BASIC PRINCIPLES AND

CONCEPTS
 ACCOUNTING DEFINED

The process of identifying measuring, and

communicating economic information to
permit informed judgments and decisions by
users of the information
ACCOUNTING

Language of business

Is a service activity. It’s function is to provide

quantitative information, primarily financial in
nature, about economic entities that is
intended to be useful in making economic
decision.
 ACCOUNTING SYSTEMS

Objectives of an accounting system:

 To process the information efficiently-at low cost

 To obtain reports quickly
 To ensure a high degree of accuracy
 To minimize the possibility of the theft and fraud
ACCOUNTING CYCLE
1. Analyze transaction

2. Journalize original entries

3. Post journal entries to

ledger

4. Identify, journalize and post

adjusting entries

5. Journalize and post

closing entries

6. Prepare financial
statements
 BRANCHES OF ACCOUNTING

 Financial accounting- information gathered is

intended both for internal (e.g. managers) and
external (e.g. banks and other creditors, government
agencies, investment advisers, etc.) parties.
Information recording is subject to certain ground
rules internationally known as Generally Accepted
Accounting Principles (GAAP).
BRANCHES OF ACCOUNTING

 Management accounting- information

gathered is primarily for the use of internal
management. Such information is used for
management planning and control.
THE NEED OF INFORMATION

Information

Nonquantitative information Quantitative information

Accounting Non-accounting
information information

Operating Financial Management

information Accounting Accounting
THREE CATEGORIES OF ACCOUNTING
INFORMATION

1. Operating Information
2. Financial Information
3. Management Information
 OPERATING INFORMATION
Constitutes the largest quantity of accounting
information; it provides the basic data for
both managerial and financial accounting.

 FINANCIAL ACCOUNTING
Information intended for managers and by
external parties, including shareholders,
banks and other creditors, government
agencies, investment advisers and the general
public.
MANAGEMENT ACCOUNTING
Used internally for planning, implementation
and control. This accounting information is
prepared to aids mangers.

THREE MANAGEMENT FUNCTION

1. Planning
2. Implementation
3. Control
USERS OF INFORMATION
 Owners
 Management
 Creditors
 Government
 Prospective owners and prospective
creditors
 Employees
 Public
 PLANNING
 The process of deciding what action should be
taken for the future

 Budgeting is one important factor of planning,

wherein it is the process of planning overall
activities of the organization for the specified
period of time.
 IMPLEMENTATION
 Putting approved plans into action.
 CONTROL
 The process used to assure that the employees performs
properly.

 Accounting information is used in the control process as am

mean of communication, motivation, attention getting and
appraisal.

Communication - when accounting report can assist

in informing employees about management plan
Motivation - it can induce members of the organization to
act in accordance with company’s goal and objectives.
Attention getting - it signals that the problems ay
exist and requires investigation.
Appraisal - basis for salary increase, promotion or
dismissal
ACCOUNTING PRINCIPLE

Established by human, ‘a general law or rule adopted

or professed as a guide to action; a settled ground or
basis of conduct and practice.

THREE CRITERIA OF ACCEPTANCE FOR PRINCIPLES

Relevance - when its result in information that is meaningful

and useful to those who need to know something about
the organization.
Objectivity - when the information is not influenced by
personal bias or judgment of those who furnish it.
Feasibility - that it can be implemented without undue
complexity or cost.
 BASIC PRINCIPLES AND
CONCEPTS

 Accounting principles are built on a foundation of

some basic concepts
 Accounting foundation consists of a set called
Generally Accepted Accounting Principles (GAAP)
 Concepts widely accepted and applied in practice
 FINANCIAL ACCOUNTING

 Governed by Generally Accepted Accounting

Principles (GAAP)
 Strike a balance between the criterion of relevance
and the criteria of objectivity and feasibility.
NATURE AND PURPOSE OF
ACCOUNTING

3 Types of Accounting Information

Operating Information
Management Accounting Information
Financial Accounting Information
 OBJECTIVES OF ACCOUNTING
SYSTEMS

1. To process the information efficiently-at low cost

2. To obtain reports quickly
3. To ensure a high degree of accuracy
4. To minimize the possibility of theft or fraud
 SIGNIFICANT RECORDKEEPING
IDEAS

• IDEA OF DEBIT AND CREDIT EQUALITY

 Every debit must have an equal and corresponding credit

• IDEA OF BALANCING
 One total should always equal some other total
 DEBIT AND CREDIT
Assets = Liabilities + Owner’s equity
Dr Cr Dr Cr Dr Cr
+ - + - + -
ACCOUNTING CONCEPTS
1. Money measurement
2. Entity
3. Going-concern
4. Cost
5. Dual aspects
6. Accounting period
7. Conservatism
8. Realization
9. Matching
10. Consistency
11. Materiality
Assets = Liabilities + Owners equity
Dr Cr Dr Cr Dr Cr
+ - + - + -
 BASIC ACCOUNTING CONCEPTS

1. Money Measurement- An accounting record is made

only of information that can be expressed in monetary
terms.
2. The Entity Concept- The owners of the business are
considered separate and distinct from the business
itself. Hence, accounts are kept for the entity as
distinguished from the persons associated with the
entity.
3. The Going-Concern Concepts- unless there is good
evidence to the contrary, it is assumed that the
business will operate indefinitely.
4. The Cost Concept- The economic resources of an entity
are called assets. An asset is ordinarily entered in the
accounting records at the price paid to acquire it- that
is, at its cost.
 BASIC ACCOUNTING CONCEPTS
5. The Dual-Aspect Concept- Assets= Liabilities+ Owner’s
Equity
6. Accounting Period- Accounting measures activities for a
special time interval, usually one (1) specified.
7. Conservatism- revenues are recognized only when they
are reasonably certain, whereas Expenses are recognized
as soon as they are reasonably possible.
8. Realization- Revenues are usually recognized in the
period in which goods were delivered to costumers or in
which services were rendered. The amount recognized is
the amount that costumers are certain to pay.
 BASIC ACCOUNTING CONCEPTS
9. Matching- when a given event affects both revenues and
expenses, the effect on each should be recognized in the
same accounting period.
10. Consistency- Once an entity has decided on a certain
accounting method, it should use the same method in all
subsequent events of the same character unless it has
sound reasons to change methods.
11. Materiality- insignificant events may be disregarded, but
there must be full disclosure of all important
information.
 THREE REPORTS

 BALANCE SHEET
 INCOME STATEMENT
 CASH FLOW STATEMENT
 BALANCE SHEET

 Is a report of status as of a moment of time,

whereas the other 2 statements summarize flows
over a period of time
 INCOME STATEMENT

 Income Statement
- summarizes the results of operations
for a period of time.
- it is a flow report as contrasted with a
balance sheet which is a status report.
 MAMAGEMENT ACCOUNTING CONTRASTED WITH
FINANCIAL ACCOUNTING
Dimension Management Accounting Financial accounting
1) Necessity Optional Required
2) Purpose A means to the end of the Produce statements for outside
assisting management users
3) Users Relatively small group; known Relatively large group; mostly
identity unknown
4) Underlying structure Varies according to use of the One basic equation:
information Asset = Liabilities + Owner's
Equity
5) Source of principles Whatever is useful to GAAP
management
6) Time Orientation Historical and estimates of the Historical
future
7) Information content Monetary and nonmonetary Primarily monetary
8) Information Precisions Many approximations Fewer approximations
9) Report Frequency Varies with purpose; monthly & Quarterly & annually
weekly common
10) Report timeliness Reports issued promptly after Delay of weeks or even months
end of period covered
11) Report entity Responsible center Overall organization
12) Liability Potential Virtually none Few lawsuits, but threat is
always present
 SIMILARITIES OF FINANCIAL AND
MANAGEMENT ACCOUNTING

1. The same considerations that make generally accepted accounting

principles sensible for purpose of financial accounting are likely to be relevant
for purpose of management accounting.
2. Operating information is used both in preparing the financial statements and
in management accounting.

3. Basic data are collected in accordance with generally accepted financial

principles.

4. The financial and management accounting information are both used in

decision making.