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BASIC CONCEPTS
Definition of Accounting
It is the process of identifying, measuring, and communicating economic
information to permit informed judgments and decisions by the users of information
...
- American Institute of Certified Public
Accountants (AICPA)
Accounting is a service activity
...
- Accounting Standard Council (ASC)
Nature of Accounting
 Accounting is a process
...

 Accounting is an art
...
It is a combination of techniques and its application
requires applied skills and expertise
...
- It deals
only with quantifiable financial transactions
...

 Accounting is a means and not an end
...

 Accounting is an information system
...
It also collects processes and communicates financial
information
...
- The records should
be systematic enough to enable easy understanding of users
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- Accounting records serve as evidence
that properties of a business do exist or how much of a particular resource does a
company have
...

 Communicating results to various parties in or connected with the
business
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 Meeting legal requirements
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


Objective - To provide users with useful information for economic and decisionmaking study and judgments
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Accounting History
 Early civilizations - Accounting history began around 3000BC and it is evidenced
by the record-keeping wealth thru "clay tablets" of Mesopotamia


Florentine Approach is the introduction of double-entry bookkeeping system
by Amanito Manucci, a partner of merchant partnership



Venetian Approach of reporting is where the debits are recorded on the left side
of the page across the credits and introduced by Andrea Bargarigo
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

Napoleonic Commercial Code gives in notes and example of inventory where
it described that the assets must be carried at their market value on the day
inventory and not on the basis of historical cost by Napoleon Bonaparte
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

The arrival of income taxation and the conflict with financial
accounting - Tax Accounting was born as a specialized field of accounting with
this development where CPAs are infused with taxation works
...





The rise of the group of companies and the need for consolidated
accounts - The evolution of Business Combination accounting practices thru
merger or consolidation
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THE ACCOUNTING PROFESSION
The Classical Notion of Stewardship
It applies to the valuation and the stewardship role
...

When the markets are perfect and complete, the assets and the changes in the book
value of owner's equity can be measured at their market value
...

 Stewardship - Stewardship of the firm affects the value of the firm
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Specialized Fields and Branches of Accounting
1
...

a
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Tax Services - For tax compliance, accountants prepare various tax
returns for income taxes, business taxes and transfer taxes
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c
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2
...
Financial Accounting
Definition - bookkeeping of financial transactions and events of a business and
preparation of basic financial
statements
Report - Financial statements:
(1) General Purpose Financial Statements are prepared to accommodate the
information needs of persons who have no capability to request or acquire information
directly from the company
(2) Special Purpose Financial Statements - utilized by internal parties to guide
them in the decision making process for the company
Purpose - guide internal and external users in economic decisions
Frequency - periodic
Intended Users - external and internal users
Standards - Philippine Financial Reporting Standards (PFRS) and Philippine
Accounting Standards (PAS)
b
...
Tax Accounting - involved in tax compliance and tax planning
d
...

e
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f
...
Government Accounting
Definition - accounting for the receipt and disposition of government fund and
property and interpreting the result thereof ; used by all government agencies
Report - periodic financial reports and financial statements
Purpose - show stewardship of public funds by the government
Frequency - periodic
Intended Users - external and internal users
Standards - National Government Accounting System (NGAS) - enhances
responsibility accounting in all agencies and discourages misappropriation and
misuse of public fund
...
Accounting Education - focuses in education students and professionals alike
about accounting, auditing, taxation, and advanced accounting and business
subjects
...

 Objectivity – to not allow bias, conflict of interest or undue influence of others to
override professional or business judgments
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 Confidentiality – to respect the confidentiality of information acquired as a
result of professional and business relationships and, therefore, not disclose any
such information to third parties without proper and specific authority, unless
there is a legal or professional right or duty to disclose, nor use the information for
the personal advantage of the professional accountant or third parties
...


Philippine Accountancy Act of 2004
The Republic Act 9298 (RA9298) otherwise known as the "Philippine Accountancy
Act of 2004" serves as the regulating law for the certified public accountants (CPAs) in
the Philippines
...
Topics and its accompanying details are included in the CPA Board
Examinations as part of the Auditing Theory subject
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 Philippine Institute of Certified Public Accountants (PICPA) - national
organization of CPAs and the accredited professional organization (APO)
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 Securities and Exchange Commission (SEC) - keeps an eye in the operations
of partnerships and corporations
 Bangko Sentral ng Pilipinas (BSP) - regulates the operations of financial
institutions, banks and business import and export activities
 Local Government Units (LGU) - ensure payment of local taxes
Financial Reporting Standards Council (FRSC)
The Financial Reporting Standards Council (FRSC) was established by the Board
of Accountancy (BOA or the Board) in 2006 under the Implementing Rules and
Regulations of the Philippine Accountancy of Act of 2004 to assist the Board in carrying
out its power and function to promulgate accounting standards in the Philippines
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Professional Organizations of CPAs
Philippine Institute of Certified Accountants (PICPA)
 the accredited professional organization (APO) of CPAs by the Professional
Regulation Commission (PRC) and has been awarded twice as PRC most
outstanding APO from among other professional organizations
...
W
...
Larkin, holder of CPA
Certificate No
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





The group set forth the following objectives:
To promote and maintain high professional and ethical standards among
accountants;
To advance the science of accounting;
To develop and improve accountancy education;
To encourage cordial relations among accountants, and
To protect the Certificate of Certified Public Accountant granted by the Republic
of the Philippines
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Sole or Single Proprietorship - Business is owned by only one person
Advantage
1
...
owner has full control of the
business - can single-handedly
decide on matters pertaining to the
business
3
...
owners have all profits for
themselves
5
...
unlimited liability - can go after
personal properties even after
extinguishing all business assets to
satisfy claims of creditors
2
...

owner's bias - owner has the
final word

b
...
easier to create than corporation
2
...
larger pool of human capital
than sole proprietorship

1
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mutual agency
3
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Corporation - artificial being created by the operation of law, having the right
of succession and the powers, attributes and properties expressly authorized by
law or incident to its existence
Advantage
1
...
transferable owner's rights ownership rights are represented by
stocks and can be transferred
through sale, donation or other
modes of transfer
3
...
virtually unlimited life - 50 years
and can be extended (no limit in
extension)
5
...
heavily regulated by the government
- closely monitored by the
government
2
...

not easy to form
4
...
Service
Definition - generally use their employees to provide services to customers
Input - labor
Output - intangible ; service
Advantages - absence of inventory ; no production facilities
Disadvantages - inability to standardize services; maintaining human capital
Service revenue - primary source of revenue through performance of services
2
...
Manufacturing (Manufacturers)
Definition - create their own products
Input - raw materials, labor, overhead
Output - tangible ; manufactured products
Advantages - visible products; quality control
Disadvantages - generally need production facilities; high conversion costs; cost
of quality control; managing inventory
Users of Accounting Information

Activities in Business Organizations
•

Financing Activities- Organizations require financial resources to obtain other
resources in financial markets
Are the methods an organization uses to obtain financial
resources from financial markets and how it manages these
resources
...
g
...
(e
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Buying land, equipment, buildings and
other resources that are needed in the operation of the business and selling
theses resources when they are no longer needed
...
(e
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research and development, design and
engineering, purchasing, human resources, production, distribution,
marketing and selling and servicing
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Accounting Principles – (Generally Accepted Accounting Principles or GAAP) These
GAAPs are the doctrines, creeds, dogmas we apply and follow in the accounting practice
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The Basic Financial Statements and their definition
1
...

2
...

3
...

4
...

5
...

Objective of Financial Statements


to provide information about the financial position, performance and changes in
financial position of an entity that is useful to a wide range of users in making
economic decisions
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1
...

2
...
Meaning, expenses recognition is driven
by a matching process
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1
...

2
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Liabilities are carried at an undiscounted amount of cash or cash equivalents that
would be required to settle the obligation currently
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Realizable (settlement) Value - Assets are carried at the amount of cash or
cash equivalents that could currently be obtained by selling the asset in an orderly
disposal
...

4
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Liabilities are carried at their present discounted value of the future net
cash outflows that are expected to be required to settle the liabilities in the normal
course of business
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Relevance- to the extent that it results in information that is meaningful and useful
to those who need to know something about a certain organization
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Objectivity- to the extent that the resulting information is not influenced by the
personal bias or judgments of those who furnish it
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Feasibility- to the extent that it can be implemented without undue complexity or
cost
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Objectivity Principle- Accounting records and statements are based on the most
reliable data available so that they will be accurate and as useful as possible
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Historical Cost- states that acquired assets should be recorded at their actual cost
and not at what management thinks as at the reporting date
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Revenue recognition principle
4
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Full disclosure principle – Information communicated to users reflect a balance
between detail and conciseness, keeping in mind the cost-benefit principle
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Materiality Principle
7
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Basic Accounting Assumptions
A
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B
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

Periodicity or Time Period Assumption refers to the equal length of time or
relatively short periods of the economic life of the organization
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Qualitative Characteristics
Understandability - Users are assumed to have a reasonable knowledge of
business and economic activities and accounting and willingness to study the
information with reasonable diligence
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Relevance - Information has the quality of relevance when it influences the
economic decisions of users by helping them evaluate past, present and future
events confirming, or correcting, their past evaluations
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Materiality depends on the size of the item or error judged in the
particular circumstances of its omission or misstatements
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Predictive Value - Accounting information should be helpful to external
decision makers by increasing their ability to make predictions about the
outcome of future events
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Feedback Value - Accounting information should be helpful to external
decision makers who are confirming past predictions or making updates,
adjustments, or corrections to predictions
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Timeliness - Accounting information must be available on time when
needed if it is to influence decisions
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Information is useless if not available when needed
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Reliability - Information has the quality of reliability when it is free from
material error and bias and can be depended upon by users to represent faithfully
that which is either purports to represent or could reasonably be expected to
represent
...
Faithful representation - A statement of financial position should
represent faithfully the transactions and other events that result in assets,
liabilities and equity of the entity at the reporting date which meet the
recognition criteria
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Substance over form - If information is to represent faithfully the
transactions and other events that it purports to represent, it is necessary
that they are accounted for and presented in accordance with their
substance and economic reality and not merely their legal form
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Prudence is the inclusion of a degree of caution in the exercise of the
judgments needed in making estimates required under conditions of
uncertainty, such that assets or income are not overstated and liabilities or
expenses are not understated
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Completeness - To be reliable, the information in financial statements
must be complete within the bounds of materiality and cost
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e
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1
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Comparability - Users must be able to compare the financial statements of an
entity through time in order to identify trends in its financial position and
performance
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a
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Comparisons over time are difficult unless there is consistency in
the way accounting principles are applied across fiscal years
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Timeliness - Management may need to balance the relative merits of timely reporting
and the provision of reliable information
2
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3
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4
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Controlled by the enterprise- Control is the ability to obtain the economic benefits and
to restrict the access of others
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Past events- The event must be past before an asset can arise
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Future economic benefits- these are evidenced by the prospective receipt of cash
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Examples of assets:
Cash, Cash equivalents, notes receivable, accounts receivable, inventories, prepaid
expenses, property, plant and equipment, investments, intangible assets and other
assets
...
Current Assets- assets that are expected to be realized, sold or consumed within the
enterprise’s normal operating cycle
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Non-Current Assets - All other assets which are not current and are expected to be
realized in more than 12 months
Examples of Current assets
1
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Accounts Receivable- Oral promises to the entity to receive cash at a later date and
usually arise from the normal course of business
o Trade Receivables - arise from the normal course of business
o Non-Trade Receivables – do not arise from the normal course of business (other
receivables)
3
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Most often, these are entered to make the
most incom

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