CHAPTER I

OVERVIEW ON B. Internal Events- events which do not

involve an external party.

ACCOUNTING i. Production- process

resources turned into finished
goods.
where

SUMMARY ii. Casualty- unanticipated loss from

disasters or similar events.
2. Measuring
Definition of Accounting - Process of assigning numbers,
commonly in monetary terms, to the
Accounting is a process involving the economic transactions and events.
activities of identifying, measuring, and These several measurement bases are
communicating information that is useful in used in preparing financial statements.
making economic decisions. Valuation by fact or opinion
1. Identifying It is said that financial statements are
process of analyzing events and mixed of facts and opinions;
transactions whether or not they will be
recognized. a) When measurement is affected
 Recognition is the process of by estimates, it is valued by
incorporating the effects of an opinion.
accountable event in the financial b) When measurement is
statements through a journal entry. unaffected by estimates, it is
NOTE:
valued by fact.
Only accountable events or economic which affects the 3. Communicating
assets, liabilities, equity, income or expenses of an entity will be
recognized. - It is the process of transforming
Those non-accountable events on the other are not economic data into useful account
recognized unless the event has an accounting relevance; then it
information. This process involves
may be recorder through memorandum entry.
three aspects:
i. Recording- refers to writing the
Types of events or Transactions accountable events through
A. External Events- are events which journal entries
involve an entity and another party. It ii. Classifying- grouping similar
includes: classes through posting in the
i. Exchange (reciprocal transfer)- ledger.
there is giving and receiving of iii. Summarizing- putting together
economic resources.
which includes the preparation
ii. Non-reciprocal transfer- “one way”
of financial statements and
transaction or one party gives and
doesn’t receive anything in return; other accounting reports.
or received something and doesn’t Interpreting- process by which information
give anything in return. involves the computation of financial
iii. External event other than transfer-
statement ratios.
involves changes in the economic
resources or obligation of an entity Basic purposes of accounting
caused by an external party but not
involve transfers of resources or To provide information that is useful in making economic
obligations. decisions.
 Economic entities which may either be
a) non-profit entity b) business entity uses
accounting to record activities, process data,
and, disseminate information intended to be
useful in making economic decisions.
Economic activities include a) production b)
exchange c) consumption d) income
distribution e) savings and f) investment
that affects the economic resources (assets)
and obligations (liabilities), and consequently,
the equity.
Types of information provided by
accounting
1. Quantitative information- expressed
in numbers, quantities or units.
2. Qualitative information- expressed in
words or descriptive form.
3. Financial information- expressed in
money values.
Types of accounting information classified
as to user’s needs
1. General Purpose- common needs of most
statement users, information under financial
accounting and governed by Generally
Accepted Accounting Principles (GAAP)
represented by Philippine Financial
Reporting Standards (PFRs)
2. Special Purpose- special needs of
particular statement users also the information
provided by other types of accounting.
Sources of information in financial
statements
 is not obtained exclusively from the
entity and some are obtained from
external sources.
Accounting as science and art
1. Based on social science, accounting
is a body of knowledge which gathered,
classified and organized systematically.
2. Based on physical art, accounting
uses creative skills and judgment.
Accounting as an information system
 Identifies and measures economic
activities, process information into
financial reports and communicates
these reports to decision makers.
Accounting as language of business
 Accounting is “language of
business”, it is the fundamental to the
communication of financial information.
Creative and Critical thinking in accounting
a. Creative thinking- imagination and
insight to solve a problem.
b. Critical thinking- logical analysis,
using deductive and inductive reasoning.
Steps in problem solving
1. Recognition a problem
2. Identifying alternative solutions
3. Evaluating the alternative
4. Selecting a solution from among
the alternatives
5. Implementing the solution
Accounting Concepts
 a principles upon which the process of
accounting is used.
 Accounting assumptions
(Accounting postulate)-
fundamental concepts or principles
and basic notion.
 Accounting theory- logical
reasoning and set of broad
principles; provide general frame and
guide for development of new
practices. Also, it comprises
Conceptual Framework and the
Philippine Reporting Standards
(PFRs)
Examples of Accounting Concepts:
1. Double-entry system- recorded minimum
of two accounts: debit and credit
2. Going concern assumption-assumed the
operations are indefinitely and do not expect
to end in the future.
3. Separate entity (Accounting entity/
Business entity concept)- the personal
transactions are separate from the business
transaction he/she owns or other entities.
4. Stable monetary unit (Monetary unit
assumption) - measured and expressed in
terms of monetary units, stable and
dependable.
5. Time period (Periodicity/Accounting
period)- an economic life which divided into
series of reporting period; calendar year
(January 1- December 31) or fiscal year (any
starting point covers 12 months but does not
start on January 1).
6. Materiality concept- impact of an omission
or misstatement information in company's
Financial Statement and could influence
economic decisions.
7.Cost-benefit(Cost constraints/
Reasonable assurance)- cost of processing
and communicating information, should not
exceed the benefits that derived from it.
8. Accrual Basis of accounting-effects of
transactions and events which recognized
when occur regardless of when cash is
received or paid. Also, under accrual basis
revenue is recorded when earned and
expenses recognized when incurred.
9. Historical cost concept (Cost principle)-
value of asset is determined on the basis of
acquisition cost.
10. Concept of Articulation- all components
of a complete set of financial statements are
interrelated.
11. Full disclosure principle-this principle
recognizes that the nature and amount of
information included in the financial
statements reflect a series of judgmental
trade-offs.
12. Consistency concept —the financial
statements are prepared on the basis of
accounting principles that are applied
consistently from one period to the next.
13. Matching (Association of cause and
effect)-costs are recognized as expenses
when the related revenue is recognized.
14. Entity theory—the accounting objective is
geared towards proper income determination.
Proper matching of costs against revenues is
the ultimate end. This theory emphasizes the
income statement and is exemplified by the
equation “Assets= Liabilities + Capital.”
15. Proprietary theory-the accounting
objective is geared towards the proper
valuation of assets. This theory emphasizes
the importance of the balance sheet and is
exemplified by the equation “Assets -Liabilities
= Capital.”
16. Residual equity theory – this theory is
applicable when there are two classes of
shares issued, i.e., ordinary and preferred.
The equation is “Assets -Liabilities- Preferred
Shareholders Equity – Ordinary Shareholders’
Equity. “ This theory is applied In the
computation of book value per share and
return on equity.
17. Fund theory—the accounting objective is
neither proper income determination nor
proper valuation of assets but the custody and
administration of funds. The objective is
directed towards cash flows, exemplified by
the formula “cash inflows minus cash outflows
equals fund.”
18. Realization —the process of converting
non-cash assets into cash or claims for cash.
It is also the concept that deals with revenue
recognition.
19. Prudence (Conservatism) — is the use of Financial accounting vs. Financial
caution when making estimates under reporting
conditions of uncertainty, such that assets or
 The term “financial accounting” is often
income are not overstated and liabilities or
used interchangeably with the term
expenses are not understated. In other words,
“financial reporting.” Although, both
when exercising prudence, the one which has
financial accounting and financial
the least effect on equity is chosen.
reporting focus on general purpose
Expense recognition principles financial statements, the latter
endeavors to promote principles that are
20. Matching concept (Direct association of also useful in “other financial reporting.”
costs and revenues)- Costs that are directly  “Other financial reporting” comprises
related to the earning of revenue are information provided outside the financial
recognized as expenses in the same period statements that assists in the
the related revenue set of inventory is initially interpretation of a complete set of
is recognized. financial statements of improves users’
21. Systematic and rational allocation— ability to make efficient economic
costs that are not directly related to the decisions.
earning of revenue are initially recognized as
assets and recognized as expenses over the
periods their economic benefits are Financial statements vs. Financial
consumed, using some method of allocation. report
22. Immediate recognition – costs that do Financial statements are the structured
not meet the definition of an asset, or ceases representation of an entity’s financial position
to meet the definition of an asset, are and results of its operations They are the end
expensed immediately. Examples include product of the accounting process and the
casualty losses and impairment losses. means by which information gathered and
processed are periodically communicated to
Common branches of accounting
users.
1. Financial accounting— is the branch
Financial Report
of accounting that focuses on general
purpose financial statements.  includes financial statements and other
information provided outside the
 General purpose financial statements are financial statements
those statements that cater to the common  assist in interpretation of a complete
needs of external users, primarily the set of financial statements
potential and existing investors, and  improves users' ability to make efficient
lenders and other creditors. External users economic decisions.
are those who are not involved in
managing the entity.
 Financial accounting is governed by the
Philippine Financial Reporting Standards
(PFRSs).

Financial Financial report

 Statement 3. Cost Accounting - systematic recording
of the cost of manufacturing goods and
1. Statement of 1. Statement of performing services in aggregate and detail.
Financial Position financial position
2. Statement of Profit 2. Statement of profit  includes methods for recognizing,
And Loss And Other and loss and other classifying, allocating, aggregating and
Comprehensive comprehensive reporting such costs and comparing
Income income them with standard costs.
3. Statement of 3. Statement of
Changes In Equity Changes in Equity 4. Auditing - objective examination and
4. Statement of Cash 4. Statement of Cash evaluation of a company's financial
Flows Flows statements.
5. Notes 5. Notes
6. Additional Statement 6. Additional 5. Tax Accounting - deals with the
Of Financial Statement of preparations of tax returns and tax payments.
Problem Financial Problem
7. Other Information 6. Government Accounting - process of
recording and the management of all financial
transactions incurred by the government
which includes it's income and expenditures.

 FINANCIAL REPORTING -refers to 7. Fiduciary Accounting - handling of

communication of financial information accounts manage by a person called fiduciary
(financial position and financial with the custody and management of a
performance) of an entity to the various property for the benefit of another.
stakeholders useful in making investment 8. Estate Accounting - handling of accounts
and credit decisions. for fiduciaries who wind up the affairs of a
 PRIMARY OBJECTIVE OF FINANCIAL deceased person.
REPORTING - provide information about
an entity's 9. Social Accounting - also called social and
1.) Economic resources environmental accounting or social
2.) Claims to those resources responsibility reporting
3.) Changes in those resources
 process of communicating the social and
environmental effects of organizations'
 SECONDARY OBJECTIVE OF
economic actions to particular interest
FINANCIAL REPORTING - provide
groups within society and to society at
information useful in accessing the entity's
large
management stewardship.
 Management Stewardship speaks about 10. Institutional Accounting - accounting for
how effective and efficient the entity's non-profit entities other than the government.
management discharged their
responsibilities in using economic 11. Accounting Systems - system that is
resources. installed by the company to organize financial
data
2. Management Accounting - also known
 designing accounting forms to be used in
as managerial accounting.
data gathering.
 Is a process of providing financial
12. Accounting Research - examines how
information and resources to the
accounting is used by individuals,
managers in decision making.
organizations and government as well as the
consequences that these economic events
have.
Bookkeeping and Accounting
Bookkeeping - process of recording all
financial transactions made by a business.
Accounting - it provides business owners
with financial insights based on information
taken from their bookkeeping data.
 requires the interpretation of the
significance of the processed
information.
Accountancy - refers to the profession or
practice of accounting.
•Practice of Accounting :
1. Public Practice - doesn't involve an
employer-employee relationship
2. Private Practice - involves and employer-
employee relationship whereas the accountant
is an employee.
FOUR SECTORS IN PRACTICE OF
ACCOUNTANCY
Under R.A. 9298 also known as the
"Philippine Accountancy Act of 2004," the
practice of accounting is sub-classified into the
following:
1. Practice of Public Accountancy -
rendering of accounting related services to
more than one client one fee basis.
2. Practice in Commerce and Industry - an
accountant serves only one company.
Accountants in private accounting provide a
staff function which supports the company by
performing accounting-related tasks.
3. Practice in Educational/Academe -
employment in an educational institutions
which involves teaching of accounting.
4. Practice in the Government - employment
in a government-owned and/or controlled
corporations where decision making requires
professional knowledge in the science of
accounting or civil service eligibility as a
certified public accountant is a prerequisite.
Note: Accountants practicing under numbers 2
and 4 are considered in private practice.
ACCOUNTING STANDARD
•The Philippine Financial Reporting
Standards (PFRSs) represent the generally
accepted accounting principles (GAAP) in the
Philippines.
•The PFRSs are Standards and
Interpretations adopted by the Financial
Reporting Standards Council (FRSC). They
comprise:
A. Philippine Financial Reporting
Standards (PFRSs)
B. Philippine Accounting Standards
(PASs); and
C. Interpretations
•PFRSs are accompanied by guidance to
assist entities in applying their requirements.
•Guidance states whether it is an integral part
of PFRSs. A guidance that is an integral part
of the PFRSs is mandatory.
The need for reporting standards
For financial statements to be useful, they
should be prepared using reporting standards
that are generally acceptable. Otherwise, each
entity would have to develop its own
standards.
Financial statements would not be
comparable, the risk of fraudulent reporting
is heightened, and economic decisions
based on these financial statements would
be grossly incorrect. For this reason, entities
 should follow a uniform set of reporting
standards when preparing and presenting
financial statements.
The term "generally acceptable" means
that either:
1. The standard has been established by an
authoritative accounting rule-making body,
e.g.. the PFRSs adopted by the FRSC; or
2. The principle has gained general
acceptance due to practice over time
and has been proven to be most useful
e.g.. double entry recording and other
implicit concepts.
Hierarchy of Reporting Standards
 When selecting its accounting policies,
an entity considers the following in
descending order:
1. Philippine Financial Reporting Standards
(PFRSs)
2. In the absence of a PFRS that
specifically applies to a transaction or
event, management shall use its
judgment in developing and applying an
accounting policy that results in
information that is relevant and reliable.
In making the judgment,
1. management shall refer to, and consider
the applicability of, the following sources in
descending order:
a. The requirements in PFRSs dealing
with similar and related issues;
b. The Conceptual Framework.
2. management may also consider the
following:
a. Pronouncements of other standard-
setting bodies
b. Accounting literature and accepted
industry practices.
Accounting standard setting bodies and other
relevant organizations .
1. Financial Reporting Standards
Council (FRSC)—is the official
accounting standard setting body in the
Philippines created under the
Philippine Accountancy Act of 2004
(R.A. No. 9298).
2. Philippine Interpretations
Committee (PIC) -is a committee
formed by the Accounting Standards
Council (ASC), they predecessor of
FRSC, with the role of reviewing their
interpretations of the International
Financial Reporting Interpretations
Committee (IFRIC) for approval and
adoption by the FRSC.
3. Board of Accountancy (BOA)-is the
professional regulatory board created
under R.A. No. 9298 to supervise the
registration, licensure and practice of
accountancy in the Philippines. The
BOA consists of a chairperson and six
(6) members appointed by the
President of the Philippines. The Board
shall elect a vice-chairperson from
among its members for a term of one
(1) year.
4. Securities and Exchange
Commission (SEC)-is government
agency tasked in regulating
corporations and partnerships, capital
and investment markets, and the
investing public. Some. SEC rulings
affect the accounting requirements of
entities and the adoption and
application of accounting policies.
5. Bureau of Intimal Revenue (BIR)-
administers the provisions of the
National Internal Revenue Code.
These provisions do not always reflect
the goals of financial reporting.
However they do at times influence the
choice of accounting methods and
procedures.
6. Bangko Sentral ng Pilipinas (BSP)-
influences the selection and application
 of accounting policies by banks and
other entities performing banking
functions.
7. Cooperative Development Authority
(CDA)-influences the selection and
application of accounting policies
cooperatives. Accounting policies
prescribed by a regulatory body (eg
BSP. CDA) are sometimes referred to
as regulatory accounting principles.
International Accounting Standard
The International Accounting Standards
Board (IASB) - is the standard-setting body of
the IFRS Foundation with the main objectives
of developing and promoting global
accounting standards.
The standards issued by the IASB are the
International Financial. Reporting
Standards (IFRSs), composed of the
following:
1. International Financial Reporting
Standards (IFRSs)
2. International Accounting Standards
(IASs)
3. Interpretations
Due Process
-The IFRSs are developed through an
international due process that involves
accountants and other various interested
individuals and organizations from around the
world.
Due process normally involves the following
steps:
1. The staff identifies and reviews issues
associated with a topic and considers the
application of the Conceptual Framework to
the issues;
2. Study of national accounting requirements
and practices, including consultation with
national-standard-setters;
3. Consulting the Trustees and the Advisory
Council about the advisability of adding the
topic to the IASB’s agenda;
4. Formation of an advisory group to give
advice to the IASB on the project;
5. Publishing a discussion document for public
comment;
6. Publishing an exposure draft for public
comment;
7. Publishing with an exposure draft a basis
for conclusions and the alternative views of
any IASB member who opposes publication;
8. Consideration of all comment received;
9. Holding a public hearing and conducting
field tests, if necessary; and
10. Publishing a standard, including
(I). A basis for conclusions, explaining, among
other things, the steps in the IASB’s due
process and how the IASB dealt with public
comments on the exposure draft
(II). The dissenting opinion of any IASB
member.
Other relevant international organizations
1. International Financial Reporting
Interpretations Committee (IFRIC)
- a committee that prepares
interpretations of how specific issues should
be accounted for under the application of
IFRS where:
a. The standards do not include specific
authoritative guidance; and
b. There is a risk of divergent and
unacceptable accounting practices.
2. IFRS Advisory Council (previously known
as the Standards Advisory Council ‘SAC’)
  is a group of organizations and
individuals with an interest in
international financial reporting.
 their role includes advising on priorities
within the IASB’s work program
 members are appointed by the IFRS
Foundation which also appoints
members to the IASB.
3. International Federation of Accountants
(IFAC)- is a non- profit , non-governmental,
non-political organization of accountancy
bodies that represents the worldwide
accountancy profession.

4. International Organization of Securities

Commissions (IOSCO)
- is an international body security
commissions.
Philippines SEC is a member of IOSCO.

Move to IFRSs
-was primarily brought about by the
increasing acceptance of IFRSs world-wide
and increasing internationalization of business
thereby increasing the need for a common
financial reporting standards that minimize, if
not eliminate inconsistencies of financial
reporting among nations.

Future of IFRSs
- the FASB and the IASB formalized
their commitment to the convergence of U.S
GAAP and IFRSs by agreeing to use their best
efforts to:
a. make their existing financial reporting
standards fully compatible as soon as
practicable ( minimize differences) and;
b. Coordinate their future work programs to
ensure that once achieve, compatibility is
maintained.

Changes in reporting standards

- financial reporting standards
continuously change primarily in response to
users’ needs.