FUNDAMENTAL CONCEPTS & PRINCIPLES
CHAPTER 1: Fundamentals of Accounting (Advance Review)
BS in Management Accounting | September 20, 2022
ACCOUNTING
● systematic process of measuring
and reporting financial information
about the activities of an economic
organization or unit. (BOOK)
● 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
result thereof. (AICPA)
● a service activity; function: provide
quantitative information, primarily
financial in nature, about economic
entities, that is intended to be
useful in making economic
decisions. (PICPA)
LIST OF TERMS
● AICPA - American Institute of
Certified Public Accountants
● PICPA - Philippine Institute of
Certified Public Accountants
4 ASPECTS OF ACCOUNTING
● Recording
○ writing down business
transactions chronologically
in the books of account as
they transpire.
● Classifying
○ sorting similar and related
business transactions into 3
categories of assets,
liabilities, and owner’s
equity.
● Summarizing
○ preparing the financial
statements from the
transactions recorded in the
books of account designed
to meet the information
needs of its users.
● Interpreting
○ representing the qualitative
and quantitative financial
information about the
business transactions in a
language comprehensible to the users of
financial statements. By interpreting the
data in the financial statements, users are
able to determine the financial standing of
the company as well as its stability and
growth potential. Users interpret financial
information relating to specific business
decisions. This makes accounting the
language of business.
LIST OF TERMS
● Chronological - arranged in or
according to the order of time
PARTIES INTERESTED IN THE
FINANCIAL INFORMATION
● Investors/Owners/Stockholders
○ provides financial
resources to keep business
going.
○ decides whether to invest
or not depending on the
estimated amount of
income on their investment.
○ would want to know the
financial position or results
of operation of their
business investment.
● Government
○ financial information is
important for tax purposes
and in compliance with
SEC requirements.
● Financial Institutions/Creditors
○ uses financial information
before extending credit to
determine the capacity of
the business organization
to pay its obligations and
their interests at the
appropriate time.
● Management
○ used by organizational
managers to set goals for
their companies.
○ managers evaluate their
progress towards these
goals and use financial
data as a guide for future
management actions.
1
FUNDAMENTAL CONCEPTS & PRINCIPLES
CHAPTER 1: Fundamentals of Accounting (Advance Review)
BS in Management Accounting | September 20, 2022

● Employees (e.g., shoe factory, food

○ financial information processing).
provides information on
ACCOUNTING SYSTEM
company stability which is
important for employees to ● comprises the methods used by
determine if they have a the business to keep records of its
future in the company. financial activities and to
summarize these accounts in
periodic accounting reports.
LIST OF TERMS

● SEC - Securities and Exchange TRANSACTION

Commission
● completed action which can be
expressed in monetary terms.
3 TYPES OF BUSINESS
ORGANIZATION
GENERALLY ACCEPTED
● Sole/Single Proprietorship ACCOUNTING PRINCIPLES (GAAP)
○ business owned and
managed by only one ● broad, general statements or rules
person. and procedures that serve as
● Partnership guides in the practice of
○ owned and managed by accounting.
two (2) or more people who ● standards, assumptions, and
agree to contribute money, concepts with general
property, or industry to a acceptability.
common fund for the ● measurement techniques and
purpose of earning a profit. standards used in the presentation
● Corporation and preparation of financial
○ managed by an elected statements.
board of directors.
○ investors are called FUNDAMENTAL CONCEPTS
stockholders and the unit of ● Entity Concept
ownership is called share of ○ regards the business
stock. enterprise as separate and
distinct from its owners and
3 TYPES OF BUSINESS OPERATION from other business
● Service enterprises.
○ engaged in the rendering of ○ example: Mr. Santos has a
services (e.g., dental clinic, car repair shop and a
barber shop, laundry barber shop, his personal
service). expenses and business
● Trading/Merchandising expenses should not be
○ engaged in buying and mixed. The two businesses
selling goods (e.g., grocery, are separate economic
sari-sari store). units and are separate and
● Manufacturing distinct from the owner.
○ engaged in the production ● Periodicity
of items to be sold. ○ the concept behind
○ involved in the purchasing providing financial
and converting of raw accounting information
materials to finished goods about the economic
activities of an enterprise

2
FUNDAMENTAL CONCEPTS & PRINCIPLES
CHAPTER 1: Fundamentals of Accounting (Advance Review)
BS in Management Accounting | September 20, 2022
for specified time periods.
For reporting purposes, one
(1) year is usually
considered as one (1)
accounting period.
○ example: separate financial
reports are prepared yearly
for the car repair shop and
barber shop to measure the
income of the two
businesses annually.
CLASSIFICATIONS OF AN
ACCOUNTING PERIOD
● CALENDAR YEAR - a
twelve-month (12) period that
starts on January 1 and ends on
December 31.
● FISCAL YEAR - a twelve-month
(12) period that starts on any
month of the year other than
January and ends twelve months
after the start period. (e.g. June
1, 2014 - May 31, 2015)
● NATURAL BUSINESS YEAR -
any twelve-month (12) period
that ends when business
activities are at their lowest
point.
● Going Concern
○ a concept that assumes
that the business enterprise
will continue to operate
indefinitely.
○ example: in preparing the
financial statements of the
car repair shop and barber
shop, the accountant
assumes that the
businesses will not close or
shut operations within the
next years.
FUNDAMENTAL CONCEPTS
● Objectivity Principle
○ states that all business
transactions that will be
entered in the accounting
records must be duly
supported by verifiable
evidence (e.g., official
receipts, deposit slips).
● Historical Cost
○ all properties and services
acquired by the business
must be recorded at its
original acquisition cost.
○ example: land bought in
1990 for one (1) million
should be recorded at one
(1) million even though its
market value in the year
2014 is already two (2)
million.
● Accrual Principle
○ 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.
○ example: the hotel cannot
consider advance payment
of customer for a month of
accommodation as income
until the customer has
checked in because the
services are not yet
rendered. As such, the
advance payment should
be considered as a liability
on the part of the hotel.
● Adequate Disclosure
○ all material facts that will
significantly affect the
financial statements must
be indicated.
○ example: market value of
land bought in 1998 may be
indicated in the financial
statements for the year
2014 in the form of a
3
FUNDAMENTAL CONCEPTS & PRINCIPLES
CHAPTER 1: Fundamentals of Accounting (Advance Review)
BS in Management Accounting | September 20, 2022

footnote or parenthetical
note.
● Materiality
○ financial reporting is only
concerned with information
significant enough to affect
decisions. This refers to the
relative importance of an
item or an event. An item is
considered significant if
knowledge of it would
influence prudent users of
the financial statements.
○ example: items of
insignificant amount such
as paper clips can be
charged outright to
expenses.
● Consistency
○ approaches used in
reporting must be uniformly
employed from period to
period to allow comparison
of results between time
periods. Any changes must
be clearly explained.
○ example: if the straight line
method of depreciation is
being used by the
company, then the method
should be uniformly used
by the company in
computing its annual
depreciation.