CHAPTER I Accounting and its

Environment
DEFINITIONS OF ACCOUNTING

Accounting is 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 the system that measures

business
activities,
processes
that
information
into
reports
and
communicates the results to decisionmakers.

Accounting is the process of identifying,

measuring and communicating economic
information
to
permit
informed
judgments and decisions by users of the
information.

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.
FUNADAMENTAL BUSINESS MODEL
1.) Investors provide the required
capital for the business. The cash
investment will be held in the
bank account.
2.) The cash in the business can be
a.) converted into another type
of asset that will be used in
the business or sold
b.) spent on operating costs such
as
salaries,
rentals
and
utilities
3.) The combination of business
resources provides the basis for
producing products or services.
4.) The sale of a product or service
generates an asset called a
receivable.
This
asset
once
collected will produce a cash
inflow for the business.
5.) If theres an existing debt from
banks, the cash inflow from
collections will be used to provide
the debt providers with interest on
their loans to the company. The
rest of the cash can be sent back
to the cycle.
TYPES OF BUSINESS

Service selling peoples time

Trader Buying and selling products

Manufacture Designing products,

aggregating components and assembling
finished products

Raw Materials Growing or extracting

raw materials

Infrastructure Selling the utilization

of infrastructure

Financial Receiving deposits, lending

and investing money

Insurance Pooling premiums of many

to meet claims of few
FORMS OF BUSINESS ORGANIZATIONS

Sole Proprietorship receives all

profits, absorbs all losses and is solely
responsible for all debts of the business.

Partnership Intentions of dividing the

profits among themselves and each
partner is personally liable for any debt
incurred by the partnership.

Corporation-Owned
by
the
stockholders. It is an artificial being
created by operation of law. The
stockholders are not personally liable for
the corporations debt.
MICRO, SMALL AND MEDIUM ENTERPRISES

Micro Enterprises Those with

assets, before financing, and employ
not more than 9 workers

Small Enterprise those with assets,

before financing, of above P3.0 to 15
million and employ 10-99 workers

Medium Enterprise have assets,

before financing, of above P15 million
to 100 million and employ 100-199
workers
ACTIVITIES IN BUSINESS ORGANIZATIONS

Financing Activities Methods an

organization uses to obtain financial
resources from financial markets and
how it manages these resources.

Investing activities Involve the

selection and management including
disposal and replacement of long-term
resources that will be used to develop,
produce, and sell goods and services.
Efficient business one that provides
goods and services at low costs
relative to their selling price.
Effective business
- one that is
successful in providing goods and
services demanded by the customers.

Operating Activities involve the

use of resources to design, produce,
distribute and market goods and
services.
PURPOSE AND PHASES OF ACCOUNTING
Business
Transaction

economic
activities of a business. Recording these
historical events is a significant function of
accounting.
a.) Measured accounting information
must be expressed in terms of a
common financial denominator.
b.) Classified reduces the effects of
numerous transactions into useful
groups of categories.
c.) Summarized financial data is
achieved through the preparation of
financial statements.
d.) Interpreted analyzed or evaluate
the liquidity, profitability and solvency
of the business organization.
FUNDAMENTAL CONCEPTS

a.) Entity Concept a section of an

organization should stand apart from
other organizations and individuals as
separate economic unit for the
purpose of accounting.
b.) Periodicity concept an entitys life
can be meaningfully subdivided into
equal time periods for reporting
purposes. For the purpose of reporting
to outsiders, one year is the usual
accounting period.
c.) Stable Monetary Unit Concept
Allows accountants to add and
subtract peso amounts as though each
has the same purchasing power as any
other peso at anytime. (Basis for
ignoring effects of inflation in the
accounting record.)
CRITERIA FOR GENERAL ACCEPTANCE OF
AN ACCOUNTING PRINCIPLE
GAAP Encompass the conventions, rules
and procedures necessary to define accepted
accounting practice at a particular time.
General acceptance of an accounting principle
usually depends on how well it meets three
criteria:
a.) Relevance it results in information
that is meaningful and useful to those
who need to know something about a
certain organization.
b.) Objectivity resulting information is
not influenced by the personal bias or
judgment of those who furnish it. It
connotes reliability, trustworthiness and
verifiability.
c.) Feasibility it can be implemented
without undue complexity or cost.
BASIC PRINCIPLES
a.) Objectivity principle Accounting
records and statements are based on
the most reliable data available so that
they will be as accurate and as useful
as possible.
b.) Historical cost Acquired assets
should be recorded at their actual cost
and not at what management thinks
they are worth as at reporting date.
c.) Revenue Recognition Principle
Revenue is to be recognized in the
accounting period when goods are
delivered or services are rendered or
performed.
d.) Expense Recognition Principle
Expenses should be recognized in the
accounting period in which goods and
services are used up top produce
revenue and not when the entity pays
those goods and services.
e.) Adequate disclosure Requires that
all relevant information that would
affect the users understanding and
assessment of the accounting entity be
disclosed in the financial statements.
f.) Materiality Financial reporting is only
concerned with that information that is
significant enough to affect evaluations

and decisions. Materiality depends on

the size and nature of the item.
g.) Consistency Principle Firm should
use the same accounting method from
period
to
period
to
achieve
comparability over time within a single
enterprise.
BRANCHES OF ACCOUNTING
a.) Auditing independent examination
that ensures the fairness and reliability
of the reports that management
submits to users outside the business
entity.
Independent Auditors where
result of the examinations is
embodied
Internal
Auditors

perform
routine tasks and undertake detailed
checking
of
the
companys
accounting procedures
External Auditors Go in for much
more selective testing
b.) Bookkeeping routine operation,
while accounting requires the ability to
examine using both financial and nonfinancial data. It is a mechanical task
involving the collection of basic
financial data.
c.) Cost Bookkeeping, Costing, and
Cost Accounting Cost Bookkeeping
the process that involves the recording
of cost data in books of account in
much greater detail.
Cost Accounting deals with the
collection, allocation, and control of the
cost of producing specific goods and
services.
Cost Accounting System contains a
great deal more data, and thus once
the data are summarized there is much
more information available to the
management company.
d.) Financial Accounting Focused on
the recording of business transactions
and the periodic preparation of reports
on financial position and results of
operations.
e.) Financial Management responsible
for setting financial objectives, making
plans based on those objectives,
obtaining the finance needed to achieve
plans, and generally safeguarding all
the financial resources of the entity.
f.) Management
Accounting

incorporates cost accounting data and

adapts them for specific decisions
which management may be called upon
to make.
Management Accounting System
incorporates all types of financial and
non-financial information from a wide
range of sources.
g.) Tax Accounting includes the
preparation of tax returns and the
consideration of the tax consequences

of proposed business transactions or

alternative courses of action.
h.) Government Accounting concerned
with the identification of the sources
and uses of resources consistent with
the provision of city, municipal,
provincial or national laws.

CHAPTER II About
International Accounting
Standards, New IFRS
Framework
WHAT ARE ACCOUNTING STANDARDS?

Authoritative statements of how

particular types of transaction and
other events should be reflected in
financial statements.
IASBS CONCEPTUAL FRAMEWORK FOR
FINANCIAL REPORTING 2010 (IFRS
FRAMEWORK)
IFRS FRAMEWORK describe the basic
concepts that underlie the preparation and
presentation of financial statements for
external users.
Scope of IFRS Framework

the objective of financial reporting

the qualitative characteristics of

useful financial information

the reporting entity

the definition, recognition and

measurement of the elements from
which financial statements are
constructed

concept of capital and capital

maintenance
OBJECTIVE OF GENERAL PURPOSE
FINANCIAL REPORTING
-to provide financial information about the
reporting entity that is useful to present and
potential investors, lenders and other creditors,

who use that information to make decisions

about buying, selling or holding equity or debt
instruments and providing or settling loans or
other forms of credit.
Primary Users need information about
the resources and claims against the resources
of the entity not only to assess an entitys
prospects for the future net cash inflows but
also how effectively and efficiently
management has discharged their
responsibilities to use the entitys existing
resources.
General Purposes financial Reports
provide information about the financial position
of a reporting entity. It also provides
information about the effects of transactions
and other events that change a reporting
entitys economic resources and claims.
Changes in Economic Resources and
Claims
a.) Financial Performance
Reflected By Accrual
Accounting in the periods in
which those effects occur, even if
then resulting cash receipts and
payments occur in a different
period.
b.) Financial Performance
Reflected By Past Cash Flows
reporting entitys cash flows
during the reporting period also
assists users to assess the entitys
ability to generate future net cash
inflows.
c.) Changes in Economic
Resources and Claims Not
Resulting From Financial
Performance presented in the
statement of changes in equity
Other Users and Their Information
Needs
a.) Employees information about
stability and profitability of
employers and its ability to
provide remuneration, retirement
benefits and employment
opportunities.
b.) Customers have an interest in
information about the continuance
of an enterprise, especially when
they have long-term involvement
with, or are dependent on, the
enterprise.
c.) Government and their
agencies interested in the
allocation of resources and
activities of the enterprise.
d.) Public information about trends
and recent development in the
prosperity of the enterprise and
the range of its activities.
External Users individuals and
others that have current or potential
financial interest in the reporting entity
but are not involved in the daily
operations of the entity.

Internal Users include the board of

directors, chief executive officers, chief
financial officers, vice presidents,
business unit managers, plant
managers and the supervisors.
QUALITATIVE CHARACTERISTICS OF
USEFUL FINANCIAL INFORMATION
identify the types of information are likely
to be most useful to users in making
decisions about the reporting entity on
the basis of information in its financial
report
Fundamental Qualitative
Characteristics
a.) Relevance

Confrimatory Role - use to

correct the decision-makers
earlier expectations.

Predictive Role used to

make predictions of future cash
flows or income.
Materiality entity-specific
aspect of relevance based on the
nature or magnitude (or both) of
the items to which the
information relates in the context
of an individual entitys financial
report.
b.) Faithful Representation seeks
to maximize the underlying
characteristics of completeness,
neutrality and freedom from error.

Completeness all
information necessary for a user
to understand the phenomenon
being depicted

Neutrality free from bias

Freedom from error no

errors or omissions in the
description of the phenomenon
Enhancing Qualitative
Characteristics

Comparability enables users

to identify and understand
similarities in, and differences
among, items.

Verifiability assure users

that information represents
faithfully the economic
phenomena it purports to
represent.

Information is available to
decision-makers in time to be
capable of influencing their
decisions.

Understandability
Classifying, characterizing and
presenting information clearly
and concisely makes it
understandable.
Cost Constraint on Useful Financial
Reporting
Cost a pervasive constraint on the
information that can be provided by
general purpose financial reporting.

UNDERLYING ASSUMPTION
Going Concern financial statements
presume that an entity will continue in
operation indefinitely or, if that presumption is
not valid, disclosure and a different basis of
reporting are required.
ELEMENTS OF FINANCIAL STATEMENTS
Asset, Liabilities and equity
measurement of financial Position in the
balance sheet
Income and Expenses measurement of
performance in the income statement
RECOGNITION OF THE ELEMENTS OF
FINANCIAL STATEMENTS
Recognition process of incorporating in
the balance sheet or income statement an item
that meets the definition of an element and
satisfies the criteria for recognition.
Recognition criteria;

It is probable that any future

economic benefit associated with the
item will flow to or from the
enterprise

The item has a cost or value that can

be measured with reliability
MEASUREMENTS OF THE ELEMENTS OF
FINANCIAL STATEMENTS
Measurement process of determining
the monetary amounts at which the elements
of the financial statements are to be recognized
and carried in the balance sheet and income
statement.
Historical Cost Assets are recorded at
the amount of cash or cash equivalents paid or
the fair value of the consideration given to
acquire them at the time of their acquisition.
Liabilities are recorded at the
amount of proceeds received in exchange for
the obligation.
Current Cost Assets are carried at the
amount of cash or cash equivalents that would
have be paid if the same or an equivalent asset
was acquired currently.
Realizable (Settlement) Value

Realizable Assets are carried at

the amount of cash or cash
equivalents that could currently be
obtained by selling an asset in an
orderly disposal.

Settlement Value Liabilities

are carried at the undiscounted
amounts of cash or cash
equivalents expected to be paid
to satisfy the liabilities in the
normal course of business.

Present Value Assets are

carried at the present discounted
value of the future net cash inflows
that the item is expected to
generate in the normal course of
business.
CONCEPTS OF CAPITAL AND CAPITAL
MAINTENANCE REVIEW QUESITONS

Financial Concept of capital such as

invested money or invested purchasing power,
capital is synonymous with the net assets or
equity of the enterprise.
Physical concept of capital such as
operating capability, capital is regarded as the
productive capacity of the enterprise based on,
for example, units of output per day.

Chapter III Accounting Equation

and the Double-Entry System
ELEMENTS OF FINANCIAL STATEMENTS
Financial Position
a.) Asset valuable resources owned
by the entity


controlled by the enterprise

past events

Future economic benefits

b.) Liability a present obligation of
the enterprise arising from past
events

obligations

transfer economic benefits

past transactions or events

complementary nature of assets

and liabilities
c.) Equity the residual interest in
the assets of the enterprise after
deducting all its liabilities.
Performance
1. Income increase in economic
benefits during the accounting
period in the form of inflows or
enhancements
of
assets
or
decrease of liabilities that result in
increases in equity.

Revenue arises in the

course of the ordinary
activities of enterprise

Gains represent other

items
that
meet
the
definition of income and
may, or may not, arise in
the course of the ordinary
activities of an enterprise
2. Expenses

decreases
in
economic benefits during the
accounting period in the form of
outflows. Generally classified as
cost of services rendered or goods
sold.

Losses - represent other

items
that
meet
the
definition of expense and
may or may not, arise in
the course of the ordinary
activities of an enterprise.
THE ACCOUNT
Account Summary device of accounting
T-Account Simplest form of the account
THE ACCOUNTING EQUATION

The most basic tool of accounting

DEBITS AND CREDITSTHE DOUBLE ENTRY
SYSTEM
Double-entry system the dual effects
of business transaction is recorded
Debited when an amount is entered on
the left side of the account
Credited when an amount is entered on
the right side.
Rule of debit and credit vary on every
account.
NORMAL BALANCE OF AN ACCOUNT

any account to the side of the account

debit or credit where

ACCOUNTING EVENTS AND TRANSACTIONS

Accounting Event an economic

occurrence that causes changes in an
enterprises assets, liabilities, and/or equity
Transaction particular kind of event that
involves the transfer of something value
between two entities.
TYPES AND EFFECTS OF TRANSACTIONS
1.) Source of Assets (SA) an
asset account increases and
corresponding
claims
account
decreases
2.) Exchange of assets (EA) one
asset account increases and
another asset account decreases
3.) Use of Assets (UA) an asset
account
decreases
and
a
corresponding
claims
account
decreases
4.) Exchange of Claims (EC) One
claims account increase and
another claims account decrease
TYPICAL ACCOUNT TITLES USED
Statement of Financial Position
Asset
o
Current
Cash any medium of exchange
that a bank will accept for deposit
at face value
Cash Equivalents short-term,
highly liquid investments that are
really
convertible
to
known
amounts of cash which are subject
to an insignificant risk of changes
in value
Notes Receivables A written
pledge that the customer will pay
the business a fixed amount of
money on a certain date
Accounts Receivable These
are claims against customers
arising from sale of services or
goods on credit.
Inventories assets which are
1. Held for sale in the
ordinary course of
business
2. in the process of
production for such
sale
3. in
the
form
of
materials or supplies
to be consumed in
the
production
process
or
in
rendering services
Prepaid Expense Expenses
paid for by the business in
advance
o
Non-current Assets
Property, Plant and Equipment
tangible asset that are help by an
enterprise for use in the production or
supply of goods or services, or for
rental to others, or for administrative
purposes and which are expected to
be used during more than one period.

 Accumulated Depreciation It is a
contra account that contains the some
of the periodic depreciation charges.
Intangible Asset identifiable,
nonmonetary assets without physical
substance held for use in the
production or supply of goods or
services, for rentals to others or for
administrative
purposes.
These
includes goodwill, patents, copyrights,
licenses,
franchises,
trademarks,
brand
names,
secret
processes,
subscription lists and non-competition
agreements.

Liabilities
o
Current Liabilities
Accounts Payable
Notes Payable
Accrued Liabilities
Unearned Revenues
Current
Portion
of
Long-Term Debt
o
Non-Current Liabilities
Mortgage Payable
Bonds Payable

Owners Equity
Capital
Withdrawals
Income Summary
Income Statement

Income
Service Income
Sales

Expenses
Cost of Sales
Salaries or Wages Expense
Telecommunications,
Electricity, Fuel and Water
Expenses
Rent Expense
Supplies Expense
Insurance Expense
Depreciation Expense
Uncollectible
Accounts
Expense
Interest Expense
ACCOUNTING BUSINESS TRANSACTIONS
Business Transaction occurrence of an
event or a condition that affects financial
position and can be reliably recorded.
Financial Transaction Worksheet form
used to analyze increase and decrease in the
assets, liabilities or owners equity of a business
entity.

Chapter III Recording Business

Transactions
STEP 1 TRANSACTION ANALYSIS
1.) Identify the transaction from source
documents.
2.) Indicate the account-either assets,
liabilities, equity, income or expensesaffected by the transaction.
3.) Ascertain whether each accounts
increased or decreased by the
transaction.
4.) Using rules of debit and credit,
determine whether to debit or credit
the account to records its increase or
decrease,
General Journal
Book of original entry
Chronological
record
of
the
entitys
transactions.
Shows all the effect of transaction in terms
of debit and credit.
Ledger
A reference book
A grouping of accounts.
Used to classify and summarize transactions
and to prepare data for basic financial
statements.
Trial Balance
Listing of all ledger accounts, in order, with
their respective debit or credit balances.
Source Documents
Identify and describe transactions and
events entering the accounting process.
Journalizing
Process of recording a transaction.
Chart of account