FUNDAMENTALS OF

ACCOUNTING &
BASIC PRINCIPLES
FINANCIAL ACCOUNTING FOR IE
FUNDAMENTAL CONCEPTS
OF ACCOUNTING
 Entity concept. It is the most basic
concept in accounting. An accounting
entity is an organization or a section of an
organization that stands apart from other
organizations and individuals as a
separate economic unit. Simply put, the
transactions of different entities should not
be accounted for together. Each entity
should be evaluated separately.
FUNDAMENTAL CONCEPTS
OF ACCOUNTING
 Periodicity concept. An entity’s life can be
meaningfully subdivided into equal time
periods for reporting purposes. It will be
aimless to wait for the actual last day of
operation to perfectly measure the entity’s
profit. This concept allows the users to obtain
timely information to serve as a basis on
making decisions about future activities. For
the purpose of reporting to outsiders, one
year is the usual accounting period.
FUNDAMENTAL CONCEPTS
OF ACCOUNTING
• Stable Monetary Unit Concept. The
Philippine Peso is a reasonable unit of
measure and that its purchasing power is
relatively stable. It allows accountants to
add and subtract peso amounts as though
each peso has the same purchasing
power as any other peso at anytime. This
is the basis for ignoring the effects of
inflation in the accounting records.
CRITERIA FOR THE ACCEPTANCE
OF AN ACCOUNTING PRINCIPLE
• The Generally Accepted Accounting
Principles, encompass the conventions,
rules and procedures necessary to define
accepted accounting practice at a
particular time.
A principle has relevance to the extent
that it results in information that is
meaningful and useful to those who need
to know something about a certain
organization.
 CRITERIA FOR THE
ACCEPTANCE OF AN
ACCOUNTING PRINCIPLE
A principle has objectivity to the extent that the resulting
information is not influenced by the personal bias or
judgement of those who furnish it. Objectivity connotes
reliability and trustworthiness. It also connotes verifiability,
which means that there is some way of finding out whether
the information is correct.
A principle has feasibility to the extent that it can be
implemented without undue complexity or cost. These criteria
often conflict with one another. In some cases, the most
relevant solution may be the least objective and the least
feasible.
 BASIC PRINCIPLES OF
ACCOUNTING
• Objectivity Principle. Accounting records and
statements are based on the most reliable data
available so that they will be as accurate and as
useful as possible. Reliable data are verifiable
when they can be confirmed by independent
observers. Ideally, accounting records are based
on information that flows from activities
documented by objective evidence. Without this
principle, accounting records would be based on
whims and opinions and is therefore subject to
disputes.
 BASIC PRINCIPLES OF
ACCOUNTING
 Historical Cost. The principle states that
acquired assets should be recorded at
their actual cost and not at what
management thinks they are worth as at
reporting date.
 Revenue Recognition Principle.
Revenue is to be recognized in the
accounting period when goods are
delivered or services are rendered or
performed.
 BASIC PRINCIPLES OF
ACCOUNTING
• Expense Recognition Principle.
Expenses should be recognized in the
accounting period in which goods and
services are used up to produce
revenue and not when the entity pays
for those goods and services.
• Adequate Disclosure. Requires that all
relevant information that would affect
the user’s understanding and
assessment of the accounting entity be
disclosed in the financial statements.
 BASIC PRINCIPLES OF
ACCOUNTING
• Materiality. Financial reporting is only
concerned with information that is significant
enough to affect evaluations and decisions.
• Materiality depends on the size and nature of
the item judged in the particular circumstances
of its omission. In deciding whether an item or
an aggregate of items is material, the nature
and size of the item are evaluated together.
Depending on the circumstances, either the
nature or size of the item could be a
determining factor.
BASIC PRINCIPLES OF
ACCOUNTING
 Consistency Principle. The firms should
use the same accounting method from
period to period to achieve comparability
overtime within a single enterprise.
 However, changes are permitted if
justifiable and disclosed in the financial
statements.
 BRANCHES OF
ACCOUNTING
• AUDITING- is an independent verification
and examination that assures fairness of
presentation of financial statements.
• Auditing serves as an assurance to
different users that the financial
statements prepared by the management
are reliable.
• It is the accountancy profession’s most
significant service to the public.
 BRANCHES OF
ACCOUNTING
• The person that performs the
examination of the financial statements
is called an auditor.
• The auditor expresses an opinion as to
the fairness as to the fairness of the
financial statements.
• The different users relied heavily on the
opinion of the auditor.
 BRANCHES OF
ACCOUNTING
 Auditing can be broadly classified into
internal audit and external audit.
 Internal audit is an examination of the
various segments of an entity performed
throughout the year by the internal auditor
who are employees of the business.
 Internal audit is primarily concerned with
the internal control adopted by the
business to safeguard its assets, check the
reliability of accounting information, and
promote operational efficiency.
 BRANCHES OF
ACCOUNTING
• An external audit is the independent
examination that ensures the fairness
and reliability of the reports that
management submits to users outside
the business entity.
• The result of the examination is
embodied in the independent
auditor’s report.
 BRANCHES OF
ACCOUNTING
• External audit is performed by external
auditors who are entirely independent of
the business.
• They are not employees of the business
under examination nor do they have
financial interest with it.
• External auditors are independent in
appearance and mental attitude and their
opinion can be relied upon.
 BRANCHES OF
ACCOUNTING
 FINANCIAL ACCOUNTING – it deals with
the preparation and interpretation of
financial information reflected in the
financial statements.
 This area is often referred as general
accounting wherein accountants accord
importance to generally accepted
accounting principles.
 The financial statements should be
prepared in accordance to Philippine
Financial Reporting Standards.
 BRANCHES OF
ACCOUNTING
• Financial accounting is the more specific
term applied to the preparation and
subsequent publication of highly
summarized financial information.
• The information supplied is usually for
the benefit of the owners of an entity.
• It can be used by management for
planning and control purposes.
 BRANCHES OF
ACCOUNTING
 MANAGEMENT ACCOUNTING – it
involves the application of analytical tools
and techniques to economic data in order
to provide assistance to the management
in the performance of its basic functions.
 It is also termed as managerial
accounting.
 Person performing this task is called
management accountant or management
consultant.
 BRANCHES OF
ACCOUNTING
 The management makes decision based on
the quantitative and qualitative information
available from management accountant.
 The primary concern of management
accounting is the internal user of the
financial statement – the management.
 The management should be properly
informed with all financial information to
enable them to make effective and efficient
decision to achieve the goals of the
business.
 BRANCHES OF
ACCOUNTING
 COST ACCOUNTING – it deals with the
collection, allocation and control of the cost
of producing specific goods and services.
 The accumulation and explanation of
actual and prospective cost data is
important to control current operations and
to plan for the future.
 Cost accounting is a technique for
determining the cost of the product,
service or process through direct
measurement or systematic rational
allocation.
 BRANCHES OF
ACCOUNTING
• TAX ACCOUNTING- it is an area of
specialization of accounting that is
primarily concerned with the application
and compliance of taxation laws and
regulations.
• Business entities and individuals are
mandated to file tax returns for all types
of transactions covered by the taxation
laws, and pay the corresponding taxes.
 BRANCHES OF
ACCOUNTING
 The taxes imposed and collected by the
national government are broadly
classified into income tax, business tax
and transfer tax.
 The primary concern of tax accounting is
the proper application of tax laws and
revenue regulations in the computation
of taxes due to the national government.
 Usually the amount of tax is computed
based on the income.
 BRANCHES OF
ACCOUNTING
• GOVERNMENT ACCOUNTING – it is
the systematic process of recording,
classifying, and summarizing all
transactions involving receipts and
disposition of government funds and
property.
• It is concerned with the identification of
sources consistent with the provisions
of city, municipal, provincial or national
laws.