CHAPTER 1 – THE ACCOUNTANCY PROFESSION

Define accounting:
- Accounting is a service activity.
- The accounting function is to provide quantitative information primarily financial
in nature, about economic entities, that is intended to be useful is making
economic decision.
The Committee on Accounting Terminology of the Americans Institute of Certified Public
Accountant defines accounting as:
- Accounting is the art of recording, classifying, and summarizing in a significant
manner and in terms of money, transaction and events which are in part at least of
a financial character and interpreting the results thereof.
American Accounting Association in its Statements of Basic Accounting Theory defines
accounting as follows:
- Accounting is the process of identifying, measuring and communicating economic
information to permit informed judgement and decisions by users of the
information.
IMPORTANT POINTS

 Accounting is a quantitative information

  Accounting information is likely to be financial in nature
 Accounting information should be useful in decision making
Accounting has number of components:

 Identifying as the analytical component.

 Measuring as the technical component.
 Communicating as the formal component.
IDENTIFYING:
- Accounting process is the recognition or nonrecognition of business activities as
“accountable” events.
- Not all business activities are accountable.
- An event is accountable or quantifiable when it has an effect on assets, liabilities,
and equity.
- Only economic activities are emphasized and recognized in accounting.
- Sociological and psychological matters are beyond the province of accounting.
EXTERNAL AND INTERNAL TRANSACTIONS
- Economic activities of an entity referred to as transactions which may be classified
as external and internal.
- External transaction or exchange transaction are those economic events involving
one entity and another entity.
- Examples are:
a. Purchase of goods from a supplier
b. Barrowing money from bank
c. Sale of goods to a customer
d. Payment of salaries to employees
e. Payment of taxes to government.
Internal transactions are economic events involving the entity only.
MEASURING
- This accounting process is the assigning of peso amounts to the accountable
economic transactions and events.
- Philippine peso is the unit in measuring accountable economic events.
- The measurement bases are historical cost and current value.
- Historical cost is the original acquisition cost and the most common measure of
financial transaction.
- Current value includes fair value, value in use, fulfillment value and current cost.
COMMUNICATING
 - The process of preparing and distributing accounting reports to potential users of
accounting information.
- Communicating process is the reason why the accounting has been called the
“universal language of the business”
- Implicit in the communication process are the recording, classifying and
summarizing aspects of accounting.

CHAPTER 5: Elements of Financial Statement

- Portray the financial effects of transaction and other events by grouping them into
broad classes according to their economic characteristics.
- Elements directly related to the measurement of financial position:
Assets
Liability
Equity
- Elements directly related to the measurement of financial performance
Income
Expenses
- The Conceptual Framework identifies no elements that are unique to the statement
of changes in equity because such statement comprises items that appear in the
statement of financial position and income statement.
- Equity is the residual interest in the asset of the entity after deducting all the
liabilities.
- Asset is defined as the economic resource, controlled by the entity as a result of past
events. Economic Resource is a right that has the potential to produce an economic
benefits.
Essential characteristics of assets
o Asset is a present economic resource
o Economic resource is a right that has the potential to produce economic
benefits.
o The economic resource is controlled by the entity as the result of past
events.
RIGHT
1. Right that corresponds to the obligation of another entity:
a. Right to receive cash
b. Right to receive goods or services
c. Right to exchange economic resources with another party on favorable
terms
 d. Right to benefit from an obligation of another party if a specified uncertain
future event occurs
2. Right that do not correspond to an obligation of another entity
a. Right over physical objects, such as property, plant and equipment or
inventories
b. Right to intellectual property
3. Right to established by contract or legislation such as owning a debt instrument or
an equity instrument or owning a registered patent.
Potential to produce economic benefits
- For the potential to exist, it does not need to be certain or even likely that the right
will produce economic benefits.
- It is only necessary that the right already exists.
- Economic resource is the present right
- Economic resource could produce economic benefits if an entity is entitled
a. To receive contractual cash flow
b. to exchange economic resources with another party on favorable terms
c. To produce cash flow or avoid cash outflows
d. To receive cash by selling the economic resource
e. To extinguish a liability by transferring an economic resource
Control of an economic resource
- An entity controls an asset if it has the present ability to direct the use of the asset
and obtain the economic benefits that flow from it.
LIABILITY
- A present obligation of an entity to transfer an economic resource as a result of past
events.
Essential characteristics of liability
- The entity has an obligation
- The obligation is to transfer an economic resource
- The obligation is a present obligation that exist as a result of past event
Obligation
- Duty or responsibility that an entity has no practical ability to avoid. Obligations can
either be legal or constructive.
- Constructive Obligations arise from normal business practice, custom and a desire to
maintain a good business relations or act in an equitable manner
 Transfer of an economic resource
- Obligation to pay cash
- Obligation to deliver goods or noncash resources
- Obligation to provide services at some future time
- Obligation to exchange economic resources with another party on unfavorable
terms
- Obligation to transfer an economic resource if specified uncertain future event
occurs
Past event
- An entity has already obtained economic benefits
- An entity must transfer economic resource
INCOME
- Increases in assets or decreases in liabilities that result in increases in equity, other
than those relating to contributions from equity holders.
- Revenue arises in the course of ordinary regular activities and is referred to by
variety of different names including sales, fees, interest, dividends, royalties and
rent.
- The essence of revenue is regularity
- Gains represent other items that meet the definition of income and do not arise in
the course of ordinary regular activities.
Statement of financial performance
- Refers to the statement of profit or loss and a statement presenting other
comprehensive income.
Expense
- Decreases in assets or increases in liability that result in decreases in equity, other
than those relating to contributions to equity holders.

CHAPTER 6: RECOGNITION AND MEASUREMENT

RECOGNITION
- Process of capturing for inclusion in the financial statements an item that meets the
definition of an asset, liability, equity, income and expense.
- The amount at which an asset, a liability or equity is recognized in financial position
is reported as, carrying amount
RECOGNITION CRITERIA
- Only items that meets the definition of an asset, a liability or equity are recognized
in the statement of financial position.
POINT OF SALE INCOME RECOGNITION
- The basic principle of income recognition is that income shall be recognized when
earned.
EXPENSE RECOGNITION
- The basic expense recognition means that expenses are recognized when incurred.
- Three applicants of matching principle:
o Cause and effect association
o Systematic and rational allocation
o Immediate recognition

CAUSE AND EFFECT ASSOCIATION

- The expense is recognized when the revenue is already recognized.
SYSTEMATIC AND RATIONAL ALLOCATION
- Some costs are expensed by simply allocating them over the periods benefited.
IMMEDIATE RECOGNITION
- An expense is recognized immediately when:
a. When an expenditure produces no future economic benefit.
b. When cost incurred does not qualify or ceases to qualify for recognition as an
asset.
DERECOGNITION
- Removal of all part of recognized asset or liability from the statement of financial
position.
- Derecognition of an asset occurs when the entity loses control of all part of the
asset.
- Derecognition of a liability occurs when the entity no longer has a present obligation
for all part of the liability.
MEASUREMENT
- Quantifying in monetary terms the elements in the financial statements
a. Historical Cost
b. Current Value
 CURRENT VALUE
o Fair value
o Value in use for asset
o Fulfillment value for liability
o Current cost

CHAPTER 7: PRESENTATION AND DISCLOSURE CONCEPTS OF CAPITAL

PRESENTATION AND DISCLOSURE
- Can be an effective communication tool about the information in financial
statements.
- Effective Communication of Information in financial statements makes the
information more relevant and contributes to a faithful representation of an entity’s
assets, liabilities, income and expense.
- Enhances understandability and comparability of information in the financial
statements.
CLASSIFICATION
- Sorting of assets, liabilities, equity, income and expense on the basis of shared or
similar characteristics.
CLASSIFICATION OF INCOME AND EXPENSES
- Income and expenses are classified as components of profit or loss and components
of other comprehensive income.
AGGREGATION
- Adding together of assets, liabilities, equity, income and expenses that have similar
or shared characteristics and are included in the same classification.
CAPITAL MAINTENANCE
- The financial performance of an entity is determined using two approaches, namely
transaction approach and capital maintenance approach.
- Traditional preparation of income statement, transaction approach
- Net income occurs only after the capital used from the beginning of the period is
maintained, capital maintenance approach.
- Return of capital is an erosion of the capital invested in the entity.
- Two concepts of capital maintenance, Financial capital and Physical Capital
FINANCIAL CAPITAL
- Invested money or invested purchasing power, capital is synonymous with net assets
or equity of the entity.
- Monetary amount
- Traditional concept based on historical cost
PHYSICAL CAPITAL
- Quantitative measure of the physical productive capacity to produce goods and
services