ACC102: Fundamentals of Financial Accounting and
Reporting (Overview of Accounting and Accounting
Concepts and Principles)
Accounting
assists all forms of economic activity in the various sectors.
serves as the language of business.
business owners get an idea of how much to pay in taxes, capital required for further projects,
whether to lease or buy an asset and so on through accounting.
helps investors to understand how efficiently their capital or economic resources are being
used.
a service activity that has the function to provide quantitative information, primarily financial in
nature, about economic entities that is intended to be useful in making economic decisions.
Types of Information provided by Accounting
Quantitative – in numbers; quantities
Qualitative – in words or descriptive form
Financial – in money values
Functions or Phases of Accounting
Recording – recording business transactions
Classifying – sorting or grouping of similar accounts
Summarizing – preparing reports (financial statements)
Interpreting – analytical function
Users of Accounting Information
Internal Users – make decisions directly affecting the internal operations of the enterprise
Examples: business owners, corporate board of directors, management and employees.
External Users – make decisions concerning their relationship to the enterprise.
Examples: investors, government agencies, creditors and suppliers, and the public.
Forms of Business Organizations
Sole Proprietorship – consists of one individual (proprietor) doing business; manager is also
the owner.
Partnership – consists of two or more persons (partners) who bind themselves to contribute
money, thus dividing the profits among themselves.
Corporation – is an artificial being created by operation of law, made of an organization and
perceived by the law as a single entity; owners are called stockholders.
Types of Business Operations
Service
Activity: selling people’s time.
Structure: hiring skilled staff and selling their time.
Examples: accounting and legal.
Trader/Merchandising
Activity: buying and selling products.
Structure: buying raw materials or manufactured goods and sell without modification
Examples: wholesale and retail.
Manufacturing
Activity: combing and designing products, and producing finished products.
Structure: taking raw materials and using equipment, and staff to create goods.
Examples: assembling of vehicles, foods and drinks, and pharmaceuticals.
Raw material production
Activity: growing or extracting raw materials.
Structure: buying blocks of land and using them to provide raw materials.
Examples: farming, mining and oil.
Infrastructure
Activity: selling the utilization of infrastructure.
Structure: buying the operating assets; selling occupancy with services.
Examples: transportations and hotels.
Financial
Activity: receiving deposits, lending and investing money.
Structure: accepting deposits and paying interests; extend loans to borrowers, charge
fees and a higher rate of interest.
Examples: banks and lending companies.
Insurance
Activity: pooling or gathering the premiums of many to meet claims of a few.
Structure: collecting cash from many customers the investing the money to pay the
losses experienced by few customers.
Examples: insurance companies.
Branches of Accounting
Auditing – independent examination that ensures the fairness and reliability of reports that the
management submits to users outside the entity.
Bookkeeping – a mechanical task that involves collecting financial data, recording business
transactions and preparing financial statements.
Government Auditing – concerned with the identification of sources and uses of resources
consistent with the provisions of city, municipal, provincial and national laws.
Financial Accounting – focused on the recording of business transactions and the preparation
of financial reports; information is primarily intended for external users.
Management Accounting – incorporates cost accounting data and adapts them for specific
decisions which management may be called upon to make; information is primarily intended for
internal users.
Taxation/Tax Accounting – includes the preparation of tax returns and the consideration of the
tax consequences of proposed transactions or alternative courses of action.
Fine points:
The early development of accounting dates back to ancient Mesopotamia, and is closely related
to developments in writing, counting and money and early auditing systems by the ancient
Egyptians and Babylonians.
Luca Pacioli, a Franciscan friar and a celebrated mathematician was recognized as the Father
of Accounting and Bookkeeping as he was the first person to publish a work on double-entry
bookkeeping and introduced the accounting field in Italy.
Financial Activities include the methods an organization uses to obtain financial resources from
financial markets and how it manages these resources.
Investing Activities involve the selection and management of resources that will be used to
develop, produce and sell goods and services.
Operating Activities involve use of resources to design, produce, distribute and market goods
and services.
Recognition Issue: to measure a business transaction, the accountant must decide when the
transaction occurred.
Valuation Issue: what value to place on the transaction.
Classification Issue: how components of the transaction should be classified.
Liquidity refers to the ease with which you can convert an asset to cash, without affecting its
market value.
Profitability sometimes referred to as net profit, is the measure of a company's income after all
expenses and taxes have been paid.
Solvency is the ability of a company to meet its long-term debts and financial obligations.
ACC102: Fundamentals of Financial Accounting and
Reporting (Accounting Concepts and Principles)
Generally Accepted Accounting Principles (GAAP)
encompasses the conventions, rules and procedures necessary to define accepted accounting
principles at a particular time.
General acceptance depends on the following:
Relevance – ability of the given information to provide a meaningful and useful result;
information must be useful, understandable, timely and needed for decision making.
Objectivity – the extent that the resulting information is not influenced by the personal bias or
judgements of those who provides it; objective information must be based on solid evidence and
facts.
Feasibility – ability that the principle can be implemented without undue complexity to cost;
feasible principle is practical.
In recording business transactions, accountant must consider the following:
Fundamental Accounting Principles
Entity Concept – each entity should be evaluated separately; it separates owners from
the business.
Periodicity Concept – divides the life of an entity into equal time periods; allows users
to obtain timely data as a basis for decision making.
Stable money unit Concept – treats peso amounts as though each peso has the same
purchasing power as any other peso at any time; effects of inflation is ignored.
Going concern – financial statements are prepared on the assumption that the
business will continue to operate in the future; it is assumed that the enterprise has no
plans nor the intention to liquidate its operations.
Fundamental Qualitative Characteristics of Financial Information
Relevance – information must be processed the predictive value and confirmatory or
feedback value.
Faithful Representation – there is agreement between the description and the
economic event it represents; a depiction should have the following:
Completeness – all any only events that occurred in a specific period are
presented.
Neutrality – free from bias.
Freedom from error – the system that processed the information were tried and
tested.
Enhancing Qualitative Characteristics
Comparability – allows comparison of similar information with another entity or with
another period for the same entity.
Consistency – use of the same accounting practice from period to period.
Verifiability – supported by documentary evidence.
Timeliness – prompt enough to be useful in decision making.
Understandability – classify and present information clearly and concisely.
Cost and Benefit Analysis of Financial Reporting – different sizes of entities and
other factors justify different reporting requirements in certain situations.
Basic Accounting Principles
Objectivity Principle – accounting records and statements are based on reliable data
and supported by verifiable documentation.
Historical Cost – acquired assets should be recorded at their actual cost and not at
what management thinks they are worth at the reporting date.
Revenue Recognition Principle – revenue is to be recognized in the accounting period
when goods are delivered or services are rendered or performed.
Expense Recognition Principle – expenses should be recognized in the accounting
period in which goods & services are used to produce revenue and not when an entity
pays for those goods & services.
Adequate Disclosure – requires that all relevant information that would affect the user's
understanding and assessment of the accounting entity be disclosed in the financial
statements.
Materiality – dictates that financial reporting should only be concerned with information
that is significant to affect evaluations and decisions.
Consistency – dictates that firms should use the same accounting method from period
to period to achieve comparability over time within a single enterprise.
Matching Principle – the costs of doing business are recorded in the same period as
the revenue they help to generate.
Fundamental Principles of the Accounting Profession
Integrity – being straightforward and honest.
Objectivity – not allowing bias, conflict of interest, or undue influence to others to
override professional business judgements.
Professional Competence and Due Care – accountants have a continuing duty to
maintain professional knowledge and skill at level required.
Confidentiality – respect of confidentiality of information acquired.
Professional Behavior – accountants are required to comply with relevant laws and
regulations.
Accounting Standards are authoritative statements of how particular types of transaction and
other events should be reflected in financial statements.
The main objective of the International Accounting Standards Board (IASB) is to develop a
uniform set of high quality, understandable and enforceable global accounting standards.
Financial Reporting Standards Council (FRSC) was created to assist the Board of
Accountancy (BOA) to carry out its powers and functions provided under Republic Act No. 9298.
Philippine Regulatory Agencies
Bureau of Internal Revenue (BIR) – to ensure compliance of National Taxes (Income
Taxes and Business Taxes) and some license requirements of all businesses.
Local Government Units (LGU) – to ensure payment of local business taxes and other
local taxes such as community tax, real property tax and professional tax.
Security and Exchange Commission (SEC) – to regulate the operation of all kinds of
corporation (profit or nonprofit).
Department of Budget and Management (DBM) – undertakes the formulation of the
annual national budget in a way that ensures the appropriate prioritization and allocation
of funds to support the annual program of government.
Bangko Sentral ng Pilipinas (BSP) – to regulate the operations of all banks and
business import and export activities and other finance institutions.
Philippine Institute of Certified Public Accountants (PICPA) – to protect the
credibility of CPA certificates and instills ideals of professionalism, ethics and
competence among CPAs.