(Intermediate Financial

 Accounting 1A)
LECTURE AID

2016

ZEUS VERNON B. MILLAN

 Chapter 1 Overview of
Accounting
Learning Objectives
• Define accounting and understand its
 basic purpose.
• Understand the basic concepts applied in
accounting.
• Know the branches of accounting and
sectors in the practice of accountancy.
• Understand the need for financial
reporting standards and how they are
developed.
•  Appreciate the reason for the adoption of
International Financial Reporting
Standards.

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 Definition of Accounting

•  Accounting is the process of identifying'

measuring' and communicating econo(ic
infor(ation to per(it infor(ed )udg(ent and
decisions by users of infor(ation.
 AAA (American Association of Accountants)

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 Tree im)ortant acti*ities inc+uded in te definition of accounting

1, Identifying % the process of analy*ing events and transactions to

deter(ine whether or not they will be recogni*ed in the boo+s.
,nly accountable events are recogni*ed in the boo+s.
2, $easuring % involves assigning nu(bers' nor(ally in (onetary
ter(s' to the econo(ic transactions and events.
-, Communicating % the process of transfor(ing econo(ic data
into useful accounting infor(ation' such as financial state(ents
and other accounting reports' for disse(ination to users.
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 TYPES OF EVENTS

1. External events – events which involve an entity and an external

 party .
a. Exchange (reciprocal transfer) – reciprocal giving and receiving 
b. Non-reciprocal transfer – “one way” transaction
c. External event other than transfer  – an event that involves
changes in the economic resources or obligations of an entity
caused by an external party or external source but does not involve
transfers of resources or obligations.

2. Internal events – events which do not  involve an external party.

d. roduction – the process by which resources are transformed into
finished goods.
e. !asualt"  – an unanticipated loss from disasters or other similar
events.
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 $easurement .ases
 1.  Historical Cost - price based on past echange
 2. Current Cost – price based on current echange
 3.  Realizable (settlement) value – net cash that could currently
 be obtained by selling the asset in an orderly disposal.
 4.  Present value / price based on future echange
 5.  Fair value - the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between (ar+et
participants at the (easure(ent date.
6.  Fair value less costs to sell  / Costs to sell are the incre(ental
costs directly attributable to the disposal of an asset' excluding
finance costs and inco(e ta epense.
7.  Revalue amount is the asset0s fair value at the date of the
revaluation less any subse1uent accu(ulated depreciation and
subse1uent accu(ulated i(pair(ent losses.
!.  "n#lation$a%uste costs / a(ounts ad)usted to the (easuring
unit current at the reporting date.
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 #asic )ur)ose of accounting

• he basic purpose of accounting is to provide

infor(ation about econo(ic activities intended
to be usefu+ in maing economic decisions.

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 Ty)es of accounting information c+assified as to users needs

• &eneral 'ur'ose accounting infor(ation - designed to

(eet the common needs of (ost state(ent users. his
infor(ation governed by the  Philippine Financial
 Reporting Standards (PFRSs).

•  'ecial 'ur'ose accounting infor(ation - designed to

(eet the specific needs  of particular state(ent users.
his infor(ation is provided by other types of
accounting' e.g.' (anagerial accounting' ta basis
accounting' etc.
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 %asic Accounting 2oncepts
• &oin concern assum'tion - the entity is assu(ed to carry
on its operations for an indefinite period of ti(e.
•  e'arate entit* / the entity is treated separately fro( its
owners.
•  table monetar* unit - a(ounts in financial state(ents are
stated in ter(s of a co((on unit of (easure3 changes in
purchasing power are ignored.
• +ime Perio  / the life of the business is divided into series of
reporting periods.
•  ,aterialit* conce't / infor(ation is (aterial if its o(ission
or (isstate(ent could influence econo(ic decisions.
• Cost$bene#it 4Reasonable assurance5 Pervasive constraint5
2ost constraint6 / the cost of processing and co((unicating
infor(ation should not eceed the benefits to be derived fro( it.

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 %asic Accounting 2oncepts - 2ontinuation
•  -ccrual asis o# accountin / effects of transactions are recogni*ed
 when they occur 4and not as cash or its e1uivalent is received or paid6 and
they are recogni*ed in the accounting periods to which they relate.
•  Historical cost conce't  42ost principle6 / the value of an asset is to be
deter(ined on the basis of ac1uisition cost.
• Conce't o# -rticulation / all of the co(ponents of a co(plete set of
financial state(ents are interrelate .
•  Full isclosure 'rinci'le / financial state(ents provide sufficient
detail to disclose (atters that (a+e a difference to users' yet sufficient
condensation to (a+e the infor(ation understandable' +eeping in (ind
the costs of preparing and using it.
• Consistenc* conce't  / financial state(ents are prepared on the basis of
accounting principles which are followed consistently fro( one period to
the net.
•  ,atc/in (Associating cause and effect) – costs are recogni*ed as
epenses when the related revenue is recogni*ed.

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%asic Accounting 2oncepts - 2ontinuation
•  0ntit* t/eor* / the accounting ob)ective is geared towards the 'ro'er
income etermination. It e(phasi*es the income statement and is
ee(plified by the e1uation “   -ssets  iabilities  Ca'ital . 
•  Pro'rietar* t/eor* / the accounting ob)ective is geared towards the
 'ro'er valuation o# assets! It e(phasi*es the i(portance of the
balance s/eet  and is ee(plified by the e1uation “   -ssets  iabilities
 Ca'ital ! 
•  Resiual euit* t/eor* / this theory is applicable where there are two
 -ssets 
classes of shares issued' ordinary and preferred. he e1uation is “ 
 iabilities  Pre#erre /are/olers 0uit*  rinar*
 /are/olers 0uit*! 
•  Fun t/eor* / the accounting ob)ective is the custody and ad(inistration
of funds.
•  Realization / the process of converting non-cash assets into cash or
clai(s to cash.
•  Pruence 42onservatis(6 / the inclusion of a degree of caution in the
eercise of the )udg(ents needed in (a+ing the esti(ates re1uired under
conditions of uncertainty ' such that assets or inco(e are not overstated and
liabilities or epenses are not understated.
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Common .rances of accounting

•  Financial accountin8 Financial Re'ortin - focuses on general purpose

financial state(ents.
•  ,anaement accountin / focuses on special financial reports geared
towards the needs of an entity0s (anage(ent.
• Cost accountin - the syste(atic recording and analysis of the costs of
(aterials' labor' and overhead incident to production.
•  -uitin " a syste(atic process of ob)ectively obtaining and evaluating evidence
regarding assertions about econo(ic actions and events to ascertain the degree of
correspondence between these assertions and established criteria and
co((unicating the results to interested users.
• +a9 accountin - the preparation of ta returns and rendering of ta advice'
such as deter(ination of ta conse1uences of certain proposed business
endeavors.
• &overnment accountin - the accounting for the national govern(ent and its
instru(entalities' focusing attention on the custody of public funds and the
purpose or purposes to which such funds are co((itted.
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 5our sectors in te )ractice of accountancy

 1.  Practice o# Public -ccountanc* " involves the rendering of audit or

accounting related services to (ore than one client on a fee basis.
 2.  Practice in Commerce an "nustr*  - refers to e(ploy(ent in the private
sector in a position which involves decision (a+ing re1uiring professional
+nowledge in the science of accounting and such position re1uires that the holder
thereof (ust be a certified public accountant.
 3.  Practice in 0ucation8-caeme / e(ploy(ent in an educational institution
 which involves teaching of accounting' auditing' (anage(ent advisory services'
finance' business law' taation' and other technically related sub)ects.
 4.  Practice in t/e &overnment / e(ploy(ent or appoint(ent to a position in an
accounting professional group in govern(ent or in a govern(ent/owned and5or
controlled corporation' including those perfor(ing proprietary functions' where
decision (a+ing re1uires professional +nowledge in the science of accounting' or
 where a civil service eligibility as a certified public accountant is a prere1uisite.

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  Accounting standards in te i+i))ines

• i+i))ine 5inancia+ Re)orting 7tandards (5R7s' are

 Standards and #nterpretations adopted by the Financial Reporting
Standards 2ouncil 4FRS26. hey co(prise"
1, i+i))ine 5inancia+ Re)orting 7tandards (5R7s'8

2, i+i))ine Accounting 7tandards (A7s'8 and

-, Inter)retations

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OPEN FORUM

QUESTIONS????

REACTIONS!!!!!
 END
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