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Accounting - A process of identifying, recording, and communicating economic information useful in making economic decisions.
1. Identifying- identifies whether the transaction is an accountable event or non-accountable event.
• Non-accountable events- not recorded in the book of accounts.
• Accountable events/Economic events- affect the assets, liabilities, equity, income or expenses of a business.
2. Recording- the accountant recognizes the identified accountable events and it is called “journalizing”.
3. Communicating- summarizes the information processed in the accounting system in order to produce meaningful reports. Common form which is
“Financial Statements”.
Accounting a process with the basic purpose of providing information about economic activities that is intended to be useful in making economic decisions.
1. Quantitative information- information expressed in numbers, quantities, or units.
2. Qualitative information- expressed in words, or descriptive form.
3. Financial information-expressed in money.
1. As a social science, accounting is a body of knowledge
2. As a practical art, accounting requires the use of creative skills and judgment.
➢ Offered to as the “language of business” because it is fundamental to the communication of financial information.
2 broad functions in Business
1. External users- with information that is useful in making, among others, investment and credit decisions. Not directly involved. Ex. Suppliers,
government, customers, lenders, non-managerial employees.
2. Internal users- with information that is useful in managing business. Ex. Owner
- Directly involved. Ex. Owners, Board of Directors, Managerial Personnel
Fra Luca Pacioli
➢ Father of Modern Accounting
➢ First systematic record keeping dealing with the “double entry recording system”
➢ The “double entry recording system” was included in Pacioli’s book titled “Summa di Arethmetica Geometria Proportioni and Proportionista”.
➢ Published on November 10, 1494 in venice
Common branches of Accounting
1. Sole Proprietorship➢ Owned by only one individual
➢ Registered with the Department of Trade and Industry (DTI)
2. Partnership➢ Owned by two or more individuals who entered into a CONTRACT
➢ Registered with the Securities and Exchange Commission (SEC)
3. Corporation➢ Owned by more than one individual. Created by operation of law rather than a contract.
➢ Artificial being or juridical person, shall not be less than 5 but not more than 15
➢ Registered with the Securities and Exchange Commission (SEC)
4. Cooperative➢ More than one individual
➢ Accordance w/ e provisions of The Philippine Cooperative Code of 2008- formed
➢ Registered with the Cooperative Development Authority (CDA)
Types of Business According to Activities
1. Service Business➢ Offers services as its main product rather physical goods.
➢ Ex. Schools, hospitals & clinics,, Bank & other financial ins. Hotels & Restaurant.
2. Merchandising Business or Trading Business➢ Buy and sell goods
➢ Ex. Grocery stores, department store, hardware, pharmacies, online stores
3. Manufacturing Business➢ Buy raw materials & processes them into final products.
➢ Ex. Car manufacturing, Tech. Companies, food processing comp., factories
Basic Accounting Concepts
1. Separate Entity Concept➢ Only the transactions of the business are recorded in the book of accounts.
➢ Personal transactions of the business owner are not recorded.
2. Historical Cost Concept-
➢ Assets are initially recorded at their acquisition cost
3. Going Concern Assumption➢ Assumed to continue to exist for an indefinite period of time.
4. Matching (Association of cause and effect)➢ Some costs are initially recognized as assets and charged as expenses only when the related revenue is recognized.
5. Accrual Basis of Accounting➢ Economic events are recorded in the period in which they occur rather than at the point in time.
6. Prudence or Conservatism➢ The accountant observes some degree of caution when exercising judgements needed in making accounting estimates under
conditions of uncertainty.
7. Time Period➢ Periodicity, accounting period, or reporting period concept
✓ When need timely periodic info. to help them make economic decisions
✓ Reporting Periods- Usually 12 month it can be longer or shorter
• Calendar Year Period- Jan 1 to Dec. 3
• Fiscal Year Period- cover 12 months but pwede ra unsa nga month mag start
8. Stable Monetary Unit➢ Power of the peso sign
➢ Assets, liabilities, equity, income and expenses are stated in terms of a common unit of measure.
9. Materiality Concept➢ A matter of professional judgement & is based on the size & nature of an item being judged
10. Cost – Benefit (Cost Constraint)➢ The cost of processing and communicating information should not exceed the benefits to be derived from the info use.
11. Full Disclosure Principle➢ Sufficient detail to disclose matters.
➢ Sufficient condensation to make the information understandable.
12. Consistency Concept- “consistent”
Accounting Standards
Accounting concepts and principles are either Explicit or Implicit:
➢ Explicit Concepts and Principles- are those “Conceptual Framework for Financial Reporting” and in the Philippine Financial Reporting Standards
➢ Implicit Concepts and Principles- not specifically mentioned in the foregoing but are customarily used because of their general and longtime
acceptance with in the accountancy profession.
➢ Referred to as the Generally Accepted Accounting Principle (GAAP)
The PFRS issued by the FRSC (Financial Reporting Standard Council)
The PFRS patterned IFRS which are issued by the IASB.
IFRS- International Financial Reporting Standard
IASB- International Accounting Standard Board
SEC- Securities and Exchange Commission
BIR- Bureau of Internal Revenue
BSP- Bangko Sentral ng Pilipinas
CDA- Cooperative Development Authority
Qualitative Characteristics of useful financial information
1. Fundamental Qualitative Characteristicsa. Relevance- It can affect the decisions of users.
➢ Predictive Value- helps users to make predictions about future outcomes.
➢ Confirmatory Value/ Feedback Value- a confirmatory value if it can help users confirm.
➢ Materiality- “entity- specific” depends on the facts and circumstances surrounding.
b. Faithful Representation-“factual”- actual effects of events that have taken place.
➢ Completeness- have complete understanding of the fin. Statements provided.
➢ Neutrality- selected or presented without bias.
➢ Free from error- not materially misstated. Must perfectly accurate in all respects.
2. Enhancing Qualitative Characteristicsa. Comparability- Can identify similarities and differences between diff. sets of info.
b. Verifiability- some agreement “ I say green; you say green”
c. Timeliness- info is timely if it is available to users in time to be able to influence their decisions.
d. Understandability- “understandable”
Assets= Liabilities+ Equity
Assets- the economic resources you control that have resulted from past events
Liabilities- present obligations that have resulted from past events.
➢ Obligation- duty or responsibility
✓ Legal obligation- results from a contract, legislation or other operation of law
✓ Constructive obligation- results from your past actions that have created a valid expectation.
➢ Giving up of economic resources- require you to pay cash, to transfer other non-cash assets or to render a service
Equity- is simply assets minus liabilities
➢ Other term “capital”, “ net assets” or net worth
The expanded accounting Equation
Assets= liabilities + equity + income- expenses
Income- increases in economic benefits during the period in the form of increase in asset.
Expenses- decrease in economic benefits during the period.
If income is greater than expenses, the difference is profit.
If income is less than expenses, the difference is loss.