CHAPTER ONE

Introduction to Accounting

Accounting is a process of identifying, recording and communicating economic information

that is useful in making economic decisions.
Identifying : wherein the accountant analyzes each business transaction and
identifies whether it is an accountable event or unaccountable event.
Recording : wherein the accountant recognizes the accountable events he has
identified. This process is called journalizing. After journalizing, the accountant then
classifies the effects of the event on the accounts, this process is called posting.
Communicating : wherein the accountant summarizes the information processed in
the accounting system to produce meaningful reports.
: the most common form of accounting report is the financial
statements.

Types of information provided by accounting:

1. Quantitative information : expressed in numbers, quantities and units
2. Qualitative information : expressed in words or descriptive forms.
- Usually found in “Notes to Financial statements”
3. Financial information : expressed in money.
- Can also be considered quantitative information as monetary amounts are
usually expressed in numbers.

Accounting as a:
Social science : Accounting is a body of knowledge which has been systematically
gathered, classified and organized
Practical art : Accounting requires the use of creative skills and judgment

Accounting as an information system

Input Process Output

Accountable events Recording, Classifying & Accounting reports such

Summarizing as financial statements

Differences between Bookkeeping and Accounting

Bookkeeping : refers to the process of recording the accounts and transactions of an entity.
- It normally ends with the preparation of the trial balance
- It does not require the interpretation of the significance of the information processed
Accounting : it covers the whole process of identifying, recording and communicating
information to interested users.

Functions of accounting in business

Accounting is often referred to as a “language of business” because it is fundamental to the
communication of financial information

Two broad functions of accounting in business

To provide non-owners of a business with information
that is useful in making investments and credit
decisions.
To provide business owners and managers with
information that is useful in managing the business.

Management is a process of establishing common objectives, coordinating efforts towards

those objectives, coordinating efforts towards those objectives and efficiently and
effectively utilizing available resources so as to achieve certain goals.

Major facets of a business

A. Finance - refers to how a business generates and manages its funds
B. Production - refers to how goods are produced or services are rendered
C. Marketing - refers to how goods or services are communicated to customers
D. Accounting - provides a measure of how well the other facets of the business are
performing

Accounting as a managerial tool

- Accounting provides information that helps a business manager perform his/her
management functions

Functions of a manager
1. Planning : the process of mapping out or arranging in detail how a business goal is to
be achieved
2. Organizing : involves assigning responsibilities and granting authority to personnel
( a manager needs to organize his/her personnel and other resources according to
plan )
3. Staffing : process of selecting, training and developing employees (human resource
management)
4. Directing : involves motivating, communicating, guiding, and encouraging personnel
(a manager leads his personnel to ensure that each is performing their
responsibilities towards the organization’s common goal to the best of their ability)
5. Controlling : a manager needs to continuously monitor results against goals and
take corrective actions necessary to ensure that the plan remains on track
 FRA LUCA BARTOLOMEO DE
PACIOLI
Father of Modern Accounting
He formulated the double entry system in 1494 (it was
included in in his book entitled “ Summa di
Arithmetica Geometria Proportioni and Proportionista“
published on November 10, 1494 in Venice)
He did not invent the system, instead he simply
described a method used by merchants in Venice
during Italian Renaissance Period

Civilizations that keeping account

records:
Babylonian
Egypt
China
Greece
Mesopotamia

Double entry records first came out

during 1340 AD in Genoa

CHAPTER TWO
Branches of Accounting and Users of Accounting Information

Common branches of Accounting

Branch of Accounting Type of Accounting Users of service

service provided

Financial accounting - General recording - All businesses use this

- Focuses on the information
needed by the external
users
- Preparation of - Business prepare FS
general purpose
financial statements
(FS)
in their record-keeping
because these records
provide information
that is also use in the
other branches
at least annually for
the use of lenders,
investors, or
government regulatory
bodies

Management accounting - Preparation of - This is required to aid

 - Focuses on the
information needed by
the internal users
Government accounting
- Focuses on the
accounting for the
government and its
instrumentalities
Auditing
- Involves the inspection
of an entity’s financial
statement to ascertain
their correspondence * the most common form of
with an established an audit opinion is the
criteria Independent Auditors' Report
Tax accounting
Cost accounting
- Systematic recording
and analysis of the costs
of materials, labor and
overhead incident
Accounting education
Accounting research
- Careful analysis of
specifically tailored them in performing
management reports their management
functions
- General record- - Required by the
keeping and government and its
preparation of agencies.
financial reports for
the government and
its agencies (also
includes the
preparation of
budgets and
accountability
reports)
- Expression of an - Businesses with gross
opinion annual sales/receipts
exceeding PHP 3M are
REQUIRED to have
their financial
statements audited by
an independent CPA
- Preparation of tax - All businesses are
returns required to file TR
- Preparation of tax - Some taxpayers may
advice requires the
professional advice of
a tax practitioner
regarding the
management of taxes
- Analysis of costs of - This is use to analyze
products/services the cost of their
products/services and
the effects of those
costs in the earnings
and pricing policies
- Teaching of - Required by business
accounting and students, owners,
related subjects accounting
professionals in their
Continuing
Professional
Development (CDP)
and other interested
parties
- Accounting research - Required by business
papers, articles, and owners, professional
 economic events and similar publications organizations and
other variables to other interested
understand their impact parties
on decisions

Types of users of accounting information

1. Internal users : those who are directly involved in managing the business, just
like the
a. Business owners
b. Board of directors
c. Managerial personnel
2. External users : those who are not directly involved in managing the business
a. Investors and stockholders
b. Lenders and creditors
c. Government agencies like SEC and BIR
d. Non-managerial employees
e. Customers
f. Public

Types of accounting information classified as to user’s needs

1. General purpose : information designed to meet the common needs of most
statement users.
: provided by financial accounting and is prepared for external users
2. Special purpose : information designed to meet specific needs of particular
statement users
: provided by management accounting and is prepared for internal
users

CHAPTER THREE

Business is an activity where goods and services are exchanged for money.
Entrepreneur or businessman is a person who are engaged in business

Forms of Business Organization

1. Sole Proprietorship : is a business that is owned by only one individual.
: most common and simplest form
: the business owner is called sole proprietor
: is registered with Department of Trade and Industry (DTI)

Advantages Disadvantages

You are literally the boss ; you can keep all the profits You assume all the risk of loss
 You have the control over the business (especially in You take all the responsibilities and rely
decision making) mostly to yourself

Easier and less costly to form because of fewer formal More difficult to raise capital because you
business requirements rely on your personal assets and loans to
initially finance the business

Lower extent of government regulation and lower taxes Personally liable for the debts and
obligations of the business

2. Partnership : a business owned by two or more individuals who entered into a

contract to carry on the business and divide among themselves the earnings
: registered with Securities and Exchange Commission (SEC)

Advantages Disadvantages

Can make better decision as there are two or Making business decision may give rise to conflict
more owners that you can rely to among partners

Share the business risks and responsibilities You don’t keep all the profits
with your partners

Easier to form because only contractual Has limited life because the partnership can be
agreement between partners is needed easily dissolved by withdrawal, retirement and
death/insanity of one of the partners

Greater capital compared to proprietorship Less capital compared to corporation

Lower extent of government regulation Is taxed like a corporation (partnership other than
compared to corporation general professional partnership)

Unlimited liability as partners can be held liable for

partnership debts up to their personal assets

3. Corporation : also owned by two or more individuals

: is an artificial being, meaning that a corporation is like a person,
separate from its owners
: created by operation of law
: the ownership is represented by shares of stocks and the owners are
called stockholders or shareholders
: the incorporators (founders) shall not be less than 5 but not more than
15 individuals
: registered with Securities and Exchange Commission (SEC)

Advantages Disadvantages

A regular investor does not need to work to earn Your opinion on corporate affairs depends on
income because only the stockholders that are the number of shares you own which means
elected as members of the BOD are tasked with the more shares = the more important your say
managerial responsibilities is to the company

Limited liability because stockholders are liable for More difficult and costly to form because of
corporate debts only up to the amount they have more formal business requirements
invested

Greater capital and ease in raising additional funds Greater extent of government regulation and
higher taxes

If the corporation is listed, one can easily transfer
their shares to their investors by selling them in the
stock market. An activity called stock trading where
one buys shares a t cheap price, wait for prices to go
up then sell them
You have to wait for the BOD to declare
dividends before you can get your share in the
profits

Unlimited life because withdrawal, retirement and

death/insanity does not dissolve the corporation
*has a legal life of 50 years and can be renewed for
an indefinite number of renewals

4. Cooperative : also owned by more than one individual

: an association of individuals who joined together to contribute capital
and cooperate in order to achieve certain goals
: formed with the provision of The Philippine Cooperative Code of 2008
and the owners are called members
: founding members shall not be less than 5 but not more than 15
individuals
: registered with Cooperative Development Authority (CDA)

Advantages Disadvantages

Each member is entitled to only one vote regardless
of his/her shareholdings
Prone to poor management. Since there is
‘one-member, one-vote’ policy, influential
members tend to dominate the election
process and the result is that those who get
elected may not be those who are qualified for
the task

Generally exempt from paying taxes; may receive Susceptible to corruption

assistance from the government

Easier and less costly to form compared to
corporation as there are fewer formal business
requirements
The Cooperative Code places some restriction
on the distribution of a cooperative's profit to
its members as it requires cooperative to
appropriate a portion of its annual profit to
some funds
 Limited liability - the members are liable for More difficult to sustain growth. A cooperative
cooperative debts only up to the amount they have success strongly depends on the members’
invested cooperation and continuing efforts

Unlimited life because withdrawal, retirement and There are restrictions on the transfer of a
death/insanity does not dissolve the cooperative member’s shares. The approval of the BOD
*has a legal life of 50 years and can be renewed for must be first obtained before transferring
an indefinite number of renewals his/her shares

Types of Business According to Activities

1. Service business : one that offers services as its main product rather than physical
goods
: e.g,. schools, firms, hospitals and clinics, banks, hotels and restau,
transportation and travel and entertainment and events planner

Advantages Disadvantages

You ‘need to worry about inventory, warehousing One may not have flexible personal time because you
and distribution costs because you don’t have any need to be directly involved in providing a service to a
inventory customer

May only need a small capital because what you Normally suffer first from decline in demand during
are selling is your skill set and you only need times of economic difficulty
yourself to render a service

You are perceived as an expert in your chosen The business’ success depends on your credibility
field

More costly to commit an error in a service business

2. Merchandising business : one that buys and sells goods without changing its
physical form
: e.g,. general merchandise resellers and distributors and
dealers

Advantages Disadvantages

You may need a much lower start-up capital because You need to have a retail store to display your
you don’t need to acquire machineries goods and it must be in a strategic location to
attract more customers

Can take advantage of price fluctuations Less flexibility in managing costs because the
costs of your goods is based primarily on their
purchase price, which you do not control

Lower cost of quality. In merchandising, if a certain Keeping track of inventory is tedious especially
product is not selling well, you can stop buying it and when you are selling numerous and varied items
find an alternative of it with fast turnover rate
Much easier to start a merchandising because you Self satisfaction is low because you did not
don’t need to have an expertise or special skill and one produce the products you sold
don’t need to have invented a product or innovative
idea

3. Manufacturing business : one that buys raw materials and processes them into final
products
: they changes the physical form of the gods it has
purchased in a production process
: e.g,. car manufacturers, technology companies, food
processing companies, factories

Advantages Disadvantages

Have a high growth potential because you can Need a high start-up to acquire machineries,
tap into a wider market and can produce in large employ people, and acquire a big space for
quantities production

Have the opportunity to establish a brand that Conceptualizing a viable manufacturing

could last longer than your lifetime business is difficult

Self satisfaction is high especially when You need to be continuously innovative and
consumers are happy and satisfied with a abreast of changes in technology
tangible product that you have produced

You may not need to have a retail store because Warehousing and logistic costs can be high
you can sell directly to wholesalers rather than
to end consumers

Can have a better pricing policy because mass You rely on raw materials so you have to
production can decrese your unit cost manage them properly because a shortage in
(economies of scale) materials can disrupt your operation and that
can be very costly

Greater flexibility in managing costs because
you can cut down costs by redesigning product,
improving your processes, acuiring more
efficient machines, employ skillful personnel,
etc.
Managing can be difficult because production
processes are often complicated and their is
always room for improbement
*more accounting work is needed

CHAPTER FOUR
Accounting Concepts and Principles

Accounting concepts and principles (assumptions/postulates) : are set of logical ideas and
procedures that guide the accountant in recording and communicating economic
information
 : provide general frame of reference by which accounting practice can be
evaluated and they serve as a guide in the development of new practices and procedures
: provide reasonable assurance that information communicated to users is
prepared in a proper way

Basic Accounting Concepts

1. Separate entity concept : the business is viewed as a separate person, distinct from
its owner(s)
: only the transactions of the business are recorded in the books of accounts
: your personal transactions must not be recorded in the books of accounts
2. Historical cost concept (cost principle) : assets are initially recorded at their
acquisition cost
: a measure of value used in accounting in which the value of an asset on
the balance sheet is recorded at its original cost when acquired by a company
3. Going concern assumption : the business is assumed to continue to exist for an
indefinite period of time
: an entity is viewed as continuing in business for the foreseeable future.
: general purpose financial statements are prepared on a going concern basis,
unless management either intends to liquidate the entity or to cease operations, or
has no realistic alternative but to do so
: opposite of this is liquidating concern which is the case if the business
intends to end its operations or if it has no other choice but to do so
4. Matching (or Association of cause and effect) : some costs are initially recognized as
assets and charged as expense only when the related revenue is recognized
: states that expenses should be recognized and recorded when those
expenses can be matched with the revenues those expenses helped to generate. In
other words, expenses shouldn’t be recorded when they are paid. Expenses should
be recorded as the corresponding revenues are recorded.
5. Accrual Basis of Accounting : an accounting method where revenue or expenses are
recorded when a transaction occurs rather than when payment is received or made.
: revenues are reported on the income statement when they are earned. When
the revenues are earned but cash is not received, the asset accounts receivable
will be recorded. (Under the cash basis of accounting, revenues are not reported
on the income statement until the cash is received
: expenses are reported on the income statement when they match up with the
revenues being reported, or when a cost has no future benefit that can be
measured. When an expense occurs and cash has not yet been paid, a liability
account will also be recorded. (The expenses that were not paid in the current
accounting period will be reported through adjusting entries.)
6. Prudence (or Conversatism) : the accountant observes some degree of caution when
exercising judgments needed in making accounting estimates under conditions of
uncertainty
7. Time Period (Periodicity or Accounting period concept) : the life of the business is divided
into series of equal short periods called reporting/accounting periods
 a. Calendar year period starts on January 1 and ends on December 31 of the same
year
b. Fiscal year period also covers 12 months but starts on a date other than January
1, e.g., July 1, 2017 to June 30, 2018
c. Interim period is shorter than 12 months; it can be a month, a quarter (3 months),
or a semiannual period (6 months)
8. Stable monetary unit : assets, liabilities, equity, income and expenses are stated in terms
of a common unit of measure, which is the peso in the Philippines
9. Materiality concept : an item is considered material if its omission or misstatement could
influence economic decisions
: materiality is a matter of professional judgment and is based on the
size and nature of an item being judged
: states that financial information is material to the financial
statements if it would change the opinion or view of a reasonable person. In other words, all
important financial information that would sway the opinion of a financial statement user should
be included in the financial statements.
10. Cost-benefit (Cost Constraint) : the cost of processing and communicating information
should not exceed the benefits to be derived from it.
: states that the cost of providing financial information in
the financial statements must not outweigh the benefit of that information to the users. In other
words, financial information is not free.
11. Full disclosure principle : information communicated to users reflects a series of
judgemental trade-offs.
: a concept that requires a business to report all necessary
information about their financial statements and other relevant
information to any persons who are accustomed to reading this
information.
12. Consistency concept : a business shall apply accounting policies consistently, and
present information consistently, from one period to another.
: states that, once you adopt an accounting principle or method,
continue to follow it consistently in future accounting periods

Accounting standards€€
Explicit concepts and principles are those that are specifically mentioned in the Conceptual
Framework for Financial Reporting and in the Philippine Financial Reporting Standards (PFRSs).
Implicit concepts and principles are those that are not specifically mentioned in the foregoing
but are customarily used because of their general and longtime acceptance within the
accountancy profession
● The term “standards” is used to specifically refer to the Philippine Financial Reporting
Standards (PFRSs)
● Traditionally, accounting standards were referred to as the generally accepted
accounting principle (GAAP)

Philippine Financial Reporting Standards (PFRSs) : are Standards and Interpretations adopted by
the Financial Reporting Standards Council (FRSC). They consist of the following:
 a. Philippine Financial Reporting Standards (PFRSs)
b. Philippine Accounting Standards (PASs)
c. interpretations
: standards are serve as guide when recording and communicating accounting
information
- Standards provide a more detailed application of concepts
: PFRSs are issued by the Financial Reporting Standards Council (FRSC), which is the
standard setting body in the Philippines
: PFRSs are patterned from the International Financial Reporting Standards (IFRSs) which
are issued by the International Accounting Standards Board (IASB)

Note that :
For the financial statements to be useful, they must be prepared
using reporting standards that are generally acceptable

The term “generally acceptable” means that either:

a. The standards has been established by an authoritative accounting standard setting
body
b. The principle has gained general acceptance due to practice over time has been proven
to be most useful

Relevant regulatory bodies

The following also affect the accounting policies used by businesses and their financial reporting
1. Securities and Exchange Commission (SEC) : is tasked with regulating corporations,
including partnerships
: requires corporations and partnerships to file audited financial statements
2. Bureau of Internal Revenue (BIR) : is tasked in collecting national taxes and administering
the provisions of the Tax Code
: they do at times influence the choice of accounting methods and procedures
3. Bangko Sentral ng Pilipinas (BSP) : is tasked in regulating banks and other entities
performing banking functions
: influences the selection and application of accounting policies by these
businesses
4. Cooperative Development Authority (CDA) : is tasked in regulating cooperatives
: influence the selection and application of accounting policies by cooperatives

Conceptual Framework for Financial Reporting : also prescribes accounting concepts meant to
guide the accountant in preparing and presenting financial statements
: this is NOT a standard, rather, it serves as a general frame of reference in the
application or development of the standards

Qualitative characteristics are the traits that make information useful to users.
1. Fundamental qualitative characteristics - refer to the essential characteristics that
information must have before it can be included in the financial statements
a. Relevance : if it has the ability to affect the decision making of the users
i. Predictive value - if users can use it as an input in making predictions
ii. Confirmatory value - if users can use it to confirm their past predictions
iii. Materiality - if omitting or misstating an item could influence the decision
making of the users
b. Faithful representation : if it is factual, meaning it represents the actual effects of
events that have taken place
i. Completeness - information must be presented with sufficient detail
necessary for users to understand them
ii. Neutrality - information are selected or presented without bias
iii. Free from error - there are no errors in the description and the process by
which the information is selected and applied
2. Enhancing qualitative characteristics - they enhance the usefulness of information. They
must be maximized
a. Comparability : if it enables users to make comparisons to identify and
understand the similarities in, and the differences among, items.
b. Verifiability : if it enables different and independent users to reach a general
agreement about what the information intends to depict
c. Timeliness : information must be provided to users on time to be capable of
influencing their decisions
d. Understandability : information must be presented clearly and concisely in order
for users to understand them