FINANCIAL ACCOUNTING
Inputs are the accountable events (recording,
Accounting – process of Identifying, Recording and
communicating economic information that is useful in
making economic decisions.
Essential Elements of Definition of Acctg
1. Identifying – Analyzes business transaction
identifies whether it is:
 Accountable event- recorded in the
book of accounts and economic events
are those that affect the assets,
liabilities, equity , income and expenses
of business.
 Non-Accountable event- Not recorded
in the book of accounts.
2. Recording – Accountant recognizes the
“accountable events” has identified. The
process is called Journalizing. Then classifies the
effect of the event on the accounts that is
posting.
3. Communicating – At the end of acctg. Period
the accountant summarize the information
processed in the acctg. System.
Financial Statements – common form of acctg.
Reports.
Nature of accounting
Types of Information provided
1. Quantitative information – expressed in
numbers, quantities or units .
2. Qualitative Information – expressed in words
or descripted form. Found in the notes to
financial statements.
3. Financial Information – Expressed in money ,
also quantitative information.
Accounting as Social Science, a body of knowledge,
systematically gathered, classified and organized.
Accounting as practical art, use of creative skills
and judgement.
In accounting system:
classifying, and summarizing)
Outputs is the Accounting Report
Bookkeeping – process of recording the accounts of
transactions of an entity .
- Normally ends w/ the preparation of trial
balance.
- Does not require interpretation of the
information processed.
Accounting – covers the whole process of identifying,
recording and communicating.
Accounting referred to as a
“language of business” – fundamental to the
communication of financial information.
Two broad functions
1. To provide External Users w/ information that
is useful in making, among other, investment
and credit decisions.
2. To provide Enternal users w/ information that is
useful in managing the business.
Types of Acctg information as to user’s needs
1. General Purpose- design to meet the common
needs of most statement uses.
- Provided by financial accounting
- Primarily for Internal usres.
2. Special Purpose – Design to meet the specific
need of particular statement users.
- Provided by management acctg or either
branches of Acctg.
- Primarily for internal users.
Fra Luca Pacioli – father of modern acctg , formulated
“double entry recording system”.
Common Branches of Accounting
1. Financial Accounting (External uses)
- Focuses on general purpose Fs.
- Is the fundamentals of financial accounting
and reporting
 Financial Statement – structured
representation – end prodect of the
acctg process.
 Financial Report – financial statements
plus other information.
2. Management Accounting (Internal users)
- Accumulation and communication of
information for use by internal users.
3. Government Accounting – refers to the acctg
for the government and its instrumentalities.
Focus to the custody of public funds.
4. Auditing – Inspection of an entity’s Fs.
5. Tax Accounting – preparation of tax returns and
rendering of tax advice.
6. Cost Accounting – systematic recording and
analysis of the costs of materials, labor and
overhead.
7. Accounting Education- Teaching acctg and
acctg related subjects.
8. Accounting research – careful analysis of
economic events and other variables.
Forms of Business Organization
Business- activity where goods or services are exchange
for money.
Persson engaged in business is called Entrepreneur or
Businessman.
1.Sole or single Proprietorship
2.Partnership
3.Corporation
4.Cooperative
 Patronage refund – profit that cooperative
returns to its owners.
 Cooperative Development Authority (CDA)
Accounting Concepts and Principles
- Set of logical ideas and procedures that
guide the accountant in recording and
communicating economic information.
- Provide reasonable assurance
- Prepared in proper way.
1. Separate entity concept – business is viewed as
a separate person, distinct frow its owner
business.
- Business transaction are recorded
- Personal transaction are not.
2. Historical cost concept – assets are initially
recorded at their acquisition cost.
3. Going concern assumption – assumed to
continue to exist for an indefinite period of
time.
- Opposite is liquidating concern.
4. Matching (Association of Cause and effect )
- Some costs are initially recognized as assets
and changed as expenses only when the
related revenues is recognized.
5. Accrual Basis of Accounting – economic events
are recorded in the period .
- Income is recorded hen it is earned.
- Expenses is recognize when it is incurred.
6. Prudence ( or conservatism)
- Accountant chooses the unfavorable one so
that assts or income are not overstated and
liabilities or expenses are not understand.
7. Time Period (Periodicity/Acctg period concept)
- Divided into series of reporting periods
 Calendar year period (12 months)
January 1 – December 31
 Fiscal year period (12 month)
July 1 – June 30
 Interim Period (shorter than 12
months )
Quarter (3months)
Semiannual (6months)
8. Stable monetary unit
- A, L, E, I, Exp. Are stated in erms of common
unit of measure w/ is PESO in the Phil.
- Purchasing power is regard as stable (due to
inflation are ignored.
9. Materiality concept
- if its omission or misstatement could
influence economic decisions.
- Matter of professional judgment, based on
the size and nature of item being judged.
10. Cost Benefit (Cost constraint)
- Should not exceed the benefits
 11. Full disclosure principle
- Both the concepts of materiality and cost-
benefit is related.
12. Consistency Concept
- Business shall apply accounting policies
consistently and present information
consistently from one period to another.

Basic Accounting Equation

Assets = Liabilities + Equity

Expanded Accounting Equation

Assets = Liabilities + Equity + Income - Expenses

Another Variation

Assets = Liabilities + Equity + Profit – Expenses

Equity, beginning + Income – expenses = Equity, Ending

Or

Equity, beginning + Profit = Equity, Ending

Total Assets = Liabilities + Equity

Total Liabilities = Assets – Equity

Total Equity = Assets – Liabilities

Profit or (Loss) = Total Income – Total Expenses

Total Income = Profit + Total Expenses

Expenses = Income – Profit

Income = Assets – Liabilities – Equity + Expenses

Expenses = Assets – Liabilities – Equity – Income

Ending Equity = Beginning Equity + Income - Expenses

= Beginning Equity + Profit – (Loss)

Profit (Loss) = Ending Equity – Beginning Equity