Fundamental

Fundamental Accounting
Accounting Principles
Principles

Chapter

Fundamental
Concepts and
Principles

Learning
Learning objectives
objectives
Conceptual:
C1: Explain the purpose and importance of accounting
in the information age.
C2: Identify users and uses of accounting.
C3: Identify opportunities in accounting and related
fields.
C4: Explain why ethics are crucial to accounting.
C5: Explain the meaning of GAAP, and define and
apply several key principles of accounting.

Analytical:
Define and interpret the accounting equation and each
of its components.

Learning
Learning objective
objective
C1: Explain the purpose and importance
of accounting in the information age.

Importance
Importance of
of Accounting
Accounting
Accounting
Accounting

is a
system that

Identifies
Identifies
Records
Records

Relevant
Relevant

information
that is

Communicates
Communicates

Reliable
Reliable
Comparable
Comparable

to
tohelp
helpusers
usersmake
make
better
betterdecisions.
decisions.

What
What is
is Accounting?
Accounting?
1.
1.

2.
2.

3.
3.

ItIt is
is aa service
service activity
activity which
which function
function is
is to
to provide
provide
quantitative
quantitative information,
information, primarily
primarily financial
financial in
in nature,
nature,
about
about economic
economic entities
entities that
that is
is intended
intended to
to be
be useful
useful in
in
making
making economic
economic decisions
decisions ..
ItIt is
is the
the art
art of
of recording,
recording, classifying
classifying and
and summarizing,
summarizing, in
in
aa significant
significant manner
manner in
in terms
terms of
of money,
money, transactions
transactions
and
and events
events which
which are
are in
in part
part at
at least
least of
of aa financial
financial
character,
character, and
and interpreting
interpreting the
the results
results thereof.
thereof.
ItIt is
is aa language
language of
of business
business

Accounting
Accounting Activities
Activities
Identifying
Business
Activities

Recording
Business
Activities

Communicating
Business
Activities

What
What is
is the
the relation
relation between
between accounting
accounting
and
and bookkeeping?
bookkeeping?
Bookkeeping is the recording of financial
transactions and events, either manually or
electronically.
Accounting is much more. It includes
identifying, measuring, recording, reporting,
and analyzing business events and
transactions, and helps information users to
make economic decisions.

Learning
Learning objective
objective
C2: Identify users and uses of
accounting.

Users
Users of
of Accounting
Accounting Information
Information
Internal Users

External Users

Lenders

Consumer Groups

Managers

Sales Staff

Shareholders External Auditors

Officers

Budget Officers

Governments Customers

Internal Auditors Controllers

Users
Users of
of Accounting
Accounting Information
Information
External Users

Internal Users

Financial accounting provides

external users with financial
statements.

Managerial accounting provides

information needs for internal
decision makers.

Users
Users of
of Accounting
Accounting InformationInformationExternal
External
Lenders: Whether the firm (borrower) can
repay the money?
Shareholders: whether to buy, hold, or sell
stocks?
Governments: whether the firm pay all due
tax?
Customers: whether the firm can exist to
provide post-sale services?
External Auditors: whether the financial
statements are prepared according to GAAP?
Etc.

Users
Users of
of Accounting
Accounting InformationInformationInternal
Internal
Marketing managers: target customers, set
price, monitor sales.
Production managers: monitor cost and ensure
quality.
Purchasing managers: what, when and where
to purchase materials.
Human resource managers: employees
performance and compensation.

Learning
Learning objective
objective
C3: Identify opportunities in accounting
and related fields.

Opportunities
Opportunities in
in Accounting
Accounting
Financial
Financial
Preparation
Preparation
Analysis
Analysis
Auditing
Auditing
Regulatory
Regulatory
Consulting
Consulting
Planning
Planning
Criminal
Criminal
investigation
investigation

AccountingAccountingrelated
related

Managerial
Managerial

Taxation
Taxation

General
Generalaccounting
accounting
Cost
Costaccounting
accounting
Budgeting
Budgeting
Internal
Internalauditing
auditing
Consulting
Consulting
Controller
Controller
Treasurer
Treasurer
Strategy
Strategy

Preparation
Preparation
Planning
Planning
Regulatory
Regulatory
Investigations
Investigations
Consulting
Consulting
Enforcement
Enforcement
Legal
Legalservices
services
Estate
Estateplanning
planning

Lenders
Lenders
Consultants
Consultants
Analysts
Analysts
Traders
Traders
Directors
Directors
Underwriters
Underwriters
Planners
Planners
Appraisers
Appraisers

FBI
FBIinvestigators
investigators
Market
Marketresearchers
researchers
Systems
Systemsdesigners
designers
Merger
Mergerservices
services
Business
Businessvaluation
valuation
Human
services
Human services
Litigation
Litigationsupport
support
Entrepreneurs
Entrepreneurs

Accounting
Accounting Jobs
Jobs by
by Area
Area
Private
accounting
60%

Public
accounting
25%

Government,
not-for-profit,
& education
15%

Learning
Learning objective
objective
C4: Explain why ethics are crucial to
accounting.

EthicsA
EthicsA Key
Key Concept
Concept

Ethics
Beliefs that
distinguish
right from
wrong

Accepted
standards of
good and bad
behavior

Guidelines
Guidelines for
for Ethical
Ethical Decision
Decision Making
Making
Identify
ethical concerns

Analyze
options

Use personal
Consider all
ethics to
good and bad
recognize ethical consequences.
concern.

Make ethical
decision

Choose best
option after
weighing all
consequences.

Learning
Learning objective
objective
C5: Explain the meaning of GAAP, and
define and apply several key principles
of accounting.

Generally
Generally Accepted
Accepted Accounting
Accounting
Principles
Principles
Financial
Financialaccounting
accounting practice
practiceis
isgoverned
governedby
by
concepts
conceptsand
andrules
rules known
known as
as generally
generallyaccepted
accepted
accounting
accountingprinciples
principles (GAAP).
(GAAP).
Relevant
Relevant
Information
Information
Reliable
Reliable Information
Information

Comparable
Comparable
Information
Information

Affects
Affectsthe
thedecision
decisionof
of
its
itsusers.
users.
Is
Istrusted
trustedby
by
users.
users.
Is
Ishelpful
helpfulin
incontrasting
contrasting
organizations.
organizations.

Setting
Setting Accounting
Accounting Principles
Principles
Financial
FinancialAccounting
Accounting
Standards
StandardsBoard
Board is
isthe
the private
private
group
groupthat
that sets
setsboth
bothbroad
broad and
and
specific
specific principles.
principles.

The
The Securities
Securitiesand
andExchange
ExchangeCommission
Commission is
is
the
thegovernment
government group
groupthat
that establishes
establishes
reporting
reportingrequirements
requirementsfor
forcompanies
companiesthat
that
issue
issuestock
stockto
tothe
thepublic.
public.

Setting
Setting Accounting
Accounting Principles
Principles
Hong Kong:
Hong Kong Institute of Certified Public Account
ants
(HKICPA)

China
Ministry of Finance Peoples Republic of China

International Accounting Standard Board

(IASB)
International Financial Reporting Standards
(IFRS)

Principles
Principles of
of Accounting
Accounting
General principles: basic assumptions,
concepts, and guidelines for preparing
financial statements.
Usually stem from long-used accounting
practice.
Specific principles: detailed rules used in
reporting business transactions and events.
Usually created by a pronouncement from an
authoritative body.

Principles
Principles of
of Accounting
Accounting General
General
Principles
Principles

Objectivity Principle
Accounting information is supported by independent,
unbiased evidence. It is intended to make financial
statements useful by ensuring they report reliable and
verifiable information.
Ex. Payments must be supported by official
receipts, and bank deposits must be
supported by deposit slips

Historical Cost Principle

Accounting information is based on actual
cost.
Cost is measured on a cash or equal-to cash basis

Ex. Land bought in 1990 for one

million pesos should be recorded at
one million pesos even though its
market value in the year 2015 is
already four million

Accrual Principle states that 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 not when the entity pays for those goods
and services
Ex. A hotel cannot consider as income the
advance payment of a customer who paid
the hotel in advance for one month
accommodation until the customer has
checked-in

Adequate
Adequate Disclosure
Disclosure states
states that
that all
all material
material
facts
facts that
that will
will significantly
significantly affect
affect the
the financial
financial
statements
statements must
must be
be indicated.
indicated.
Ex.
Ex. Land
Land bought
bought at
at one
one million
million pesos
pesos in
in
1998
1998 should
should be
be recorded
recorded at
at historical
historical cost
cost in
in
the
the 2015
2015 financial
financial statements.
statements. However,
However, the
the
current
current market
market value
value of
of two
two million
million pesos
pesos in
in
the
the year
year 2006
2006 may
may be
be indicated
indicated in
in the
the
financial
financial statements
statements for
for the
the year
year 2015
2015 in
in the
the
form
form of
of footnote
footnote or
or parenthetical
parenthetical note
note

Materiality
Materiality means
means that
that financial
financial reporting
reporting is
is
only
only concerned
concerned with
with information
information significant
significant
enough
enough to
to affect
affect decisions.
decisions. This
This refers
refers to
to the
the
relative
relative importance
importance of
of an
an item
item or
or event.
event. An
An
item
item is
is considered
considered significant
significant ifif knowledge
knowledge of
of
itit would
would influence
influence prudent
prudent users
users of
of the
the
financial
financial statements
statements
Ex.
Ex. Items
Items of
of significant
significant amount
amount such
such as
as
paper
paper clips
clips can
can be
be charged
charged outright
outright to
to
expenses
expenses

Consistency
Consistency means
means that
that that
that
approaches
approaches used
used in
in reporting
reporting must
must be
be
uniformly
uniformly employed
employed from
from period
period to
to
period
period to
to allow
allow comparison
comparison of
of results
results
between
between time
time periods.
periods. Any
Any changes
changes
must
must be
be clearly
clearly explained.
explained.
Ex.
Ex. IfIf straight
straight line
line method
method of
of
depreciation
depreciation is
is being
being used
used by
by the
the
company,
company, then
then the
the method
method should
should be
be
uniformly
uniformly used
used by
by the
the company
company in
in
computing
computing annual
annual depreciation.
depreciation.

Business
Business Entity
Entity Forms
Forms
Proprietorship
Proprietorship

Partnership
Partnership

Corporation
Corporation

Exh.
1.8

Characteristics
Characteristics of
of Businesses
Businesses
Characteristics
Characteristics Proprietorship
Proprietorship Partnership
Partnership Corporation
Corporation
Business
yes
yes
yes
Businessentity
entity
yes
yes
yes
Legal
no
no
yes
Legal entity
entity
no
no
yes
Limited
no
no
yes
Limited liability
liability
no*
no*
yes
Unlimited
no
no
yes
Unlimited life
life
no
no
yes
Business
no
no
yes
Businesstaxed
taxed
no
no
yes
One
yes
no
yes
One owner
owner allowed
allowed
yes
no
yes

**Proprietorships
Proprietorshipsand
andpartnerships
partnershipsthat
thatare
areset
set up
upas
asLLCs
LLCs
provide
providelimited
limitedliability.
liability.

Corporation
Corporation

Owners of a corporation are called

shareholders (or stockholders).
When a corporation issues only
one class of stock, we call it
common stock (or capital stock).

Learning
Learning objective
objective
Define and interpret the accounting
equation and each of its components.

Accounting
Accounting Equation
Equation
Assets
Assets

Liabilities
Liabilities

Assets

Liabilities
& Equity

Equity
Equity

Accounting
Accounting Equation
Equation
Assets are resources with future benefits that are owned or
controlled by a company.
Liabilities are what a company owes its creditors in future
products or services.
Equity refers to the claims of its owner(s).

Forms of funds=Sources of funds ( )

What resources does the firm have? (Assets) = Where
do those resources come from? (Liabilities and Equity)
A firm acquires assets by funds. Liabilities and equity
are the sources of funds to acquire those assets.

Assets
Assets
Cash
Cash
Accounts
Accounts
Receivable
Receivable

Vehicles
Vehicles

Store
Store
Supplies
Supplies

Notes
Notes
Receivable
Receivable

Resources
Resources
owned
owned or
or
controlled
controlled by
by
aa company
company

Land
Land

Buildings
Buildings
Equipment
Equipment

Liabilities
Liabilities
Accounts
Accounts
Payable
Payable

Notes
Notes
Payable
Payable

Creditors
Creditors
claims
claims on
on
assets
assets
Taxes
Taxes
Payable
Payable

Wages
Wages
Payable
Payable

Equity
Equity
Owner
Owner
Withdrawals
Withdrawals

Owner
Owner
Investments
Investments

Owners
Owners
claims
claims
on
on
assets
assets
Revenues
Revenues

Expenses
Expenses

Expanded
Expanded Accounting
Accounting Equation
Equation

Assets
Assets

Owner
Owner
Capital
Capital

Liabilities
Liabilities

Owner
Owner
Withdrawals
Withdrawals

+
Revenues
Revenues

Equity
Equity

Expenses
Expenses

Expanded
Expanded Accounting
Accounting Equation
Equation
Revenues: gross increase in equity from a
companys earnings activities.
Expenses: the cost of assets or services used
to earn revenue. Expenses decrease owners
equity.
Owner investments: the assets an owner puts
into the company.
Owner withdrawals: the assets take away from
the company for personal use.

End of Chapter 1

Chapter
Chapter 11 Homework
Homework
Ex. 1-1,1-2,1-7
Problem 1-1A
Due on June 12, 2006 (Monday)