Definition of Accounting  Function of an Auditor:

 American Accounting Association defined accounting as a process a. Locate and Rectify Accounting Errors
 American Institute of Certified Public Accountant defined accounting as b. Test the reliability of the financial reports
an art c. Trace Fraudulent Transactions
 Accounting Standard Council defined accounting as a service activity Nature of Accounting
 Accounting is the language and eyes of the business Accounting helps businessmen answer the question of "How much is the
Accounting: increase in capital as a result of business operations?" or its? Profitability
 The function of accounting is to provide quantitative information  Accounting helps businessmen answer questions such as " Can the
 The #1 rule of Debit and Credit Theory is that assets increase with debits on business sustain its long-term profitability and cash flow?" or its Stability
the left and liabilities and OE increase with credits on the right side  Accounting helps businessmen answer questions such as " are there
 The purpose of accounting is to help financial users see the true picture of available funds to finance the business operations?" or its Liquidity
the business in social terms  Accounting helps businessmen answer questions such as "how much
 Overall objective of financial accounting is to provide useful information borrowed capital and owner's capital are invested in the business?" or its
for economic decision making Capital structure
 Description of accounting: Activities of Accounting
a. Accounting is an information system  Identifying refers to the recognition and non-recognition of accountable
b. Accounting is the language of business events.
c. Accounting is a process that leads to understandable information  Measuring
 Accounting is useful in making economic decisions  Communicating
 Accounting demands critical thinking and creative skills Forms of Business Organization
History of accounting  Sole-Proprietorship advantages:
 Savary commercial code used historical code as the basis of valuation  Easy to set up; only few legal requirements
 Eugene Schmalenbach believed that the Chart of Accounts contains  Only one decides for the business
relevant dynamic information affecting the economics flight of an enterprise  All profits are for the owner
 Napoleonic Commercial Code used market value as the basis of valuation  Easy to Dissolve
 The following are the books Luca Pacioli introduced into his book called  Sole-Proprietorship Disadvantages:
"Summa de Arithmetica" are the Journal Book, Memorandum Book and  Unlimited Liability
Ledger Book  Limited Resources
 Venetian approach is an approach that is most famous, since merchant  All Losses are borne by the owner
kept their accounts in a bilateral form  Limited life
 Partnership advantages:
Branches of Accounting  Easy to Form – Mere Agreement
 Managerial accounting is the area of accounting that emphasizes the  Joint resources
developing accounting information for use within an entity  Lesser government supervision
 Private Accounting means the CPAs are employed in business entities in  Tax Exempt if professional partnership
various capacity as accounting; accountants employed by a business firm or  Corporation is a form of business organization in which the ownership is
a non-government organization evidence by shareholdings
 Budget Accounting covers the efficient management of cash and other  Corporation advantages:
resources by anticipating or predicting monetary objectives in the future  Limited Liability
 Tax Accounting was born due to the infusion of CPA's in the practice of  Power Of succession
taxation  Greater source of resource
 General Accounting is directly involved in the preparation of financial  Renewable and perpetual Life
statements
 Corporation Disadvantages:
 Internal Accounting deals on ensuring adherence to prescribed
 Most costly and difficult to organize
management policies
 Only the BOD and other officers can bind the corporation in
 Public Accounting accountant whose services as professional are hired not
contracts
on employee-employer relationships
 Shareholders have limited access and control
 Specialized branches of accounting under CMO 3 of 2007 are: Cost
 Stringent government supervision
Accounting, Private Accounting and Public Accounting.
 Wholesaler is a business that buys finished goods in bulk and sells them in
 Auditing is performed after the work of accountant is completed
smaller lots to stores that in turn will sell them to the public.
  Retailer is a business that buys finished goods in small lots and then sells
them in small amounts to the public.
Accounting cycle refers to the specific tasks involved in completing an accounting
process
 Purpose of the source document is to inform accounting staff about a
transaction and to provide proof of the details.
 Chart of Accounts is a list of the ledger accounts belonging to a business,
numbered and arranged in proper ledger order.
 Journalizing is the process of recording accounting entries in the journal.
 Journal is a book in which the account entries for all transactions are first
recorded
 The main purpose of the Journal is to record all of the debits and credits for
a transaction together in one place.
 Ledger is a group or file of accounting records that get stored together, as in
pages in a book.
 T-Account is a tool for learning debit and credit theory and for solving tricky
accounting problems.
 Worksheet is an optional step in the accounting cycle and may be made to
facilitate the preparation of the financial statements.
IFRS & PFRS
 Both the IASB and the FASB have essentially the same governance
structure, that is, a foundation that provides oversight, a board, an advisory
council, and an interpretations committee.
 The PFRS collectively include:
 PFRS corresponding to IFRS
 PAS corresponding to IAS
 Philippine interpretations corresponding to IFRIC and SIC
interpretations and interpretations developed by PIC
 IOSCO is the governmental body is most influential in enforcing IFRS
 IFRS stands for International Financial Reporting Standards
 IFRS is the term used to indicate the whole body of IASB authoritative
literature.
 IFRS is comprised of:
 International Financial Reporting Standard
 International Accounting Standards
 International Accounting Standards Interpretations.
 Generally Accepted Accounting Principles (GAAP) for US companies are
developed by the Financial Accounting Standards Board (FASB).
 Accounting standard-setters use the following process in establishing
international standards: Research, preliminary views, exposure draft,
standard
 The major key organizations on the international side are the: IASB and
IOSCO
 The overriding requirement of ifrs is for the financial statements to give a fair
presentation (or true and fair view).
 The expectations gap is the difference between: What the public thinks
accountants should do and what accountants think they can do.
 Economic consequences of accounting standard-setting means: Accounting
standards can have detrimental impacts on the wealth levels of the providers
of financial information.
 US GAAP is more detailed or rules-based while IFRS tends to be simpler
and more flexible in the accounting and disclosure requirements.
 The FRSC formed the Philippine InterpretationsCcommittee (PIC) in August
2006 to assist the FRSC in establishing and improving Financial Reporting
Standards in the Philippines.
 The objective of financial reporting uses an entity rather than a proprietary
approach in determining what information to report.
Qualitative Characteristics
 useful financial reporting identify the types of information are likely to be
most useful to users in making decisions
 broad classes of financial effects of transaction and other events
 measure the extent to which an entity has complied with all relevant
standards and interpretations
 non-qualitative aspects of an entity's position and performance and changes
in financial position
 Application of the full disclosure principle is violated when important financial
information is buried in the notes to the financial statements
 Fundamental qualitative characteristics (content)
1) Relevance - the capacity of the information to influence a decision
a. Predictive value helps users in predicting or anticipating future
outcomes
b. Confirmatory value enables users to check and confirm earlier
predictions or evaluations
2) Faithful Representation- description and numbers or figures must watch
what really existed or happened
a. Completeness-The financial statements shall be accompanied by notes
to financial statements;
b. Neutrality- Preparers of statements should not try to increase the
usefulness of the information to a few users to the detriment of others
who may have opposing interests; Free of bias
c. Free from error- There are no errors or omissions in the description of
the phenomenon
 Enhancing qualitative characteristics (form)
1. Comparability- the ability to bring together for the purpose of noting points of
likeness and difference
2. Verifiability - enhancing qualitative characteristic implies consensus
3. Understandability- requires that users have some knowledge of the complex
economic activities of entities, the accounting process and the technical
terminology in the statements
4. Timeliness- The older the information, the less useful
 Conservatism
 When in doubt, recognize all losses and don't recognize gain
 Best described as selecting an accounting alternative that has the
least favorable impact on owners' equity
 Materiality:
 Information is material if the omission or misstatement could
influence the economic decisions that users make on the basis of
the financial information about entities
 Materiality is not a fundamental qualitative characteristic but rather
a threshold or cut off point in determining useful information
 Materiality is dependent on professional judgement because no
threshold limit is defined in the Conceptual Framework
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