BA -102

FUNDAMENTALS OF
ACCOUNTING

CHAPTER 1
Fundamental Concepts and
Principles
Learning Objectives
In this chapter, you should learn to:

• define accounting and its purpose

• differentiate the types of business organization
• distinguish the different types of business
operations
• know and appreciate the accounting principles
used in the practice of accounting
 The Emergence of
•Accounting
The emergence of accounting dates back thousands of years
and has evolved alongside human civilization.

• Early accounting practices can be traced to ancient

Mesopotamia around 3100 BCE, where records of
transactions involving trade, taxation, and agricultural
production were maintained using clay tablets.

• As societies grew more complex, the need for more

organized financial record-keeping became evident.
 The Emergence of
•Accounting
In ancient Egypt and Greece, accounting was used for government
administration, taxation, and managing public funds, while the Roman Empire
developed advanced methods to maintain financial control over its vast
territories.

• The turning point in the history of accounting came during the late 15th century
with the publication of Luca Pacioli’s "Summa de Arithmetica", which introduced
the principles of double-entry bookkeeping.

• This system revolutionized financial management and provided a reliable

framework for modern accounting practices.

• Over the centuries, accounting evolved further with the industrial revolution,
globalization, and advancements in technology, shaping it into the robust
profession we know today, crucial for economic growth and organizational
success.
Accounting Definition
Accounting is the systematic process of
measuring and reporting relevant
financial information about the
activities of an economic organization of
unit. Its underlying purpose is to provide
financial information. It is capable of
being expressed in monetary terms.
Accounting Definition
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 finacial
character, and interpreting the result
thereof.
Accounting Definition
The Philippine Institute of Certified Public
Accountants (PICPA) defines accounting
as a service activity. Its function is to
provide quantitative information,
primarilty financial in nature, about
economic entities, that is inteneded to be
useful in making economic decisions
Accounting Definition
Accounting is the process of identifying,
recording, classifying, summarizing,
interpreting, and communicating
financial information about an entity to
facilitate informed decision-making by
stakeholders.
Accountin
g Identifying
• Recognizing financial transactions or events that are relevant
to the business.

Recording
Systematically documenting these transactions in the books of
accounts.

Classifying
Organizing or sorting transactions into categories (e.g.,
assets, liabilities, revenues, expenses) for better
understanding.
Accountin
g Summarizing
Preparing financial statements like income statements,
balance sheets, and cash flow statements to present the data
in a concise format.
Interpreting

Analyzing financial data to draw insights about the entity's

performance and financial position.

Communicating

Sharing financial information with stakeholders such as

investors, creditors, management, and regulators.
 1 Management
• To plan, control, and evaluate business operations using
USERS OF ACCOUNTING financial data.
• For budgeting, forecasting, and performance
INFORMATION measurement.

2 Employees
• To assess job security and the organization’s financial
health.
• To determine opportunities for promotions, raises, or
bonuses.

3 Owners/Proprietors
INTERNAL USERS
• To understand profitability and the return on their
investments.
Internal users are people • To make decisions about reinvesting in the business or
within the organization withdrawing funds.
who use accounting
4 Department Heads
information to manage
operations and make • To monitor department-specific budgets and expenses.
• To evaluate efficiency and identify areas for improvement.
strategic decisions.
 1 Investors
• To evaluate the organization’s profitability and financial
USERS OF ACCOUNTING stability.
• To make decisions about buying, holding, or selling
INFORMATION shares.

2 Creditors/Lenders
• To assess the organization’s ability to repay loans or
credit obligations.
• To determine the terms of lending (e.g., interest rates,
repayment schedules).

3 Suppliers
External Users
• To evaluate the financial health of the business and
decide whether to extend credit for purchases.
External users are
people or entities outside
the organization who rely
4 Customers
on accounting information
to make decisions • To assess the company’s stability and ability to deliver
goods and services over the long term.
regarding their relationship
with the business.
USERS OF ACCOUNTING
5 Government and Regulatory Authorities
INFORMATION • To ensure compliance with tax laws, regulations, and
financial reporting standards.
• To determine taxes owed or eligibility for government
grants or subsidies.

6 Analysts
• To analyze the financial performance of companies for
research, investment, or public reporting purposes.
External Users
External users are
7 Public
people or entities outside
the organization who rely • To understand the company’s impact on the economy,
employment, or the environment.
on accounting information
to make decisions
regarding their relationship
with the business.
Types of Business 1
Single/Sole Proprietorship
A business owned and operated by a
Organization single individual.

• There are several types of business

organizations, each with its own Key Features:
legal structure, ownership model, • Simple to establish and manage.
and operational characteristics.
• The owner has full control over
• The type of organization chosen decisions and profits.
affects taxation, liability, decision- • The owner is personally liable for all
making, and the overall functioning
of the business. debts and obligations of the business.

Examples:
Freelancers, small retail shops, and
single-owner consultancies.
Types of Business 2 Partnership
Organization A business owned and operated by two or more individuals
who share profits, losses, and responsibilities.
• There are several types of business
Types of Partnerships:
organizations, each with its own
legal structure, ownership model,
• General Partnership: All partners share equal
and operational characteristics.
responsibility and liability.
• The type of organization chosen • Limited Partnership (LP): Includes both general
affects taxation, liability, decision- partners (with unlimited liability) and limited partners
making, and the overall functioning (liability is restricted to their investment).
of the business. • Limited Liability Partnership (LLP): Partners have
limited liability and are not responsible for the negligence
of other partners.
Key Features:
•Easy to form but requires a partnership agreement.
•Shared decision-making and financial resources.
•Potential for disputes among partners.
Examples: Law firms, accounting firms, and small businesses with
multiple owners.
Types of Business 3 Corporation
A separate legal entity owned by shareholders, with rights
Organization and responsibilities distinct from its owners.

Types of Corporations:
• There are several types of business
organizations, each with its own • C Corporation: Taxed separately from its owners
legal structure, ownership model, (double taxation: corporate and personal income taxes).
and operational characteristics.
• S Corporation: Avoids double taxation; profits and
• The type of organization chosen losses pass through to shareholders' personal tax
affects taxation, liability, decision- returns.
making, and the overall functioning
of the business. Key Features:
• Limited liability for shareholders.
• Can raise capital through the issuance of shares.
• More complex and expensive to establish due to
regulations and reporting requirements.

Examples:
Large companies like Apple, Microsoft, and Coca-Cola.
Types of Business
Operations 1 Service Operations
• Businesses that provide intangible
• The three types of business
products or services to their customers.
operations refer to the
primary activities that a
business undertakes to Key Features:
achieve its goals and deliver • No physical goods are produced.
value to its stakeholders. • Focused on delivering customer
experiences, expertise, or solutions.
• These are service operations, • Relies heavily on skilled labor and client
merchandising operations,
relationships.
and manufacturing
operations. Examples:
•Consulting firms, education institutions, healthcare
services, banking, and IT support.
Types of Business
Operations 2 Trading/Merchandising Operations
• Businesses that buy and sell tangible
• The three types of business
goods without significantly altering the
operations refer to the
primary activities that a products.
business undertakes to
achieve its goals and deliver Key Features:
value to its stakeholders. • Involves purchasing goods from suppliers and
selling them to customers.
• These are service operations, • Focus on inventory management and logistics.
merchandising operations, • Revenue is earned by adding a markup to the
and manufacturing cost of goods sold.
operations. Examples:
•Retail stores (e.g., supermarkets, clothing stores) and
wholesale distributors.
Types of Business
Operations 3 Manufacturing Operations
• Businesses that produce tangible goods by
• The three types of business
transforming raw materials into finished
operations refer to the
primary activities that a products.
business undertakes to
achieve its goals and deliver Key Features:
value to its stakeholders. • Involves production processes, such as assembling,
fabricating, or processing.
• Requires significant investment in machinery, labor, and raw
• These are service operations,
materials.
merchandising operations, • Products are sold either directly to customers or to
and manufacturing retailers/wholesalers.
operations. Examples:
•Car manufacturers, food processing plants, furniture
makers, and electronics factories.
Types of Business
Operations
Comparisons
ASPECT SERVICE MERCHANDISI MANUFACTURING
OPREATIONS NG
Product Type Intangible (e.g. Tangible Tangible (raw materials to
service) (Finished finished goods)
goods)
Inventory No inventory Finished goods Raw materials, work in
progress and finished goods
Focus Customer Buying and Production and assembly
interaction selling goods
Examples Banking, health Retails stores, Factories, production plants
care, parlor wholesalers
Accounting
System
Comprises the methods used by
businenss to keep records of its
financial activities and to summarize
these accounts in a periodic
accounting period

Transaction
is a completed action which can be
expressed in monetary terms
Generally Accepted Accounting
Principles
• 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

amd standards used in the presentation
of financial statements.
Fundamental
Concepts of
Accounting
1
Business Entity 2 Money
Measurement
Lorem ipsum dolor sit amet, consectetur
adipiscing elit. Morbi id aliquam ex,
• The business is treated as a interdum faucibus tortor. Suspendisse id
tellus nibh. Aliquam eros purus,
separate entity from its owner(s). fermentum eget aliquet quis.
• Personal transactions of the owner
are not mixed with the business’s
financial transactions. 3 Accounting Period
• Example: If the owner buys a Lorem ipsum dolor sit amet, consectetur
adipiscing elit. Morbi id aliquam ex,
personal car, it is not recorded in interdum faucibus tortor. Suspendisse id
the business’s accounts. tellus nibh. Aliquam eros purus,
fermentum eget aliquet quis.
Fundamental Accounting period can be classified
as:
Concepts of
Accounting
2 Preiodicity Concept
a. Calendar Year: a twelve-month
period that starts on January 1
and ends Decemeber 31
• is the concept behind providing financial
accounting information about the b. Fiscal Year: a twelve-month
economic activities of an enterprise for period that starts on any month
a specific period of time of the year other than january
• For reporting purposes, one year is and ends twelve months after
usually considered as one accounting the start of the period.
period.
A natural business year is any
twelve month period that ends
• Example: A company prepares
when business activities are at
financial statements annually to report their lowest point
its financial health.
Fundamental
Concepts of
Accounting
3 Going Concern

• a concepts that assumes that the business

enterprise will continue to operate indefinitely

• Example: In preparation of financial statements, the

accountant assumes that the business will not close or
shut operations within next year
Basic Principles of Accounting

1 Objectivity Principle
• states that all business transactions that will be
entered in the accounting records must be duly
supported by verifiable evidence

• Example: Payment must be supported by official

receipts, bank deposits must be supported by deposit slips
Basic Principles of Accounting

2 Historical Cost
• means that all properties and services acquired by
business must be recorded at its original
acquisition cost

• Example: land bought last 2000 for 1 million pesos

should be recorded at one million pesos even the value
this 2025 is three million pesos
Basic Principles of Accounting
3 Accrual Principle
• states that the income should be recognized at the time it is
earned such as when goods are delivered or when the service
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 entity pays for the goods and services

• Example: Hotel cannot consider as income the advance payment of

customer
Basic Principles of Accounting
4 Adequate Disclosure
• states that all material facts that will significantly affect the
financial statement must be indicated

• Example: the land bought in 2000 should be recorded at historical cost

in 2025 financial statements. However, the current market value of 3
million pesos in teh year 2025 may be indicated in the FS in the for of
footnote or parenthetical note
Basic Principles of Accounting
5 Materiality
• means that financial reporting is only concerned with information
significant enough to affect decisions.

• This refers to relative importance of an item or event. An item considered

significant is knowledge of it would influence prudent users of statements

• Example: items of insignificant amount such as paper clips can be

charged outright to expenses
Basic Principles of Accounting
6 Conistency
• means taht 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 straightline method of depreciation is being used by the

company, then the method shoudl be uniformly used by the company in
computing its annual depreciation.
Thank
You