- Financial information provide information on company stability which is important for

THREE TYPES OF BUSINESS ORGANIZATION

1.) Sole/ Single Proprietorship- is a business owned and managed by only one person.

2.) Partnership - is a business organization 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 - is a form of business organization managed by all elected Board of Directors (BOD). The investors are
called stockholders and the unit of ownership is called share of stocks.

THREE TYPES OF BUSINESS OPERATIONS

1. Service- is a type of Business Operation engaged in rendering services.

- it is easy to establish and only requires small amount of capital.

Ex. Vulcanizing shop, Barber Shop, Laundry shop and etc.

2. Trading/Merchandising- is a type of Business Operation engaged in Buying and Selling good without
changing its form.

Ex. Department Store, Supermarket, Sari-sari store and etc.

*When goods are sold in small quantities, it is called RETAILING.

*When goods are sold in big quantities or volume, it is called WHOLESALING.

3. Manufacturing- is a type of business operation engaged in the production of items to be sold. It is involved in
the purchasing and converting of raw materials to finished goods.

- The manufacturer buy the raw materials. He makes the raw materials to finished products by applying
direct labor and factory overhead.

* Raw materials- are what you see in the completed product.

* Direct Labor- is the work on the raw materials as it is converted into finished products.

* Factory Overhead- are the resources needed or costs that need to be paid for in making products other than
raw materials. Factory overhead refers to all costs in manufacturing other than raw materials and direct
labor.

Ex. Shoe Factory, Food Processing and etc.

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Accounting System- comprises the methods used by the business to keep records of its financial activities and to
summarize these accounts in periodic accounting periods.

Transaction- is a completed action which can expressed in monetary terms.

General Accepted Accounting Principles (GAAP)

-These are broad, general statements or "rules" and "procedures" that serve as guides in the practice of
Accounting.

-These are standards, assumptions and concepts with general acceptability.

-These are measurement techniques and standard used in the presentation and preparation of financial statements.

Fundamental Concepts

1. Entity concept- regards the business enterprise as separate and distinct from its owner and from other
business enterprises.

2. Periodicity- is the concept behind providing accounting information about the economic entities of an
enterprise for specified time periods. For reporting purposes, one year is usually considered as one accounting
period.

*Calendar year- a twelve-month period that starts on January 1 and ends on December 31.
 *Fiscal year- a twelve-month period that starts on any month other than January and ends twelve months after
the start period.

3. Going Concern- is a concept which assumes that the business enterprise will continue to operate
indefinitely.

Basic Principle

1. Objectivity Principle- Transactions entered in Accounting records must be duly supported with
verifiable evidences.

2. Historical Cost- All properties and services acquired by the business must be recorded in its original
acquisition cost.

3. Accrual Principle - states that income should be recognized at the time it is earned such as when goods
are delivered or when services have been rendered. Likewise, expenses should be recognized at the time
they are incurred such as when goods and services are actually used and not at the time when the entity
pays for those goods and services.

4. Adequate Disclose - states that all material facts that will significantly affect the financial statements
must be indicated.

5. Materiality- means that financial reporting only concerned with information significant enough to affect
decisions.

6. Consistency- means that approaches used in reporting must be uniformly employed from period to
period to allow comparison of results between time periods.