ACCOUNTING INTRODUCTION: FUNCTIONS AND PHASES OF ACCOUNTING

- Accounting provides financial information. Accounting handles the financial operations of the
Without financial information, economic business as well as provide information and advice to
developments and social programs may never other departments.
have been implemented.
It measures and records business transactions – a
- In a market economy, information guides
significant function in accounting.
decision-makers to answer how they should
better allocate resources in a way that can Measuring the effects of a transaction must be
effectively meet the needs and goals of those expressed in money (medium of exchange and a
within the market. measure of value) in order for accounting information
- Accounting measures business activities, to be useful.
interprets its financial information into reports,
and passes the results to decision-makers. To measure a business transaction, the accountant
- Without accounting, a business wouldn’t know must answer:
about its own financial status, issues, and 1. When the transaction occurred (recognition
situation. issue)
- Accounting teaches about better management 2. What value to place on the transaction
of the financial aspects of living, such as (valuation issue)
personal financial planning, education 3. How its components should be classified
expenses, car amortization, business loans, (classification issue)
income taxes and investments.
Recorded data must be classified and summarized.
DEFINITION AND NATURE
Classification reduces the effects of numerous
- Accounting is a service activity. It provides transactions into useful groups or categories.
quantitative information, primarily financial in
nature, about economic entities that is Summarization of financial data is achieved through
intended to be useful in making economic financial statements and they summarize the effects of
decisions. all transactions that occurred during a period.

The result of the summarization phase must be

interpreted or analyzed to evaluate the liquidity,
- Accounting is an information system that profitability, and solvency of the business organization.
measures, processes, and communicates
information about an economic entity. Liquidity – the ability of a debtor to pay their debts on
time.

Profitability – the ability of an entity in generating

- Accounting is the process of identifying, profits.
measuring, and communicating economic
information to permit informed judgments and Solvency - the ability of a company to meet its long-
decisions by its users. term debts and other financial obligations.

- 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.
CHAPTER 1 + CHAPTER 4
Accounts - a record in an accounting system that tracks Assets – something a business owns
the financial activities of a specific asset, liability, equity,
- Recorded in the balance sheet.
revenue, or expense.
- A present economic resource controlled by the
- Detailed record of the increases, decreases, and entity as a result of past events.
balance of each element that appears in an
entity’s financial statement.
Current assets - assets that are convertible to cash in
- A record of money received and money paid
less than a year.
out.
Examples/Elements:
Incurred – indicates that an expense has occurred or a
transaction has taken place and needs recording - Cash – includes coins, currency, money orders,
bank deposits, and drafts.
Incurred Expenses – fees that have been charged to a
- Cash equivalents – short-term, highly liquid
business but have not yet been paid by the company
investments that are readily convertible to cash
- unpaid expenses and which are subject to an insignificant risk of
- An expense is considered incurred when a changes in value. (Has a maturity period of 90
resource is consumed. days or less)
- E.g. Marketable Securities, Treasury bills,
Example: bank certificates of deposit, bankers' acceptances,
corporate commercial paper, and other money
If your business hired a contractor for a day that
market instruments.
charged $300 for their services, the business would have
- Notes Receivable – written pledge that the
a $300 incurred expense. If that contractor is paid in
customer will pay the business a fixed amount
cash at the end of the day, it becomes a $300 paid
of money on a certain date.
expense.
- Accounts receivable – the money a company's
Accruals - the recording of revenues that a company customers owe for goods or services they have
has earned but has yet to receive payment for, and the received but not yet paid for. (Invoiced)
expenses that have been incurred but that the company - Inventory – goods and products that are
has yet to pay. intended to be sold, along with the raw
materials that are used to produce them
Depreciation - the deduction in the price of a tangible - Prepaid expense – future expenses that are
asset which reduces the asset’s monetary value due to a paid in advance (paid but not incurred)
variety of reasons like wear and tear that is caused by a - Accrued Income/ Accrued Revenue – money
prolonged use of the asset. that is earned but has yet to be received
- Is what happens when assets lose value over - The same as accounts receivable, only
time until the value of the asset becomes zero, difference is that invoices are yet to be issued.
or negligible Non-current assets - long-term investments that are
- Reduction in the cost of a fixed asset in not easily converted to cash or are not expected to
sequential order, due to wear and tear until the become cash within an accounting year.
asset becomes obsolete.
- Use to deduct taxes, to match expenses to Examples/Elements:
balance books, and to accurately value assets.
- Property & Equipment – tangible assets that
Accounting information system are held by an enterprise for use in the
- used by a business to analyze transactions, handle production or supply in the goods or services, or
routine bookkeeping tasks, and structure information so for rental/administrative purposes and which
it can be used to evaluate the performance and health are expected to be used in more than one
of the business. period.
- A system of collecting, storing, and processing financial - Accumulated Depreciation – a contra asset
and accounting data that are used by decision makers. account that measures the total wear on a
- The combination of personnel, records, and company’s assets.
procedures that a business uses to meet its needs for
- A total of all the depreciation expenses
financial information.
incurred to date.
This system generates output in the form of financial - NOT AN ASSET, they are only presented
reports which can be further categorized into together
Internal and external reports. - Intangible Assets - an asset that is not physical
in nature
Internal reports – used by the management - E.g. Goodwill, brand recognition and
intellectual property, such as patents, trademarks,
External reports – used by individuals and organizations and copyrights
that are the business’ external users– those that have
an economic interest in the business but are not part of Liability – an amount a business owes to other parties.
its management.
- Recorded in the balance sheet.
 - A present obligation of the entity to transfer an Examples:
economic resource as a result of past events.
- Capital – the financial resources that businesses
Current Liabilities - amounts due to be paid to creditors can use to fund their operations like cash,
within twelve months. machinery, equipment and other resources.
- This account is used to record the original and
Examples/Elements:
additional investments of the owner of the
- Accounts payable – invoiced short-term business entity. It is increased by the amount
obligations owed to creditors or suppliers, of profit earned during the year or is decreased
which have not yet been paid. by a loss. Cash or other assets that the owner
- Notes payable – the opposite of notes may withdraw from the business ultimately
receivable. It is a written pledge that the reduce it.
business will pay another party a specified - Withdrawals - act of taking back or away
amount of money on a specified future date. something (cash, asset) that has been granted
- Accrued Expenses / Accrued Liabilities – or possessed.
amounts owed to others for unpaid expenses - Income Summary – temporary account used at
(not paid but incurred) the end of the accounting period to close
- e.g. salaries payable, utilities payable, income and expenses. This shows the profit or
interests payable, taxes payable loss for the period before closing to the capital
- Amounts that are owed, but the vendors' account.
invoices have not yet been received and/or
Income/Revenue – the total amount of income
have not yet been recorded in Accounts
generated by the sale of goods or services.
Payable.
- Recorded in income statement.
- The inflow of money or other assets that results
from sales of goods or services or from the use
of money or property. The result of revenue is
an increase in assets.

Example/Elements:

- Service Revenue – earned by performing

services for a customer or client.
- Sales – earned as a result of sale of
merchandise.

Expense – a cost of doing business or a used-up asset.

- Unearned Income/ Unearned Revenues – the
payment that the business receives before - Recorded in income statement.
providing customers with goods or services. - The outflow of money, the use of other assets,
(Collected but not earned) or the incurring of a liability.
- advanced payment from a - Can be paid immediately with cash, or the
customer for goods & services that payment could be delayed which would create
have not yet been delivered. a liability.
- When the goods or services are provided to a
customer, the unearned revenue is reduced Examples/Elements:
and income is recognized. - Cost of Sales / Cost of Goods Sold - the cost
- Also called as Deferred Income/ Deferred incurred to purchase or to produce the products
Revenue sold to customers during the period.
Non-current Liabilities – long-term debts or other - Salaries or Wages Expense – payment of an
financial obligations that can be paid after a year employer to an employee, such as
salaries/wages, 13th month pay, cost of living
Examples/Elements: allowances, and other related benefits.
- Telecommunications , Electricity, Fuel, and
- Mortgage Payable – records the long-term debt
Water Expenses
of the business entity for which the business
- Supplies Expense – expenses of using supplies in
entity has pledged certain assets as security to
the conduct of daily business.
the creditor.
- Rent Expense – expense for space, equipment,
- Bonds Payable - account that contains the
or other asset rentals.
amount owed to bond holders by the issuer.
- Insurance Expense – portion of premiums paid
on insurance coverage which has expired.
Owner’s Equity (Stockholder’s equity) - leftover assets - Depreciation Expense - the expenses that are
charged to fixed assets based on how much the
- Recorded in the balance sheet.
assets get consumed during the accounting
- The residual interest in the assets of the
period according to the accounting policy of the
enterprise after deducting all liabilities.
business.
- assets – liabilities
 - The portion of the cost of a tangible 4. Statement of cash flows (Statement of changes
asset allocated or charged as expense during an in financial position) – reports the amount of
accounting period. cash received and disbursed during the period.
- The portion of a fixed asset that has
been considered consumed in the current - Tells how much actual cash and cash
period. equivalents entered and left the company
- Uncollectible Accounts Expense – the amount during the period.
of receivables estimated to be doubtful of - Consists of 3 sections: operating activities,
collection and charged as expense during an investment activities, and financing activities.
accounting period. - Indicates how well a company is managing its
- Interest Expense – an expense related to the cash and its growth.
use of borrowed funds. It is the price that a
lender charges a borrower for the use of the
lender's money.
Relationships Among The Financial Statements
(CH.1):
Kinds of Financial Statements (CH.1):
1. The income statement - shows the profit
1. Income Statement (Statement of earned and profit lost.
Comprehensive Income / Profit and loss
statement) – presents a summary of the 2. The statement of changes in equity - considers
revenues and expenses of an entity for a the profit or loss figure from the income
specific period. statement as one of the determining factors
that explains the change in owner’s equity.
- It gives the summary of the revenue and
expenses generated by a company over the
reporting period.
3. The statement of financial position or balance
- Excess of income over expenses = profit sheet - reports the ending owner’s equity
taken directly from the statement of changes in
- Excess of expenses over income = loss
equity.
- shows how profitable the company is.

2. Balance sheet (Statement of Financial Position)

4. The statement of cash flows - reports the net
– provides a snapshot of all the assets,
increase or decrease in cash during the period
liabilities, and equity of an entity at a point in
and ends with the cash balance reported in the
time, usually at the end of the quarter or the
balance sheet.
end of the year.
Income Statement & Balance Sheet Connections
- Shows the net worth (total wealth) of the (CH.1):
company.

The balance sheet presents information based

on the basic accounting model, the accounting
equation:
Assets = Liabilities + Owners Equity
A proper balance sheet must always balance-
total assets must always equal liabilities and
owner’s equity.

 Transactions require additions to both

sides (left and right sides), subtraction to both
sides (left and right sides), or an addition and 1. Sales (→ income) on cash basis provide the
subtraction on the same side (left or right side) entity with ready cash (→ Assets)
2. Sales (→ income) on credit/account generate
3. Statement of changes in equity (Statement of accounts receivable (→ Assets)
Owner’s equity / Statement of Retained 3. Inventory (→ Assets) is needed to be able to
Earnings) – presents a summary of the changes generate sales (→ income)
in capital such as investments, profit or loss, 4. The cost of goods sold (→ Expense) is the cost
and withdrawals during a specific period. of sold inventory (Assets)
- used to determine a person's or a company's - E.g., if unit Z costs you $7.50 and you sell it,
creditworthiness, as well as to evaluate the the COGS would be $7.50.
company's value when the owner or 5. Inventory purchases can be made on credit
shareholders want to sell it. which will give rise to accounts payable (→
Liabilities)
 6. Prepaid expenses (→ Assets), accounts Paying a Creditor
payable, or accrued expenses payable (→
↓Assets (Cash) -> Credit
Liabilities) are operating expenses (→ Expense)
↓Liabilities (Accounts Payable) -> Debit
7. A periodic charge for the use of property and
equipment is entered as depreciation expense. Earned Revenue from Charge Account Clients
Depreciation expense (→ Expense) is
aggregated in accumulated depreciation (→ ↑Assets (A/R) -> Debit
Assets) ↑Income (→Owner’s Equity) -> Credit
8. Borrowing money by issuing promissory notes Expenses (Salaries, Utilities, Rent, etc.)
(Notes Payable → Liabilities) will entail Interest
Expense ↓Assets (Cash) -> Credit
9. Profit (→ income) increases owner’s equity. ↓OE (↑Expense) -> Debit

DEBITS AND CREDITS – DOUBLE-ENTRY SYSTEM Collections on Account

(CH.4) ↓Assets (A/R) -> Credit
↑Assets (Cash) -> Debit
 Accounting is based on a double-entry system
which means that the dual effects of a business Selling Services for Cash
transaction is recorded.
↑Assets (Cash) -> Debit
Double-Entry System - an accounting system where ↑OE (Revenue) -> Credit
every transaction is recorded in two accounts: a debit to
one account and a credit to another. Withdrawing

- The total debits for a transaction must always ↓Assets (Cash) -> Credit
equal the total credits. ↓OE (Withdrawals) -> Debit
 The logic of debiting and crediting is related to the EFFECTS OF TRANSACTIONS (CH. 4)
accounting equation.
ASSET LIABILITY OWNER’S EQUITY
Debit – record all of the money flowing into an account.
+ +
(Amount is always entered on the left side of the
+ +
account)
+ asset
Credit - record all of the money flowing out of an - asset (2)
account. (Amount is always entered on the right side of - -
the account) - -
+ -
“Debit all that comes in and credit all that goes out.” -
- +
Charles E. Sprague
+ liability
RULES OF DEBIT AND CREDIT - liability (2)
+ oe, - oe (2)
ACCOUNTS
DEBIT CREDIT
Examples:
(Normal Balance) (Opposite Balance)
↑ Increases in ↓ Decreases in Initial Transactions
Assets Assets
Expenses Expenses Starting a business
(Opposite Balance) (Normal Balance) + Assets (Cash) = + Owner’s Equity (Capital)
↓ Decreases in ↑ Increases in
Liabilities Liabilities Purchasing Equipment on Credit
Owner’s Equity Owner’s Equity + Assets (Equipment) = + Liabilities (Accounts Payable)
Income Income
Purchasing Supplies with Cash

- Assets (Cash) = + Assets (Supplies)

Example: A projector costs P5, 000. You will buy that
new projector for your conference room. Since money Paying a Creditor
is leaving your business, you would enter a credit into
your cash account. You would also enter a debit into - Assets (Cash) = - Liabilities (Accounts Payable)
your equipment account because you’re adding a new
projector as an asset. Effects of Revenue & Expenses

Selling Services on Credit

Accounts Debit (DR) Credit (CR)
Equipment P5, 000 + Assets (Accounts Receivable) = + OE (Capital)
Cash P5, 000
Employee’s Salaries (Salaries Expense)

- Assets (Cash) = - Owner’s Equity (Capital)

Other Examples: (read effects on transactions first)
Collecting Receivables Practice of Public Accountancy – certified public
accountants (CPA) who offers and/or renders to more
+ Assets (Cash) = - Assets (Accounts Receivable)
than one client on a fee basis
Selling Services for Cash
They provide services such as:
+ Assets (Cash) = + Owner’s Equity (Capital)
- Auditing and verifying financial transactions and
Expense accounting records
- preparation, signing, or certification for clients of
- Assets (Cash) = - Owner’s Equity (Capital) reports of audit, balance sheet, and other
financial, accounting and related schedules,
exhibits, statements or reports which are to be
CHAPTER 2 + CHAPTER 3 used for publication, credit purposes, to be filed
with a court or government agency, or to be
PRACTICE OF ACCOUNTANCY (CH. 2)
used for any other purpose.
Republic Act 9298 (Philippine Accountancy Act of - The design, installation, and revision of the
2004) accounting system
- The preparation of income tax returns
- signed into law by President Gloria Macapagal Arroyo
- Representing before clients before government
on May 13, 2004
agencies on tax and other matters related to
- Regulates the practice of accountancy in the accounting
Philippines. - Renders professional assistance in matters
related to accounting
- Repealed Presidential Decree 692, the Revised - The recording of financial facts or data
Accountancy Law, which was enacted May 5, 1975  Certified Public Accountants (CPA) – are public
accountants that offer their services to the public.
They may practice individually or as members of
CHARACTERISTICS OF THE PROFESSION public accounting firms.
- Their work includes auditing, taxation, and
- All members of the accountancy profession are
management advisory services.
Certified Public Accountants (CPA), which means they
 Public accountants pool together and work
have passed the CPA Licensure Examinations given by
together in a single firm. Most public accountants
the Professional Regulatory Board of Accountancy
are CPA firms since most of their professional
(BOA).
employees are CPAs. They vary greatly in size;
Any person applying for the examination shall establish some are small proprietorships and others are
the following requisites to the satisfaction of the BOA: large partnerships. There are large global CPA
firms with more than 1,000 partners.
1. Must be a Filipino citizen
Practice in Commerce and Industry
2. Is of good moral character
- Its accountants are employed by a particular business
3. A holder of the degree Bachelor of Science in
firm or non-profit organization, perhaps as a chief
Accountancy (BSA)
accountant, controller or financial vice president.
4. Academy or institute duly recognized and/or
Practice in Education or Academe
accredited by the Commission on Higher Education
(CHED) or other authorized government offices. - involves teaching of accounting, auditing,
management advisory services, finance, business law,
5. Has not been convicted of any criminal offence
taxation, and other related subjects.
involving moral turpitude.
Accounting education – primary goal is to produce
- CPAs have their own body of language. They use
competent professional accountants capable of making
terminologies peculiar to the profession (e.g. debits and
a positive contribution over their lifetimes to the
credits)
profession and society in which they work.
- CPAs adhere to the Code of Ethics. This code upholds
- Guarantees the continued development of the
the CPA’s responsibility to serve the public with
profession by endeavoring to clarify and address
competence and integrity. The public, in return,
emerging issues through research and sharing the
expresses its confidence to CPAs by relying on the
results obtained with their colleagues.
financial statements they audit.
- Those who practice in education or academe are
- CPAs are members of a national organization whose
considered as unheralded heroes as they make others
role is to ensure the continued improvement of the
understand the body of accounting knowledge as well
accountancy profession to meet the demands of the
as prepare candidates for the CPA board exams.
times.
Practice in Government
CAREER OPPORTUNITIES
- shall constitute in a person that holds or is appointed
to a position in an accounting professional group in
government or government-owned/-controlled 4) COST ACCOUNTING- the collection, allocation, and
corporation, including those performing proprietary control of the costs to produce or supply a product
functions where decision making requires professional or service.
knowledge and being a CPA is a prerequisite. - This accumulation and explanation of actual and
prospective cost data is important to control current
operations (i.e. to lower costs and thus, increase
profits) and to plan for the future.

- Cost accounting can be viewed as the intersection

between managerial and financial accounting. Both
managerial and financial accounting use the
"production cost" data accumulated using the cost
 Accountants may be hired by the following: accounting system of the entity.
- Congress of the Philippines
- Commission on Audit (COA)
- Department of Finance 5) FINANCIAL MANAGEMENT- the management of the
- Department of Budget and Management finances of an organization to achieve the financial
- Bangko Sentral ng Pilipinas (BSP) objectives of the entity.
- Bureau of Internal Revenue (BIR) - The widely accepted objective of the entity is to
- Bureau of Treasury (BTr) maximize the value of the firm for its owners, that is,
- Local Government Units to maximize shareholder wealth.

BRANCHES OF ACCOUNTING
1) BOOKKEEPING – mechanical task involving the - Financial management decisions cover
collection of basic financial data. investment decisions, financing decisions,
distributing profits back to investors, and risk
- The data are first entered in accounting records or management.
books of accounts, and then extracted, classified, - Financial management is not a totally
and summarized in the form of an income independent area in business administration. It
statement, balance sheet, and cash flow statement. draws on a much wider range of disciplines such
Accounting takes place when the accuracy of each as accounting, economics, marketing,
entry is required to be tested. production, human resources and mathematics,
particularly, quantitative methods.
- Bookkeeping is a routine operation, Accounting
requires the ability to examine a problem using
6) GOVERNMENT ACCOUNTING – encompasses
both financial and non-financial data.
the processes of analyzing, recording,
2) FINANCIAL ACCOUNTING- focused on the recording classifying, summarizing and communicating all
of business transactions and the periodic preparation transactions involving the receipt and
of reports on results of operations, changes in disposition of govt. funds and property, and
equity, financial position and cash flows. interpreting the results thereof.

- provides information to external users Three types:

(stockholders, creditors, and govt. agencies) New Government Accounting System (NGAS) –
monthly, quarterly, annually (retrospective, simplified set of accounting concepts,
information about the overall firm performance) guidelines, and procedures designed to ensure
correct, complete, and timely recording of govt.
- Financial Accountants must accord importance to
financial transactions, and production of
generally accepted accounting principles (GAAP)
accurate and relevant financial reports.
- Financial accounting is the more specific term
applied to the preparation and subsequent Accounting Responsibility – emanates from the
publication of general-purpose financial statements. constitution, laws, policies, rules and
regulations. The offices charged with the
3) MANAGEMENT ACCOUNTING – provides responsibility are:
information primarily to the internal management
(internal users). - Commission on Audit (COA) – is an
independent constitutional commission
It measures, analyzes, and reports financial and non- that keeps the general accounts of the
financial information which is the used by the govt., promulgates accounting rules and
management for planning control, and decision- regulations, and submits to the
making. (Prospective, based on very detailed President and Congress an annual
information) report of the government.
- Department of Budget and
Management (DBM) – responsible for
the formulation and implementation of
 the National Budget with the goal of constant legal search for ways to minimize tax
attaining our national socio-economic payments.
plans and objectives. The dept. shall
Tax avoidance – attempt to reduce clients’ tax liabilities
also be responsible for the efficient and
in accordance with the law
sound utilization of the govt. funds and
revenues to effectively service the Tax evasion – a serious offense. It is the non-declaration
country’s development objectives. of sources of income on which tax might be due
- Bureau of Treasury (BTR) – the
principal custodian of all govt. funds. 9) ACCOUNTANCY RESEARCH – the systematic process
They receive and keep govt. funds and of collecting and analyzing information to increase one’s
manage and control the disbursements. understanding of the functions of a professional
It also maintains accounts of financial accountant and contribute to the solution of problems
transactions of all national govt. besetting the practice of the profession.
agencies and instrumentalities. Accountancy Research can be classified into:
National Budget – is the government’s estimate Functional classification – financial accounting,
of its income and expenditure. It is what the management accounting, auditing and assurance, tax,
govt. plans to spend for its program and and other functional areas (such as fraud prevention
projects and where the funds will be sourced, and investigation, corporate governance, internal
whether from revenues or borrowings. auditing, risk management, sustainability reporting, and
General Appropriations Act (GAA) – is the the like)
approved national budget for the year. Sectoral classification – education and academe,
commerce and industry, public practice, and
government.
7) AUDITING – the systematic process of objectively
obtaining and evaluating evidence regarding assertions Accountancy research can also be basic and applied.
about economic actions and events to ascertain the 10) FORENSIC ACCOUNTING – or fraud examination,
degree of correspondence between those assertions includes fraud detection, fraud prevention, litigation
and established criteria and communicating the results support, business valuations, expert witness services
to interested users. and other investigative services.
- The process of assessment and ascertaining of - Labeled as one of the “sizzling” career areas in
financial, operational, and strategic goals and processes accounting - AICP
in organizations to determine whether they are in
compliance with the stated principles in addition to - Forensic Accountants work for public accounting and
them being in conformity with organizational and more consulting firms, banks, law firms, law enforcement
importantly, regulatory requirements. agencies, and other organizations.

- It is the accountancy profession’s most significant - Types of Frauds - employee embezzlement, vendor
service to the public. fraud, customer fraud, management fraud (or financial
statement fraud), investment scams and other
External Audit - the independent examination that consumer frauds, and other types of fraud.
ensures the fairness and completeness of the financial
statements that management submits to users outside 11) INTERNATIONAL ACCOUNTING – is the study of
the business entity. The result is embodied in the standards, guidelines and rules of accounting, auditing
independent auditor’s report. and taxation that exist within each country as well as
comparison of those items across countries.
- External auditors are appointed from outside the
entity. Their job is to protect the interest of the users of ROLE OF ETHICS IN BUSINESS
financial statements. Ethics – concerned with right and wrong and how
8) TAXATION – the process or means by which the conduct should be judged to be good or bad. Business
sovereign, through its lawmaking body, raises income to ethics tells what is right or wrong in a business
defray the necessary expenses of the government. situation.

- Taxes are the lifeblood of the government and their ETHICAL DILEMMAS
prompt and certain availability are an imperious need - White Collar Crime - financially motivated,
(Commissioner vs. Pineda, 21 SCRA 105) nonviolent or non-directly violent crime
Tax Accounting – includes the preparation of the committed by individuals, businesses and
relevant tax returns and the consideration of the tax government professionals.
consequences of proposed business transactions or - Fraud, embezzlement, thief of equipment and
alternative courses of actions. supplies, false insurance claims, bribery,
kickbacks, etc.
- Accountants involved in tax work are responsible for - Customers, suppliers, shareholders, and
computing the amount of tax payable and they aim to everyone else pays a price for this.
comply with existing tax statutes, but they are always in
 - Whistle-blowing – refers to going to the - The effects of transactions and other events are
authorities or the media with proof that a recognized when they occur and not when cash or its
company is engaged in a wrong-doing. Some equivalent is received or paid, and they are recorded
people see whistle-blowers as “squealers”, and reported in the financial statements of the periods
while others see them as heroes. Extreme to which they relate.
situations call for extreme measures, and
whistle-blowing usually serves an important
Generally Accepted Accounting Principles (GAAP)
purpose. - is the set of guidelines and procedures that constitute
- Conflicts of interest – arises when a person acceptable accounting practice at a given time.
must play two conflicting roles in a situation.
For example, if the purchaser of a telecomm. - They make financial statements meaningful and
Company is part-owner of a company bidding to useful, regardless of the type of business organization.
supply the needs of the telecom firm, then - The various needs for financial information can be
there is a conflict of interest. When faced with satisfied only if there are rules, procedures, and
this situation, it’s best to inform someone principles of accounting that are generally accepted and
responsible about it or to relinquish roles. used.
- Fiduciary Responsibilities – an attorney, CPA,
financial advisor, or executor of an estate have - If GAAP is not followed and the entity made up its own
toward a client. The professional must put the rules, there could be no basis for comparing the
client’s interest ahead of his own because the earnings and financial position of different firms. Even
client has placed significant trust in him, the records and reports of a particular entity could not
- Sexual Harassment – unwanted repeated or be compared for different periods unless accounting
aggressive sexual commentary or advances of a principles were applied consistently. Users of financial
sexual nature towards another person. statements would probably be misinformed and misled.
- Discrimination based on race, religion,
CRITERIA FOR GENERAL ACCEPTANCE OF AN
ethnicity, gender, age, marital status, or sexual
ACCOUNTING PRINCIPLE
preference.
Relevance – results in information that is meaningful
FUNDAMENTAL CONCEPTS OF ACCOUNTANCY
and useful to those who need to know something about
(CH.3)
a certain organization.
Entity Concept – The most basic concept in accounting.
An accounting entity is an organization that stands
apart from other organizations and individuals as a Objectivity – resulting information is not influenced by
separate economic unit. Each unit must be valuated the personal bias or judgment of those who furnish it.
separately.
- It connotes reliability and trustworthiness. It also
Periodicity Concept – An entity’s life can be connotes verifiability which means that there is some
meaningfully subdivided into equal time periods for way of finding out whether the information is correct.
reporting purposes. This concept allows the users to
Feasibility – it can be implemented without undue
obtain timely information to serve as a basis about
complexity or cost.
future activities. One year is the usual accounting period
for reporting to outsiders. These criteria often conflict with one another. In some cases,
the most relevant solution may be the least objective and
- During the lifetime of an entity, accountants produce least feasible.
financial statements at arbitrary points in time.
BASIC PRINCIPLES
Stable Monetary Unit Concept – The Philippine peso is
a reasonable unit of measure that its purchasing power Objectivity Principle – accounting records and
is relatively stable. It allows accountants to add and statements are based on the most reliable data
subtract peso amounts as though each peso has the available so that they will be accurate and as useful as
same purchasing power as any other peso at any time. possible.
This is the basis for ignoring the effects of inflation in
- Accounting records are based on information that
the accounting records.
flows from activities documented by objective evidence.
- Accountants do not recognize that the value of peso
- Without this principle, accounting records will be
changes over time.
based on whims and opinions and is therefore subject
- The financial records should be stated in terms of a to disputes.
common financial denominator.
Historical Cost – acquired assets should be recorded at
Accrual Basis – depicts the effects of transactions and their actual cost and not at what the management
other events and circumstances on a reporting entity’s thinks they are worth as at a reporting date.
economic resources and claims in the periods in which
Revenue Recognition Principle – revenue is to be
those effects occur, even if the resulting cash receipts
recognized when goods are delivered and when services
and payments occur in a different period.
are rendered or performed.
Expense Recognition Principle - expense should be - Financial statements shows the results of the
recognized when goods and services are already used stewardship of management, that is the accountability
up to produce revenue and not when the entity pays for of the management for the resources entrusted to it by
those goods and services. the owner(s).

Adequate Disclosure – requires that all relevant - The framework notes that general purpose financial
information that would affect the user’s understanding reports cannot provide all the information that users
and assessment of the accounting entity be disclosed in may need to make economic decisions. They will need
the financial statements. to consider pertinent information from other sources
(ex: general econ conditions and expectations, political
- Requires relevant information to form part of financial
events and political climate, industry and company
statements for decision-making purposes.
outlooks)
Materiality – financial reporting is only concerned with
- The management of a reporting entity is also
information that is significant enough to affect
interested in the financial information about the entity,
evaluations and decisions.
but they need not rely on financial reports because they
- It depends on the size and nature of the item judged in are able to obtain financial information they need
the particular circumstances of its omission. In deciding internally.
whether an item or an aggregate of items is material,
QUALITATIVE CHARACTERISTICS OF USEFUL
the nature and size of the item are evaluated together,
or either of the two.
FINANCIAL INFORMATION

Consistency Principle – the firms should use the same - identifies the types of information are likely to be
accounting method from period to period to achieve most useful to users in making decisions about the
comparability over time within a single enterprise. reporting entity on the basis of information in its
Changes are permitted if it is justifiable and disclosed in financial report. It applies equally to financial
the financial statements. information in general-purpose financial reports as well
as to financial information provided in other ways.
CONCEPTUAL FRAMEWORK FOR FINANCIAL
The Framework identifies two fundamental qualitative
REPORTING (2018)
characteristics and four enhancing qualitative
- describes the objective and concepts for general characteristics.
purpose financial reporting.
FUNDAMENTAL QUALITATIVE CHARACTERISTICS
- The revised Conceptual Framework deals with the
objective of financial reporting, the qualitative - Information must be both relevant and faithfully
characteristics that determine the usefulness of represented if it is to be useful
information in financial statements; financial Relevance
statements and the reporting entity; the definition,
recognition, derecognition, and measurement of the - Relevant financial information is “capable of making a
elements from which financial statements are difference in the decisions made by users.” Financial
constructed; presentation and disclosure; and concepts information is capable of making a difference if it has
of capital and capital maintenance. predictive value, confirmatory value, or both. They are
interrelated.
OBJECTIVE OF GENERAL-PURPOSE FINANCIAL
REPORTING: Financial information…

- is to provide financial information about the reporting - has confirmatory value when it provides feedback
entity that is useful to existing and potential investors, about (confirms or changes) previous evaluations.
lenders, and other creditors in making decisions relating - has predictive value when it can be used as an input
to providing resources to the reporting entity (or the to processes employed by users to predict future
entity). outcomes.
- The primary users need information about the For information to be relevant, it should assist in either
resources and claims against the resources of the entity the confirmation of past predictions or in the making of
not only to assess its prospects for future net cash new predictions.
inflows but also to assess how effectively and efficiently
management has discharged their responsibilities to use Materiality is also part of relevance. Information is
the entity’s existing resources (i.e. stewardship). material if omitting it or misstating it could influence
decisions that users make on the basis of financial
- Stewardship – embodies the responsible planning and information about a specific reporting entity.
management of resources (on behalf of its owners).
Faithful Representation
The classical notion of stewardship focuses on how the
money and the other assets entrusted to the steward - seeks to maximize the underlying characteristics of
by the owner were used, and how much money and completeness, neutrality, and freedom from error.
other assets were present at the end of the reporting
period.
Completeness – includes all information necessary for a be justified by the benefits of reporting that
user to understand the phenomenon being depicted, information.
including all necessary descriptions and explanations.
- The cost-benefit constraint prescribes that only
Neutrality – free from bias. Not slanted, weighted, information with benefits of disclosure greater
emphasized, de-emphasized or otherwise manipulated
than the costs of providing it need to be disclosed.
to increase the probability that financial information
will be received favorably or unfavorably by users. It Going Concern – financial statements are normally
does not mean information with no purpose or no prepared on the assumption that an enterprise is a
influence on behavior. going concern and will continue in operation for
Freedom from error – there are no errors or omissions the foreseeable future. It is assumed that the
for the reported information or in the description of the enterprise has no intention or necessity of
transaction and other events, and no errors have been liquidation or curtailing materially the scale of its
made in selecting and applying an appropriate process operations. This assumption is the basis of the
to produce the reported information. It does not mean depreciation of assets over their useful lives. If an
it has to be perfectly accurate in all aspects. entity expects to liquidate, its assets will be valued
ENHANCING QUALITATIVE CHARACTERISTICS at their worth at liquidation rather than its original
cost.
- enhances the usefulness of information that is
relevant and faithfully represented. ELEMENTS OF FINANCIAL STATEMENTS

- It should be maximized to the extent necessary. - Financial statements portray the financial effects of
transactions and other events by grouping them into
- It cannot render useful information if information is broad classes according to their economic
irrelevant or not faithfully represented. characteristics. These broad classes are termed the
- Qualitative characteristics: comparability, verifiability, elements of financial statements.
timeliness, and understandability - Assets, Liability, and Equity – elements directly
Comparability – information is more useful if it can be related to the measurement of financial position in the
compared with similar information about other entities balance sheet.
and with similar information about the same entity for - Income and Expenses – elements directly related to
another period or another date. the measurement of performance in the income
- Comparability allows users to identify and understand statement.
similarities and differences among items. A comparison - The statement of changes in financial position
requires at least two items. (Statement of Cash Flow) usually reflects income
- Consistency is related to comparability, but not the statement elements and changes in balance sheet
same. Consistency refers to the same methods for the elements.
same items, either from period to period within a
RECOGNITION AND DERECOGNITION OF THE
reporting entity or in a single period across entities.
ELEMENTS OF FINANCIAL STATEMENTS
- Comparability is the goal, consistency helps to achieve
Recognition – process of capturing for inclusion of an
that goal.
item that meets the definition of an asset, liability,
Verifiability – helps assure users that information equity, income, or expenses in the statement of
faithfully represents the economic phenomena it financial position (balance sheet) or the statement(s)
purports to represent. It is when different of financial performance (income statement, balance
knowledgeable and independent observers could reach sheet, cash flow statement).
a consensus, although not necessarily complete
Derecognition – the removal of all or part of a
agreement, that a particular description is faithful
recognized asset or liability from an entity’s statement
representation.
of financial position (balance sheet).
Timeliness – information is available to decision-makers
MEASUREMENT OF THE ELEMENTS OF FINANCIAL
in time to be capable of influencing their decisions. The
older, the less useful. STATEMENTS

Understandability – information is classified, (2018 Conceptual Framework) Two categories of

characterized, and presented clearly and concisely. measurement basis were identified:
Excluding even the most complex information would
- Historical Cost Measurement Basis
make financial reports incomplete and potentially
misleading. - Current Value Measurement Basis
Cost Constraint – pervasive constraint on the Historical Cost – provide information about
information that can be provided by general- elements that is derived from the historical price of
purpose financial reporting. Reporting such the transaction or event that gave rise to the item
information imposes costs and those costs should being considered for measurement.
Current Value – provide monetary information COGS for an automaker would include the material
about elements, using information updated to costs for the parts that go into making the car plus the
reflect conditions at the measurement date. labor costs used to put the car together. The cost of
sending the cars to dealerships and the cost of the labor
used to sell the car would be excluded.

Furthermore, costs incurred on the cars that were not

sold during the year will not be included when
calculating COGS, whether the costs are direct or
indirect.
As a rule of thumb, if you want to know if an expense falls under
COGS, ask: "Would this expense have been an expense even if no
sales were generated?"

Operating Expenses - ongoing cost for running a

product, business, or system

- Refers to expenditures not directly related to

the production of your products.

Examples: Rent, Office supplies, Legal costs, Sales and

marketing, Payroll, Utilities, Insurance, administration
fees, and wages.

Mortgage - a loan from a bank or other financial

institution that helps a borrower purchase property

Bond - loan from an investor to a borrower such as a

company or government. The borrower uses the money
to fund its operations, and the investor receives interest
on the investment.

- The bond is a contract between the issuer and

EXTRA ACCOUNTING TERMS (OPTIONAL) the lender specifying the terms of repayment
and the interest to be charged.
- Confusing/unfamiliar terms + terms unrelated
to current lessons but might be useful for later. Maturity Date - the date when the final payment is due
for a loan, bond or other financial product.
Investment - the investing of money or capital in order
to gain profitable returns, such as interest, income, or Interest - fee for borrowing an asset from a lender. An
appreciation in value. expense to the borrower and income to the lender.

Profit - the income remaining after settling all expenses. Insurance - a practice or arrangement by which a
company or government agency provides a guarantee
Appreciation - an increase in the value of an asset of compensation for specified loss, damage, illness, or
over time. death in return for payment of a premium.
Liquidation - the process of selling off a company's Premium - an amount paid periodically to the insurer by
inventory, typically at a big discount, to generate
the insured for covering his risk.
cash.

Liquidity – refers to the ease with which an asset, or

security, can be converted into ready cash without
affecting its market price

- The ability of a debtor to pay their debts on

time.

Profitability – the ability of an entity in generating

profits.

Solvency - the ability of a company to meet its long-

term debts and other financial obligations.

Cost of goods sold (COGS) - total of all costs used to

create a product or service, which has been sold.
Indirect expenses, such as distribution costs and sales
force costs, are excluded. (It is also referred to as cost
of sales.

- Recorded in income statement as expense.

Example: