Accounting 101
Comprehensive Exam Reviewer
Accounting
Scope of Practice of Accountancy
Is a SERVICE ACTIVITY
Is an INFORMATION SYSTEM
Is a PROCESS
Is an ART
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Phases of Accounting
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Professional Accountant – an individual who holds a valid
certificate issued by the Board of Accountancy.
Fundamental Principles of an Ethical Professional Accountant
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Memorandum – book where all transactions are
recorded
Journal – Merchant’s private book.
Ledger – alphabetical listing of the accounts. A
grouping of accounts.
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Entity Concept
Periodicity Concept
Stable Monetary Unit Concept
GAAP
Stands for Generally Accepted Accounting Principles. It
encompasses the conventions, rules and procedures
necessary to define accepted accounting practices at a
particular time.
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Relevance
Objectivity
Feasibility
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Basic Principles of GAAP
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General Knowledge
Organizational and Business Knowledge
Information Technology Knowledge
Accounting Knowledge
Intellectual Skills
Interpersonal Skills
Communication Skills
Professional Ethics - Values
Moral Values
Branches of Accounting
Criteria in selecting GAAP
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Integrity
Objectivity
Professional Diligence and Due Care
Confidentiality
Professional Behavior
Core Competencies for Accountants
Fundamental Concepts under the Accounting Process
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Public Accountancy
Commerce and Industry
Education / Academe
Government
Ethics
Measuring
Classifying
Summarizing
Interpreting
Books in Summa
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Objectivity Principle
Historical Cost
Revenue Recognition Principle
Expense Recognition Principle
Adequate Disclosure
Materiality
Consistency Principle
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Accountancy in the Philippines
PRC – stands for Professional Regulation Commission.
R.A. 9298 – the Philippine Accountancy Act of 2004 by
Former president Gloria Arroyo signed on May 13, 2004.
PICPA – Philippine Institute of CPAs
PAS – Philippine Accounting Standards
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Auditing – most significant service of accountants to
the public.
Bookkeeping – mechanical task involving the
collection of basic financial data.
Cost Bookkeeping, Costing, and Cost Accounting –
involves the recording of cost data in books of
accounts.
Financial Accounting – focused on recording
business transactions and preparation of reports on
financial position and results of operations. Targets
the owners of the entity and other parties.
Financial Management – involves setting financial
objectives and making plans using those objectives.
Management Accounting – incorporates cost
accounting data and adapts them for specific
decisions for the management.
Taxation – includes the preparation of tax returns
Government Accounting – concerned with the
identification of the source and uses of resources in
compliance with the provisions of existing laws.
Accounting 101
Comprehensive Exam Reviewer
Jovi Vonn Balcita
Accountancy around the World
Elements of Financial Statements
IASB – stands for International Accounting Standards Board.
Its objective is to achieve convergence in the accounting
principles used around the world.
IFRSF – stands for International Financial Reporting
Standards Foundation. An independent private sector
organization working in the public interest. They use the
IASB as the standard setting body for principles.
Elements directly related to the measurement of financial
position in the balance sheet:
 Assets
 Liabilities
 Equity
Elements directly related to the measurement of
performance in the income statement:
 Income
 Expenses
Accounting Standards – authoritative statements of how
particular types of transactions and other events should be
reflected in financial statements.
Recognition – the 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.
Criteria for recognition are as follows:
 It is probable that any future economic benefits
associated with the item would flow to or from the
enterprise; and
 The item has a cost or value that could be
measured with reliability.
IFRS Framework – describes the basic concepts that
underlie the preparation and presentation of financial
statements for external users.
Users of Financial Information*
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Primary Users – need information about the
resources and claims against the entity to assess the
management.
External Users – has current or potential financial
interest in the reporting entity but are not involved
in the daily operations of the entity.
Other Users – Employees, Customers, Government
and their agencies, and the public
Measurement of the Elements of Financial Statements
Measurement – 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 and
income statements. Basis of measurement are as follows:
 Historical Cost – assets are measured at the amount
of cash paid at the time of acquisition.
 Current Cost – assets are carried at the amount of
cash if the same or equivalent asset was acquired
currently.
 Realizable Value – assets are carried at the
amount of cash that could currently be obtained by
selling an asset in an orderly disposal.
 Settlement Value – liabilities are carried at the
undiscounted amounts of cash expected to be paid
to satisfy the liabilities required in the normal
course of business.
 Present Value – assets/liabilities are carried at the
present discounted value of the future net cash
inflow/outflow that is expected to be required.
*this classification is not part of the IFRS Framework
Qualitative Characteristics of Useful Financial
Information
Fundamental Qualitative Characteristics
 Relevance – capable of making a difference in the
decisions made by users. Could have a predictive
or a confirmatory value, or both.
 Faithful Representation – seeks to maximize the
completeness, neutrality, and freedom from error.
Enhancing Qualitative Characteristics
 Comparability
 Verifiability
 Timeliness
 Understandability
Underlying Assumptions
Concepts of Capital and Capital Maintenance
Going Concern – presuming that the entity has neither the
intention, nor the need to liquidate or curtail materially the
scale of its operations.
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Financial Concept – capital is synonymous with the
net assets or equity of an enterprise.
Physical Concept – capital is regarded as the
productive capacity of the enterprise, based on,
for example, units of output per day.
Accounting 101
Comprehensive Exam Reviewer
Jovi Vonn Balcita
Elements of Financial Statements
Double Entry System
Financial Position
 Assets – resources controlled by an enterprise as a
result of past events and from which future
economic benefits are expected to flow to the
enterprise
 Liabilities – present obligations of the enterprise
arising from past events, the settlement of which is
expected to result in an outflow from the enterprise
of resources embodying economic benefits.
 Equity – the residual interest in the assets of the
enterprise after deducting all its liabilities.
Performance
 Income – increases in economic benefits during the
accounting period in the form of inflows or
enhancement of assets, or decreases in liabilities
that results in increases in equity. Encompasses both
Revenue and Gains.
 Expenses – decreases in economic benefits in the
accounting period in the form of outflows or
depletion of assets, or incurrences of liabilities that
result in decreases in equity. Loss represents other
items that meet the definition of expenses and may
or may not arise in the course of ordinary activities.
A debit side entry must always have a corresponding credit
entry. For every transaction, there must always be one or
more accounts debited and one or more accounts credited.
Each transaction affects at least two accounts. Total debits
must always equal total credits.
Normal Balance of an Account
The normal balance of an account refers to the side of an
account where increases are recorded.
Accounting Events and Transactions
Accounting Event – an economic occurrence that causes
changes in an enterprise’s assets, liabilities, and/or equity.
Transaction – an event that involves the transfer of
something of value between two entities.
Types and Effects of Transactions
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The Account
Source of Assets
Exchange of Assets
Use of Assets
Exchange of Claims
Accounting for Business Transactions
The basic summary device of accounting. A separate
account is maintained for each element that appears in the
balance sheet and income statement.
“T” Account – the simplest form of the account.
Business Transaction – the occurrence of an event or a
condition that affects financial position and can be reliably
recorded.
The Accounting Equation
𝐴𝑠𝑠𝑒𝑡𝑠 = 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 + 𝑂𝑤𝑛𝑒𝑟 ′ 𝑠 𝐸𝑞𝑢𝑖𝑡𝑦
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Accounting 101
Comprehensive Exam Reviewer
The Journal
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Accrual Basis
A chronological record of transactions. It shows transactions
in debits and credits. The book of original entry. The
General Journal is the simplest journal.
The standard contents of the journal are as follows:
 Date
 Account Titles and Explanation
 Posting Reference
 Debit
 Credit
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Journalizing – the process of recording a transaction.
The effects of transactions and other events recognized
when they occur and not as cash is received or paid.
The accountant records revenues when earned and
expenses when they are incurred.
In the Cash Basis, the accountant does not record a
transaction until cash is received or paid.
Periodicity Concept
This is done by dividing the economic life of a business into
artificial time periods. Most basic accounting period is one
year.
Simple entry – only two accounts are affected.
Compound entry – three or more accounts are affected.
Liquidation – process of going out of business.
Kinds of Accounting Years
 Fiscal year – period of any twelve consecutive
months
 Natural year – a twelve-month period that ends
when business is at their lowest level.
 Calendar year – annual period ending on
December 31
 Interim period – a period of less than one year
The Ledger
Grouping of the entity’s accounts. The General Ledger is the
“reference book” of the accounting system and is used to
classify and summarize transactions, and to prepare data
for basic financial statements.
Classification of the accounts in the general ledger
 Balance Sheet - permanent accounts.
 Income Statement - temporary/nominal accounts.
Deferrals and Accruals
The Chart of Accounts
Deferrals – postponement of the recognition of “an
expense already paid, but not yet incurred”, or of
“revenue already collected but not yet earned.
e.g. Prepaid Expenses, Supplies, Depreciation, Revenues
received in advance
A listing of all of the accounts and their account numbers in
the ledger.
Posting
Transferring the amounts from the journal to the
appropriate accounts in the ledger.
Trial Balance
Accruals – recognition of “expense already incurred, but
unpaid”, or of “revenue earned, but uncollected”.
e.g. Accrued Expenses (Salaries, Interest), Accrued
Revenues (Uncollectible Accounts)
A list of all accounts with their respective debit and credit
balances. It is prepared to verify the equality of debits and
credits in the ledger at the end of each accounting period.
The Worksheet
A document that provides an efficient way to summarize
the data for financial statements. It simplifies the adjusting
and closing process. It can also reveal errors.
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Accounting 101
Comprehensive Exam Reviewer
The Financial Statements
Statement of Financial Position
Also called the Balance Sheet, this statement lists all the
assets, liabilities, and equity of an entity as at a specific
date.
Users analyze the balance sheet to evaluate an entity’s
liquidity, financial flexibility, and solvency.
Report format – lists the assets, followed by liabilities, then
by the owner’s equity.
Account format – lists the assets on the left and the others
on the right.
Statement of Comprehensive Income
In Basic Accounting, only the Income Statement is discussed
further.
The Income Statement presents a summary of the revenues
and expenses for a period.
Statement of Changes in Owner’s Equity
This statement presents a summary of the changes in capital
such as investments, profit or loss, and withdrawals during a
specific period.
Statement of Cash Flows
This statement reports the amount of cash received and
disbursed during the period. It is a formal statement that
classifies cash receipts and payments into operating,
investing, and financing activities.
Activities undertaken by an entity
 Operating activities – involves providing services,
and producing and delivering goods.
 Investing activities – includes making and collecting
loans, acquiring and disposing of investments,
property, equipment, and other assets.
 Financing activities – includes obtaining resources
from owners and creditors.
Accounting Policies
This statement lists the specific principles, bases,
conventions, rules, and practices adopted by an enterprise
in preparing and presenting financial statements.
Notes to Financial Statements
This statement provides narrative descriptions of items
presented in the statements and information about items
that do not qualify for recognition in the statements.
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