Intermediate Accounting Volume 1

CHAPTER 1 The Development of the Accounting Profession

The primary purpose of accounting is to provide quantitative information, about economic
entities, that is to be used as the basis for formulation of economic decisions.
A branch of accounting called management accounting is designed to meet the information needs
of these internal users.
Internal Users
Active Owners and Managers
The general purpose reports provided to external users are called the financial statements, which
are the product of a broad branch of accounting called financial accounting.
External Users
Inactive Users
Creditors and Lenders
Suppliers
Potential Investors
Taxing Authorities
Regulatory Bodies
Employees and Employees Unions
Financial Analyst
Advisers and General Public
Users may also categorized as direct or indirect
Direct Users use financial information as a tool to protect their own interest in
the enterprise.
Owners
Managers
Creditors
Suppliers
Customers
Employees
Taxing Authorities
Indirect Users use accounting information to provide advice to or protect the
interest of a direct user.
Regulatory Agencies protect the interest of the investors and the public
Labor unions protect the interest of the employees
Financial and Legal Consultants provide advices and assistance to their
clients who may be customers, lenders or suppliers of the firm
Accounting primarily provides information that can be measured and expressed in terms of units
of measure. The monetary unit is generally the unit of measure used in communicating
accounting information.
Accounting Entity Concept the concept that separates the personality of the enterprise from
that of its owners and other stake holders. An accounting entity is capable of controlling its own
economic resources and incurring economic obligations.

Branches of Accounting

 Financial Accounting
o The broadest branch of accounting focusing on the needs of external users.
o It is concerned with the recognition, measurement and communication of
economic resources, economic obligations and changes in economic resources
and economic obligations.
o Should conform to the accounting standards as developed by standard setting
bodies.
Management Accounting
o Serves the information needs of the internal users. The managers and active
owners use accounting information in making and implementing short-term and
long-range plans for the enterprise.
o Because the information required by the management may vary based on the
specific needs at a particular time, the information provided is not structured and
is not necessarily conforming to the accounting standards.
Cost Accounting
o Concerned with the measurement and recognition of cost of service provided or
products manufactured.
o It is ordinarily associated with manufacturing companies as a tool of both
financial accounting and management accounting.
Tax Accounting
o Is concerned with the computation of taxes and preparation of tax returns
submitted to a taxing authority.
Government Accounting
o Encompasses the process of analyzing, classifying, summarizing and
communicating all transactions involving the receipt and disposition of the
government funds and property and interpreting the result thereof.

Bookkeeping refers only to one phase of accounting, the recording phase.

Other phases of accounting include classifying, summarizing and
communication information and interpreting the result thereof.
Auditing - refers to an independent examination of the financial statements
conducted by a certified public accountant for the purpose of rendering an opinion
as to the fairness of the presentation of the financial statements.
THE DEVELOPMENT OF THE ACCOUNTING PROFESSION AND THE STANDARD
SETTING PROCESS
Luca Pacioli who introduce the system of recording business transactions into debit and
credit parts which is popularly called double entry bookkeeping system.
IASC (International Accounting Standards Committee)
IAS (International Accounting Standards) set of uniform global accounting standard.
IASB (International Accounting Standards Board)
IFRS (International Financial Reporting Standards) the standards that originated from
IASB
PICPA (Philippine Institute of Certified Public Accountant) organized the Accounting
Standard Council
SFAS (Statements of Financial Accounting Standards) accounting standards
developed by ASC

 FRSC (Financial Reporting Standard Council) - successor of SFAS

BOA (Board Of Accountancy) the body that regulates the practice of accountancy in
the Philippines.
PFRS (Philippine Financial Reporting Standard)
THE CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING
Conceptual Framework facilitate the consistent and logical formulation of PFRS. It also
provides a basis for the use of judgement in resolving accounting issues.
In case of conflict between a PFRS and the conceptual framework, the requirements of
the specific PFRS shall prevail.
Accrual Basis
-

The Financial Statement are based on the accrual basis of accounting. The accrual basis
recognizes the effects of the transactions when the transaction occur, rather than
when cash is receive and paid.
Revenues are recorded when earned, that is, generally when goods are sold or when
service are performed. Expenses are recorded when incurred, not necessarily when
cash is paid.

Going Concern
-

Entities are presumed to continue operations in the future, unless there indications in
the contrary

Qualitative Characteristics of Accounting Information

A. Fundamental Qualitative Characteristics
a. Relevance relevant information influences the judgement and evaluation of the
user. Relevant information possesses three qualities: confirmatory value (feedback
value), predictive value and materiality.
i. Confirmatory Value the quality of value that confirms earlier expectation
ii. Predictive Value enables its users to make forecasts and plan their future
actions.
iii. Materiality provides a threshold or cutoff point for recognition.
b. Faithful Representation An information is faithfully represented when it depicts the
actual events or effects of events and not merely their legal form. Faithful
Representation is the quality of being honest to the users.
i. Completeness A complete depiction shall include all information necessary
for a user to understand the phenomenon being depicted.
ii. Neutrality Neutral Information is impartial and not biased toward the
particular needs or desires or specific users. It is not manipulated to induce a
particular decision or evaluation by the users.
iii. Freedom from Error - means that the process used to produce the
information has been carefully selected and appropriately applied.

B. Enhancing Qualitative Characteristics

a. Comparability Comparable information enables users to identify similarities and
differences between different sets of economic circumstances.

b. Verifiability means reaching consensus if another knowledgeable and independent

observers use the same measurement process.
i. Direct Verification applies direct observation, as counting cash
ii. Indirect Verification means redoing the process of measurement
c. Timeliness Timely information is provided early enough for the users to use it as a
basis for making decision.
d. Understandability Understandable financial information is presented using forms
and terminologies that are adapted to the users range of understanding.
Elements of Financial Statements
Asset These are the resources controlled by the entity as a result of past events and from which
future economic benefits are expected to flow to the enterprise.
Liability a present obligation of an enterprise arising from past events, the settlement of which
is expected to result in an outflow from the entity of the economic resources embodying economic
benefits.
Equity the residual interest in the assets of the entity after deducting all its liabilities.
Income is the increase in economic benefits during an accounting period in the form of inflows
or enhancements of assets or decreases of liabilities that result in increase in equity, other than those
relating to contributions from equity participants. Revenues arise from major or central activities of the
enterprise while gains arise from incidental activities.
Expenses the decrease in economic benefits during the reporting period in the form of
outflows or depletion of assets or incurrence of liabilities that result in decreases in equity, other than
those relating to distributions to equity participants.
Recognition Principles
The Conceptual Framework identifies two general criteria for the recognition of financial
statement elements. They are as follows.
1. It is probable that there is an inflow or outflow of economic benefits.
2. The element has a cost or value that could be reliably measured.
The Conceptual Framework identifies four measurement bases:
1. Historical Cost the cost of acquisition
2. Current Cost (Fair Value) the amount of cash or cash equivalents that would have to be paid
if the same asset or an equivalent asset is acquired currently.
3. Realizable Value the assets disposal value reduced by disposal costs, or the liabilities
settlement amount including settling cost.
4. Present Value discounted future cash flow

Other cost:
1. Sunk Cost cost that have already been incurred and will be changed or avoided by any future
decision.

2. Committed Cost cost resulting from an organization structure or use of facilities and its basic
organization structure.
3. Discretionary Cost cost resulting from management decision to spend a particular amount of
money for specific cost
4. Common Cost the mutually beneficial cost
5. Joint Cost the cost incurred in a single process that yields two or more products.
6. Opportunity Cost theses represents the benefit foregone because one force of action is chosen over
another.
The Concepts of Capital and Capital Maintenance
Concepts of Capital
A. Financial Concept of Capital financial assets are measured at fair value, while PPE, intangible
assets, depending on the accounting policy adopted by the enterprise, maybe measured using
historical cost or revalued amount (which considers fair value at the date of revaluation).
B. Physical Concept of Capital defines capital as the operating capacity of the enterprise and requires
the use of the current cost as measurement basis for an enterprises assets and liabilities.
Capital Maintenance
Capital Maintenance Concept measures profit as the amount of capital that the enterprise can
distribute to its owners and be as well of the period as it as in the beginning.
A. Financial Capital Maintenance Concept measures profit as the excess of the financial amount of
net assets at the end of the period over the financial amount of the net assets at the end of the period
over the financial amount of net assets at the beginning of the period, after deducting contributions
from owners and adding back distributions to owners.
B. Physical Capital Maintenance Concept measures profit as the excess of the productive capacity of
the enterprise at the end of the period over the productive capacity at the beginning of the period,
measured in terms of current cost, after excluding the effects of transactions with owners.

CHAPTER 2 Cash and Cash Equivalents

Nature and Composition of Cash