FUNDAMENTAL CONCEPTS

OF ACCOUNTING
 GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES (GAAP)

• These are broad, general statement of “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 and standards used in the
presentation of financial statements.
Fundamental Concepts
 Entity Concept

•Regards the business enterprise as

separate and distinct from its owners
and from other business enterprises.
•Example
 Entity Concept
Mr. Santos has a car repair shop and a barber shop. This car repair
shop is considered as a separate entity distinct from the barber shop
and the owner, Mr. Santos. The expenses of the car repair shop
should not be mixed with the expenses of the barber shop and the
personal expenses of Mr. Santos. The two businesses are considered
to be separate economic units, separate and distinct from their
owner. As such, these should be treated as different from each other,
although owned and operated by only one person. Hence, the
personal expenses of Mr. Santos should not be mixed with the
expenses of any business.
 Periodicity
Is the concept behind providing financial
accounting information about the economic
activities of an enterprise for specified time periods
For reporting purposes, one year is usually
considered as one accounting period.
Example
 Periodicity

Separate financial reports are prepared yearly for

the car repair shop and the barber shop of Mr.
Santos. Hence, Mr. Santos can measure the income
of the two businesses annually
 Periodicity
An accounting period may be classified as either
of the following:

Calendar Fiscal
Year Year
 Calendar Year

•A twelve-month period that

starts on January 1 and ends on
December 31
 Fiscal Year

• A twelve-month period that starts on any month of the year other than
January and ends twelve months after the start period. E.g. June 1, 2014
ends its fiscal year on May 31, 2015.
• This is still twelve-month period although it does not start in January and
end in December.
• A natural business year is any twelve-month period that ends when business
activities are at their lowest point.
 Going Concern
Is a concept which assumes that
the business enterprise will
continue to operate indefinitely.

Example
 Going Concern

In preparing the financial statements of the car

repair shop and the barber shop, the accountant
assumes that the businesses will not close or shut
operations within the next years.
FOOD FOR THOUGHT