INTODUTION TO ACCOUNTING The Basic Skills in order for one to be a good

accountant
What is Accunting
 Process in which the financial information
about a business or non-profit organization
is recorded, classified, summarized,
interpreted, and communicated to owner’s,
managers, investors, and other interested
parties in need of financial investors, and
other interested parties in need of financial
information in order to make decisions
 Accounting is often called “the Language
of Business”
 A process of identifying, measuring, and
communicating economic information
(American Accounting Association or AAA)
 The art of recording, classifying, and
summarizing in terms of money,
transactions, and events (American Institute
of Certified Public Accountants or AICPA)
 A service activity; to provide quantitative
information, primarily financial in nature and
about economic entities (Accounting
Standards Council or ASC)
 Strong written and oral communication
 Organization and attention to detail
 Analytical and problem-solving skills
 Time management
 Systems analysis
 Matehmatical and deductive reasoning
 Critical Thinking
 Active learning
 Clerical knowledge
 Profficiency with Microsoft Office Suite
The Nature of Accounting
 Art of recording, classifying, summarizig in a
significat manner in terms of money,
transactions, and events
 The nature of accounting an be define in
two ways
1. Quantitative Attributes of Accounting
2. Qualitative Attributes of Accounting
1. Quantitative Attributes of Accounting

Questions asked in need of financial informtion: a) Accounting is a process

b) Accounting is a Science
1. How much cash does the business have? c) Accounting is an art
2. How much money do customers owe the d) Accounting deals with financial informations
business? and transactions
3. What is the cost of the merchandise sold? e) Accounting is a means and not an end
4. What is the change in sales volume? f) Accounting is a service activitiy
5. How much money is owed to the suppliers? g) Accounting is a discipline
6. What is the profit or loss? h) Accounting as a Stewardship Function
Accounting System 2. Qualitative Attributes of Accounting
 It is designed to accumulate data about a a) Comparability
firm’s financial affairs, classify data in a b) Reliable
meaninful way, and summarize it in periodic c) Faithful Representation
reports called Financial Statements d) Understandability
 An efficient accounting system allows e) Relevance
managers to quickly obtain a wide range of
Scopes of Accouning
useful information
The Roles of an Accountant
1. Establishes the records and procedures that
make up the accounting system
2. Supervise the operations of the accounting
system
3. Interprets the resulting financial information
How Accounting Data is Prepared using
Various Accounting Methods (RJ Bull)
Main Areas of Accounting
1. Public Accounting
- Public accounting refers to a business
that provides accounting services to
other firms.
- Public accountants provide accounting
expertise, auditing, and tax services to
their clients
2. Managerial Accounting
- In management accounting or
managerial accounting, managers use
the provisions of accounting information
in order to better inform themselves
before they decide matters within their
organizations, which aids their
management and performance of
control functions.
3. Governmental Accounting
- Government accounting refers to the
process of recording and the
management of all financial transactions
incurred by the government which
includes its income and expenditures.
Other Branches of Accounting
1. Financial Accounting
- Financial accounting is the field of
accounting concerned with the
summary, analysis and reporting of
financial transactions related to a
business.
- This involves the preparation of financial
statements available for public use.
2. Cost Accounting
- Cost accounting is defined as "a
systematic set of procedures for
recording and reporting measurements
of the cost of manufacturing goods and
performing services in the aggregate
and in detail.
3. Tax accounting
- Tax accounting focuses on tax returns
and payments rather than the
preparation of public financial
statements.
4. Fund Accounting
- Fund accounting is a system of
accounting used by non-profit entities to
tracking the amount of cash assigned to
different purposes and the usage of that
cash.
- Thus, the focus of fund accounting is on
accountability, rather than profitability.
5. Forensic Accounting
- Forensic accounting utilizes accounting,
auditing, and investigative skills to
conduct an examination into the
finances of an individual or business.
- Forensic accounting is frequently used
in fraud and embezzlement cases to
explain the nature of a financial crime in
court.
6. Auditing
- Auditing typically refers to financial
statement audits or an objective
examination and evaluation of a
company's financial statements –
usually performed by an external third
party.
- Audits can be performed by internal
parties and a government entity, such as
the Internal Revenue Service (IRS).
a. External Auditing
- Can be defined as the review of
financial statements. To be more to
be more specific, external auditing is
the examination of a company's
financial statement to determine if it
is accurate and legal. External
auditing is done to ensure that there
is no fraud that is committed
b. Internal Auditing
 - Involves the improvement of internal
a) Banks
accounting affair such as weakness
is regarding their accounting policy
and miss management.
USERS OF ACCOUNTING INFORMATION
1.Inside the Business
 “Internal Members”
- Guide them in making good business
decisions
- Managerial Accounting
a) Owners and Managers
o Sole Proprietors, Partners, and Major
Stockholders
o Evaluation of the company’s
performance
o Decision-making and Planning
o Responsibilities:
 Internal Control - procedures to
safeguard assets and ensure
reliability of accounting data
 Prevention of fraud
*Major Stockholders own the majority of the
shares of a company making them the
Board of Directors (BOD)
*BOD are responsible in the company’s
decision-making and planning.
b) Employees
o Company’s financial results
 affect income of the employee
 Has implications on their job security
e) Unions
2. Outside the Business
 “External Members”
- Do not manage the business
- Interested in financial information
o Loans for businesses
o Banks use the financial statements to
assess the company’s ability to repay
the loan (+ interest)
(Chron Contributor, 2020)
 Banks review company’s income
statement, cash flow, and balance
sheetto decide on the terms of the
loan, how much they will give, or if
they will provide a loan
b) Tax Authorities
o Provides information about taxes due
o Determines the tax bases (Price,
Haddock, & Farina, 2021)
 Income Taxes -taxable income
 Sales taxes -Sales income
 Property taxes
o Assure accurate tax collection
 Financial statements = verify
accuracy
c) Regulatory Agencies and Investors
o Regulatory Agencies:
 Oversee the financial information
and business activities of certain
regulated industries
o Investors:
 Base the investment of their capital
on the financial
health of an entity
 Actual or Existing Investors
 Potential Investor
d) Customers
o Buyers of goods and services.
 Producers, manufacturers,
retailers, etc.
o Pay attention to the financial information
about the company.
 Does the company offer useful
products at fair prices? And will
the company survive long
enough to honor its product
warranties?
o Interested in knowing whether it’s
capable of providing the customer’s
needs
o Employee Union
 o Negotiate salary increases, benefits, profits among themselves.” (Art. 1767, Civil
profit-sharing Code of the Philippines)
 Useful for deciding how much to  Partnership as a contract:
negotiate for an increase in the o Consent- two or more persons bind
next contract themselves or voluntarily enter into an
agreement
o Object:
 Money- legal tender, cash
 Property:
Forms Of Business Organization  Real property - immovable property;
I. As To Ownership land or anything attached to it
 Sole Proprietorship  Personal property - Tangible and
 Partnership intangible
 Corporation  Industry - labor, skills
II. As to activity o Cause - to divide the profits among
 Service themselves
 Merchandising/Trading  How long can partnerships exist?
 Manufacturing o There is no limit to the life of a
partnership but the death of a partner
I. AS TO OWNERSHIP leads to the dissolution of the
a. SOLE PROPRIETORSHIP partnership.
 A business entity that owns by an individual in  Dissolution
his/her name, or under a recognized business o A partner can assign his interest to
name, who solely takes all business profits and
another person, the assignee, without
losses
the consent of the other partners and
 Simplest form of business without causing dissolution in cases,
 Number of Owner/s: 1 but only the rights to share in the profits
 Business Life - Ends when the owner: and losses, rights to the remedies
o Decides to close the business against fraud in the management are
o Unable to carry on business operations assigned to the assignee (Art. 1813,
o Dies unless he/she appointed or Civil Code of the Philippines).
authorized some whom he/she trusts to o If it is clear that the intention of the
continue the operation of the business partner is to withdraw from the
 The owner is solely responsible for all possible partnership, causing dissolution, then
debts that the company may face the withdrawing partner needs the
 Advantages: consent of his otherpartners as to his
o Can establish a withdrawal and as to who his interest
o business instantly will be assigned to.
o Complete control over o “On dissolution, the partnership is not
o the business terminated, but continues until the
 Disadvantages: winding up of partnership affairs is
o Unlimited liability completed.” (Art. 1828, Civil Code of
the Philippines)
o Limited capital
 Partnership Liability
o Because business is done in the
b. PARTNERSHIP
name of the partnership, it is the
 Legal Definition:
partnership that is liable for its
o “By the contract of partnership two or more
obligations, which in turn are the
persons bind themselves to contribute
obligations of the partners
money, property, or industry to a common
composing the partnership on a pro
fund, with the intention of dividing the
rata basis unless the partner entered
 a contract which he is personally o Corporation is an entity of its own so it will
liable even if it benefits the not dissolve when ownership changes
partnership and the partnership o Flexibility in terms of raising capital through
alone. (Art. 1816, Civil Code of the the sales of stock
Philippines) o Easy transaction and transferring of
ownership
c. CORPORATION  Disadvantages:
 A legal entity that is doing business o Typically closely monitored by the
 Has legal rights to own properties and do government
business with its own name o High organizational and operational costs
 Can be taxed, sued, and/or enter into o Possibility if double taxation
contractual agreements
 Public corporations are owned by shareholders
who elects board of directors to oversee
responsibilities II. AS TO ACTIVITY
a. SERVICE
Important Terms Related:  Provides or offers professional skills,
 Stock - represents the ownership of the expertise, advice, et cetera in exchange for a
corporation fee.
 Privately owned corporations - also  Examples
known as closely held corporations where o Schools, Law or Accounting Firms
ownership is usually limited to specific
individuals b. MERCHANDISING/TRADING
 Publicly owned corporations - can be  Merchandising/trading businesses are those
bought or sold in stock exchanges that sell finished products to consumers to
earn revenue.
Types Of Corporation:  Merchandising/Trading businesses also
i. C-Corporation purchase goods to be
 A corporation that is taxed separately from  resold, and incur costs like labor and
its owners materials.
 Gives owners limited liability, which  These types of businesses sell
encourages risk-taking such as potential “merchandise” or “goods''.
 investments.  Examples of such are retail stores that sell
 Shareholders can sell their own shares groceries, clothing, electronics, or any
ii. S-Corporation tangible goods.
 Also known as Subchapter S-Corporation  Wholesale
 Offers the owners limited liability o Wholesalers refer to
 Does not pay income taxes; earnings and merchandising/trading businesses
profits are treated as distributions that sell products in bulk to other
 Shareholders must report income on their business which use the goods in the
ITR production of other products or to
iii. Limited Liability Company resell with added value.
 A hybrid business structure that provides the  Retail
limited legal liability of a o Retail refers to the final and direct to
 corporation consumer sale of goods.
 Specifically made for small businesses
 Taxed as a sole proprietorship c. MANUFACTURING
 Can have unlimited number of owners  Is the combining of small parts to make a
whole finished product in a large production
 Advantages: scale
 Uses division of labor
 o Division of labor is when work is
divided among many people to
increase production efficiency and
quality
 According to Britannica, important
manufacturing industries include aircraft
manufacturing, automobiles, chemicals and
clothing amongst others
 Manufacturing also uses different kinds of
processes throughout different industries
QUALITATIVE CHARACTERISTICS OF USEFUL
FINANCIAL INFORMATION
Qualitative Characteristics
 Qualities that make accounting
information useful for decision making
by investors, creditors, and other users
a) Fundamental / Primary
b) Enhancing / Secondary
a) Fundamental (Primary) Qualitative
Characteristics
I. Relevance
o accounting information is capable of
making a difference in a decision
 Confirmatory Value
- helps in verifying fulfillment or
nonfulfillment of prior
expectations or decisions
 Predictive Value
- helps in making predictions or
forecasts about the meaning
and ultimate outcome of events
*both components must be material in order
to be relevant
II. Faithful Representation
o Define economic phenomena in terms of
words and amounts. The substance of
the phenomenon it claims to reflect.
 Completeness
- Necessary definitions and
examples
- Removing a portion of the
information could make it false or
misleading.
 Neutrality
- Unbiased in the analysis or
presentation of financial
information.
 Free from error
- No mistakes or omissions in the
explanation of the phenomena
and the method used have been
chosen and applied without
errors in the process.
III. Materiality Constraint
o Refers to the “importance of the
amount or financial data of
amaterial/item that is linked with the
company’s financial data.”
o Items with small value are considered to
be immaterial which will “only
becharged as an expense in the
company’s financial data,”
o While items with bigger value arecalled
materials, which would be “heavily
capitalized and depreciated”.
o However materiality is “not just limited
to monetary amount.”
o “Professional Judgement is also
needed” as a basis if an item is
immaterial or material.
o Example:
 The CEO of a construction company
is deciding whether or not to
purchase a new bulldozer that cost
around P250,000.
 Since the CEO allocated P325,000
funds for the purchase of the new
bulldozer, the price of the bulldozer
is below the materiality level of the
allocated funds..
 The CEO decided to put the
purchase as an expense, since the
value of the bulldozer which is
P250,000 is below the allocated
funds of P325,000.
 However if the price is higher than
the funds, then the CEO can just put
the purchase as an asset, wherein
it’s value will be depreciated as time
goes by.
 Ms. Bautista’s Explanation
o Professional judgement is needed to
decide whether an amount is
insignificant or immaterial
 o Examples:
 Rounding off – depends on how 2. VERIFIABILITY
small or how large a company is o Independent measures lead to the
 Collection shortages – depends on same result
the amount of collectible or  Verifiable = reaching a consensus
management decision  Faithfully claims what it represents
o Practical Application (+Cost Benefit  Supported by evidence
Analysis)
o Situation 5. You baked 50 pcs of 3. TIMELINESS
cupcakes and carefully arranged them in o Availability of information
5 boxes to be delivered to one  Refers to how quick the accounting
restaurant. Upon delivery, your customer information is to the users
counted only 49 pcs of cupcakes. She - Information - must be available
therefore demanded that she will only early enough to be used in the
pay for 49 pcs. What will you do? decision making process
 You will go back home and get one  Information received competes with
piece of cupcake and deliver to the other info in the company
restaurant. - Ex: company issues financial
 Fight with your customer and insist statements a year after
there are 50 pcs. accounting period, dfficult to
 Just collect the value of 49 pcs and determine how the company is
apologize to your customer. doing in the present.
o Situation 6. Refer to situation 5. Upon
getting back to your kitchen, will you still 4. UNDERSTANDABILITY
look where the missing cupcake went? o Simple is key.
 Information - clear, concise
Enhancing Qualitative Characteristics  Avoid using jargon
 Comparability  “User-specific” - in terms of
o Comparison of data within and across interpreting The data
entities
 Verifiability BASIC ASSUMPTIONS
o Measures -> same results 1. ECONOMIC ENTITY
 Timeliness o Business Entitiy
o Information needed is available as early o Creates a distinction between the
as possible and need. owner’s personal transactions and the
 Understandability business transactions
o Information – clear and concise o Example: Ellie owns a bakery and she
keeps track of all her transactions
1. COMPARABILITY  Business Transactions
o Information compared within - Hired a baker
companies - Bought ingredients
 Compared within different time - Purchase of machineries
eriods  Owner Transactions
- Ex: Comparison of income - Bought a new phone
(2019-2021) - Vacation expenses
 Helps draw conclusion about trends - Online Shopping
and performance o Practical Application:
 Use of uniformity and consistency  Situation 3. You need money to buy
principles books in school.
o Information compared across
companies
 Identify similarities and ifferences
  Should you ask money from your
mother or get it from the Php10,000
fund that your mother gave you?
2. MONETARY UNIT PRINCIPLE
o Money Measurement Concept
o All items should be expressed in
monetary terms
o Items with no monetary value will not be
included in the financial statements
 Examples:
- Employee skill level
- Employee working conditions
- Expected resale value of a
patent
- Quality of customer support
- Efficiency of the administration
o Practical Application
 Situation 4. You have a cousin who
lives in the USA and came here to
visit you. He loved your cupcakes and
he ordered one dozen. He did not
have any Philippine pesos with him
so he paid you $8.
 How will you record the sales for your
transaction with your cousin?
3. PERIODICTY OF INCOME / TIME PERIOD
o Report its financial statements within a
certain period of time
o Periods can be monthly, quarterly, and
annual
 Importance:
- Proper comparison and
evaluation
- Allow stakeholders to monitor
company and market it
- Allow company intervene
o Ms. Bautista’s Explanation
 The indefinite life of a company can
be divided into periods of equal
length for the preparation of financial
reports
 Examples:
- Monthly report
- Quarter 1, 2, 3, 4
- 2018 Annual Report
o Practical Application:
 Situation 2. Your mother told you that
you can report to her the results of
your business after you finish college.
 Do you wait for two years before you
prepare financial reports or would you
want to prepare them monthly or
quarterly to monitor the progress of
your business?
4. GOING CONCERN
o Business can continue long enough to
meet its goals and obligations
o Ability to make enough money to stay
afloat or escape bankruptcy
o Importance:
 Encourages a company to move
any of its prepaid payments to
future accounting periods
 Serves as a guidance
o Examples:
 Prepaymet and accrual expense
o Ms. Bautista’s Explanation
 The business will continue in
operational existence for the
forseeable future
 Example:
- “I’ll pick this up tomorrow,
when you will still be here as
always”
o Practical Application:
 Situation 9. You have an order from a
customer for one dozen of cupcakes
but she wants it to be delivered after
two weeks.
 Do you decline the order because
you may no longer be in business
after two weeks? Or do you accept
the order and deliver on the specified
date of the customer?
THE BASIC PRINCIPLES OF ACCOUNTING
1. REVENUE RECOGNITION PRINCIPLE
o One should only record revenue when it
has been earned, not when it has been
collected.
o An advanced cash payment prior to the
service yet to be rendered is recorded
as deferred revenue.
 o Although a service that is rendered prior
to cash payment is yet to be paid, it is
recorded as accrued revenue.
o Examples:
 Pest extermination services whose
service cost is ₱2000, have rid one's
house of pests and the like is already
recorded as accrued revenue. Even
if, there is no cash collected from the
rendered services.
 House cleaning services are paid in
advance prior to the business
rendering their services to the
customer’s house will be recognized
not as revenue but liability.
o Ms. Bautista’s Explanation
 The revenue recognition principal
states that revenue should be
recognized in the accounting period
in which it is earned
 In a service business, revenue is
usually considered to be earned at
the time the service is performed
 In merchandising business, revenue
is usually earned at the time the
goods are delivered
- “I’ll pick this up tomorrow,
when you will still be here as
always”
o Practical Application (+Conservatism)
 Your mother gave you the amount of
Php10,000 which shall be used for
your small business to buy and sell
cupcakes.
 Situation 1. A potential customer
talked to you and told you that she
may order 100 pcs. Of cupcakes for a
party. She said she will ask first her
friends if they want cupcakes for their
party.
 Should you record the revenues you
would possibly earn from the
cupcakes?
2. MATCHING PRINCIPLES
o This concept basically disregards the timing
and the amount of actual cash inflow or
cash outflow and concentrates on the
occurrence (i.e. accrual and deferral) of
revenue and expenses.
o Revenues must be recorded with the period
they were earned.
o Expenses that have incurred along the
same period must also match the
corresponding revenue.
o Example:
 Expenses recorded when used to
generate revenues
 Rent for 12 months amounting to
36,000. The rent will only surface in the
books when it has generated revenue.
 Ms. Bautista’s example
- Car sold: May 28, 2019
- Comission was paid: June 15, 2019
o Practical Application:
 Situation 12. You sold 120 pcs of
cupcakes in November. Your sales
amounted to a total of Php3,600. You
have computed that total cost of 100 pcs
of cupcakes is Php2,000. This means
that cost per cupcake is Php20. How
much should you record as cost
(expense) of cupcakes in the month of
November?
3. FULL DISCLOSURE PRINCIPLE
o “All material facts should be disclosed”
o Requires the company to include all
necessary information in their financial
statements.
o Stakeholders become more aware of the
status and current operations of the
institution they are part of.
o It serves as transparency for organizations
in the market and avoids the act of faking or
manipulating their records.
o Example:
 Company X wants to purchase
Company Z. Company X is going into
bankruptcy and should give Company Z
the full disclosure of their financial
statement.
 This will give proof that they are in that
position.
o Practical Application:
 Situation 8. You are asking your mother
for money because you need to bake
more cupcakes and your funds are
running out.
 Your mother asked you to explain why
you need more funds. What will you do?
4. HISTORICAL COST PRINCIPLE (HISTORICAL
PRINCIPLE)
o All assets, liabilities, and equity must be
recorded within the period it acquired or
received.
o The amount of the asset should not be
ACCRUAL ACCOUNTING
changed only if it “appreciates” or
depreciates”.
o Example:
 You bought a painting last year for 100k
and now after a year, the value
increased to 150k. The 100k is still the
recorded value not the current value.
 2016 – $50,000
 2017 – $100,000
o Practical Application:
 Situation 7. You bought a second hand
laptop for Php 2,000 so you can use it to
record your revenues and expenses for
your cupcake business.
 After a year of successful operations,
you discovered that you can sell your
laptop for Php1,000 which you can now
use to buy a new laptop, do you change
the recorded value of your laptop in your
accounting records?
5. CONSISTENCY PRINCIPLE (Ms. Bautista)
o A company should use the same accounting
policies and methods for recording similar
events or transactions from one financial
period to another.
o It is necessary that a company consistently
apply its accounting methods and policies
from one financial year to another.
o Practical Application:
 Situation 11. All your materials (flour,
sugar, baking powder, etc.) are
measured in grams. And that was
how you have been recording your
inventory, in grams.
 One of your suppliers suddenly
delivered flour to you and it was
TYPES OF ACCRUALS
packed and labeled in ounces. What
will you do?
OTHER RELATED CONCEPTS
ACCRUALS
o Accruals are revenues earned or expenses
incurred which impact a company’s net
income on the income statement, although
cash related to the transaction has not yet
changed hands.
o “This means (in short) that all revenue and
expenses are measured when they are
earned (revenue) or incurred (expenses)
and this is NOT necessary when the
matching cash flows occur (“Accruals
Definition,” 2021)
o Accounting reports should always try and
reflect economic reality and not arbitrary
choices of management or outside actors.
(“Financial Statement Basics: From
Confusion to Comfort in Under 100 Pages,”
2015, p.78)
o “The recognition of income and expenses
at the time they are earned or incurred,
regardless of when the cash for the
transaction is received or paid out.”
(“Keeping the Books: Basic
Recordkeeping and Accounting for Small
Business,” 2014)
o Miss Bautista’s Explanation:
 “The effects of business
transactions should be recognized
in the period in which they
occurred. Income should be
recognized in the period when it is
earned regardless of when the
payment is received. Expenses
should be recognized in the period
when it is incurred regardless of
when the expenses are paid.
o Practical Application:
 Situation 10. Your customer in
Situation 9 will pay you three days
after your delivery date. Your
delivery date is July 10.
 When should you record your
sales, July 10 or July 13?
1. Accrued Expenses / Expense Accruals
o Accrued expense are costs that have been
incurred; it is recorded in a journal entry
together with other liabilities. (Bragg, 2020)
o Accrued expenses are considered to be
current liabilities because the payment is
 usually due within one year of the date of o Practical Application (+Revenue
the transaction. (Tuovila, 2019) Recognition Principle)
o Current Liabilities - "Payable"
o Examples:
 An expense you record now but is
payable at a later date
 Utility expenses that won’t be billed
until the following month
 Salaries/wages owed to employees
who work without having received
their full earned monthly salary.

2. Accrued Revenue / Revenue Accruals

o Accrued revenue is a sale recognized by
the seller but has not yet been billed to the
customer. (Bragg, 2020)
o Accrued revenues are either income or
assets (including non-cash assets) that are
yet to be received It is recorded as
receivables (current asset) on the balance
sheet to reflect the amount of money a
customer owes the business. (Tuovila,
2019)
o Current Asset - "Receivable"
o Examples:
 Billings delayed for several months or
years
- Long-term construction projects
 Loans - accrued interest revenue
monthly
CONSERVATISM OR PRUDENCE
o Conservatism is an accounting principle
that comes to play when facing uncertainty
in recognizing the outcome of a financial
statement: gain or loss.
o A "play it safe action” wherein it anticipate
future losses; opting for a lesser asset
amount or a greater liability amount, and a
lesser amount of net income rather than
gain or revenue.
o Gains can only be recognized if it is certain
that it will be received. By recording the
potential loss, less profit and less asset
amounts will be reported.
o Ms. Bautista’s Explanation:
 Provide – Liabilities, Expenses, Loss
 Do not anticipate – Assets, Revenue,
Income
 Your mother gave you the amount of
Php10,000 which shall be used for
your small business to buy and sell
cupcakes.
 Situation 1. A potential customer talked
to you and told you that she may order
100 pcs. Of cupcakes for a party. She
said she will ask first her friends if they
want cupcakes for their party.
 Should you record the revenues you
would possibly earn from the
cupcakes?
COST/BENEFIT ANALYSIS PRINCIPLE
o The cost-benefit principle holds that the
cost of providing information via the
financial statements should not exceed its
utility to readers.
o If accounting concepts suggest a particular
accounting treatment for an item, but it
appears that the theoretically correct
treatment would require an unreasonable
amount of work, the accountant may
analyze the benefits and costs of the
preferred treatment to see if the benefit
gained from its adoption is justified by the
cost.
 o Practical Application (+Materiality)
o Situation 5. You baked 50 pcs of cupcakes
and carefully arranged them in 5 boxes to
be delivered to one restaurant. Upon
delivery, your customer counted only 49
pcs of cupcakes. She therefore demanded
that she will only pay for 49 pcs. What will
you do?
 You will go back home and get one
piece of cupcake and deliver to the
restaurant.
 Fight with your customer and insist
there are 50 pcs.
 Just collect the value of 49 pcs and
apologize to your customer.
o Situation 6. Refer to situation 5. Upon
getting back to your kitchen, will you still
look where the missing cupcake went?

COST BENEFIT TEST

o You discover that one of your employee is
stealing from the cash register. The amount
is suspected to be over $1,000 but you are
not sure
o It is estimated that you will have to pay
$5,000 to your account attorney to dig
through his records and discover the exact
amount of theft