Module 1: Fundamental Concepts and Principles

Learning Outcomes:
1. To know about accounting and its importance.
2. Categorize Business Organizations
3. Identify various types of business organizations
4. To appreciate basic accounting principles and its use in business accounting.

Learning Outcome No. 1 To know about accounting and its importance.

Accounting - is an information and measurement system that identifies, records, and
communicates information about an organization’s business activities.
Identifying – Select relevant transactions and event.
Recording – Keep a chronological log of transactions and events measured in dollars.
Communicating – Communicating results to users of information through financial reports.

Other Meaning –
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
financial character, and interpreting the result thereof.
PICPA – defines accounting as a service activity its function is to provide quantitative
information primarily financial in nature about economic entities that is intended to be useful in
making economic decisions.
Accounting is called the language of business because all organizations set up an accounting
information system to communicate data to help people make better decisions. Accounting
information is communicated to external and internal users.

External users – is not directly involved in the organization but are interested parties in the
accounting information. Examples are lenders, shareholders, governments, consumer groups,
external auditors and customers.

Internal users – directly involved in running and managing the organization. Examples are
Executives, Managers, Internal Auditors, Sales Staff, Budget Analysts, and Controllers.

Learning Outcome No. 2 - Categorize Business Organizations

A sole proprietorship, is a business owned by one person. The business is a separate entity
for accounting purposes. However, the business is not a separate legal entity from its owner.
A partnership is a business owned by two or more people, called partners, which are jointly
liable for tax and other obligations. Like a proprietorship, no special legal requirements must be
met in starting a partnership. The only requirement is an agreement between partners to run a
business together. The agreement can be either oral or written and usually indicates how
income and losses are to be shared. A partnership, like a proprietorship, is not legally separate
from its owners.
A corporation, also called a C corporation, is a business legally separate from its owner or
owners, meaning it is responsible for its own acts and its own debts. Separate legal status
means that a corporation can conduct business with the rights, duties, and responsibilities of a
person. A corporation acts through its managers, who are its legal agents. Separate legal status
also means that its owners, who are called shareholders (or stockholders), are not personally
liable for corporate acts and debts.

Learning Outcome No. 3 Identify various types of business organizations

Service – is a type of business operation engaged in rendering of services
Trading/Merchandising – is a type of business engaged in buying and selling goods
Manufacturing – is engaged in the production of items to be sold. This type of business
operation is involved in the purchasing and converting raw materials to finished goods.

Learning Outcome No. 4 To appreciate basic accounting principles and its use in business
accounting.
GAAP – Generally Accepted Accounting Principles governed the rules and concepts in
financial accounting. GAAP aims to make information relevant, reliable, and comparable.
A relevant information affects the users. A reliable information is trusted by the users. A
comparable information helps in contrasting organization.
In today’s global economy, there is increased demand by external users for comparability in
accounting reports. This demand often arises when companies wish to raise money from
lenders and investors in different countries.

Fundamental Concepts
1. Business Entity Assumption – Separate business and personal transactions.
2. Time Period Assumption - presumes that the life of a company can be divided into
time periods such as months and years, and that useful reports can be prepared for
those periods.
3. Going Concern Assumption - The going-concern assumption states that, in the
absence of information to the contrary, the business entity is assumed to continue
operations into the foreseeable future.

Basic Principles
1. Objectivity Principle – States that all business transactions that will be entered in the
accounting records must be duly supported by verifiable evidence.
 2. Historical Cost – means that all properties and services acquired by the business must
be recorded at its original cost
3. 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.
4. Adequate Disclosure – states that all material facts that will significantly affect the
financial statements must be indicated.
5. Materiality - prescribes that information that would influence the decisions of a
reasonable person need to be disclosed. Both importance and relative size are
reviewed.
6. Consistency – means that 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.

Answer Exercises 1,2 and 3 submit to jmitra@feu.edu.ph due date is 09.23.2020

Read Chapter 2 Financial Statements for a service business and the fundamental accounting
equation.
Required Book : Lao-Ong, Flocer (2014) Fundamentals of Accounting –Textbook for Beginners,
4th Edition, C & E Publishing, Inc.