FUNDAMENTALS

OF ACCOUNTING 1

2020-2021 First Sem

Contents
Session 1: Accounting Concepts and Its Consideration
Session 2: Basic Consideration on Financial Statements
Session 3: Preparation of Financial Statements
Session 4: Adjusting the Accounts
Session 1
 Understand and explain the
definition, purpose, nature, functions and objectives of accounting.

 Distinguish the branches of accounting, users of accounting

information.

 Understand the double entry bookkeeping concept and how it differs

from single entry bookkeeping.

 Appreciate the history of accounting, accounting variations among

countries

 Adopt the basic professional values and ethics

Why Do We Need Accounting?
So why do we need accounting?
Asking that question of an accountant is
like asking a farmer why we need rain. We
need accounting because it’s the only way
for business to grow and flourish.
.

Accounting is the backbone of the

business financial world. After all,
accounting was created in response to the
development of trade and commerce during
the medieval times.
Accounting is the conscious of the
business world.
When handled with care and with respect, it
performs as expected. When abuse occurs, and the
system is circumvented or overridden because of
dishonesty and greed, it doesn’t work correctly.

Accounting is much like all other systems in

place, they are only as good as the people using
them.
ACCOUNTING 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
decisions.
Economic
Activities and their
classification.
 BASIC PURPOSE OF
ACCOUNTING:

• To provide quantitative information about economic entities

intended to be useful in making economic decisions.
TYPES OF INFORMATION
PROVIDED BY ACCOUNTING
1. Quantitative information – expressed in numbers,
quantities or units.
2. Qualitative information – expressed in words or
descriptive form
3. Financial information – expressed in terms of money
ECONOMIC ENTITY VS BUSINESS ENTITY
Functions of Accounting
Functions of Accounting
Functions of Accounting
Branches of Accounting/Area of
Specialization
Branches of Accounting/Area of Specialization
Branches of Accounting/Area of Specialization
USERS OF ACCOUNTING
INFORMATION
Internal users are those who make decisions directly affecting
the internal operations of the business.

External users are individuals or enterprises that have

financial interest in the business but they are not involved in
the day activities of the organization.
Internal users
External users
External users
FUNDAMENTAL CONCEPTS
ENTITY CONCEPT
PERIODICITY CONCEPT
STABLE MONETARY UNIT CONCEPT
 BASIC
PRINCIPLES
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.
Historical
Cost • This principle states that acquired asset
should be recorded at their actual cost
and not at what management thinks they are
worth as at reporting date.
– the total cost of producing or buying an item,
which may include, e.g., its price plus the cost
of delivery or storage.
 Revenue
Recognition • Revenue is to be recognized in the

Principle
accounting period when goods are delivered
or services are rendered or performed.
 Expense
Recognition • Expenses should be recognized in the
accounting period in which goods and

Principle 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.
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.
Consistency
Principle • The firms should use the same accounting
method from period to period to achieve
comparability over time within a single
enterprise. However, changes are permitted
if justifiable and disclosed in the
financial statements.
 Underlying Assumption
• Accrual Basis
– Financial Statements are prepared on the accrual on the accrual basis
of accounting and not as cash or its equivalent is received or paid.
Under this assumption, the effects of transactions and other events are
recognized when they occur and they are recorded in the accounting
records and reported in the financial statements of the periods to why
they relate. “Revenue as they earned, even not yet received and; Expenses as they incurred,
even not yet paid.

• Cash Basis
– does not record a transaction until cash is received or paid. Generally,
cash receipts are treated as revenues and cash payments as expenses.
 Underlying Assumption
• Going Concern
– Financial statements are normally prepared on the assumption
that an enterprise is a going concern and will continue in operation
for a foreseeable future. It is assumed therefore that the enterprise
has neither the intention nor the need to liquidate its operations.