ACCOUNTING
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AICPA
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American Institute of Certified Public
Accountants
It is an art of recording, classifying, summarizing in
a significant manner and in terms of money,
transactions, and events which are, in part at least, of
a financial character, and interpreting the results
thereof.
AAA
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American Accounting Association
It is the process of identifying, measuring and
communicating economic information to permit
informed judgments and decisions by users of the
information.
LIMITATIONS TO FINANCIAL
ACCOUNTING
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Accounting Standards Council
It is a service activity. Its function is to provide
quantitative information, primarily financial in
nature, about economic entities that is intended to be
useful in making economic decisions.
GAAP
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Generally Accepted Accounting Principles
A collection of commonly followed accounting
rules, standards and procedures for financial
reporting.
Its specification includes definition of concepts and
principles , as well as industry-specific rules.
Standards in the Philippines:
● Philippine Accounting Standards (PAS)
● Philippine Financial Reporting Standards
(PFRS)
PURPOSE OF ACCOUNTING
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Main Purpose: to provide quantitative financial
information about economic entities that is intended
to be useful in making economic decisions.
GENERAL ACCOUNTING EQUATION
− Equity + Liability
= Asset
DEBIT
CREDIT
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Drawings
Expenses
asset
Liabilities
Capital
Revenue
USERS OF FINANCIAL INFORMATION
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Internal Users – who make decisions directly
affecting internal operations of the entity (people
included in the business)
External Users – who make decisions concerning
their relationship to the entity (general public as a
whole)
Primary Users – existing and potential investors
and creditors (Capital Providers)
Permits alternative treatments
Designed to supply past information
Influence by personal judgement
Ignores important non-monetary information
Does not provide detailed analysis
Does not disclose the present value of businesses
BRANCHES OF ACCOUNTING
ASC
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Secondary Users – Residual Enumeration
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Business Accounting
● Financial Accounting - concerned with general
purpose financial statements
● Managerial Accounting - preparation of
special purpose financial reports for
management needs.
● Cost Accounting - determining and exercising
control over the cost of the manufactured
product or service
● Tax Accounting - based on the enacted tax
laws and includes the preparation of tax returns
and the consideration of the tax consequences
of business transactions.
Not-for-Profit Accounting
● Government Accounting - process of
analyzing, recording, classifying, summarizing,
and communicating all transactions involving
state funds and properties
● Institutional Accounting - accounting for nonprofit entities including NGOs.
Auditing
● External Auditing - the independent
examination intended to support the expression
of an impartial expert opinion on the fairness of
the financial statements (external auditor giving
his/her opinion)
● Internal Auditing - independent, objective
assurance and consulting activity designed to
add value and improve an organization’s
operations
● Forensic Auditing - relation and application of
finance, accounting, tax and auditing
knowledge to analyze, investigate, inquire, test
and examine matters in civil law, criminal law
and jurisprudence in an attempt to obtain the
truth from which to render an expert opinion
Fiduciary Accounting
● Estate Accounting - handling of accounts for
fiduciaries who wind up the affairs of a dead
person
● Trust Accounting - handling of accounts for
fiduciaries who determine that customer’s
money are held for the purpose contracted by
the customer and its management
● Receivership Accounting - handling of
accounts for a fiduciary appointed to take
charge of a financially unstable business
pending its disposition or the attainment of an
imposed objective
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FORMS OF BUSINESS
ORGANIZATIONS
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Sole Proprietorship
● The simplest business form under which one
can operate a business. It is not a legal entity. It
refers to a person who owns the business and is
personally responsible for its debts.
● Advantages:
→ easy to start up and organize
→ few legal restrictions
→ full autonomy as to the business
→ easy to discontinue or dissolve only owner
is taxed
→ owner gets all the profits
● Disadvantages:
→ unlimited liability
→ owner bears all responsibility
→ owner bears all losses
→ less source of capital
Partnership
● By contract, two or more persons bind
themselves to contribute money, property or
industry to a common fund with the intention of
dividing the profit among themselves
● General Professional Partnership – compose
of professionals who want to practice their
profession or who want to make their profession
available to the public
● Advantages:
→ greater source of capital
→ specialization of managerial skills
→ few legal restrictions
→ tax on individual partner
● Disadvantages:
→ difficult to start up and organize
→ restricted transfer of ownership
→ unlimited liability
→ partner’s action can legally bind the
business
→ partnership agreement may cause
dissolution
→ double taxation (national revenue code:
also tax the distributive share of the
partner)
Corporation
● An artificial being created by operation of law,
having the right of succession and the powers,
attributes and properties expressly authorized
by law or incident to its existence
● Existence: should be register to the Security and
Exchange Commission and should have an
issue of
the articles of incorporation,
certification of incorporations and by laws
● Advantages:
→ ownership is easily transferable
→ limited liability
→ greater source of capital
→ specialization of managerial skills
Disadvantages:
→ difficult to organize
→ moral legal restriction
→ higher tax
→ double taxation
→ little control over management
→ more government controls
TYPES OF BUSINESS ACTIVITIES
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Service Firms – those that perform/rendered
services for a fee
Merchandising Firms – those that will buy and sell
merchandise or goods that are in salable for to its
customers
Manufacturing Firms – those that buy raw
materials, convert them into finished goods and sell
the manufactured products to other companies or
individual
HISTORICAL DEVELOPMENTS
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Classical Notion of Stewardship – God provided
all the things in the world and it is the duty of man
to take care of it and to account for this blessings
● Stewardship of Management – the
management has the duty to account and make
financial statements for the funds, assets that are
provided by the capital providers to the
company
Florentine Approach – It was created in 14th
century by Amanito Manucci, It is a recording
system (journal entries)
Venetian Approach – debits and credits was first
used by the Venetian merchants in Italy in the 15th
century. (general ledger)
Savary Commercial Code – provides historical
cost
Napoleon Commercial Code – provides current
cost or fair market value
Schamalenbach – made the chart of accounts in
order to uniform accounting in all jurisdictions
Luca Pacioli – the Father of Accounting
RA 9298 – PHILPPINE ACCOUNTACY
ACT OF 2004
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Serves as the regulating law for the certified public
accountants (CPAs) in the Philippines
1. The scope of the profession’s practice
2. The creation of the Regulatory Body for CPAs
known as the Professional Regulatory Board of
Accountancy (BOA)
3. The admittance and licensure of qualified
candidates for the CPA profession
4. The guiding rules and law in the practice of
accountancy which includes prohibitions,
5.
limitations, accreditations and the continuing
professional education (CPE)
The Penal and Final provisions
PURPOSES OF THE FRAMEWORK
− Assist the FRSC in the development of future FRS
and in its review of existing PAS
* CPD POINTS of CPAs are about 120 units in 3 years
* Attends Seminars
− Assist prepares of financial statements in applying
FIELDS OF SPECIALIZATION
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Public Practice
Commerce and Industry
Government
Education
ACCOUNTING STANDARDS SETTING
BODIES
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Financial Reporting Standards Council (FRSC)
– successor of the Accounting Standards Council
whose main function is to establish GAAP. FRSC
was establish by the Board of Accountancy (BOA).
It monitors the technical activities of the IASB and
issue invitations to comment on exposure drafts of
proposed IFRS and IFRIC.
Accounting Standards Council (ASC) – created
by the Philippine Institute of Certified Public
Accountants to establish GAAP.
International Accounting Standards Board
(IASB) – sole responsibility for setting International
Financial Reporting Standards.
CONCEPTUAL FRAMEWORK
− The framework sets out the concepts that underlie
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the preparation and presentation of financial
statements for external users.
It is an attempt to provide an overall theoretical
foundation for accounting
It is not a Philippine Financial Reporting Standard
hence it does not define standards for any particular
measurement or disclosure issue
In cases of conflict, PFRS will prevail over the
framework
The management is not mandated to automatically
apply the conceptual framework; it is directed to
consider the applicability of the conceptual
framework
HIERARCHY GUIDE
− The Accounting Standards (PFRS, PAS)
− In the absence of standards, the preparer will use
judgement and shall consider the following:
1. Requirement in other PFRS dealing with similar
transactions
2. Conceptual Framework
3. Management may consider the following:
→ Pronouncement issued by other standard
setting bodies
→ Other accounting literature and industry
practices
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PFRS and in dealing with topics that have not yet to
form the subject of the PFRS
Assist auditors in forming an opinion as to whether
financial statements conform with the PFRS
Assist uses of financial information in interpreting
the information contained in financial statements
prepared in conformity with PFRS
Provide those who are interested in the work of
FRSC with information about its approach to the
formulation of PFRS
PERVASIVE CONSTRAINTS
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Materiality – information is material if its omission
or misstatement could influence the decisions that
users make on the basis of an entity’s financial
information
Cost-benefit Analysis – the benefits of providing
the financial reporting information should justify the
cost of providing that information
QUALITATIVE CHARACTERISTIC
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Are attributes that make the information provided in
financial statements useful to users
There are kinds of qualitative characteristics:
● Fundamental (RFP) – more on the content
→ Relevance – to be useful, information must
be relevant to the decision-making needs of
the users
▪ Predictive Value – must influence the
economic decisions of users by
helping them evaluate past, present
and future events.
▪ Confirmatory Value – must influence
the economic decisions of users by
helping them confirm or correct past
evaluations.
→ Faithful Representation – implies that
financial information represent faithfully
the economic phenomenon that is purports
to represent or could reasonably be
expected to represent
▪ Completeness – relevant information
should be presented in a way that
facilitates understanding and avoids
erroneous implications.
o Standard of Adequate Disclosure
– all significant and relevant
information leading to the
preparation of financial statements
shall be clearly reported.
▪ Neutrality – a neutral depiction is
without bias in the preparation of
financial information
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Free from Error – there are no
material errors or omissions in the
description of the phenomenon or
transaction
* Substance over Form – information is to
represent faithfully the transactions and other
events it purpose is to represent, it is necessary
that the transactions and events are accounted in
accordance with their substance and reality and
not merely their legal form
* Conservatism or Prudence – when
alternatives exist, the alternative, which has the
least favorable effect on equity, should be
chosen. Is the inclusion of a degree of caution
in the exercise of judgement needed in making
the estimates required under conditions of
uncertainty.
Enhancing (VCUT) – how the content are
presented to the users
→ Comparability – refers to the ability to
identify similarities and differences
between two sets of economic phenomena
▪ Consistency – use of the same
accounting policies and procedures
within an entity from period to period,
or a single period across entities.
▪ Intra-comparability/
Horizontal
Comparability – must be able to
compare the financial statement of an
entity through time in order to identify
trends in financial position and
performance.
▪ Inter-comparability/ Dimensional
Comparability – in a single period,
must be able to compare the financial
statement of different entities in order
to evaluate their relative financial
position and performance
→ Timeliness – information must be
available when the users’ needs it.
→ Understandability – able users to
comprehend the information’s meaning
and likewise enables users who have
reasonable knowledge of business and
economic and financial diligence to
comprehend the information.
→ Verifiability – implies that knowledge and
independent observers could reach a
general consensus that the information
does represent faithfully the economic
phenomena it supposed to represent
UNDERLYING ASSUMPTIONS /
POSTULATE
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A basic notion that serves as the understructure of
accounting in order to prevent misunderstanding of
the use of the financial statements
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Going Concern – financial statements are normally
prepared on the assumption that the entity will
continue in operation for the foreseeable future.
Economic Entity Assumption – assumes that the
entity is separate and distinct from the owners or
other business units.
Monetary Unit Assumption – transactions in. the
Philippines are measured and reported in Philippine
Peso
● Quantifiability – the accounts should be stated
in terms of a unit of measure
● Stability of the Peso – the purchasing power of
the peso is stable or constant
Periodicity Assumption – the life of an entity can
be divided into time period for the purpose of
providing periodic reports
● 1 month (monthly basis)
● 3 months (quarterly basis)
● 6 months (semi-annual basis)
● 12 months (annual basis)
● Calendar year - Jan. 1 to dec. 31
● Fiscal year - the period will begin
● on the 1st day of any month of the year except
January and will end on the last day of the
twelfth month completing the one year period.
● Natural business year - it is a twelve-month
period that ends on any month when the
business month is at the lowest or experiencing
slack season.
Accrual Accounting – assumes that an income is
earned regardless of when cash is received; and an
expense is incurred regardless of when cash is paid.
Cash Basis – only recognized income/ expense if
there is cash received or cash paid
FINANCIAL STATEMENTS
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Statement of Financial Position
Statement of Financial Performance
Statement of Owner’s Equity
Statement of Cash Flows
Notes to Financial Statements – provide details of
the amounts in the financial statements and also
includes the policies that the company follows
ELEMENTS OF THE FINANCIAL
STATEMENTS
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Asset – the resources controlled by the entity as a
result of past events and from which future
economic benefits are expected to flow to the entity
Liability – financial obligations of an entity arising
from past events, the settlement of which is expected
to result in an outflow from the entity of resources
embodying economic benefits.
Equity – residual interest in the assets of an entity
after deducting all its liabilities. In other words,
whatever is left, that belongs to the owner of a
business
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Income – the 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, other than contribution from
equity participants
Expense – the decrease in economic benefit during
the accounting period in the form of outflow or
decrease in asset or increase in liability that results
in decrease in equity, other than distribution to
equity participants
RECOGNITION AND DERECOGNITION
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Recognition – process of capturing for inclusion in
the statement of financial position or financial
performance an item that meets the definition of the
financial statements
Carrying Amount – the amount at which an asset,
a liability or equity is recognized in the statement of
financial position
An item that meets the definition of an element
should be recognized if:
● Probable – any future economic benefit
associated with the item will flow to or from the
entity
● Measured Reliably – item has a cost or value
ACCOUNTING CYCLE
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ASSET
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RECOGNITION AND DERECOGNITION
FOR EXPENSES
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Matching Principle – on the basis of a direct
association between cost incurred and the earning of
specific item of income
Systematic and Rational Allocation – when
economic benefits are expected to arise over several
accounting periods and the association with income
can be broadly or indirectly determined.
Immediate Recognition – when expenditure
produces no future economic benefits or when, to
the extent that, future economic benefit do not
qualify, or cease to qualify for recognition.
Process of determining or assigning monetary
amounts at which the elements of the financial
statement are to be recognized and reported
● Historical Cost – amount of cash or cash
equivalent paid or the fair value of the
consideration given to acquire an asset at the
time of acquisition
● Current Cost – the amount of cash or cash
equivalent that would have to be paid if the
same or equivalent asset was acquired currently.
● Realizable Cost – the amount of cash or cash
equivalent that could currently be obtained by
selling the asset in an orderly disposal
● Discounted Cost – the discounted value of the
future net cash inflows that the item is expected
to generate in the normal course of business
Current Asset
● Unrestricted
● Primarily for the purpose of Trading
(rendering of service/ selling of goods/
lending)
● Accounts Receivable (on account)
● Notes Receivable (promissory note)
● Entity expects to realize the asset (convert to
cash)
● Intends to sell or consume it within 12 months
Non-Current Asset
● Use for Production or Supply of goods and
services, for rental or administrative
● Tangible Assets
● Property, Plant & Equipment
● Long-term Investment
● Accretion of wealth through capital
distribution
● Intangible Asset
LIABILITIES
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MEASUREMENT
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Analysis of Business Transactions and Source
Documents
Journalizing of Entries in the General Journal
Posting of Entries in General Ledger
Preparation of the Unadjusted Trail Balance
Journalizing and Posting of Adjusting Entries
Preparation of the Adjusted Trail Balance
Preparation of the Financial Statements
Closing Entries
Preparation of the Post-Closing Trial Balance
Reversing Entries
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Current Liabilities
● Entity expects to settle the liability within the
entity normal operating cycle
● Purpose of Trading (buying, borrow or
acquiring services)
● Does not have Unconditional Right to defer
settlement
Non-Current Liabilities
● More than 12 months
OWNER’S EQUITY
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Net Asset or Net Worth
Owner's Equity (Sole Proprietorship), Partners'
Equity (Partnership), Stockholders' Equity
(Corporation)
Residual interest in the assets of the entity after
deducting all of its liabilities
* DOUBLE LINE = FINAL TOTAL
* SINGULAR LINE = TOTAL / THERE IS
ANOTHER SET OF COMPUTATION