You are on page 1of 31

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


 Planning
 Implementation
 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
• Money measurement
• Entity
• Going-concern
• Cost
• Dual aspects
• Accounting period
• Conservatism
• Realization
• Matching
• Consistency
• Materiality
Assets = Liabilities + Owners equity
Dr Cr Dr Cr Dr Cr
+ - + - + -
BASIC ACCOUNTING CONCEPTS
• Money Measurement- An accounting record is made
only of information that can be expressed in monetary
terms.
• 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.
• The Going-Concern Concepts- unless there is good
evidence to the contrary, it is assumed that the
business will operate indefinitely.
• 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
1. The Dual-Aspect Concept- Assets= Liabilities+
Owner’s Equity
2. Accounting Period- Accounting measures activities for
a special time interval, usually one (1) specified.
3. Conservatism- revenues are recognized only when
they are reasonably certain, whereas Expenses are
recognized as soon as they are reasonably possible.
4. 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
1. Matching- when a given event affects both revenues
and expenses, the effect on each should be
recognized in the same accounting period.
2. 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.
3. 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
1) Purpose A means to the end of the Produce statements for outside
assisting management users
1) Users Relatively small group; known Relatively large group; mostly
identity unknown
1) Underlying structure Varies according to use of the One basic equation:
information Asset = Liabilities + Owner's
Equity
1) Source of principles Whatever is useful to GAAP
management
1) Time Orientation Historical and estimates of the Historical
future
1) Information content Monetary and nonmonetary Primarily monetary
1) Information Precisions Many approximations Fewer approximations
1) Report Frequency Varies with purpose; monthly & Quarterly & annually
weekly common
1) Report timeliness Reports issued promptly after Delay of weeks or even months
end of period covered
1) Report entity Responsible center Overall organization
1) 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.

You might also like