ACCTG 1200: CHAPTER 1 Lesson 1.1: The Basics
Business
 is an economic entity that processes thing of value and is
capable of growth.
 According to IFRS, it is an integrated set of activities and assets
that is capable of being conducted and managed for the
purpose of providing goods or services to customers,
generating investment income.
TRANSPARENCY financial information that is relevant ans faithfully
represents the reality of economic events about the entity leads to
ACCOUNTABILITY as the performance and stewardship of those
entrusted with resources are timely monitored to promote EFFICIENT
financial and economic markets that maximize the potentials of
people and resources while pursuing sustainability and social
responsibility of business endeavors.
LESSON 1.2
In business, Cash is the “king” , not only because it is the unit of
measuring resources, obligations and returns, but because it is the
most liquid of assets. It is the oil that fuels the transactions and events
to grow the business.
Transaction Groups
 An interconnected and interrelated set of business transactions
and events.
 Model and starting point of understanding and analyzing
transactions in accounting.
SIX Common Transaction Groups
1. Financing groups - starting point of the business
 Concerned with the sources of funds and assets
2. Revenue Group - main point of operating a business
 Interrelated activities is known as the sales group.
3. Investing Group - concerned with the purchase of long-term
assets used in business operations.
 An investing transaction can, therefore, have a related
transaction in the financing group.
The environment in which the business entities exist consist of both
economic and informational aspects.
The economic environment ( both international and national) is the
source of opportunities for income and the growth of the business.
Achieve consistency, standards for financial reporting should be
agreed upon internationally. Standards and criteria by which we
asses the value of matters or results and the set of guidelines in
performing tasks.
International Financial Reporting Standards
- the global information model
International Accounting Standards Board (AISB)
- The global financial reporting standard selling body that issues the
IFRS.
4. Personnel Group or Human Resources Group
 Encompass processes such as hiring, training, promoting, and
terminating the services of the company employees.
The IFRS Foundation - based on London, England, United Kingdom
- has a stated mission of developing IFRS that formalizes the
principles of transparency, Accountability, and Efficiency.
- serve the public interest by fostering trust, growth and long-term
financial stability in the global economy.
- not-for-profit international organization that aims to develop a
single set of high-quality global accounting standards known as IFRS.
5. Purchasing Group - encompasses the ordering of inventory of
goods and supplies needed to render services
IFRS Standard- formalizes the principle of transparency,
accountability and efficiency in financial markets
6. Conversion Group or Product Conversion
 set of processes in converting raw materials into finished
goods.
 Process involves the start of production to the storage of the
outputs for sale.
The US uses GAAP and is the biggest economy in the world.
Accounting, the Language of Business
 Financial accounting and reporting deal with information and
accountants are the processors of this information.
 Non-profit also organizations need financial information.
 The vocabulary of accounting as a language includes financial
statements, their elements- assets, liabilities, equity, income, and
expenses- and the specific types (accounts) of these elements.
 The objective of financial reporting:
 Transparency, Accountability, and Efficiency
Key differences between IFRS and US GAAP
 US GAAP is more rule based and PFRS is more principle based.
 The framework of the PFRS leaves more room for interpretation
and may often require lengthy disclosures of financial statements.
 IFRS are more logically sound and may possibly better represent
the economic substance of transactions.
The Manpower: Sectors of the Accountancy Profession
STANDARDS-SETTING BODIES
There are four main sectors of accountancy professionals that are
acknowledged internationally and in the Philippines:
Financial Reporting Standards Council (FRSC) - vested PFRS
- was established by the professional Regulatory Council (PRC) in
accordance with the IRR of the Philippine Accountancy Act of 2004 to
assist the Professional Regulatory Board of Accountancy (BOA).
1. Private or Commerce and Industry
- performed by a person involved in an entity’s decision-making that
requires professional knowledge in the science of accounting.
2. Public Accountancy
- rendered by an independent (not employee) professional who
renders professional audit services as a CPA to more than one client
on a fee basis.
3. Practice in Government
- rendered by a person who holds or is appointed to a position in an
accounting professional group in government or government owned
and/or controlled corporation (GOCC)
4. Education/ Academe
- performed by an educational institution that involves teaching
accounting, auditing, management advisory services, finance, business
law, taxation, and other technically related subjects.
Companies - entities with stated objectives (for profit or not-forprofit) and registered with proper and pertinent government agencies.
- different forms: single proprietorship, one-person corporation,
partnerships, private and public corporations, and GOCCs
1. Large Companies- assets are more than 350 million or the liabilities
of more than 250 million - full IFRS
2. Public Interest Entities - issues by class of instruments to the public
market. - full IFRS
3. Medium-sized entities - asset of 100 million to 350 million or
liabilities of 100 million to 250 million - PFRS for SMEs
4. Small entities - assets or liabilities are between 3 million to 100
million - they are not required to file financial statements
- PFRS for Small and Medium-sized Entities
5. Micro-entities - assets and liabilities of 3 million
- either PFRS for SMEs or Income Tax Basis
There are exceptions to the general rule based on the threshold
provided by SRC rule 68. These pertain to the fact that some
companies are subsidiaries, associates, joint ventures, and/or
branches of foreign companies and should adhere to the Financial
Reporting framework being applied by their pants, associate, coventures and foreign headquarters. Public corporations like LGUs
are accounted under the Philippine Public Sector Accounting
Standards. Government- owned and controlled Corporations such
as GSIS and SSS, are accounted as if they are private, for-profit
corporations under the PFRS.
Accounting Standard-Setting Bodies and other Relevant
Organizations
1. Financial Reporting Standards Council (FRSC)
- is the official accounting standard-setting body in the Phils.
- created under the Phil. Accountancy Act of 2004 (RA 9298).
- It is composed of a chairman and 14 representative members.
- replaced the Accounting Standards Council(ASC)
2. Philippine Interpretations Committee (PIC) - it has the role of
reviewing the interpretations of the International Financial Reporting
Interpretations Committee (IFRIC) for approval and adoption of the
FRSC.
3. Board of Accountancy (BOA) - the professional regulatory board
created under RA 9298 to supervise
- the registration, licensure, and practice of accountancy in
the Philippines.
- It consists of a chairperson and 6 members with a tenure of
one (1) year.
4. International Accounting Standards Board (IASB) - the standardsetting body of the IFRS Foundation with the main objective of
developing and promoting global accounting standards.
5. International Financial Reporting Interpretations Committee
(IFRIC) - the committee that prepares interpretations of how specific
issues should be accounted for under the application of the IFRS.
6. IFRS Advisory Council (IFRSAC) - group of organizations and
individuals with an interest in international financial reporting.
7. International Federation of Accountants (IFAC) - it is a non-profit,
non-governmental, non-political organization of accountancy bodies
that represents the worldwide accountancy profession.
8. Philippine Institute of Certified Public Accountant (PICPA)
- The national professional organization of Certified Public
Accountants in the Philippines having the basic authority of setting-up
and implementing rules vital to the accounting profession.

Accounting Associations under the wing of PICPA
National Association of Certified Public Accountants in
Education (nACPAE) –for accounting professors
- Government Association Certified Public Accountants
(GACPA)
–for government accountants
- Association of Certified Public Accountants in Public Practice
(ACPAPP)
- Association of CPAs in Commerce and Industry (ACPACI)
-for all private and public accountants
-
9. Auditing and Assurance Standards Council (AASC)
- is the body authorized to establish and promulgate
generally accepted auditing standards (GAAS) in the
Philippines. Replaced the Auditing Standards and Practices
Council (ASPC)
10. Professional Regulations Commission (PRC)
- the body in charge of regulating and licensing the practice
of accountancy and other specialized professions.
11. International Organizations of Securities Commissions (IOSCO)
- an international body of securities commissions.
12. Securities and Exchange Commission (SEC)
- the government agency tasked with regulating corporations
and partnerships, capital and investment markets, and the
investing public.
13. Bureau of Internal Revenue (BIR)
- administers the provisions of the National Internal Revenue
Code.
14. Bangko Sentral ng Pilipinas (BSP)
- influences the selection and application of accounting
policies by banks and other entities performing banking
functions.
15. Cooperative and Development Authority (CDA)
- influences the selection and application of accounting
policies by cooperatives.
The Conceptual Framework for Financial Reporting
(or the “Framework”) is a basic document that sets
objectives and the concepts for general purpose financial
reporting.
Its predecessor, Framework for the preparation and
presentation of the financial statements was issued back
in1989.
Then in 2010, IASB published the new document, however, it
was a bit unfinished as a few concepts and chapters were
missing.
The newest and completed Framework Published in 2018 is
comprised of 8 Chapters.
The Basic Accounting Concepts -principles upon which the
process of accounting is based.Used interchangeably with
accounting assumptions and accounting theory.

some are derived from the Conceptual Framework
and the PFRSs but some are implicit or generally
accepted because of their long-time use.

Double-Entry System – each accountable event is
recorded in two parts, the Debit and Credit.

Going Concern - the entity is assumed to carry on
its operations for an indefinite period of time.

Separate Entity – the entity is treated separately from
its owners.

Stable Monetary Unit - amounts in the financial
statements are stated in terms of a common unit of
measure; changes in purchasing power are ignored.

Time Period – the life of the business is divided into
series of reporting periods.

Materiality concept – information is material if its
omission or misstatement could influence economic
decisions.

Cost-benefit – the cost of processing and
communicating information should not exceed the
benefits to be derived from it.

Accrual Basis of Accounting – effects of transactions
are recognized when they occur (and not as cash is
received or paid) and they are recognized in the
accounting periods to which they relate.Historical Cost
Concept – the value of an asset is determined on the
basis of acquisition cost.

Concept of Articulation – all of the components of a
complete set of financial statements are interrelated.

Full Disclosure Principle – financial statements
provide sufficient detail to disclose matters that make
a difference to users, yet sufficient condensation to
make the information understandable, keeping in mind
the costs of preparing and using it.

Consistency Concept – financial statements are
prepared on the basis of accounting policies which are
applied consistently from one period to the next.

Matching Principle– costs are recognized as expenses
when the related revenue is recognized.

Residual Equity Theory – this theory is applicable
where there are two classes of shares issued, ordinary
and preferred. The equation is “Assets – Liabilities –
Preferred Shareholders’ Equity = Ordinary
Shareholders’ Equity.”

Entity Theory- the objective is proper income
determination (matching of cost and revenues in the
income statement). Exemplified by the equation
"Assets=Liabilities + Capital"

Proprietary Theory - the objective is the proper
valuation of assets in the balance sheet. Exemplified
by the equation "Assets- Liabilities = Capital"

Fund Theory – the accounting objective is the custody
and administration of funds.

Realization – the process of converting non-cash
assets into cash or claims for cash.

Prudence (Conservatism) – the inclusion of a degree of
caution in the exercise of the judgments needed in
making the estimates required under conditions of
uncertainty, such that assets or income are not
overstated and liabilities or expenses are not
understated.

Systematic and rational Allocation - costs that are
not directly related to income generation are initially
recognized as an asset and recognized as expenses
over the period where their economic benefits are
consumed.

Immediate recognition -costs that do not/ceases to
meet the definition of assets are expensed
immediately.
ACCTG 1200: CHAPTER2
The Conceptual Framework deals with the following:
a. Objective of financial reporting
b. Qualitative characteristics of useful information
c. Definition, recognition and measurement of financial statement
elements
d. Concepts of capital and capital maintenance
A. Objective of financial reporting
“The objective of general purpose financial reporting is to provide
financial information about the reporting entity that is useful to
existing and potential investors, lenders and other creditors in making
decisions about providing resources to the entity.”
- Foundation of Conceptual Framework
Primary Users of Financial Reporting
1. Existing and Potential Investors
2. Lenders and Other Creditors
These users cannot demand information directly from
reporting entities and must rely on
general purpose financial reports for their financial information needs.
Lenders > extend loans; Creditors > other forms of credit
The concern of primary users is the entity’s prospects for
future net cash inflows. General purpose financial reports provide
information on a reporting entity’s:
a. Financial position – information on economic resources (assets)
and claims against the reporting
entity (liabilities and equity).
b. Changes in economic resources and claims– information on
financial performance and other transactions and events that lead
to changes in financial position.
Economic resources and Claims
Information on economic resources and claims help users assess the
entity’s:
a. Financial strengths and weaknesses
b. Liquidity and solvency
c. Needs for additional financing and how successful it is likely to
be in obtaining that financing
d.
Liquidity > ability to pay short-term; solvency > ability to meet long term
obligations
Current ratio; asset-liability matching
Economic resources and claims
economic resources.
 Return provides an indication on how well management has
efficiently and effectively used the entity’s resources. Variability
of the return helps users in assessing the uncertainty of future
cash flows.
 For example, significant fluctuations in reported profits may
indicate financial instability and uncertainty on the entity’s
ability to generate cash flows from its operations.
B. Qualitative Characteristics
The qualitative characteristics of useful financial information
identify the types of information that are
likely to be most useful to the primary users in making decisions using
an entity’s financial report.
The Conceptual Framework classifies the qualitative
characteristics into the following:
1. Fundamental qualitative characteristics – these are the
characteristics that make information useful to users. They are
consist of the following:
A. Relevance
Information is relevant if it is capable of making difference
in the decisions made by the users.
I. Predictive value - if the information can prediction or
forecast
II. Confirmatory value- feedback about confirms or
changes
III. Materiality
it could reasonably be expected to influence decisions that
the primary users of a specific reporting entity’s general
purpose financial statements make on the basis of those
financial statements.
The Conceptual Framework states that materiality
is an ‘entity-specific’ aspect of relevance, meaning
materiality depends on the facts and circumstances
surrounding a specific entity. Accordingly, the Conceptual
Framework and the Standards do not specify a uniform
quantitative threshold for materiality. Materiality is a
matter of judgment.
B. Faithful Representation
The information provides a true, correct and complete
depiction of what it is intent to represent. Clear and well-explained
\Faithfully represented information has the following characteristics:
I. Completeness – all information necessary for users to
understand the phenomenon being depicted are provided.
These include:
 Description of the nature of the item
 Numerical depiction (monetary amount)
 Description of the numerical depiction (historical cost
or fair value)
 Explanations of significant facts surrounding the item
II. Neutrality – information is selected or presented without
bias
III. Free from error – this does not mean that the information
is perfectly accurate in all aspects. It means there are no
errors in the description and in the process by which the
information is selected and applied.

If the information is an estimate, that fact should be
described clearly, including an explanation of the process
used in making that estimate.
2. Enhancing qualitative characteristics – these are the
characteristics that enhance the usefulness of information. They consist
of the following:
A. Comparability
Information is comparable if it helps users identify
similarities and differences between one information and another
information that is either provided by the same entity but in another
period (intracomparability) or by other entities (inter-comparability).
Consistency refers to the use of the same methods for the same items.
Comparability is the goal while consistency is the means of achieving
that goal.
B. Verifiability
Information is verifiable if different users could reach an
agreement as to what the information intents to represent.
 Direct verification - involves direct observation (counting of
cash, inventory of supplies)
 Indirect verification – recalculating using the same formula
(checking the inputs in the cash ledger and recalculating the
ending balance)
C. Timeliness
Information is timely if it is available to users in time to be able to
influence their decisions. Older is less useful.
D. Understandability
Information is understandable if it is presented in a clear and concise
manner.
Understandability does not mean that complex matters should be
excluded because this would make information incomplete and
potentially misleading. Accordingly, financial reports are intended for
users:
 Who have reasonable knowledge of business activities and
 Who are willing to analyze the information diligent
Cost constraint- important to keep businesses from incurring excesive
cost as part of their financial reporting obligations
- benefit > cost
ACCTG 1200: CHAPTER 3
Lesson 3.1: THE REPORTING ENTITY
1. Financial Statements = means to tell a story (stage/ theater)
2. Reporting entity = Main character
3. Primary users = Audience
4. Financial Position, Performance, Changes other than Performance,
Cash Flows = Main Themes of the story
5. Efficiency, Returns, Liquidity, and Solvency = Dramatic needs of the
main character
•Reporting Entity
 entity required to prepare financial statements
 can be a single entity, a portion of an entity, or more than one
entity.
 not necessarily a legal entity
 a.k.a. company, business or entity
•Control
- present ability to direct the use of economic resources and obtain
the economic benefits that may flow from it.
- One entity (Parent) can have control over another entity (Subsidiary).
•Consolidated Financial Statements
-If the reporting entity compromises both the Parent and its
Subsidiaries.
-useful for primary users
•Unconsolidated Financial Statements
- If the reporting entity is the Parent alone
-useful to existing and potential investors, lenders and other creditors
- If consolidated FS are required, unconsolidated FS cannot serve as a
substitute.
•Entities Not Linked by Control
- If a reporting entity compromises two or more entities that are not
linked by parent-subsidiary relationships, the reporting entity is
referred to as COMBINED FINANCIAL STATEMENTS.
•Boundary of a Reporting Entity
- Determining the appropriate boundary can be difficult if the
reporting entity (a) is not a legal entity (b) is not compromised of only
legal entities linked by parent-subsidiary relationships.
-Determining the boundary of the reporting entity is driven by the
information needs of the primary users of the reporting entity’s
financial statements
- These users need relevant information that faithfully represents the
financial elements. Faithful representation requires that:
(a) The boundary of the reporting entity does not contain an
arbitrary or incomplete set of economic activities.
(b) It includes the set of economic activities within the boundary of
the reporting entity that results in neutral information
(c) A description is provided of how the boundary of the reporting
entity was determined and of what constitutes the reporting entity.
Asset- is a present economic resource controlled by the entity as a
result of past events.
Three aspects of the definition of an assets:
1. The reporting entity has a right over the economic resource
2. The right has the potential to produce economic benefits
3. The resource is controlled by the reporting entity
-“An asset is a resource controlled by the entity as a result of past
events and from which future economic benefits are expected to flow
to the entity”.
Essential Elements in the definition of asset
a. Control – means the entity has the exclusive right over the benefits
of an asset or the ability to prevent others from accessing those
benefits -Substance over form concept
i. Ownership or possession is not always necessary for control to
exist (ex. Asset acquire through bank financing)
ii. Physical form is not necessary for an asset to exist. (ex.
Receivables and intangibles)
iii. The presence or absence of expenditure is not necessary in
determining the existence of an asset. (ex. Donations)
b. Past Events
- Resources for which control is yet to be obtained in the future do not
qualify as assets in the past event. (ex. Mere intention to acquire
vehicles)
c. Future Economic Benefits
- ‘Future” means the resource is expected to provide economic benefit
over more than one accounting period. Expense for current period
only.
- “Economic benefits” means the potential of the resource to provide
the entity, directly, indirectly with cash and cash equivalents.
Liability
“A liability is a present obligation of the entity arising from past
events, the settlement of which is expected to result in an outflow from
the entity of resources embodying economic benefits”
Essential Elements in the definition of liability
a. Present obligation arising from past events – means that at the
reporting date, the entity has the responsibility to perform some act
because of an obligating event that has already transcribed.
I.
II.



Legal obligation – an obligation that results from a
contract, legislation or other operation of law
Constructive obligation – an obligation that results from an
entity’s actions that create a valid expectation from others
that the entity will accept and discharge certain
responsibilities.
Intention to purchase inventory (no obligation)
Irrevocable contract to purchase an inventory (creates liability)
Assumed acceptable of repairs in the future (constructive)
b. Outflow of economic benefits – settling an obligation normally
requires the entity to:
 Pay cash
 Transfer non-cash assets
 Render a service
 Replace the obligation with another obligation
 Convert the obligation to equity
asses
a broad approach to identifying the existence of a liability, such that
a liability may exist:
o Even if the obligee (payee) is not specifically known
o Even if the amount of the liability is not definite (ex. Provisions)
Equity
“Equity is the residual interest in the assets of the entity after
deducting all its liabilities”
Performance
The elements directly related to the measurement of performance are
income and expenses.
Income
“Income is increases in economic benefits during the accounting period
in the form of inflows or enhancements of assets or decreases of
liabilities that result in increases in equity, other than those
relating to contributions from equity participants”.
Income includes both revenue and gains.
a. “Revenue arises in the course of the ordinary activities of an entity
and is referred to by a variety of different names including sales,
fees, interest, dividends, royalties and rent”
b. “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
entity”.
Revenues and gains are normally presented separately in the
financial statements as knowledge of them is useful in making
economic decisions.
Expenses
“Expenses are decrease in economic benefits during the accounting
period in the form of outflows or depletions of assets or incurrences of
liabilities that result in decrease in equity, other than those relating to
distributions to equity participants”. Capitalizable costs - recognized
as assets
Period costs or revenue expenditures – expensed
immediately in the period they are incurred
Expense recognition principle