Accounting - Fundamental Standpoint, Second Edition

MODULE

Essential Accounting Ideas

Whats in Accounting for me?

Definition of Accounting
Accounting in the Philippines
Bookkeeping and Accounting
Financial Accounting and Managerial Accounting
Users of Accounting Information
Business Organizations and their activities
Accounting Postulates
Financial Statements
Elements of Financial Statements
Career Opportunities in Accountancy
The CPA Licensure Examination
Introduction to the Accounting Process
Jiyeon Services Case

After completing this module, you should be able to

Define the term accounting and remember its development in the Philippines.
Know the difference between Bookkeeping and Accounting.
Differentiate Financial Accounting from Managerial Accounting.
Know the users of Accounting Information.
Identify the different business organizations.
Enumerate and describe some Accounting postulates.
Know the different financial statements and their elements.
Enumerate the different career opportunities in the field of Accountancy.
Describe the nature of the Philippine CPA Licensure Examination.
Recite the steps of the Accounting cycle.
Be familiarized with the example business, Jiyeon Services.

Essential Accounting Ideas | 1

Accounting - Fundamental Standpoint, Second Edition

Definition of Accounting
Accounting is defined as a service activity. The main function of accounting is to
provide quantitative information, primarily financial in nature, about economic
entities, that is intended to be useful in making economic decisions, and in
making reasoned choices among alternative courses of action.
According to Wikipedia, Accountancy is the process of communicating financial
information about a business entity to users such as shareholders and managers.
The communication is generally in the form of financial statements that show in
money terms the economic resources under the control of management; the art
lies in selecting the information that is relevant to the user and is reliable. The
principles of accountancy are applied to business entities in three divisions of
practical art, named accounting, bookkeeping, and auditing.

Accounting is the art of

recording, classifying, and
summarizing in a significant
manner and in terms of
money, transactions and
events which are, in part at
least, of financial character,
and interpreting the results
thereof.

Accounting is defined by the American Institute of Certified Public Accountants (AICPA) as "the art of recording,
classifying, and summarizing in a significant manner and in terms of money, transactions and events which are, in
part at least, of financial character, and interpreting the results thereof."
Summarizing all of these, accounting is a service activity by providing financial information to external or internal
users, as a helpful tool in economic decisions.

Accounting: Philippine Setting

The Philippine Institute of Certified Public Accountants created
the Accounting Standards Council in 1981 to make generally
accepted accounting principles in our country. The approved
statements of the Accounting Standards Council were called
Statements of Financial Accounting Standards which were
based on the accounting standards of the United States based
Financial Accounting Standards Board.
In 1997, the Accounting Standards Council made a decision to
converge Philippine accounting standards with the International Accounting Standards issued by the International
Accounting Standards Committee, which was succeeded by the International Accounting Standards Board.
The Accounting Standards Council was replaced by the Financial Reporting Standards Council in 2006. The FRSC is
now the accounting standards setting body in the Philippines which was created by the Professional Regulations
Commission.
In the same year, the FRSC approved the issuance of the new and revised Philippine Accounting Standards, and the
all new Philippine Financial Reporting Standards.

Essential Accounting Ideas | 2

Accounting - Fundamental Standpoint, Second Edition

Bookkeeping and Accounting - Different Standpoints

Do not confuse Accounting and Bookkeeping. Bookkeeping is the routine recording
of economic activities, and is a mechanical process. Always remember that
accountants analyze and interpret financial information, conduct audits, and
prepare financial statements. Also, accountants design systems of accounting,
prepare special business and financial studies, forecasts, and budgets. They also
provide tax services.

Bookkeeping is the routine

recording
of
economic
activities, and is a mechanical
process.

In the accounting cycle to be discussed in the later section of this module, we will see the bookkeeping steps and
accounting steps of the accounting cycle.

Financial Accounting and Managerial Accounting

Managerial Accounting is for internal use. It provides information for the managers of
the company. The kinds of information usually used by managers are broad to detail.
Financial Accounting information is used by people outside the company, such as
stockholders and creditors. Financial Accounting looks on the company as a whole.
Managerial Accounting focuses on segments, and is more in detail.

Financial Accounting is
concerned with business
transactions. Managerial
Accounting emphasizes
accounting information for
use within an entity.

Financial Accounting is concerned with the recording of business transactions and the
eventual preparation of financial statements. It focuses on general purpose reports
known as financial statements. These financial statements are intended for internal and external users. Financial
Accounting is the area of accounting that emphasizes reporting to creditors and investors. Managerial Accounting is
the area of accounting that emphasizes developing accounting information for use within an entity.
Before you move on, you should define the term accounting and remember its development in the Philippines.
You should also know the difference between Bookkeeping and Accounting, and differentiate Financial
Accounting from Managerial Accounting.

Users of Accounting Information

Internal Users are decision making individuals inside the business. They need the Managerial Accounting information
as they are the one responsible for the performance of the business. External Users are individuals outside the
business, comprising of the following: (1) Owners and prospective owners, which are providers of risk capital, and
concerned with the risk inherent in it, (2)Creditors or lenders, (3)Government, with their agencies, (4) Employees,
which are curious about the stability of their employers, (5)Customers, (6)General public..

Business Organizations and their activities

The forms of business organizations include the Sole Proprietorship, or which means that only one person own, and
regulates the business. An example of sole proprietorship includes small businesses and retail establishments. Sole
proprietorship is existent because of the will of the proprietor, and neither by agreement nor operation of law.

Essential Accounting Ideas | 3

Accounting - Fundamental Standpoint, Second Edition

Another form of business organization is Partnership, or which means that two or

more persons own the business and they contribute money, property, or industry
into a common fund, with the intention of dividing profits between themselves. A
partnership has a legal personality, separate from the partners.
Last form of business organization is the Corporation. It is a separate legal entity,
organized in accordance with law. It divides ownership into shares of stocks. It
will obtain its legal personality only when it is registered and had been issued the
articles of incorporation.
These three given business organizations may have the following business
activities:

Sole Proprietorship is
owned and operated by one
person only. Partnership is
operated by two or more
partners.
Corporation
divides ownership into shares
of stocks. These three given
organizations may provide
service, sell goods, or
transform inputs to outputs
and sell them.

Service - providing services to customers.

Merchandising - buying and selling of goods.
Manufacturing - buying raw materials, transforms them into finished goods, and sells them.
This material will discuss Sole proprietorship under the three business activities. Partnership and Corporation will be
discussed in Accounting 2, Financial Accounting 2, and Advanced Accounting 1.

Accounting Postulates
The Going Concern postulate means that in the absence of evidence to the
contrary, the accounting entity is viewed as continuing in operation indefinitely.
Simply stated, the entity prepares financial statements on the assumption that
the entity will continue operations for the foreseeable future.
In the Accounting entity postulate, the entity is separate from the owners,
managers, and employees who constitute the entity. The transactions of the
entity shall not be merged with that of the owners.
In the Time period postulate, it requires that the indefinite life of an entity is
subdivided into time periods or accounting periods which are usually of equal
length for the purpose of preparing financial reports on financial position, cash
flows, and performance.

We have some accounting

postulates in practice, which
includes going concern,
accounting
entity,
time
period, and monetary unit.
The accrual basis postulate is
no longer carried forward as
an underlying assumption in
the
new
Conceptual
Framework.

The Monetary unit postulate means that the financial statement elements should be stated in terms of a unit of
measure and that the purchasing power of the peso is stable or constant and that its insignificance therefore may be
ignored.

Before you move on, you should know the users of Accounting Information, identify the different business
organizations, and enumerate and describe some Accounting postulates.

Essential Accounting Ideas | 4

Accounting - Fundamental Standpoint, Second Edition

Financial Statements
Financial Statements are structured financial representation of the financial position of
and the transactions undertaken by an enterprise. The objective of general-purpose
financial statements is to provide information about the financial position, performance,
and cash flows of an enterprise that is useful to a wide range of users in making
economic decisions. IAS 1, Presentation of Financial Statements presents the basis for
the presentation of financial statements.
A complete set of financial statements includes the following:

Financial Statements
are structured financial
representation of the
financial position of
and the transactions
undertaken by an
enterprise.

Statement of Financial Position - also called balance sheet. It shows the list of
Assets, Liabilities, and Owners Equity of the business in a given month or year. This shows a detailed and
structured representation of the Accounting Equation. To qualify as a component of the set of financial
statements, the SFP reported must be the end-of-period balance sheet.
Statement of Comprehensive Income - this shows the Revenues and Expenses of the company, and hence,
shows if the company had a profit or loss for a given period. This also includes comprehensive items.
Comprehensive Income is the companys change in the total stockholders equity from sources other than
from its owners.
Statement of Changes in Equity - this is also called Capital Statement, and shows the summary of the
changes occurred in the Capital of the owner (in sole proprietorship), the partners (in partnership), or the
shareholders (in corporation).
Statement of Cash Flows - this reports cash receipts and cash disbursements in relation to the major
activities of the entity: operating, investing, and financing.
Notes, comprising a summary of significant accounting policies and other explanatory information.
A Statement of Financial Position as at the beginning of the earliest comparative period when the entity
applies an accounting policy retrospectively or makes a retrospective restatement of items in the financial
statements, or when it reclassifies items in the financial statements.
The representation and preparation of these Financial Statements will be discussed in the fifth module. Preparation of
notes and disclosures will be discussed in Intermediate Accounting subjects.

What do Financial Statements contain?

Business entities report the following financial statement elements.
Assets are things of value owned by the business. This includes the following:
Cash - this is any medium of exchange that the bank will accept at face value.
Accounts Receivable - claims against debtors, or customers from performance of services or sale
Notes Receivable - claims against debtors, with a written note of promise to pay.
Merchandise Inventories - goods held for sale.
Supplies - goods used in the operations of the business.

Essential Accounting Ideas | 5

Accounting - Fundamental Standpoint, Second Edition

Prepaid Expenses - expenses paid in advance, like rent, insurance, and taxes.
Equipments
Furniture and Fixtures
Automobiles
Truck
Land
Building
Liabilities are equities of the creditors, or debts of the business. This includes the following:
Accounts Payable
Notes Payable
Salaries Payable
Taxes Payable
Interest Payable
Mortgage Payable
Capital is the rights of the owner, into the assets of the business. In a sole proprietorship, it is represented by the
name of the owner, then the word Capital. For a partnership, there are as many Capital accounts as there are
partners. In a corporation, it is Stockholders Equity.
Revenue is the gross inflow of economic benefits during the period arising in the course of ordinary activities of an
enterprise when these inflows result in increase in equity other than those
The elements of financial
relating to contribution from owners.
statements include Assets,
Liabilities, Capital, Revenue,
Expenses are gross outflow of economic benefits during the period in the course
and Expenses.
of ordinary activities when those outflow result in decrease in equity, other than
those relating to distribution to owners.

Career Opportunities in Accountancy

People who pursue studies in the field of Accountancy may be employed in four fields. These may be in public,
private, in the government, and in education.
Public Accounting offers accounting and related services for a fee to companies, or to the general public. Certified
Public Accountants are the licensed professionals engaged in Public Accounting. They may provide services in
Auditing, which examines the accounting records and financial statements of companies, and present opinions to the
accuracy of the accounting data. They may also provide services in Management Advisory, which employs both
historical and estimated data in assisting management with day to day problems and planning for the future. Lastly is
Tax services, which involves the preparation of tax returns and the consideration of tax consequences of proposed
business transactions.
Private Accounting provides services to a particular type of business firm. They may provide services in financial
accounting, cost accounting, budgeting, and internal auditing.

Essential Accounting Ideas | 6

Accounting - Fundamental Standpoint, Second Edition

Government Accounting is a field of accounting wherein accountants provide accounting services for governmental
units. The accounting in government setting differs from the business world, because accounting for the government
relates to accounting for not for profit entities.
Accounting Education includes all accountants who are engaged in teaching accounting to accounting students. Here
in our country, the demand for accountants for education is high, and there are positions to fill throughout the
country.

The Philippine CPA Licensure Examination

The Board of Accountancy, under the Professional Regulations Commission, administers the CPA Licensure
Examination every May and October. The qualification of applicants in the CPA Licensure Examination is a degree
holder of Bachelor of Science in Accountancy, conferred by an institution recognized by the Commission on Higher
Education or other authorized government offices. The licensure examination shall cover, but not limited to, the
following areas:
Theory of Accounts
Business Law and Taxation
Management Services
Auditing Theory
Auditing Problems
Practical Accounting Problems I
Practical Accounting Problems II
To pass the examination, a candidate must obtain a grade of 75%, with no grade lower than 65% in any area. In the
event a candidate obtains 75% and above in at least a majority of the areas, the candidate shall receive a conditional
credit for the areas passed, provided, that the candidate shall take an examination in the remaining areas within two
years from the preceding examination. If the candidate fails to obtain 75% and a rating of 65% in each of the areas
re-examined, the candidate is considered failed in the entire examination.
Any candidate who fails in two complete CPA Licensure Examinations shall be disqualified from taking another set of
examinations, unless the candidate submits evidence to the satisfaction of the Board that he/she enrolled in and
completed at least 24 units of the areas given in the licensure examinations.
Before you move on, you should know the different financial statements and their elements, enumerate the
different career opportunities in the field of Accountancy, and describe the nature of the Philippine CPA Licensure
Examination.

Introduction to the Accounting Process

The Accounting Process, also called Accounting cycle, is a step-by-step activity done by a business enterprise. This
process will be discussed one by one up to Module 5.
1. The source documents are to be gathered are analyzed.
2. The transactions given in each of the source documents are journalized.
3. The journalized transactions are posted in the ledger.

Essential Accounting Ideas | 7

Accounting - Fundamental Standpoint, Second Edition

4.
5.
6.
7.
8.
9.
10.
11.

A trial balance is prepared to test the equality of debits and credits.

The documents for adjustments are prepared and analyzed.
A worksheet is prepared.
Financial Statements are prepared.
The adjusting entries are journalized and posted.
The closing entries are journalized and posted.
The ledger is ruled and balanced and a Post-closing trial balance is prepared.
Reversing entries are journalized.

Jiyeon Services Case

This example business will be our reference to discuss the accounting process. This will be used up to Module 5.
Consider the following:
Miss Jiyeon Park, a Korean expatriate living here in the Philippines for 7 years now, plans to open a business in our
country. She plans to open a service company which she will call Jiyeon Services. Jiyeon Services will commence on
the first day of the year, January 1, 2012.
Transactions on the first month of operations of Jiyeon Services are given as follows:
Jan 01
Jan 02
Jan 03
Jan 04
Jan 05
Jan 08
Jan 09
Jan 10
Jan 12
Jan 14
Jan 15
Jan 17
Jan 19
Jan 22
Jan 23
Jan 26
Jan 27
Jan 28
Jan 29

Miss Jiyeon Park invested P 500,000 cash to open Jiyeon Services.

The business bought P 5,000 worth of office supplies, paid in cash.
Bought a small automobile, on account, amounting to P 120,000. Also bought an equipment,
paying cash of P 65,000.
Paid an Insurance Policy, charged to Prepaid Insurance account. P 18, 960 good for 2 years.
Paid a fourth of the price of the automobile.
Rendered services to customers, receiving cash of P 2,300
Rendered services to customers, P 6,320 on account.
Rendered services to customers, receiving cash of P 5,000
Paid another fourth price of the automobile.
Rendered services to customers, P 8,000 on account.
Paid half-month salaries of three employees, P 4,680 each.
Rendered services to customers, receiving a note of promise to pay P 12,000.
Due to an emergency, the owner withdrawn an amount of P 15,000.
The business bought an additional P 3,000 worth of office supplies, paid in cash.
Rendered services to customers, receiving cash of P 4,500.
Rendered services to customers, P 3,560 on account.
Collected the account of January 9 and 14.
Paid Utility bills, worth P 2,450.
Paid this months rent, P 3,650.

Data for adjustment of Jiyeon Services:

a. P 3,400 worth of office supplies were used up.
b. Record the Insurance expired for the month.
c. The equipment has a salvage value of P 25,000 and expected to be usable for 7 years.
d. The automobile has a salvage value of P 40,000 and expected to be usable for 5 years.
e. Payable half-month salaries, P 4,680.
f. Telephone bills payable February 2, P 2,500.
The financial reporting intervals will be on a monthly basis, ending the first month of operations at January 31, 2012.

Essential Accounting Ideas | 8

Accounting - Fundamental Standpoint, Second Edition

Discussion Questions
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.

What is accounting and what is the importance of accounting?

What are the stages of development of the field of Accountancy in the Philippines?
What is the difference between bookkeeping and accounting?
What is the difference between Financial Accounting and Managerial Accounting?
Who are the users of accounting information? Provide examples.
What are the different forms of business organizations? What are their activities?
Enumerate the different accounting postulates and describe their importance.
What are the different types of financial statements? What are financial statements composed of?
What are the different career opportunities in the field of accountancy?
Describe the nature of the Philippines CPA Licensure Examination.
What is the importance of the accounting process?

Appreciate Accounting
1.
2.
3.
4.
5.
6.

Research for more definitions of accounting.

What is the difference between the words accounting and accountancy?
Interview a CPA, and ask him/her the true feeling of taking the CPA Licensure Examination.
Research for a companys annual report and take a look at their financial statements.
Research about one Accounting firm and what do accounting firms composed of.
If you will be pursuing studies in this field, what career opportunity will you be in?

Module Exam - Identification

1.
2.
3.
4.
5.
6.
7.
8.
9.

The rights of the owner, into the assets of the business.

It provides services to a particular type of business firm.
This reports cash receipts and cash disbursements in relation to the major activities of the entity.
The financial statements are prepared on the assumption that the entity will continue in operation for the
foreseeable future.
They are decision making individuals inside the business.
This information is used by people outside the company, such as stockholders and creditors.
It includes all accountants who are engaged in teaching accounting to accounting students.
This examines the accounting records and financial statements companies, and present opinions to the
accuracy of the accounting data.
It is a separate legal entity, organized in accordance with law. It divides ownership into shares of stocks.

Task Sheet
Make a research regarding these concepts:
1. History of Accounting
2. Other branches of Accountancy
3. Forensic Accounting
4. Experiences of an Accounting Student
5. Experiences of an Accounting Professor
6. Differences of Accounting Standards around the world
7. Calls for harmonization of Accounting standards.

Essential Accounting Ideas | 9