ACCTG 121N CHAPTERS 1-4
Definition of Accounting
1. As defined by Accounting Standards Council
- A service activity
- Provides quantitative information that is
intended to be useful in making economic
decision
2. As defined by American Institute of Certified
Public Accountants
- An art of recording, classifying and
summarizing transactions
3. As defined by American Accounting
Association
- A process of identifying, measuring, and
communicating economic information
- Universal language of business
Important Points in Accounting (based on ASC)
 Quantitative information
 Financial in nature
 Useful in making economic decision
Components of Accounting (based on AAA)
1. Identifying- analytical component
- Recognition or non-recognition of
business activities as accountable events
Not accountable- cannot be quantified of expressed in
terms of a unit of measure
Accountable or quantifiable- has an effect on assets,
liabilities, and equity
Transactions- economic activities of an entity
 External Transactions- involving one entity
and another entity
 Internal Transactions- involving the entity
only
2. Measuring- assigning of peso amounts
The measurement bases are:
 Historical cost- most common measure of
financial transactions
 Current cost
 Realizable value
 Present value
3. Communicating- preparing and distributing
accounting reports
Recording- process of systematically maintaining a
record of all economic business transactions
Classifying- sorting or grouping of similar and
interrelated economic transactions
- Accomplished by posting to the ledger
Ledger- group of accounts which are categorized into
asset, liability, equity, revenue, and expense accounts
Summarizing- preparation of financial statements
Accounting as an information system
- it measures business activities, processes
information into reports and
communicates the reports to decision
makers
- step-by-step process
Financial Statements- documents that report
financial information about an entity to decision
makers
Financial reports- tell how an entity is performing in
terms of profit and loss and where it stands in
financial terms
Overall objective of Accounting
- provide quantitative financial information
about a business that is useful to users in
making economic decisions
The Accountancy Profession
Republic Act No. 9298
- Philippine Accountancy Act of 2004
- A law regulating the practice of
accountancy in the Philippines
Board of Accountancy- body authorized by law to
promulgate rules and regulations affecting the
practice of the accountancy profession in the
Philippines
- Responsible for preparing and grading
the Philippine CPA examination
Bookkeeping- procedural
Accounting- conceptual or constructive
Professional Regulation Commission- issues
Certificate of Registration to practice public
accountancy which shall be valid for 3 years
Main Areas in Accounting
1. Public Accounting
- Offers three kind of services--- auditing,
taxation, and management advisory
services
Auditing- primary service offered by most public
accounting practitioners
- examination of financial statements and
verifying whether they are prepared
according to accounting standards
Taxation- includes preparation of annual income tax
returns and determination of tax consequences of
certain proposed business endeavors
Management advisory services- refer to services to
clients on matters of accounting, finance, business
policies, and many other phases of business conduct
and operations
 2. Private Accounting
- Includes maintaining the records,
producing the financial reports, preparing
the budgets, and controlling and
allocating the resources of the entity
- Assists management in planning and
controlling the entity’s operations
Controller- highest accounting officer in an entity
3. Government Accounting
- Encompasses process of analyzing,
classifying, summarizing, and
communicating all transactions involving
the receipt and disposition of government
funds and property and interpreting the
results thereof
- Focused on the custody and
administration of public funds
Financial Accounting is the area of accounting
that emphasizes reporting to creditors and
investors while Managerial Accounting is the
area of accounting that emphasizes
developing accounting information for use
within an entity.
Generally Accepted Accounting Principles
- Developed on the basis of experience,
reason, custom, usage and practical
necessity
- Represent the rules, procedures, practice
and standards followed in the preparation
and presentation of financial statements
Accounting standards- create a common
understanding between preparers and users
- Highest standard
Financial Reporting Standards Council
- Former Accounting Standards Council,
replaced last January 2006
- Has 14 members and a chairman
- Its function is to establish GAAP in the
Philippines
3 Pronouncements of FRSC
1. Philippine Accounting Standards
2. Philippine Financial Accounting Standards
3. Philippine Interpretations Committee-
provide interpretation of PFRS
- replaced Interpretations Committee last
August 2006
International Accounting Standards Committee
- an independent private sector body with
the objective of achieving uniformity in
the accounting principles which are used
by business and other organizations for
financial reporting around the world
- - formed in June 1973
- Was replaced by International Accounting
Standards Board
Objective of IASC
 Formulate and publish in the public interest
accounting standards
 Work for the improvement and
harmonization of regulations, accounting
standards, and procedures relating to the
presentation of financial statements
Underlying Assumption
Going-Concern- basic assumption
- Continuity assumption and indefinite life
Includes:
a. Time-Period- quarterly, semi-annual,
annually
b. Monetary Unit- value of money is constant
- Quantifiability and stability
c. Separate Entity- owner and business are
separate
Conceptual Framework- summary of the terms and
concepts that underlie the preparation and
presentation of financial statements for external
users
- Provide an overall theoretical foundation
for accounting
- Provide guidance
- Assists FRSC, preparers, auditors, external
users, and others
Users of Financial Statements
 Primary Users- investors, lenders and
creditors
 Other Users- employees, customers,
government, and public
Scope of Conceptual Framework
1. Objective of financial reporting
- provide financial information that is
useful to external users in making
economic decisions
Limitations:
 does not provide the value of an entity
 does not provide complete
information
 estimates value of the company
2. Qualitative characteristics
- assists the preparers of financial
statements
- financial judgment
- makes financial information useful
Qualities and attributes that make financial
statements useful to users
 a. Fundamental Characteristics- contributes to Recognition of Elements of Financial Statements
decision usefulness
1. Assets- probable that the future economic
i. Relevance- capacity of information to
benefits will flow to the entity
influence the decision
2. Liabilities- measurable; probable that the
Ingredients:
future economic benefits will settle its future
 Predictive Value- forecast the
obligation
future
3. Income- recognized when earned regardless
 Confirmatory Value- also called
when it was collected
feedback value; correcting the past
4. Expense- recognized when incurred
evaluation
 Materiality- size of an item and Point of Sale- actual exchange of cash and goods
nature of an item
ii. Faithful Representation- represent the Exception to the Point of Sale
phenomena it purports to represent 1. Installment Method- recognizing income at
- “substance over form” the point of collection
- Conservatism- asset must not be
overstated and liabilities must not be Formula: Collection x Gross Profit Rate = Gross Profit
understated
2. Cost Recovery Method- recognizing income
- Constraint- cost in benefit
after the cost is fully received
Ingredients:
3. Cash Method- recognized when cash is
 Neutrality- non-bias principle of
received regardless what it is earned
full disclosure of full disclosure
4. Percentage of Completion- applied in
 Completeness
construction contracts
 Free from errors- absence of
5. Production Method- revenue is earned at the
materiality
point of production and is applicable to
b. Enhancing Qualitative Characteristics- help
agriculture
distinguish better information from inferior
i. Comparability- make the users understand Other Income Recognition
and identify similarities and dissimilarities
1. Interest Revenue- recognized on a time
 Consistency
proportion basis that takes into account the
 Regular reporting period
effective yield on the asset
ii. Understandability- comprehensible and
2. Royalties Income- recognized on an accrual
readily understood by users
basis in accordance with the substance of the
iii. Timeliness- availability of financial
relevant agreement
statements before the users make
3. Dividends- recognized when the
economic decision
shareholder’s right to receive payment is
iv. Verifiability- supported by evidences;
established or declared
receipts
4. Installation Fees- recognized over the period
Definition, Recognition, and Measurement of of installation by reference to the stage of
Elements completion
5. Subscription Fees- recognized on a straight
Definition of Elements of Financial Statements
line basis over the subscription period
In Balance Sheet, 6. Admission Fees- recognized when the event
takes place
1. Assets- resources controlled arising from the 7. Tuition Fees- recognized as revenue over the
past transaction or event; future economic period in which tuition is provided
benefits are expected to flow
2. Liabilities- legal and constructive obligation; Expense Recognition Principle- application of
arising from the past transaction of event; the matching principle
settlement of which requires an outflow of
1. Cause and effect- the expense is recognized
economic benefits
when the revenue is already recognized
3. Equity- residual interest
2. Systematic and Rational Allocation- some cost
In Income Statement, are expensed by simply allocating the mover
the period benefited
4. Income- increase in economic benefits 3. Immediate Recognition- the cost incurred is
 Revenue- arising from ordinary expensed outright because of uncertainty of
course of business future economic benefits or difficulty of
 Gain- not in the ordinary course of reliability associating certain costs with
business future revenue

5. Expense- decrease in economic benefits
Measurement of Elements of Financial Statements  The fact that the information are not
comparable
Measurement- process of determining the monetary
amounts
Measurement Bases
1. Historical Cost- most commonly adopted in
preparing the financial statements
- Also called past purchase exchange price
- Also called acquisition cost
2. Current Cost- amount of cash that would have
to be paid if the same asset was acquired
currently
- Also called current purchase exchange
price
3. Realizable Value- amount of cash that could
currently be obtained by selling the asset in
an orderly disposal
- Also called current sale exchange price
4. Present Value- discounted value of the future
net cash inflows that the asset is expected to
generate in the normal course of business
- Also called future exchange price
Formulas:
PV of 1= (1+r)-n

1−(1+ r)−n
PV of Ordinary Annuity=
r

1−( 1+r )−n

PV of Annuity Due= ( r )
( 1+r )

Financial Statements
- Means by which information accumulated
and process in financial accounting are
periodically communicated to users
- Main output of the financial accounting
process
- Structured representation of balance
sheet and income statement
Objectives:
 Provide information about balance sheet,
income statement, and cash flow
 Company’s stewardship of the resources
effectively and efficiently
Components of Financial Statements
1. Balance Sheet
2. Income Statement
3. Comprehensive Income
4. Changes in Owner’s Equity
5. Cash Flows
6. Notes to Financial Statements
Frequency of Financial Reporting- annually
If change, disclose the following:
 Period covered of the changes
 Reason for using long-term and short-term
period