BASIC ACCOUNTING

RA 9298 – The Philippine Accountancy Act of 2004

- The law regulating the practice of accountancy in the Philippines.

Board of Accountancy (BOA)

- Body authorized by law to promulgate rules and regulations affecting the practice of accountancy in the
Philippines. They are responsible for preparing and grading the Philippine CPA examination.

Financial Reporting Standards Council (FRSC)

- The regulatory body tasked with the establishment of generally accepted accounting principles in the
Philippines
- The standard-setting body created by the Professional Regulation Commission upon the recommendation
of the Board of Accountancy.
- Successor of the Accounting Standards Council (ASC)

IFRS = PFRS; IAS = PAS

- The Philippine Financial Reporting Standards (PFRS) and the Philippine Accounting Standards (PAS) are the
new set of Generally Accepted Accounting Standards (GAAP) issued by the ASC to govern the preparation
of financial statements.
- PFRS and PAS are patterned after the revised International Financial Reporting Standards (IFRS) and
International Accounting Standards (IAS) issued by the International Accounting Standards Board (IASB)

Types of business
3 Main Types
1. Services - provide service, for a fee to clients. Ex. Beauty Parlor, barber shop, school.
2. Trader or merchandising - buy and sell products. Ex. Wholesaler, retailer, bookstore.
3. Manufacturer -buys raw materials, processes into finished goods and sell to customers Ex. shoe factories,
food processors.
Other Types
4. Raw Materials - growing or extracting raw materials. Ex. Farming, mining, oil
5. Infrastructure - selling the utilization of infrastructure. Ex. hotels, sports facilities
6. Financial - receiving, lending and investing money. Ex. Banks
7. Insurance - pooling premiums of many to meet claims of a few. Ex. Insurance company

Forms of Business Organization

1. Sole Proprietorship - single owner.
2. Partnership - owned by two or more person and created by mere agreements.
3. Corporation - organized as separate legal entity from the owners and created by the law.

Activities in Business Organizations

1. Financing Activities - use to obtain financial resources from financial markets and how it manages its
resources.
2. Investing Activities - engages in acquisition of properties, plant and equipment or other resources other
than cash.
3. Operating Activities - engages earning of income by selling goods or services and by incurring expenses.
What is Accounting?
Accounting according to:
A. Accounting Theory of the American Accounting Association
a. The process of identifying, measuring, and communicating economic information to permit
informed judgements and decisions by users of the information.
B. American institute of Certified Public Accountants (AICPA)
a. 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 financial character and
interpreting the results thereof.
C. According to the Accounting Standards Council
a. Accounting is a service activity. Its function is to provide quantitative information, primarily
financial in nature, about economic entities, that is intended to be useful in making
economic decision.

Three functions:
a) Main function : To provide quantitative information, primarily financial in nature, about
economic activities, that is intended to be useful in making economic decisions

b) Basic function: To record and report accurately the economic reality of the business.

c) Audit function: To test the truthfulness of financial reports

Phases of Accounting
 Based on the definition of the American Accounting Association
1. Identifying –recognition and non-recognition of business activities.
2. Measuring –assigning of peso amounts.
3. Communicating – preparing and distributing accounting reports

 Based on the definition of the American Institute of Certified Public Accountants

1. Recording – financial transactions are recorded in a systematical and chronological manner
2. Classifying – sorting and grouping similar items under the designated name, category or account
3. Summarizing – summarizing data after each accounting period. Data must be presented in a manner
which is easy to understand and use
4. Interpreting – analyzing financial data

UNDERLYING ASSUMPTIONS
These are basic notions or fundamental premises which the accounting process is based.
A) Going concern - in absence of evidence to contrary, the accounting entity is viewed as continuing in
operation indefinitely.

Other fundamental concepts:

a. Accounting entity – the entity has a separate juridical personality from those who
constitute the entity
b. Time period/Periodicity – allows the users to obtain timely information for the purpose of
reporting, one year is the usual accounting period
c. Stable Monetary unit – The Philippine Peso is a reasonable unit of measure

QUALITATIVE CHARACTERISTICS
A) Fundamental Qualitative Characteristics
a. Relevance – capacity of the information to influence a decision
i. Confirmatory value
 ii. Predictive value
b. Faithful Representation – actual effects of the transactions shall be properly accounted for
and reported in the financial statements.
i. Completeness – relevant information shall be presented in a way that facilitates
understanding and avoids erroneous implication.
ii. Free from error – there are no errors or omissions
iii. Neutrality – without bias, fair,

B) Enhancing Qualitative Characteristics

a. Verifiability – different knowledgeable and independent observers could reach consensus
b. Comparability – ability to bring together for the purpose of noting points of likeness and
difference (within entity = horizontal or intracomparability ; across entities = dimensional or
intercomparability)
c. Understandability – financial information must be comprehensible or intelligible if it is to be
most useful. (presenting information clearly and concisely)
d. Timeliness – FI must be available or communicated early enough when a decision is to be
made.

ACCOUNTANCY PROFESSION
1. Public Accounting
2. Private Accounting
3. Government Accounting
4. Academe/Education

BRANCHES OF ACCOUNTING
1. Auditing
2. Bookkeeping
3. Cost Accounting
4. Financial Accounting
5. Financial Management
6. Management Accounting
7. Taxation
8. Government Accounting

STEPS IN THE ACCOUNTING CYCLE

1. Analyzing and Classifying Data
2. Journalizing
3. Posting to the General Ledger
4. Preparing the Unadjusted Trial Balance
5. Adjusting Entries
6. Preparing Adjusted Trial Balance
7. Preparing Financial Statements
8. Closing Entries
9. Post-Closing Trial Balance
10. Reversing Entries
FINANCIAL STATEMENTS
1. Statement of Financial Position
2. Income Statement
3. Statement of Comprehensive Income
4. Statements of Changes in Equity
5. Statement of Cash Flows
6. Notes to Financial Statements

ELEMENTS OF FINANCIAL STATEMENTS

A. Financial Position/Balance Sheet
 Assets
 Liabilities
 Equity
B. Financial Performance/Income Statement
 Income
 Expenses

Assets - resources controlled by the entity as a result of a past event and are expected to yield
future economic benefits

Dr Cr
*normal balance

increase in asset decrease in asset

Liabilities - present obligations of the entity that arises from a past event where there is an
expected outflow of resources

Dr Cr
*normal balance

decrease in liability increase in liability

Owner's Equity - residual claim owners have on the asset of the firm

Dr Cr
*normal balance

decrease in owner's equity increase in owner's equity

Revenues - income generated from normal business operations

Dr Cr
*normal balance

increase in revenue

Expenses - costs incurred during production of goods or offering of services

Dr Cr
*normal balance

increase in expenses

ADJUSTING ENTRIES

I. ACCRUALS
a. Accrued expense – expense already incurred but not yet paid
Expense account xx
Payable account xx

b. Accrued income – income already earned but not yet collected

Receivable account xx
Income account xx

II. DEFERRALS
a. Deferred/Prepaid expense – expense already paid but not yet incurred

Expense Method & Asset Method

 Expense Method
Initial Transaction
Expense account xx
Cash xx
At Year end
Asset account xx
Expense account xx

 Asset Method
Initial Transaction
Asset account xx
Cash xx
At Year end
Expense account xx
Asset account xx
 b. Deferred/Unearned income – income already collected but not yet earned

Income Method & Liability Method

 Income Method
Initial Transaction
Cash xx
Revenue xx
At Year end
Revenue xx
Unearned Income xx

 Liability Method
Initial Transaction
Cash xx
Unearned Income xx
At Year end
Unearned Income xx
Revenue xx

ACCRUALS vs. DEFERRALS

Accruals: NOW >> Revenue/Expense Recognition Deferrals: NOW >> Cash Flows
LATER >> Cash Flows LATER >> Revenue/Expense Recognition

III. DEPRECIATION
Depreciation Expense xx
Accumulated Depreciation xx

*Take note whether the amount given is the DEPRECIATION for the year or the ACCUMULATED
DEPRECIATION for the year

Example:
UNADJUSTED TRIAL BALANCE
Cash P500,000 Accounts Payable P350,000
Accounts Receivable 1,000,000 Notes Payable 150,000
Equipment P200,000 Owner’s Equity 1,150,000
Less: Acc. Depreciation (50,000) 150,000 LIABILITIES AND OWNER’S EQUITY P1,650,000
ASSETS P1,650,000

Adjusting Entry:
Depreciation for the year is P75,000 Accumulated Depreciation for the year is P75,000

Depreciation Expense 75,000 Depreciation Expense 25,000

Accumulated Depreciation 75,000 Accumulated Depreciation 25,000

*Acc. Depreciation to be reported P75,000

Prior Period/Unadjusted Acc. Depreciation (50,000)
Adjustment P25,000
IV. BAD DEBTS
 Direct Write-off Method
Bad Debts Expense xx
Accounts Receivable xx

 Allowance Method
Bad Debts Expense xx
Allowance for Bad Debts xx