WHAT IS ACCOUNTING?
Purchase of merchandise from supplier
It is the process of identifying, measuring, and
communicating economic information to permit
informed judgment and decision by users of the
information. –AAA (American Accounting Association)
ASC
(Accounting Standard Council)
 accounting is a service activity
 it provides quantitative information, intended to
be useful in making economic decision.
CATAICPA
(Committee on Accounting Terminology of
the American Institute of Certified Public
Accountants)
 accounting is the art of recording, classifying,
and summarizing in significant manner
 in terms of money, transactions, and events are
in part at least of financial character
 interpreting the results thereof
Types of information provided by accounting are:
1. Quantitative, in numbers or quantities;
2. Qualitative in words or descriptive form
3. Financial, in monetary values
Components of Accounting:
“Identifying”
The economic activities of the organization are
identified and recorded in the accounting records
with assigned amounts used in measuring the
accountable economic transactions
An event is considered accountable and quantifiable
when:
 It affects a financial element ( assets,
liabilities, equity )
 It has already happened
 It can be measured reliably
“Economic activities of an entity are referred to
as transactions”
External transactions- involves one entity and
another entity.
e.g. 1.
2. Borrowing money from a bank
3. Sale of merchandise to customer
4. Payment of salaries to employees
Internal transactions- involves one entity only.
e.g. 1. Production and casualty loss
“Measuring”
The assigning of peso amounts to accountable
economic transactions and events. The recorded
data are classified within the system to
accumulate subtotals for various types of
accounts.
Historical cost- the most common measure of
financial transactions
“Communicating”
The information is summarized in accounting
reports designed to meet the information needs
of various decision-makers such as investors,
managers, governmental agencies, and
interpreting the significance of the processed
information.
Implicit in the communication process are:
■Recording or journalizing- the process of
systematically maintaining a record of
all economic business transactions after
they have identified and measured.
■Classifying- the sorting or grouping of similar
and interrelated economic transactions
into their respective classes.
-accomplished by posting to the ledger.
■Summarizing- is the preparation of financial
statements which include the statement
of financial position, income statement,
statement of comprehensive income,
statement of changes in equity and
statement of cash flows
Purpose of accounting
The basic purpose of accounting is to provide decision
makers with information useful in making economic
decision.
These includes:
 Allocation and use of scarce economic resources
such as money, materials, land and labour.
THE ACCOUNTANCY PROFESSION
Republic Act No. 9298- the law regulating the
practice of accountancy in the Philippines.
-known as the “Philippine Accountancy Act
of 2004”
Board of Accountancy- the body authorized by law
to promulgate rules and regulations
affecting the practice of accountancy
profession in the Philippines.
-responsible for preparing and grading the
examination.
Public accounting- composed of individual
practitioners, small accounting firms and
large multinational organizations that render
independent and expert financial services to
the public.
Auditing- the primary service offered by most
public accountants.- the examination of
financial statements by independent certified
public accountant for the purpose of
expressing an opinion as to the fairness with
which the financial statements are prepared.
Taxation service- the preparation of annual income
tax returns and determination of tax
consequences of certain proposed business
endeavours.
Management advisory services- refers to services to
clients on matters of accounting, finance,
business policies, organization procedures,
product costs, distribution and many other
phases of business conduct and operations.
Private accounting- this includes maintain the
records. Producing the financial reports,
preparing the budgets and controlling and
allocating the resources of the entity.
Government accounting- transactions involving the
receipt and disposition of government funds
and property.
- the focus is the custody and administration
of public funds
e.g. of agencies under:
BIR, COA, DBM, SEC, NBI
“Continuing professional development raises and
enhances the technical skill and competence of
the certified public accountant”
“it is to be emphasized that the continuing
professional development has become mandatory
for certified accountant exempt temporarily:
a. The CPA is working abroad
b. The exemption is for the duration of stay
abroad
c. The CPA has been out of the country for at
least 2 years immediately prior to the date of
renewal of license and accreditation
“Accounting vs. Auditing vs. Bookkeeping”
ACCOUNTING
 accountants should be able to design
accounting systems and system of internal
control, interpret and record complex
transactions, and assist management in
interpreting all types of accounting
information
 conceptual and is concerned with the why,
reason or justification for any action adopted
AUDITING
 examining the financial statements to ascertain
whether they in conformity with GAAP
 performance of an investigation enabling the
auditors to express an independent opinion
(Auditor’s report).
BOOKKEEPING
 refers to the daily operation of an accounting
system—that is recording and classifying routine
transactions.
 The how of accounting. Procedural and largely
concerned with development and maintenance of
accounting records.
“Financial vs. Managerial”
Financial accounting- concerned with the recording of
business transactions and the eventual
preparation of financial statements
-focuses on general purpose reports known as
financial statements intended for internal and
external users
Managerial accounting- accumulation and preparation 3. IASC- independent private sector body that
of financial reports promote their worldwide acceptance and
observance.
-area of accounting that emphasizes developing -work generally for the improvement
accounting information for use within the entity.
and harmonization of regulations
relating to the presentation.
GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (GAAP) 4. IASB replaces IASC.
 Rules, procedures, practice and standards  IASB published IFRS
followed in the preparation of financial  IASC issued IAS which was adopted
statements. also in IFRS.
 Its purpose is to identify proper accounting
practices for the preparation and presentation of
financial statements
 Ensure comparability and uniformity in financial
statements based on the same financial
information.

FINANCIAL REPORTING
STANDARDS COUNCIL
1. PICPA created ASC on November 18, 1981
2. The FRSC replaces ASC.
 the FRSC is the accounting standard
setting body created by the PRC
 main function is to establish and
improve accounting standards
 composed of 15 members with a
chairman who is an experienced senior
accounting practitioner.
 Term of office is 3 years, renewable for
another term

Composition of FRSC:
1. BOA
2. SEC
3. BSP
4. BIR
5. COA
6. Major organization of preparers and users of
financial statements—FINEX
 Accredited national professional organization of
CPA’s: (2 representatives each)
7. Public practice
8. Commerce and industry
9. Academe or education
10. government
CONCEPTUAL FRAMEWORK
Assumption and financial reporting
UNDERLYING ASSUMPTIONS
The conceptual framework for financial reporting
mentions only one assumption, the GOING CONCERN.
The four basic accounting assumptions:
1. Going Concern
 Assumes that accounting entity will
continue in operation for a period of
time sufficient to carry out its existing
commitments.
2. Accounting entity
 Is the specific business organization
 Transaction of different entities
should not be accounted together
since they are distinct and separate
from each other.
 To have a fair presentation of
financial statements.
3. Time period
 Life of a business must be divided
into a series of accounting periods of
equal length.
 Calendar year, twelve-month period
that ends on December 31
 Natural year, twelve-month period
that ends any month
4. Monetary unit
 Money is used as the basic
measuring unit for financial
reporting
CONCEPTUAL FRAMEWORK
A summary of the terms and concepts that underlie the
preparation and presentation of financial statements. An
attempt to provide an overall theoretical foundation for
accounting which will guide users of the information.
SCOPE:
a. Objective of financial reporting
b. Qualitative characteristics of useful financial
information
c. Definition, recognition and measurement of the
elements from which financial statements are
constructed
d. Concepts of capital and capital maintenance
Objective of financial reporting
 To provide financial information about reporting
entity that is useful to users in making decisions
about providing resources to the entity.
 The “why”, purpose or goal of accounting
 The primary responsibility for the preparation and
presentation of the financial statements lies with the
MANAGEMENT.
QUALITATIVE CHARACTERISTICS
Attributes that make the information useful to users.
Fundamental qualitative characteristics:
Relevance
o the capacity of the information to influence a
decision
o financial information must be capable of making a
difference in the decisions made by users
o ingredients that contribute to the relevance of
accounting information are predictive and
confirmatory value.
Materiality
o also known as the doctrine of convenience
o refers to the relative importance of an item,
significant enough to affect evaluations or decisions.
o Factors to determine an item a material are nature of
the item, relative size of the item and cumulative
effect on the financial statements.
Faithful representation
o Means that financial reports represent economic
phenomena or in words and numbers.
o Descriptions and figures must match what really
existed or happened
Three characteristics of faithful representation:
 COMPLETENESS-statements must be
complete within the bounds of materiality
and cost
-result of the principle of full disclosure of
financial facts significant enough to
influence judgment.
 NEUTRALITY-neutral and free from bias.
-synonymous with “principle of fairness”
 FREE FROM ERROR-no errors or
omissions in the process of producing
information
Substance over form
o The transactions and events are accounted in
accordance with their substance and reality and not
merely their legal form
Conservatism
o Do not include as an aspect if faithful representation
o It would be inconsistent with neutrality
o Subjective and may contain an element of bias
o Means that “in case of doubt, record any loss and do
not record any gain”
o It is synonymous with prudence
o Attempts to resolve uncertainties in the valuation of
asset as the lower end of the range of reasonable
values
 PRUDENCE- exercised care and caution
when dealing with uncertainties in
measurement
“anticipate no profit and provide for
probable and measurable loss”
ENHANCING QUALITATIVE
CHARACTERISTICS
Intended to increase the usefulness of financial
information
Comparability- information can be compared to other
data to identify similarities and differences
 may be made within an entity or between
and across entities for evaluation.
 Within an entity- intracomparability
-comparisons through time
 Between and across entities- comparisons
between 2 or more entities engaged in
same industry
-intercomparability
 Consistency- include in comparability
 accounting method and practices should be
applied on a uniform basis
 helps to achieve the goal of comparability
Understandability- user is able to perceive the
significance of the information
 comprehensible
Verifiability- reported information should be based on
objectively determined facts that can be
verified.
 implies consensus.
 supported by evidence so that an accountant
would look into same evidences would
arrive at same economic decision.
 can be direct or indirect.
DIRECT-e.g. counting cash
INDIRECT- using the same methodology. FIFO
Timeliness- financial information must available early
enough when decision is to be made
 What happened in the past would become the
basis of what happen in the future.
ACCOUNTING CONSTRAINTS
1. Timeliness 3. Fair presentation
2. Cost benefit 4. Balance between qualitative
characteristics
Elements of financial statements
A. Statement of financial position (balance sheet)
Asset
 A resource controlled by the entity as a
result of past events and from which future
economic benefits are expected to flow the
entity.
 Cost or value of the asset can be measured
reliably.
 Take the form of convertability into cash or
cash equivalents
 Recorded initially at original acquisition cost
(COST PRINCIPLE)
Liabilities
 Present obligation arising from past evens
the settlement of whichis expected to result
in an outflow from the entity of resources.
Equity
 Residual interest in the assets of the entity
after deducting all of the liabilities.
B. Income statement and statement of comprehensive
income
 INCOME- increase in economic benefit during the
accounting period in the form of inflow or
increase in asset or decrease in liability that
results in increase in equity,
o Encompasses both revenue and gains.
o Revenue- arises in the course of the ordinary
regular activities
o Gains- meet the definition of income and do
not arise in the course of the ordinary
regular activities
 EXPENSES- decrease in economic benefit during
the accounting period in the form of an outflow
o encompasses losses as well as those of
ordinary regular activities
o Losses- do not arise in the course of the
ordinary regular activities and include losses
resulting from disasters
RECOGNITION OF ELEMENTS
Recognition means the reporting of an asset,
liability, income or expense of the financial
statements of an entity.
1. Asset recognition principle- asset is recognized in
the balance sheet when it is probable that future
economic benefit will flow to the entity
2. Liability recognition principle- recognized when it
is probable that an outflow of economic benefits will
be required for the settlement of a present obligation.
3. Income recognition principle- recognized when it
is probable that future economic benefits will flow to
the entity as a result of an increase in an asset
4. Expense recognition principle- recognized when it
is probable that a decrease in future economic
benefits has occurred as a result of a decrease of an
asset
BROAD ACCOUNTING PRINCIPLES THAT GUIDE
ACCOUNTING PRACTICE
Cost principle
 Assets are recorded at the amount of cash or
cash equivalent paid or the fair value of the
consideration given
Revenue principle
 Require the recognition and reporting of
revenues in accordance with accrual basis.
Matching concept
 Require that cost and expenses incurred in
earning revenue should be reported in the
same period
Full disclosure
 All relevant information should be presented
in an unbiased, understandable, and timely
manner.

MEASUREMENT OF ELEMENTS
Measurement is the process of determining the
monetary amounts at which the elements of the
financial statements are to be recognized and
carried in the balance sheet

 Historical cost- amount of cash or cash

equivalent paid or the fair value of the
consideration given to acquire asset. (past
purchase exchange)

 Current cost- amount of cash/equivalent that

would have to be paid if the same asset was
acquired (current sale exchange price)

 Realizable value- amount of cash that could

currently be obtained by selling the asset in
orderly disposal (current sale exchange price)

 Present value- discounted value of the future

net cash inflows that the asset is expected to
generate in normal course of business (future
exchange price)
STATEMENT OF FINANCIAL POSITION
Financial statements-convey a concise picture
of the financial performance, financial
position, and cash flow.
 The end product of the accounting process
 Provide information about an enterprise’s
assets, liabilities, equity, income and
expense
COMPONENTS OF FINANCIAL STATEMENTS
1. Statement of financial position (balance sheet)
2. Income statement
3. Statement of comprehensive income
4. Statement of changes in equity
5. Statement of cash flow
6. Notes, comprising a summary of significant
accounting policies and other explanatory notes
Financial reports- include not only the basic
financial statement but also “non-financial”
information.
General features:
 Fair presentation and compliance with
IFRS
 Going concern
 Accrual basis accounting
 Materiality and aggregation
 Offsetting
 Frequency of reporting
 Comparative information
 Consistency of presentation
Current assets- cash or cash equivalent unless the asset
is restricted from being exchanged or used to
settle a liability
 Holds the asset for trading
 Asset is to realized within twelve
months
 Realize or intends to sell within the
normal operating cycle.
Operating cycle- time between the acquisition of assets
for processing and their in cash or cash
equivalent
Herewith the line items of current assets;
a. Cash and cash equivalent-
b. Financial assets at fair value such as trading
securities
c. Trade and other receivables
d. Inventories
e. Prepaid expenses
Non-current assets-assets which are not classified as
current. It comprises the following:
 Property, plant and equipment- assets for use in
production or supply of goods and services
 Long term investment- for the accretion of wealth
through capital distribution
 Intangible assets- nonmonetary asset
 Other noncurrent asset
LIABILITIES- present obligations of an enterprise
arising from past transactions or events

Statement of financial position- purpose is to show

the financial condition or status of a business entity
at a specific date.
Liquidity- how close are the cash to
realization
Solvency-the ability of the enterprise to
settle its long term liabilities.
Capital structure- indicates what amount of
assets has been financed by the owner and
what amount has been financed by creditor
Financial flexibility- the ability of an
enterprise to use its financial resources to
adapt to change

ASSETS- resources controlled by the enterprise as a

result of past transactions and events