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Evolution of Accounting

Cradle of Civilization (4000 BC to 10 AD)

➔ Record keeping was common in Mesopotamia
➔ Clay tablet was used to account for goods in commercial use

14th Century (1200 to 1494)

➔ Double entry bookkeeping (used in general journal and ledger) by Luca Pacioli “The Father of Modern Accounting”

French Revolution (1500 to 1700)

➔ Development of accounting began due to social change
➔ Affected government, finances, laws, customs and business

Industrial Revolution (1760 to 1830)

➔ Establishment of businesses and infrastructure
➔ Introduced mass production
➔ Fixed assets and market value were given attention

20th Century (1913 to 1997)

➔ The Beginning of Modern Accounting in America
➔ American Institute of Certified Public Accountants (AICPA) was established
➔ 1923: R.A. 3105 or 1st Accounting Law was passed
➔ Philippine Institute of Certified Public Accountants (PICPA) created Accounting Standards Council (ASC) to establish
accounting standards in the Philippines

The Present
➔ The Development of Modern Accounting and Commerce
➔ 1997: International Accounting Standards Council (IASC) was established
➔ 2001: International Accounting Standards Board (IASB) replaced IASC and established International Financial
Reporting Standards (IFRS)
➔ 2004: Professional Regulation Commission (PRC) created the Financial Reporting Standards Council (FRSC) to
replace the ASC

Nature of Accounting

➔ Recording (business transactions)
● General Journal a.k.a. Book of Original Entry
➔ Classifying (assets, liabilities, etc.)
● General Ledger a.k.a. Book of Final Entry
➔ Summarizing
● Financial Statements
i. Income Statement/Statement of Comprehensive Income (SCI)
ii. Balance Sheet/Statement of Financial Position (SFP)
iii. Statement of Cash Flows (SCF)
iv. Statement of Changes in Equity (SCE)
v. Notes to Financial Statements
➔ Interpreting

1. Analyzing business transactions
● Account business transactions only
2. Recording business transactions
● General Journal
3. Posting business transactions
● General Ledger (T-account)
4. Preparing trial balance
● Dr = Cr
5. Adjusting entries (+ / -)
6. Preparing adjusted trial balance
● Trial balance +/- adjusting entries = adjusted trial balance
7. Preparing Statement of Comprehensive Income (SCI)
● Accounts only revenue and expenses
● Revenue > Expense = net income
● Expense > Revenue = net loss
● Revenue = Expense = breakeven
8. Preparing Statement of Financial Position
● A = L + OE (accounting equation)
9. Closing entries
10. Preparing post-closing trial balance


➔ The users of accounting information (stakeholders - internal or external users) have the ability to make economic
decisions based on the management assertion affirmation in the financial statements
➔ The result of the financial statements serves as a means, and not an end, whether or not to continue the business

➔ It caters to the needs of every user
➔ It provides assistance to decision makers by providing them financial reports that will guide them in coming up with
sound decisions
➔ Accountants make sure that financial statements are available on a timely basis
➔ Storehouse of information
➔ Transactions from past to present are kept, manual or with intervention of accounting system

Functions of Accounting

To fulfill the stewardship function of the business

➔ The management report on how well a business fares which is a reflection of how well they manage their business

To help interested users come up with informed decisions

➔ Internal and external users use these reports to make informed decisions based on past performance and current
financial condition of the business

To support daily operations

➔ Financial information from accounting are used to come up with recommendations on how to improve the operational
effectiveness and efficiency of a company
Definitions of Accounting
American Accounting Association (AAA)
➔ Accounting is the process of identifying, measuring, and communicating economic information to permit informed
judgement and decisions by users of information.
● Identifying: whether or not it is a business transaction
● Measuring: using local currency
● Communicating: using the 5 financial statements

American Institute of Certified Public Accountants (AICPA)

➔ Accounting is the art of recording, classifying, and summarizing in a significant manner and in terms of money,
transactions and events which are of financial character, and interpreting the results thereof.
● Recording: journal (book of original entry)
● Classifying major accounts (Assets, Liabilities, Equity, Revenue, Expenses)
● Summarizing: using the 5 financial statements

Accounting Standards Council (ASC)

➔ Accounting is a service activity. Its function is to provide quantitative information primarily financial in nature, about
economic entities, to be used in making in economic decisions.
● Quantitative information: deals with numbers and figures
● Service activity: caters to the needs of any type of business organization
● Financial in nature: dealing with monetary terms and values
● Economic entities: forms of business organization

Branches of Accounting
➔ The accountant performs or offers to perform any activity that will result to an issuance of an attest report that is in
accordance with professional standards (PAS, PFRS, GAAP)
➔ Services:
1. External Auditing - auditors examine the financial and business transactions of a company with which he is
not affiliated with in order to express an opinion on whether statements have been presented fairly or not
● Auditor - gives credibility to the financial statements
● Auditor’s Opinion/Report - basis of whether or not the financial statements are prepared truthfully
and without any material error
● Audited Financial Statement - FS that underwent the process of auditing

2. Tax Preparation and Planning Services - tax services wherein accountants advice and help clients in tax
planning and preparing tax returns
● Tax Specialist - knowledgeable about revenue regulations and tax laws; represents the client in any
tax-related case filed by the BIR
● Tax Reports/Returns:
○ Income Tax: individual = 5% to 32%, corporate = 30%
○ Business Tax
1. VAT - indirect tax which is passed on to the buyer
2. Percentage Tax - those with annual sales below 1, 919, 500
3. Real Property Tax - paid yearly on all real properties
4. Excise Tax - applies to goods manufactured and to consumed in the Philippines
5. Capital Gain Tax - sale of real property
6. Doc Stamp - tax on documents
7. Donor’s Tax - tax on donation, gift, or gratuitous transfer of property
8. Estate Tax - tax on the right of deceased person to transmit his estate to heir or
9. Final Withholding Tax - income tax withhold for certain payors
10. Expanded Withholding Tax - covers services
11. Withholding Tax on Compensation - receiving purely compensation income

3. Management Advisory Services - accountant advises management on matters such as installation of an

accounting system, introduction of new products, business processes and other business activities
● Consultant - covers services such as financial planning and control, and the development of
accounting and computer systems
● Output: advisory services/consultancy

➔ Involves setting up system of recording business transactions that are aggregated to financial statement
➔ Services:
1. Internal Auditing
● Reviews the business operations to check if they are complying with management policies
● Evaluates the efficiency of business operations
2. Tax Accounting
● Deals with the preparations of various tax returns and doing tax planning for the business
● Similar to tax services in public accounting, but the client is the business and not the public
3. Financial Accounting
● Ends in preparation and presentation of financial statements in accordance with GAAP
● Information from this branch helps investors and creditors in deciding where to allocate their scarce
4. Cost Accounting
● Covers the reporting of financial information relevant to manufacturing operations
● Focuses on accumulating costs for financial reporting and decision making purposes
● Cost Accountant - determines the inventory for financial reporting services
5. Budgeting
● Provides a detailed collection and reporting of expenditures and revenues involved in a business or
company operations
● Tracks money taken in and the money spent by the company and staff
6. Accounting Information System
● Small businesses often use lower costs software packages
● Large organizations would often use accounting built software packages

➔ A system used in government offices to record and report financial transactions
➔ Utilizes the systematic process
➔ Reveals how public funds have been generated, utilized and employed in both national and local governments

➔ Engages in teaching accounting, financial management, taxation, and other related business course by accounting
educators (professors, deans and researchers)
➔ Accounting Research - encompasses research interest in the areas of financial accounting, management accounting,
auditing and assurance, and taxation

1. Forensic Accounting
● Provide detective work needed to investigate and examine evidence of stealing or fraud
2. Information Technology Services
● Businesses seek individuals who can design and implement customized software systems in e-commerce
3. Environmental Accounting
● Determine how companies can be both profitable and environmentally responsible
● Do environmental compliance audit
● Set up preventive system
4. International Accounting
● Accountants who are knowledgeable in international trade rules and regulations

Users of Accounting Information

1. Managers/Management
● Plan, organize and run a business
● 5 functions of Management:
i. Planning
ii. Organizing
iii. Staffing
iv. Leading
v. Controlling
● Hierarchy of Management
i. Top-Level - sets strategic direction and oversees the performance of the whole organization (CEO,
ii. Middle-Level - ensures that their unit’s performances are aligned with the organization’s objectives
(Dep’t Heads, Branch Managers, Junior Executives)
iii. Lower-Level - oversees the day to day operations and direct employees in the performance of tasks
(supervisors and team leaders)
2. Employees/Labor Union
● Assess the ability of the enterprise to provide remuneration, retirement benefits and employee opportunities
● Assess the company’s profitability and stability and their consequence on future salary and job security
3. Owners
● Provide capital to the business; help them decide whether they should withdraw or increase their investments;
return on investments

1. Potential and Existing Investors
● Assess the risk inherent in, and return provided by, their investment
2. Lenders/Creditors/Potential Creditors
● Determine whether their loans and interest attached to them will be paid when due
3. Customers
● Information about the continuance of an enterprise, especially when they are dependent on it

4. Suppliers
● Determine whether amounts owing to them will be paid on time
5. Tax Authorities
● Determine the credibility of the tax returns filed and if the business paid the correct amount of taxes
6. Regulatory Bodies
● Ensure that the company’s disclosure is in accordance with the rules and regulations set in order to protect the
interest of the stakeholders
● Legitimacy of a business
7. Public
● Provide information about the trends and recent development in the prosperity of the enterprise and the range
of its activities

Forms of Business Organizations

➔ Owned by only one individual for the practice of trade or profession
➔ Advantages:
● Full control of operations
● Easy to start, easy to dissolve
● All profits go to owner
● Less regulations
● Government only taxes the owner, not the business
➔ Disadvantages:
● Unlimited liability
● Limited life (business dies if owner is incapable)
● Difficulty in raising capital
● Personal assets are on the line

➔ Owned by two or more individuals pooling their resources together as a common fund
➔ Profit of the business is divided among the partners as per partners’s request (articles of co-partnership)
➔ 2 Types:
1. General Partnership - each partner is a general partner with unlimited liability
2. Limited Partnership - at least one general partner and the rest are limited partners who enjoy limited liability
➔ Advantages:
● Increased potentials from two or more different strengths
● Easy to form with proper agreements on its formation
● Less regulations compared to corporations
➔ Disadvantages:
● Unlimited liability of one or all partners
● Limited life (business dies if one partner is incapable)
● High possibility of dispute between partner
➔ Required to have 5 to 15 incorporators
➔ Legal personality that is separate and distinct from the owners
➔ Board of Directors are elected by the owners and take control of the corporation’s activities
➔ Advantages:
● More sources of funds
● Easy to transfer ownership
● Liability of owners is limited
● Unlimited commercial life
● Large pool of human capital
➔ Disadvantages:
● More regulations to be followed
● Profit is taxed at the corporation tax rate
● Costly to incorporate
● Stockholders are taxed again when profits are distributed to them

➔ Owned by a group of individuals who also serve as benefactors to the business endeavor
➔ Requires at least 15 members
➔ Board of Directors and officers are elected to manage the business
➔ Advantages:
● Limited life
● Democratic organization
➔ Disadvantages:
● Obtaining capital through investors
● Lack of membership and participants

Types of Business Organization

➔ Providing intangible products, such as professional skills, proposals and expertise
➔ Ex. accounting firms, law firms, schools, medical clinic, banks, etc.

➔ “Buy and sell” business
➔ Products are bought from manufacturers and resold at a higher amount than purchase price
➔ Ex. grocery, hardware, department stores, drugstores

➔ Materials are bought to create a new product
➔ Inventories: raw materials, work in process, finished goods
➔ Ex. food factories, garment factories, car manufacturing companies

----------------------------------------------Accounting Assumptions---------------------------------------------
GAAP: Generally Accepted Accounting Principles
➔ Determine what, when and amount to record
➔ Rules and procedures necessary
➔ Govern the application of accounting procedures
Importance of GAAP
➔ Guide: prepares financial statement
➔ Aid: effective execution and communication

1. Going Concern - business will exist long enough to carry out its objectives
2. Accrual Basis - revenue/expense is recorded, regardless if the cash is received/paid
3. Monetary Unit - all transactions should be in Philippine Peso
4. Economic Entity - the business and owner are treated separately
5. Time Period - accounting process is completed over a specific time period (calendar or fiscal)

Accounting Principles

1. Full Disclosure - financial statement should include sufficient information for stakeholders’ decisions
2. Objectivity - business transactions should have evidence/documentation
3. Matching - expenses should match revenues
4. Materiality - transactions may affect decision
5. Cost - amount spend/earned should be recorded based on actual cash equivalent/original cost
6. Conservatism - choose the alternative that will least affect the net income
7. Revenue Recognition - revenue is recognized as soon as goods are sold/services are rendered, regardless of when
money is received
Business Transaction Analysis
Business Transactions
➔ Events which involve the exchange of values between two or more parties
➔ Eg. goods purchased, services rendered, credit availed by the business, cash received or paid out, debts incurred

Business Documents
➔ Official receipt for services
➔ Sales invoice (SI) for goods purchased
➔ Promissory note
➔ Contracts
➔ Cheques

External - economic events between the business and an outside party

Internal - within the business (ex. salary)


I. Current (CRIP)
A. Cash
B. Receivables
1. Account Receivable
2. Notes Receivable
C. Inventories
1. Unused Supplies
D. Prepaid (AIR)
1. Advertising
2. Insurance
3. Rent
II. Non Current (LBMAF)
a. Land
b. Building
c. Machinery
d. Automobiles
e. Furniture & Fixtures
III. Contra Assets
a. Accumulated Depreciation
b. Allowance for Doubtful Accounts


Current Liabilities (ANSUITUC)

A. Accounts Payable
B. Notes Payable
C. Salaries Payable
D. Utilities Payable
E. Interest Payable
F. Taxes Payable
G. Unearned Revenue
H. Current Portion of Long Term Debt
II. Noncurrent Liabilities (LLBM)
A. Loans Payable
B. Long Term Debt
C. Bonds Payable
D. Mortgage Payable

Owner’s Equity (CREW)

I. Capital
II. Revenues (PISS)
A. Professional Fees
B. Interest Income
C. Sales
D. Service Revenue
III. Expenses (SSWUTCDD)
A. Salaries Expense
B. Supplies Expense
C. Wages
D. Utilities Expense
E. Taxes and Licenses Expense
F. Cost of Sales
G. Doubtful Account Expense
H. Depreciation Expense
IV. Withdrawals