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Fundamentals of Accounting

Accounting provides quantitative financial information about an economic entity to support economic decisions. The accounting cycle includes identifying transactions, recording them in journals, posting to ledgers, preparing trial balances and financial statements. Fundamental concepts include the entity, periodicity, monetary unit, and going concern assumptions. Financial statements report on assets, liabilities, equity, income and expenses according to accounting principles of objectivity, historical cost, revenue/expense recognition, disclosure, materiality and consistency.

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48 views

Fundamentals of Accounting

Accounting provides quantitative financial information about an economic entity to support economic decisions. The accounting cycle includes identifying transactions, recording them in journals, posting to ledgers, preparing trial balances and financial statements. Fundamental concepts include the entity, periodicity, monetary unit, and going concern assumptions. Financial statements report on assets, liabilities, equity, income and expenses according to accounting principles of objectivity, historical cost, revenue/expense recognition, disclosure, materiality and consistency.

Uploaded by

Jelo sunido
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Fundamentals of Accounting

Accounting definition
-Accounting is a service activity. Its function is to provide quantitative information, primarily financial in
nature, about an economic entity that is intended to be useful in economic decisions.

The Accounting Cycle


-Identification of Events to be Recorded
-Transactions are Recorded in the Journal
-Journal Entries are Posted to the Ledger
-Preparation of a Trial Balance
-Preparation of Worksheet
-Preparation of Financial Statements
-Closing
-Preparation of Post Closing Trial Balance
-Reversing

Fundamental Concepts
-Entity Concept
-Periodicity Concept
-Stable Monetary Unit Concept
-Going Concern

Entity Concept
-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.

Periodicity Concept
-An entity’s life can be meaningfully subdivided into equal time periods for reporting purposes.

Stable Monetary Unit Concept


-The Philippine peso is a reasonable unit of measure and that its purchasing power is relatively stable.
This is the basis for ignoring the effects of inflation in the accounting records.

Going Concern Assumption


-The financial statements are normally prepared on the assumption that an enterprise is a going concern
and will continue in operation for the foreseeable future.

Generally Accepted Accounting Principles (GAAP)


-Encompass the conventions, rules and procedures necessary to define accepted accounting practice at
a particular time.
BASIC PRINCIPLES
-Objectivity
-Historical Cost
-Revenue Recognition Principle
-Expense Recognition Principle
-Adequate Disclosure
-Materiality
-Consistency Principle

Objectivity
-Accounting records and statements are based on the most reliable data available so that they will be as
accurate and as useful as possible.

Historical Cost
-This principle states that acquired assets should be recorded at their actual cost and not at what
management thinks how much they are worth as at the reporting date.

Revenue Recognition Principle


-Revenue is to be recognized in the accounting period when goods are delivered or services are
rendered or performed.

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
-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.
-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.

Users of financial information


-Investors
-Creditors
-Suppliers
-Employees
-Customers
-Government
-Public
Elements of Financial Statements
-Assets
-Liabilities
-Owner’s equity
-Income
-Expenses

Financial Statements
-Financial statements are written records that convey the business activities and the financial
performance of a company. Financial statements are often audited by government agencies,
accountants, firms, etc. to ensure accuracy and for tax, financing, or investing purposes. For-profit
primary financial statements include the balance sheet, income statement, statement of cash flow, and
statement of changes in equity.

Elements of Financial Statements

ASSET is a resource controlled by the enterprise as a result of past events and from which future
economic benefits are expected to flow to the enterprise.

LIABILITY is a present obligation of the enterprise arising from past events, the settlement of which is
expected to result in an outflow from the enterprise of resources embodying economic benefits.

EQUITY is the residual interest in the assets of the enterprise after deducting all its liabilities.

INCOME is an increase in economic benefits during the accounting period.

EXPENSES are decreases in economic benefits during the accounting period.

Account
-An account is a record in an accounting system that tracks the financial activities of a specific asset,
liability, equity, revenue, or expense. These records increase and decrease as business events occur
throughout the accounting period. Each individual account is stored in the general ledger and used to
prepare the financial statements at the end of an accounting period.

Types of Accounts

Temporary Accounts- an account whose balance is not carried over at the end of every accounting year
and thus begins the new year with zero balance. The primary use of a temporary account is to show how
any draws, expenses, and/or revenue have affected an equity account. Another name for temporary
accounts is nominal accounts.

Permanent Accounts- accounts whose balances remain open at the end of the accounting time and are
carried over to the next accounting period. Such accounts remain open

INTRODUCTION TO ACCOUNTING CYCLE

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