Fundamental Accounting Principles Concepts, Importance & Examples Video & Lesson Transcript

fundamental financial accounting concepts

It is shown as the part of owner’s equity in the liability side of the balance sheet of the company. GAAPGAAP are standardized guidelines for accounting and financial reporting. ProfitabilityProfitability refers to a company’s ability to generate revenue and maximize profit above its expenditure and operational costs. It is measured using specific ratios such as gross profit margin, EBITDA, and net profit margin. It aids investors in analyzing the company’s performance. BookkeepingBookkeeping is the day-to-day documentation of a company’s financial transactions. These transactions include purchases, sales, receipts, and payments.

What are the 4 types of accounts?

  • Checking Account. Think of a checking account is as your “everyday account.” It's a place to keep the money you use to pay your bills or cover everyday expenses.
  • Savings Account.
  • Money Market Account.
  • Certificate of Deposit (CD)

These videos help reinforce important lessons and are always available for review. Underlying accounting concepts are also known as accounting assumptions. One assumption is that the business and the owners’ records be kept separate fundamental accounting since the business is its own entity. Another is the going concern concept, which assumes the business will continue to be in business in the future. Another is that there is one stable currency in which records will be recorded.


The Shareholders’ Equity Statement on the balance sheet details the change in the value of shareholder’s equity from the beginning to the end of an accounting period. Accrual ConceptAccrual Accounting is an accounting method that instantly records revenues & expenditures after a transaction occurs, irrespective of when the payment is received or made. I used this book for my graduate-level Financial Accounting course. It uses the horizontal accounting method to get you started and then moves into journal entries and t-accounts. It was to the point and logical, which made it easy to read and understand. I thought the companion workbook also went with it nicely and thoroughly reinforced the concepts from the book.

fundamental financial accounting concepts

Business TransactionsA business transaction is the exchange of goods or services for cash with third parties (such as customers, vendors, etc.). The goods involved have monetary and tangible economic value, which may be recorded and presented in the company’s financial statements. There are several international standards that are generally followed by all companies. The separate entity principle states that business funds and transactions must be kept separate from the personal finances of all owners and principles in the business.

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Please note this information refers to the previous edition. Students are often overwhelmed by the amount of information presented in the introductory financial accounting course. By focusing on fundamental concepts in a logical sequence, students are able to fully comprehend the material rather than memorize seemingly unrelated terms and topics. The goal of “Fundamental Financial Accounting Concepts” is to enable students to understand how any given business event affects the financial statements. The “financial statements model” is a highly praised feature because it allows students to visualize the simultaneous impact of business events on all of the key financial statements . The goal of Fundamental Financial Accounting Concepts is to enable students to understand how any given business event affects the financial statements.

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For all of you not very keen on economics, choose another book to get the basics of financial accounting. Too much unwanted details that take off the focus of the real point.

The Differences of GAAP & Tax Accounting

Merchants in the olden times recorded transactions in simple lists. Business became more and more complex, hence the development of more effective ways to keep track of business transactions. Financial accounting focuses on classifying, recording, summarization, interpreting, and reporting business transactions. Sales, purchases, earnings, expenditures, and other transactions are documented in the company’s books of accounts. Also, the firm can compare financial statements against the performance of other companies.

More than 15 million users have used our Bookshelf platform over the past year to improve their learning experience and outcomes. With anytime, anywhere access and built-in tools like highlighters, flashcards, and study groups, it’s easy to see why so many students are going digital with Bookshelf. The United States uses an accounting system known as Generally Accepted Accounting Principles , which is established and overseen by the Financial Accounting Standards Board . On an international scale, the standards and rules, known as the International Financial Reporting Standards , are set by the International Accounting Standards Board . Chapter II covers fundamental concepts to help you build a good foundation before moving to more elaborate accounting topics. Non-cash ExpensesNon-cash expenses are those expenses recorded in the firm’s income statement for the period under consideration; such costs are not paid or dealt with in cash by the firm. Every investor should go through the following four financial statements of a company.

Why are Fundamental Accounting Principles Important?

They are the basis upon which the fundamental ones are derived. However, they are different because underlying concepts are merely understood assumptions among accountants, whereas fundamental concepts are specific rules that accountants follow.

fundamental financial accounting concepts

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