Definitions of Accounting

- a service activity; provides quantitative information, primarily financial in nature, about

economic entities that is intended to be useful in making economic decisions
- 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
- the process of identifying, measuring, and communicating economic information to
permit informed judgments and decisions by users of the information

Luca Pacioli
the Father of Accounting

Published the book Summa Arithmetica, Geometrica, Proportioni et Proportionalita

Accountancy is a profession whose members are engaged in the collection of financial data,
the summary of that data, and then the presentation of information in a form that helps
recipients take effective decisions.

Liquidity - ability to pay off short-term liabilities

Solvency - ability to pay off long-term liabilities

Branches of Accounting

- Auditing - the checking and reporting of accounts; usually trained accountants who
specialize in checking accounts rather than preparing them
- External auditors
- Internal auditors
- Bookkeeping - a mechanical task involving the collection of basic financial data;
normally takes place once a year, but can occur more frequently
- Data is entered in books of account
- Extracted and summarized in the form of a profit and loss account and a balance
sheet
- Cost Accounting - the process that involves the recording of cost data in books of
account; similar to bookkeeping but data are recorded in greater detail
- Financial Accounting - the more specific term applied to the preparation and
subsequent publication of highly summarized financial information
- Management Accounting - cost accounting data and adapts them for specific decisions
that management may be called upon to make
- Financial Management - responsible for setting financial objectives, making plans
based on those objectives, obtaining the finance needed to achieve the plans, and
generally safeguarding all the financial resources of the entity
 - Taxation - computing the amount of tax payable by both business entities and
individuals

Accountancy Practices in the Philippines

Republic Act 9298, the Philippine Accountancy Act of 2004

- Practice of Public Accountancy

- Practice in Commerce and Industry
- Practice in Education/Academe
- Practice in Government

A professional accountant is defined as “an individual who holds a valid certificate issued by
the Board of Accountancy (i.e., Certified Public Accountant or CPA), whether he/she be in public
practice, industry, commerce, the public sector, or education.”

Code of Ethics for Philippine CPAs

- Integrity
- Objectivity
- Confidentiality
- Professional Behavior

Accounting Standards - authoritative statements of how particular types of transactions and

other events should be reflected in financial statements

Accounting Standards Council (ASC) - created by the Philippine Institute of Certified Public
Accountants (PICPA) to establish and improve accounting standards that will be generally
accepted in the Philippines

Financial Reporting Standards Council (FRSC) - created per Section 9(A) of the Rules and
Regulation Implementing R.A. 9298 as the new accounting standard-setting body, thus,
replacing the Accounting Standards Council (ASC)

International Accounting Standards Board (IASB) - assumed accounting standard-setting

responsibilities from its predecessor body, the International Accounting Standards Committee
(IASC); the objective is to achieve convergence in the accounting principles that are used by
businesses and other organizations for financial reporting around the world
Entity - something that can be recognized as having its own separate identity, such as an
individual

Economic Entity - usually refers to a business or organization whose major purpose is to

produce profit for its owners

Fundamental Business Model

1. Investors provide the required capital for the business.

2. The cash in the business can be converted into another type of asset that will be used
in the business, sold, or spent on operating costs such as salaries, rents, and utilities.
3. The combination of business provides the basis for producing the products or
services.
4. The sale of a product or a service generates an asset called a receivable. This asset
once collected will produce a cash inflow for the business.
5. If there are existing debts from any entity, the cash inflow from collections will be used
to provide the debt provides with interest on their loans to the company.

Types of Businesses

- Services - hiring staff and selling their time to serve

- Trader - buying a range of raw materials and manufactured goods and consolidating
them, making them available for sale in locations near to their customers or online for
delivery
- Manufacture - buying blocks of land and using them to provide raw materials
- Infrastructure - buying and selling operating assets (typically large assets); selling
occupancy often in combination with services
- Financial - accepting cash from depositors and paying them interest; using the money to
provide loans to borrowers, charging them fees and a higher rate of interest than the
depositors receive
- Insurance - collecting cash from many customers; investing the money to pay the losses
experienced by a few customers

Forms of Business Organizations

- Sole Proprietorship - single owner

- Partnership - owned by two or more persons
- Corporation - owned by stockholders

Before the effects of transactions can be recorded, they must be measured.

To be useful in making decisions, the recorded data must be classified and summarized.
It is imperative that the result of the summarization phase be interpreted or analyzed to
evaluate the liquidity, profitability, and solvency of the business organization.

Users and their Information Needs

- Investors - information to help them determine whether they should buy, hold, or sell
- Employees - information about the stability and profitability of their employers
- Lenders - information that enables them to determine whether their loans and the
related interest will be paid when due
- Suppliers and other trade creditors - information that enables them to determine
whether amounts owing to them will be paid when due
- Customers - information about the continuance of an enterprise, especially when they
have a long-term involvement with, or are dependent on, the enterprise
- Government and their agencies - the allocation of resources and, therefore, the
activities of the enterprises; information in order to regulate the activities of the
enterprises, determine taxation policies, and as the basis for national income and similar
statistics
- Public - may assist the public by providing information about the trends and recent
developments in the prosperity of the enterprise and the range of its activities

Fundamental Concepts in Accounting

- Entity Concept - an organization or a section of an organization that stands apart from

other organizations and individuals as a separate economic entity; each entity’s
transactions should be evaluated separately
- Periodicity Concept - an entity’s life can be meaningfully subdivided into equal time
periods for reporting purposes
- Stable Monetary Unit Concept - assumes that the value of a currency is stable over
time

Generally Accepted Accounting Principles (GAAP) make financial statements meaningful

and useful, regardless of the type of business organization. GAAPs are changed and refined as
accountants respond to the changing environment.

Criteria for GAAPs should have relevance, objectivity, and feasibility.

Basic Principles

- Objectivity Principle - Accounting records and statements are based on the most
reliable data available so that they will be as accurate and as useful as possible.
 - Historical Cost - acquired assets should be recorded at their actual cost and not at
what management thinks they are worth as at 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 and services are used up to produce revenue and not when the
entity pays for the goods and services.
- Adequate Disclosure - Requires all relevant information that would affect the user’s
understanding and assessment of the accounting entity to be disclosed in the financial
statements.
- Materiality & Aggregation - Financial reporting is only concerned with information that
is significant enough to affect evaluations and decisions. Requires an entity to present
separately each material class of similar items and present separately items of dissimilar
nature or function unless they are immaterial.
- Consistency Principle - The firms should use the same accounting method from
period to period to achieve comparability over time within a single enterprise. However,
changes are permitted if justifiable and disclosed in the financial statements.

The Conceptual Framework for Financial Reporting (IFRS Framework) describes the basic
concepts that underlie the preparation and presentation of financial statements for external
users. The framework deals with the objective of financial statements.

The objective of general-purpose financial reporting is to provide financial information about

the reporting entity that is useful to present and potential investors, lenders, and other creditors,
who use that information to make decisions about buying, selling, or holding equity or debt
instruments and providing or settling loans or other forms of credit.

Qualitative Characteristics of Useful Financial Information

Fundamental Qualitative Characteristics

- Relevance
- Faithful Representation
- Neutrality
- Completeness
- Freedom from Error

Enhancing Qualitative Characteristics

- Comparability
- Verifiability
 - Timeliness
- Understandability

The financial statements are normally prepared on the assumption that an enterprise is a
GOING CONCERN and will continue in operation for the foreseeable future. It is assumed that
the enterprise has neither the intention nor the need to liquidate or curtail materially the scale.

Elements of Financial Statements

- Balance Sheet
- Assets - resources owned and controlled by the enterprise as a result of a past
event and from which economic benefits are expected to flow to the enterprise
- Liabilities - present obligations arising from past events; settlement of which is
expected to result in an outflow of resources from the enterprise
- Equity - the residual right or interest of the owner in the enterprise net assets
- Income Statement
- Income - increase in economic benefits during the period in the form of cash
inflows, enhancements of assets, or decreases in liabilities that result in
increases in equity; represent the inflow of cash or other assets
- Expense - decreases in economic benefits during the accounting period in the
form of outflows, depletions of assets, or incidences of liabilities that result in
decreases in equity

Accounting Equation

Assets = Liabilities + Equity

An item that meets the definition of an element should be recognized if:

● it is probable that any future economic benefit associated with the item will flow to or
from the enterprise; and
● the item has a cost or value that can be measured with reliability.

Measurement of the Elements of Financial Statements

The process of determining monetary amounts of which the elements of the
financial statements are to be recognized and carried in the balance sheet and income
statement.

- Historical Cost - assets are recorded at the amount of cash or cash equivalents paid or
the fair value of the considerations given to acquire at the time of their acquisition
 - Current Cost - assets are carried at the amount of cash or cash equivalents that would
have to be paid if the same or an equivalent asset was acquired currently
- Present Value - assets are carried at the present discounted value of the future net
cash inflows that the item is expected to generate in the normal course of business
- Realizable Value - assets are carried at the amount of cash or cash equivalents that
could currently be obtained by selling an asset in an orderly disposal
- Settlement Value - liabilities are carried at the undiscounted amounts of cash or cash
equivalents expected to be paid or to satisfy the liabilities in the normal course of
business

Concepts of Capital and Capital Maintenance

- Financial Concept - capital is synonymous with the net assets or equity of the
enterprise, such as invested money or invested purchasing power
- Physical Concept - capital is regarded as the productive capacity of the enterprise
based on, for example, units of output per day, such as operating capability

The Accounting Cycle / The Accounting Process

A holistic process that records a business’s transactions from start to finish, helping
businesses stay organized and efficient

1. Gathering Source Documents/Business Papers & Analyzing Business Transactions

(Transaction Analysis)
2. Journalizing (Recording to the Journal)
3. Posting to the Ledger
4. Preparation of Trial Balance (Unadjusted Trial Balance)
5. Preparation of Worksheet and Adjusting Entries
6. Journalizing and Posting of Adjustments (Adjusted Trial Balance)
7. Preparation of the Financial Statements
8. Journalizing and Posting of Closing Entries (Closing the Books)
9. Preparation of Post-Closing Trial Balance
10. Journalizing and Posting of Reversing Entries

Transaction Analysis
If a business transaction affects the components of the accounting equation, it will be
recorded.

Transactions are a business’s economic events recorded by accountants

 - External Transaction - economic events between the company and some outside
enterprise
- Internal Transaction - economic events that occur entirely within one company

Each transaction must have a dual effect on the accounting equation. For example, if an asset is
increased, there must be a:
● Decrease in another asset, or
● Increase in a specific liability, or
● Increase in owner’s equity.

Source Business Documents:

● Purchase Requisition
● Purchase Order
● Sales Invoice
● Service Invoice
● Delivery Receipt
● Official Receipt
● Cash Voucher
● Check Voucher
● Petty Cash Voucher
● Billing Statement
● Statement of Account
● Check
● Deposit Slip

Journalizing
Making transaction entries into the Journal

Journal - the book of original entry; shows the debit and credit effects on specific accounts for
every transaction

Account - an individual accounting record of increases and decreases in a specific asset,

liability, or owner’s equity item

Debit (Dr.) - Drawings, Expenses, Assets

Credit (Cr.) - Liabilities, Equity (Capital), Revenue (Income)
DEA LER

Posting to the Ledger

Transferring records from journal to ledger
Ledger - the entire group of accounts maintained by a company; provides the balance in each
of the accounts as well as keeps track of changes in these balances

T-account form - the standard form of account used in accounting textbooks

Chart of Accounts - lists the accounts and the account numbers that identify their location in
the ledger

Trial Balance
- a list of accounts and their balances at a given time that is usually prepared at the end of
an accounting period
- proves the mathematical equality of debits and credits after posting
- can uncover errors in journalizing and posting
- does NOT guarantee freedom from recording errors
a. A transaction is not journalized.
b. A correct journal entry is not posted.
c. A journal entry is posted twice.
d. Incorrect accounts are used in journalizing or posting.
e. Offsetting errors are made in recording the amount of a transaction.

Methods of Depreciation

The four depreciation methods include straight-line, declining balance, sum-of-the-years' digits,
and units of production.

Straight-Line Depreciation
The straight-line method is the most common and simplest to use. A company estimates an
asset's useful life and salvage value (scrap value) at the end of its life.
Depreciation: (cost of asset - salvage value)/useful life

Declining Balance Depreciation

The declining balance method is a type of accelerated depreciation used to write off
depreciation costs earlier in an asset's life and to minimize tax exposure. With this method, fixed
assets depreciate more so early in life rather than evenly over their entire estimated useful life.
Depreciation: current book value x depreciation rate

Sum-of-the-Years' Digits Depreciation

The sum-of-the-years'-digits method (SYD) accelerates depreciation as well but less
aggressively than the declining balance method. Annual depreciation is derived using the total
of the number of years of the asset's useful life.
Depreciation: (remaining lifespan/SYD) x (asset cost - salvage value)

Units of Production Depreciation

The units of production method assigns an equal expense rate to each unit produced. It's most
useful where an asset's value lies in the number of units it produces or in how much it's used,
rather than in its lifespan.
Depreciation: (asset cost - salvage value)/estimated units over asset's
lifetime x actual units made

Components of Financial Statements

● Statement of Financial Position, or Balance Sheet
● Statement of Profits and Income, or Income Statement
● Statement of Cash Flows, or Cash Flow Statement
● Statement of Changes in Equity
● Notes to the Financial Statements

Completing the Cycle for a Merchandising Business

With no perpetual record of the cost of sales during the period, the only way to obtain the cost of
the ending inventory is to make a physical count. The steps involved in the physical count
follows:
a. All merchandise owned by the entity is counted.
b. The quantity counted is multiplied by the cost per unit for each inventory item.
c. The costs of various items are added to determine the total cost of inventory, which
results the ending inventory.
Special Journals
Multi-column journals with special money columns for specific accounts commonly used
in the recording process of accounting
 A major advantage of special journals is that their use permits division of labor among
several persons. The recording step in the accounting cycle can be divided, which often reduces
recording time.
Payroll Entry