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Accounting Defined
(ASC) Accounting Standards Council
Accounting 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.
(AICPA) American Institute of Certified Public Accountants
Accounting is the art of recording, classifying, and 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) American Accounting Association
Accounting is the process of identifying, measuring, and communicating economic information to permit informed
judgment by users of the information.
Important Activities in Accounting Process
 Identifying (accountable or non-accountable transactions or events)
 Measuring (in terms of money)
 Communicating
- recording (journalizing)
- classifying (posting in general ledger)
- summarizing (preparation of financial statements)
Purpose of Accounting
Provide quantitative financial information about a business that is useful in making economic decisions – through
– the financial statements.
Areas of Practice of Accountancy Profession
1. Public Accounting
INDEPENDENT and expert financial services to the public.
-auditing
-taxation
-management advisory services
2. Private Accounting - employment in business entities as accounting staff, chief accountant, internal auditor,
controller.
Controller is the highest accounting officer in a business entity.
3. Government Accounting – encompasses the process of analyzing, classifying, summarizing, and communicating all
transactions involving the receipt and distribution of government funds and property and interpreting the results
thereof.
Theory of Accounts Practical Accounting 1
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Authorities and Regulatory Bodies of
Accounting in the Philippines
Professional Regulation Commission (PRC)
- conducts the CPA Board Exam
- issue license
Board of Accountancy (BOA)
- body authorized by law to
promulgate rules and regulations
affecting the practice of the
accountancy profession in the
Philippines.
Philippine Institute of Certified Public
Accountants (PICPA)
Chapter 1 – Introduction to Financial Accounting
Philippine Vs. International Standards
PHILIPPINE
STANDARDS
ISSUER
SFAS
ASC*
(Statement
(Accounting
of Financial
Standards
Accounting
Council)
Standards)
PAS
ASC*
Philippine
(Accounting
Accounting
Standards
Standards
Council)
GAAP Defined
Generally Accepted Accounting
Principles (GAAP) represents the
conventions, rules, procedures,
practice and standards followed in
the preparation and presentation of
financial statements.
IFRS Defined
IFRS is a set of principles-based
international accounting standards
stating, how particular types of
transactions and other events
should be reported in financial
statements.
IFRS Standards Composition
PFRS
(Philippine
Financial
Reporting
Standards)
FRSC
(Financial
Reporting
Standards
Council)
INTERNATIONAL
STANDARDS
ISSUER
IAS
(International
Accounting
Standards)
IASC**
(International
Accounting
Standards
Committee)
IFRS
IASB
(International (International
Financial
Accounting
Reporting
Standards Board)
Standards)
* The ASC is now replaced by the FRSC.
** The IASC is now replaced by the IASB.
FRSC is the accounting standard setting body created by the PRC upon
recommendation of the BOA to assist the BOA in carrying out its
powers and functions provided under RA 9298.
FRSC Composition
14 members and 1 chairman
The 14 members shall be representatives from the following:
1. International Financial Reporting
Standards
(IFRS 1-13)
2. International Accounting Standards
(IAS 1-41)
3. Interpretations by the Standard
Interpretations Committee (SIC)
4. Interpretations by the International
Financial Reporting Interpretations
Committee (IFRIC)
Board of Accountancy
1
Securities and Exchange Commission 1
Bangko Sentral ng Pilipinas
1
Bureau of Internal Revenue
1
Commission on Audit
1
Major organization of preparers and
users of financial statements
1
Accredited national professional organization of CPAs:
Public Practice
2
Commerce and Industry
2
Accounting Assumptions
Academe
2
The basic notions or fundamental
Government
2
premises on which the accounting
The chairman and the members have term of 3 years renewable for
process is based.
another term.
Also known as postulates
Underlying Accounting Assumption
GOING CONCERN
-the entity is viewed as continuing in operation indefinitely.
Practical Accounting 1 Theory of Accounts
Chapter 1 – Introduction to Financial Accounting
Implicit Accounting Assumptions
ACCOUNTING ENTITY
The entity is separate from the owners,
managers
and
employees
who
constitute the entity.
TIME PERIOD
The indefinite life of an entity is
subdivided into time periods or
accounting periods which are usually of
equal length.
MONETARY UNIT has two aspects:
QUANTIFIABILITY
The assets, liabilities, equity, income and
expenses should be stated in terms of a
unit of measure which is the peso.
STABILITY OF THE PESO – the
purchasing power of the peso is stable
or constant and that its instability is
insignificant and therefore may be
ignored.
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Scope of Conceptual Framework
1. Objective of financial reporting
2. Qualitative characteristics of useful financial information
3. Definition, recognition, and measurement of the elements
from which financial statements are constructed
4. Concepts of capital and capital maintenance
Note: The Conceptual Framework is not a PFRS. In case where there is
conflict between the requirements of the framework and PFRS, the
latter shall prevail.
Classification of Users According to the New Conceptual Framework
1. Primary users – investors, lenders, other creditors
2. Other users - employees, customers, governments, public
FINANCIAL REPORTING
The provision of financial information about an entity to external
users that is useful in making economic decisions and for
assessing the effectiveness of the entity’s management.
Some Information Provided by the Financial Statements
Statement of Financial Position
LIQUIDITY
CONCEPTUAL FRAMEWORK
The availability of cash in the near future to cover currently
It is a summary of the terms and
maturing obligations.
concepts that underlie the preparation
SOLVENCY
and presentation of financial statements
The availability of cash over a long term to meet financial
for external users.
commitments when they fall due.
Purpose of Conceptual Framework
Statement of Comprehensive Income
1. To assist the FRSC in developing FINANCIAL PERFORMANCE
accounting standards that represent
Changes in economic resources and claims that result from
Philippine GAAP
entity’s operation.
2. To assist preparers of financial
Concepts in Financial Reporting Objectives
statements in applying accounting
ENTITY THEORY
standards and in dealing with issues not
The accounting objective is geared towards proper income
yet covered by GAAP
determination. (Assets = Liabilties + Capital)
3. To assist the FRSC in its review and
PROPRIETARY THEORY
adoption of IAS
The accounting objective is directed toward proper valuation of
4. To assist users of financial statements in
assets. (Assets – Liabilities = Capital)
interpreting the information contained
RESIDUAL EQUITY THEORY
in the financial statements
The accounting objective is also proper valuation of assets.
5. To assist auditors in forming an opinion
(Assets – Liabilites – Preference Sharehoders’ Capital = Ordinary
as to whether financial statements
Shareholders’ Capital)
conform with Philippine GAAP
FUND THEORY
6. To provide information to those
The accounting objective is proper custody and administration of
interested in the work of the FRSC in the
funds.
formulation of PFRS
Note: The product of financial reporting is the financial statements.
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Chapter 1 – Introduction to Financial Accounting
FINANCIAL STATEMENTS
EXPENSES
The means by which the information
Decrease in economic benefits during the accounting period in the
accumulated and processed in
form of an outflow or decrease in asset or increase in liability that
financial accounting is periodically
results in decrease in equity, other than distribution to equity
communicated to users.
participants.
Complete Set of Financial Statements
RECOGNITION
The process of reporting or recording an asset, liability, income, or
expense on the face of the financial statements.
1. Statement of Financial Position
2. Income Statement
3. Statement
of
Comprehensive Recognition Principles
Income
1. Asset Recognition Principle
4. Statement of Changes in Equity
2. Liability Recognition Principle
5. Statement of Cash Flows
3. Income Recognition Principle
6. Notes, comprising a summary of
4. Expense Recognition Principle
significant accounting policies and
ASSET RECOGNITION PRINCIPLE
other explanatory notes.
Asset is recognized when
1. It is probable that future economic benefits will flow to the
Elements of Financial Statements
entity.
Financial Position Financial Performance
2.
The cost or value of the asset can be measured reliably.
1. Assets
4. Income
2.
3.
Liabilities
Equity
5.
Expenses
LIABILITY RECOGNITION PRINCIPLE
Liability is recognized when
1. It is probable that an outflow of resources embodying
ASSETS
economic benefits will be required for the settlement of a
Resources controlled by the entity as a
present obligation.
result of past transactions or events and
2. The amount of the obligation can be measured reliably.
from which future economic benefits are
INCOME RECOGNITION PRINCIPLE
expected to flow to the entity.
Income is recognized when
LIABILITIES
1. It is probable that future economic benefits will flow to the
Present obligations of the entity arising
entity as a result of an increase in an asset or a decrease in a
from past transactions or events the
liability.
settlement of which is expected to result
2. The economic benefits can be measured reliably.
in an outflow of resources embodying
EXPENSE RECOGNITION PRINCIPLE
economic benefits.
Expense is recognized when
EQUITY
1. It is probable that a decrease in future economic benefits has
The residual interest in the asset of the
occurred.
entity after deducting all of its liabilities.
2. The decrease in economic benefits can be measured reliably.
INCOME
EXPENSE
INCOME
Increase in economic benefit during the
accounting period in the form of an
inflow or increase of asset or decrease of
REVENUE
GAINS
EXPENSE
LOSSES
liability that results in increase in equity,
Arises in the
Do not arise in
Arises in the
Do not arise
course
of
the course of
course
of
in the course
other than contribution from equity
ordinary
ordinary
ordinary
of ordinary
participants.
regular
activities of an
entity.
Practical Accounting 1 Theory of Accounts
regular
activities.
regular
activities of an
entity.
regular
activities.
Chapter 1 – Introduction to Financial Accounting
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MATCHING PRINCIPLE
Those costs and expenses incurred in earning a revenue should be reported in the same period the revenue is
reported.
MATCHING PRINCIPLES
PRINCIPLE
1.
Cause
and
Association Principle
Measurement
Statements
Effect
RECOGNITION
The expense is recognized when the
revenue is already recognized
2. Systematic and Rational
Allocation
The cost is expense by allocating it
over the periods benefited
3. Immediate
Principle
The cost incurred is expense
outright because of uncertainty of
economic benefits
of
the
Recognition
Elements
of
Financial FAIR PRESENTATION
MEASUREMENT
The process of determining the monetary amounts at
which the elements of the financial statements are to
be recognized and carried in the financial statements.
Four Measurement Bases Or Financial Attributes
HISTORICAL COST (past purchase exchange price)
The 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 (current purchase exchange price)
The amount of cash or cash equivalent that would
have to be paid if the same or an equivalent asset was
acquired currently
REALIZABLE VALUE (current sale exchange price)
The amount of cash or cash equivalent that could be
obtained by selling the asset in an orderly disposal
PRESENT VALUE (future exchange price)
The discounted value of the future net cash inflows
that the item is expected to generate in the normal
course of business
General Features in the Preparation and
Presentation of Financial Statements
1.
2.
3.
4.
5.
6.
7.
8.
EXAMPLE
Cost of goods sold
Bad debts expense
Warranty expense
Sales commission
Depreciation
Amortization
Insurance expense and other prepayments.
Advertising expense
Administrative expenses
Losses from sale of assets
Fair presentation and compliance with PFRS
Going concern
Accrual Basis
Materiality and aggregation
Offsetting
Frequency of Reporting
Comparative Information
Consistency of Operation
The faithful representation of the effects of
transactions and other events in accordance with
the definitions and recognition criteria laid down in
the Conceptual Framework
GOING CONCERN
The accounting entity is viewed as continuing in
operation indefinitely in the absence of evidence to
the contrary.
ACCRUAL BASIS
Income is recognized when earned regardless of
when received and expense is recognized when
incurred regardless of when paid.
MATERIALITY AND AGGREGATION
The specific requirements of PFRS need not be met
of the resulting information is not material.
Note: An entity shall present separately each material class of similar
items. An entity shall present separately items of dissimilar nature or
function unless they are immaterial.
OFFSETTING
Assets and liabilities, and income and expenses,
when material shall not be offset against each other,
unless permitted by another PFRS.
FREQUENCY OF REPORTING
An entity shall present a complete set of financial
statements at least annually.
COMPARATIVE INFORMATION
The financial statements of the current period shall
be presented with comparative figures of the
financial statements of the preceding year.
CONSISTENCY OF PREPARATION
The presentation and classification of financial
statement items shall be uniform from one
accounting period to the next.
Theory of Accounts Practical Accounting 1
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Chapter 1 – Introduction to Financial Accounting
QUALITATIVE CHARACTERISTICS
OF FINANCIAL STATEMENTS
FUNDAMENTAL
Relevance
Faithful
Representation
ENHANCING
Verifiability
Comparability
Understandability
Timeliness
COMPLETENESS
All significant and relevant information leading to
the preparation of financial statements shall be
clearly reported.
NEUTRALITY
The financial statements should not be prepared so
as to favor one party to the detriment of another
party.
FREE FROM ERROR
There are no errors or omissions in the description
of the phenomenon, and the process used to
produce the reported information has been selected
and applied with no errors in the process.
QUALITATIVE CHARACTERISTICS
The qualities and attributes that make financial  SUBSTANCE OVER FORM means that transactions and
accounting information useful to the users.
events should be accounted for in accordance with
their economic substance rather than their legal form.
RELEVANCE
The capacity of the information to make a
 CONSERVATISM means when alternatives exist, the
difference in a decision made by users.
alternative which has the least effect on equity shall
Ingredients:
be chosen.
Predictive Value
Confirmatory Value
VERIFIABILITY
Materiality
Means that different knowledgeable and
PREDICTIVE VALUE
independent observers could reach consensus,
It can help users increase then likelihood of
although not necessarily complete agreement, that a
correctly predicting or forecasting outcome of
particular depiction is a faithful representation.
events.
CONFIRMATORY VALUE
If it provides
evaluations.
COMPARABILTY
feedback about previous
The ability to bring together for the purpose of
noting points of likeness and difference.
Kinds:
MATERIALITY
Comparability within an entity
Information is material if its omission or
Comparability across entities
misstatement could influence the economic
decision that the users make on the basis of the Note: To achieve comparability, there must be consistency in
accounting method and principles use.
financial information about the entity.
FAITHFUL REPRESENTATION
UNDERSTANDABILITY
The financial reports represent economic
Requires that the financial information must be
phenomena or transactions in words and
comprehensible or intelligible if it is to be useful.
numbers.
Ingredients:
TIMELINESS
Completeness
Having information available to decision makers
Neutrality
in time to influence their decisions.
Free from error
Practical Accounting 1 Theory of Accounts
Chapter 1 – Introduction to Financial Accounting
Accounting Process
1. Analyzing
the
business
documents
transactions.
2. Journalizing
3. Posting
4. Preparing the unadjusted trial balance
5. Preparing adjusting entries.
6. Preparing the financial statements
7. Preparing the closing entries
8. Preparing a post-closing trial balance
9. Preparing the reversing entries
or
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5. Noncounterbalancing Error
Error which if not detected is not automatically
counterbalanced or corrected in the following
accounting period.
METHODS OF RECORDING EXPENSES
EXPENSE METHOD
The original payment
is debited to an
expense account.
Accounting Records
ASSET METHOD
The original payment
is debited to an asset
account.
1. Journal – records of chronological transactions
2. Ledger – group of accounts used in summarizing
the effects of transactions in each elements of
financial statements.
Classes of Accounts
1. Real Accounts – represents assets, liabilities and
equity
2. Nominal Accounts – represents revenues and
expenses
3. Mixed Accounts– represents those with real and
nominal element
CONTRA VS. ADJUNCT ACCOUNTS
Contra Accounts – deducted from the related account.
METHODS OF RECORDING INCOME
INCOME
INCOME METHOD
An income account is
credited
for
the
receipt of the income.
LIABILITY METHOD
A liability account is
credited
for
the
receipt of the income.
Adjunct Account – added to the related account.
KINDS OF ERRORS
1. Transposition
- The figures are interchange.
- Eg. 1234 is written as 4123.
2. Transplacement
- Error in placing the decimal point.
3. Error of Omission
- The transaction is not recorded.
CLOSING ENTRIES are made at the end of an accounting
period after adjusting entries and financial statements
have been prepared for the purpose of closing all nominal
or temporary accounts.
REVERSING ENTRIES are made at the beginning of the
new accounting period in order to transfer all accrued and
prepaid items established by adjusting entries to the
nominal accounts that are used in recording transactions
during the new accounting period.
4. Counterbalancing Errors
- Error which if not detected is automatically
counterbalanced or corrected in the following Items that could be reversed:
accounting period.
a. Accruals
b. Deferrals under the expense and income
method
Theory of Accounts Practical Accounting 1