 Accounting is the “process of identifying,
measuring and communicating economic
information to permit informed judgments
and decisions by users of the information.”
3 important activities included in the definition
of accounting:
1. IDENTIFYING – process of analyzing
events and transactions to determine
whether or not they will be recognized
Types of events or transaction
A. External events - are events that involve
an entity and another external party.
B. Internal events– are events that do not
involve an external party.
2. MEASURING – involves assigning
numbers, normally in monetary terms,
to the economic transactions and
events.
3. COMMUNICATING – the process of
transforming economic data into useful
accounting information, such as
financial statements and other
accounting reports, for dissemination to
users the process of transforming
economic data into useful accounting
information, such as financial
statements and other accounting
reports, for dissemination to users
The communicating process of accounting
involves three aspects
o RECORDING – refers to the process of
systematically committing into writing
the identified and measured
accountable events in the journal
through journal entries
o CLASSIFYING – involves the grouping of
similar and interrelated items into their
respective classes through posting in
the ledger
o SUMMARIZING – putting together or
expressing in condensed from the
recorded and classified transactions and
events.
 Economic entities use accounting to record
economic activities, process data, and
disseminate information intended to be
useful in making economic decisions
A. Not-for-profit entity- one that carries out
some socially desirable needs of the
community
B. Business entity- one that operates
primarily for profit
 Economic activities are activities that affect
the economic resources (assets) and
obligations (liabilities), and consequently,
the equity of an economic entity
1. Production- process of converting
economic resources into outputs of goods
and services that are intended to have
greater utility than the required inputs
2. Exchange- the process of trading
resources or obligations for other resources
3. Consumption- the process of using the
final output of the production process
4. Income distribution- the process of
allocating rights to the use of output among
individuals and groups in society
5. Savings- the process of setting aside
rights to present consumption in exchange
for rights to future consumption
6. Investment- the process of using current
inputs to increase the stock of resources
available for output as opposed to
immediately consumable output
Types of information provided by accounting
1. Quantitative information – information
expressed in numbers, quantity, or
units.
2. Qualitative information – information
expressed in words or descriptive form.
3. Financial information – is also
quantitative information because
 monetary amounts are normally
expressed in numbers
Types of accounting information classified as
to users’ needs
1. General purpose accounting information-
designed to meet the common needs of most
statement users.
2. Special purpose accounting information-
designed to meet the specific needs of
particular statement users.
 Accounting identifies and measures
economic activities, processes information
into financial reports, and communicates
these reports to decision makers
Creative and critical thinking in accounting
a. Creative thinking- involves the use of
imagination and insight to solve problems by
finding new relationships (ideas) among items
of information
b. Critical thinking- involves the logical analysis
of issues, using inductive or deductive reasoning
to test new relationships to determine their
effectiveness
 Accounting assumptions (Accounting
postulates)- are the fundamental concepts
or principles and basic notions that provide
the foundation of the accounting process
Examples of accounting concepts
1. Double-entry system – each
accountable event is recorded in two
parts debit and credit
2. Going concern assumption – the entity
is assumed to carry on the operations
for an indefinite period of time.
Meaning, the entity does not expect to
end its operations in the foreseeable
future
3. Separate entity (Accounting
entity/Business entity concept/Entity
concept) the entity is viewed separately
from its owners
a. Assets, liabilities, equity, income and
expenses are stated in terms of a
common unit of measure, which is the
peso in the Philippines.
b. The purchasing power of the peso is
regarded as stable or constant and that
its instability is insignificant and
therefore ignored
4. Stable monetary unit (Monetary with
assumption) –allows accountants to add
& subtract peso amounts as though
each peso has the same purchasing
power as any other peso at any time
5. Time period (Periodicity/Accounting
period) – the life of the entity is divided
into series of reporting periods
6. Cost-benefit (Cost
constraint/Reasonable assurance) – the
cost of processing and communicating
information should not exceed the
benefits to be derived from it
7. Accrual basis of accounting – the
effects of transactions and other events
are recognized when they occur
8. Historical cost concept (Cost principle)
– the value of an asset is determined on
the basis of acquisition cost.
9. Concept of articulation- all of the
components of a complete set of
financial statements are consistent
10. 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
11. Consistency concept- the financial
statements are prepared on the basis of
accounting principles that are applied
consistently from one period to the
next
12. Matching (Association of cause and
effect)- costs are recognized as
 expenses when the related revenue is
recognized
13. Entity theory- the accounting objective
is geared towards proper income
determination.
o This theory emphasizes the
income statement and is
exemplified by the equation:
“Assets = Liabilities + Capital”
14. Proprietary theory- the accounting
objective is geared towards the proper
valuation of assets
o emphasizes the importance of
the balance sheet and is
exemplified by the equation:
“Assets – Liabilities = Capital”
15. Residual equity theory- this theory is
applicable when there are two classes
of shares issued, i.e., ordinary and
preferred.
o Equation is “Assets – Liabilities
– Preferred Shareholders’
Equity = Ordinary Shareholders’
Equity”.
16. Fund theory- the accounting objective
is neither proper income determination
nor proper valuation of assets but the
custody and administration of funds
17. Realization- the process of converting
non-cash assets into cash or claims for
cash.
18. Prudence (Conservatism)- is the use of
caution when making estimates under
conditions of uncertainty, such that
assets or income are not overstated and
liabilities or expenses are not
understated
Common branches of accounting
1. Financial Accounting – is the branch of
accounting that focuses on general
purpose financial statements.
o Financial accounting is
governed by the Philippine
Financial Reporting Standards.
(PFRSs)
o The term “financial accounting”
is often used interchangeably
with the term “financial
reporting”.
o Financial statements are the
structured presentation of an
entity’s financial position and
results of its operations
o Financial reporting involves the
provision of financial
information about an entity
that is useful in making
economic decisions by external
users and assessing
management’s stewardship
2. Management accounting – refers to the
accumulation and communication of
information for use by internal users or
management
 Incorporates all the types of financial &
non-financial information from a wide
range of sources
3. Cost accounting – is the systematic
recording and analysis of the costs of
materials, labor, and overhead incident
to production
 deals with the collection, allocation, &
control of the cost of producing specific
goods & services
4. Auditing – is the process of evaluating
the correspondence of certain
statements with established criteria and
expressing an opinion there on
5. Tax accounting – the preparation of tax
returns and rendering of tax advice,
such as the determination of the tax
consequences of certain proposed
business endeavours.
6. Government accounting – collects &
spends huge amount of public funds
annually so it is necessary that there is
 proper custody & deposition of these
funds.
7. Fiduciary accounting – refers to the
handling of accounts managed by a
person entrusted with the custody and
management of property for the benefit
of another
8. Estate accounting – refers to the
handling of accounts for fiduciaries who
wind up the affairs of a deceased
person.
9. Social accounting –the process of
communicating the social and
environmental effects of an entity’s
economic actions to the society
10. Institutional accounting – the
accounting for non-profit entities other
than the government
11. Accounting systems – the installation of
accounting procedures for the
accumulation of financial data and
designating of accounting forms to be
used in data gathering
12. Accounting research – pertains to the
careful analysis of economic events and
other variables to understand their
impact on decisions
 Bookkeeping refers to the process of
recording the accounts or transactions of an
entity
Four sectors in the practice of accountancy
1. Practice of Public Accountancy-
involves the rendering of audit or
accounting related services to more
than one client on a fee basis
2. Practice in Commerce and Industry-
shall constitute in a person involved in
decision making requiring professional
knowledge in the science of accounting,
or when such employment or position
requires that the holder thereof must
be a certified public accountant
3. Practice in Education/Academe –
employment in an educational
institution which involves teaching of
accounting, auditing, management
advisory services, finance, business law,
taxation, and other technically related
subjects.
4. Practice in the Government-
employment or appointment in a
position in an accounting professional
group in the government or in a
government-owned and/ controlled
corporation
 The Philippine Financial Reporting
Standards (PFRSs) represent the generally
accepted accounting principles (GAAP) in
the Philippines
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 2004
2. Philippine Interpretations Committee (PIC) -
is a committee formed by the Accounting
Standards Council (ASC), the predecessor of
FRSC, with the role of reviewing the
interpretations of the International Financial
Reporting Interpretations Committee (IFRIC) for
approval and adoption by 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
4. Securities and Exchange Commission (SEC) -
is the government agency tasked in regulating
corporations and partnerships, capital and
investing markets, and the investing public
5. Bureau of Internal Revenue (BIR) -
administers the provisions of the National
Internal Revenue Code. These provisions do not 1. Comparability: Information should be
always reflect the goals of financial reporting comparable between different entities
or time periods;
6. BangkoSentral ng Pilipinas (BSP) - influences
2. Verifiability: Independent and
the selection and application of accounting
knowledgeable observers are able to
policies by banks and other entities performing
verify the information;
banking functions
3. Timeliness: Information is available in
7. Cooperative Development Authority (CDA) - time to influence the decisions of users;
influences the selection and application of 4. Understand ability: Information shall be
accounting policies by cooperatives classified, presented clearly and
concisely
 International Accounting Standards
Committee (IASC) FINANCIAL STATEMENTS & REPORTING ENTITY
The IASC was founded in June 1973
o Financial Statements
OBJECTIVE OF FINANCIAL REPORT The financial statements should provide the
useful information about the reporting entity
1. The main objective of general purpose
1. In the statement of financial position,
financial reports is to provide the financial
by recognizing Assets, Liabilities, Equity
information about the reporting entity that
2. In the statements of financial
is useful to existing and potential: Investors,
performance, by recognizing Income,
Lenders, and Other creditors
and Expenses
Qualitative characteristics of useful financial 3. In other statements, by presenting and
information disclosing information about
Recognized and unrecognized assets,
 Fundamental qualitative characteristics liabilities, equity, income and expenses,
1. Relevance: capable of making a their nature and associated risks; Cash
difference in the users’ decisions. The flows; Contributions from and distributions
financial information is relevant when it to equity holders, and Methods,
has predictive value, confirmatory assumptions, judgements used, and their
value, or both. changes.
Materiality is closely related to
relevance.
2. Faithful representation: The
information is faithfully represented
when it is complete, neutral and free
from error.
 Completeness – info. must be complete
within the bounds of materiality & cost
 Neutrality – free from bias
 Free from error- this does not mean that
the information is perfectly accurate in
all respects
2. Enhancing qualitative characteristics
3. The underlying assumption in financial
reporting is going-concern. It is assumed
that the entity has neither the intention nor
the need to end its operations in the
foreseeable future
THE ELEMENTS OF FINANCIAL STATEMENTS
1. Asset = a present economic resource
controlled by the entity as a result of past
events
Essential elements in the definition of asset
a. Control- means the entity has the exclusive
right over the benefits of an asset or the ability
to prevent others from accessing those benefits
b. Past events- the control over a resource have
resulted from a past event or transaction
c. Future economic benefits- “Future” means the
resource is expected to provide economic
benefits over more than one accounting period.
2. Liability = a present obligation of the
entity to transfer an economic resource as
a result of past events
Essential elements in the definition of liability
a. Present obligation arising from past events
– means that at the reporting date, the entity
has the responsibility to perform some act
because of an obligating event that has
already transcribed
b. Outflow of economic benefits- settling an
obligation normally requires the entity to; a)
Pay cash b) Transfer other non-cash assets c)
Render a service d) Replace the obligation
with another obligation’ e) Convert the
obligation to equity
3. Equity = the residual interest in the assets
of the entity after deducting all its
liabilities
4. Performance = The elements directly
related to the measurement of
performance are income and expenses
o Income = increases in assets or
decreases in liabilities resulting in
increases in equity, other than
contributions from equity holders
o Expenses = decreases in assets or
increases in liabilities resulting in
decreases in equity, other than
distributions to equity holders
RECOGNITION& DERECOGNITION
Recognition = the process of incorporating in
the balance sheet or income statement an item
that meets the definition of an element and
satisfies the criteria for recognition
Derecognition = means removal of an asset or
liability from the statement of financial position
and normally it happens when the item no
longer meets the definition of an asset or a
liability.
Expense recognition principles
o Matching concept – costs that are
directly related to the earning of
revenue are recognized as expenses in
 the same period the related revenue is
recognized
o Systematic and rational allocation- costs
that are not directly related to the
earning of revenue are initially
recognized as assets and recognized as
expense over the periods their economic
benefits are consumed, using some
method of allocation
o Immediate recognition- costs that do not
provide or cease to provide future
PRESENTATION & DISCLOSURE
economic benefits are expensed
immediately
MEASUREMENT
Measurement = the process of determining the
monetary amounts at which the elements of
the financial statements are to be recognized
and carried in the balance sheet and income
statement
o Historical cost
For assets- this the amount of cash
paid of the fair value of the
consideration given to acquire them at
the time of the acquisition.
For liabilities- this the amount of
proceeds received in exchange for the
obligation or the amount of cash
expected to be paid to settle a liability
o Current cost
For assets- this is the amount of cash
that would have to be paid if the same
asset was acquired currently.
For liabilities- this is undiscounted
amount of cash that would be required
to settle the obligation currently.
o Realizable value (Settlement value)
For assets- this is the amount of cash
that could currently be obtained by
selling the asset in an orderly disposal.
For liabilities- this is the settlement
value or the undiscounted amount of
cash expected to be paid to satisfy the
liabilities in the normal course of
business.
o Present value
For assets- this is the discounted value
of the future net cash inflows expected
to be derived from the asset.
For liabilities- this is the discounted
value of the future net cash outflows
expected to be paid to settle the
liability
 The main aim of presentation and
disclosures is to provide an effective
communication tool in the financial
statements.
CONCEPTS OF CAPITAL & CAPITAL
MAINTENANCE
1. Financial capital – this is synonymous
with the net assets or equity of the
entity.
2. Physical capital – this is the productive
capacity of the entity based on, for
example, units of output per day.
Here the profit is earned if physical
productive capacity increases during
the period, after excluding the
movements with equity holders.
 Financial statements are the end product
of the financial reporting process and the
means by which the information gathered
and processed is periodically
communicated to users
General features of financial statements
1. Fair Presentation and Compliance
with PFRSs – The financial statements
must "present fairly" the financial
position, financial performance and
cash flows of an entity. Fair
presentation requires the faithful
representation of the effects of
transactions, other events, and
conditions in accordance with the
definitions and recognition criteria for
assets, liabilities, income and
expenses set out in the Framework
2. Going Concern - Going concern is an
accounting term for a company that
has the resources needed to continue
operating indefinitely until it provides
evidence to the contrary. ... If a
business is not a going concern, it
means it's gone bankrupt and its
assets were liquidated.
3. Accrual Basis of Accounting – means
the transactions must be recognize
when they occur and not when cash is
received or paid.
4. Materiality and Aggregation - each
material item should be presented
separately and immaterial accounts
should be aggregate with amount and
not presented separately
5. Offsetting - Offsetting is another term
for netting. With offsetting, you show
your company's assets and liabilities
on the balance sheet on a net basis. In
offset accounting, you decrease the
total, or net, of a different account
balance to create a net balance.
6. Frequency of reporting - complete set
of financial statements shall be
presented at least annually
7. Comparative information - document
used to compare a particular financial
statement with prior period
statements. Previous financials are
presented alongside the latest figures
in side-by-side columns, enabling
investors to identify trends, track a
company's progress and compare it
with industry rivals
8. Consistency of presentation - to
ensure that transactions or events are
recorded in the same way, from one
accounting year to the next
 The statement of financial position shows
the entity’s financial condition (i.e., status
of assets, liabilities and equity) as at a
certain date
 Working capital = Current Assets –
Current Liabilities
 Current assets are all the assets of a
company that are expected to be sold or
used as a result of standard business
operations over the next year
 Current liabilities are a company's short-
term financial obligations that are due
within one year or within a normal
operating cycle
 Liabilities that are payable upon demand
of the lender are classified as current.
These presentations have the following basic
formats:
A. Single statement presentation:
Statement of profit or loss and other
comprehensive income
Revenues P100
Expenses (80)
Profit or loss 20
Other comprehensive income 10
Comprehensive Income P30
B. Two-statement presentation
1. Statement of profit or loss/Income
statement
Revenues P100
Expenses (80)
Profit of loss P20
2. Statement of other comprehensive
income
Profit of loss P20
 Other comprehensive income 10
Comprehensive income P30
The following are not included in determining
the profit or loss for the period:
1. Correction of prior period error - Direct
adjustment to the beginning balance of retained
earnings. The adjustment is presented in the
statement of changes in equity.
2. Change in accounting policy - Similar
treatment to the correction of prior period
error.
3. Other comprehensive income - Changes
during the period are presented in the “other
comprehensive income” section of the
statement of comprehensive income.
Cumulative balances are presented in the equity
section of the statement of financial position.
4. Transactions with owners - Recognized
directly in equity. Transactions during the
period are presented in the statement of
changes in equity.
 Total comprehensive income is “the
change in equity during a period resulting
from transactions and other events, other
than those changes resulting from
transactions with owners in their capacity
as owners
 Total comprehensive income is the sum
of profit or loss and other comprehensive
income
 Statement of Changes in Equity –
summarizes the changes that occurred in
owner’s equity.
 Statement of Cash Flows – provides
information about the cash receipts
(inflows) & cash payments (outflows) of an
entity during period time.
 The notes provided information in
addition to those presented in the other
financial statements.
 Objectivity – The accounting concept that
requires financial statement information
to be supported by independent, unbiased
evidence other than someone's belief or
opinion
 Business entity assumption – The
accounting assumption that requires every
business to be accounted for separately
from other business entities, including its
owner or owners
 Going-concern assumption – The rule that
requires financial statements to reflect the
assumption that the business will continue
 operating instead of being closed or sold,
unless evidence shows that it will not
continue
 Cost principle – The accounting principle
that requires accounting information to be
based on actual cost and requires assets
and services to be recorded initially at the
cash or cash-equivalent amount given in
exchange
 Matching principle – accounting principles
prescribes that a company record its
expenses incurred to generate the
revenue reported
 Inventories are assets held for sale in the
ordinary course of business, in the process
of production for such sale or in the form
of materials or supplies to be consumed in
the production process or in the rendering
of services
 Cost
o Purchase cost – includes the purchase
price, import duties, non-refundable, or
non-recoverable purchase taxes and
transport, handling, and other costs
directly attributable the acquisition of
the inventory
o Conversion costs- these refer to the costs
necessary in converting raw materials
into finished goods
o Other costs necessary in bringing the
inventories in their present location and
condition
 First-In, First-out (FIFO) – method
assumes that the goods first purchased
are first sold and consequently the goods
remaining in the inventory at the end of
the period are those most recently
purchased or produced
 Weighted Average – cost of sales and
ending inventory are determined based on
the weighted average cost of beginning
inventory and all inventories purchased or
produced during the period
 Specific identification shall be used for
inventories which are not ordinarily
interchangeable
 Net realizable value is the estimated
selling price in the ordinary course of
business less the estimated costs of
completion and the estimated costs
necessary to make the sale
 Fair value reflects the price at which an
orderly transaction to sell the same
inventory would take place between
market participants at the measurement
date
 Raw materials inventory is not written
down below cost if the finished goods in
which they will be incorporated are
expected to be sold at or above cost.
 Trade discounts, rebates and other similar
items are deducted in determining the
costs of purchase
 Accrual Accounting – The effects of
transactions and other events on an
entity’s economic resources and claims
are depicted in the periods in which
those effects occur even if the resulting
cash receipts and payments occur in a
different period
 Financial reporting standard council –
What is the standard-setting body in the
Philippines at the present time?
 FIFO/Average method – The cost of
inventory shall be measured using
 Economic entity assumption – applicable
to all forms of business organizations