Accounting Equation ​- accounting tool used
when transactions are analyzed as to their
effects on assets, liabilities, and equity.
Accounting Framework​ - set of accounting
standards and operating guidelines used in
analyzing transactions and preparing financial
statements that stakeholders need in
decision-making.
● Financial position is based on 3
elements -- assets, liabilities, equity
● Financial performance is based on 2
elements -- revenue and expense
Assets ​- economic resources owned and
controlled by the business
- Used in operating the business and
would benefit the business over a
number of years
- A resource obtained by the business
as a result of a past event from which
future economic benefits are expected
- Land, building, cash, furniture and
fixtures, equipment, supplies, etc.
Economic benefit​ - ability of the asset to
produce future cash flows for the business
whether directly (when asset is sold for cash)
or indirectly (when used to create other
assets like machine to produce goods)
● Assets are claimable by two parties:
owner(s) and creditors
Liabilities ​- obligation to do or pay
- Debts of the business owing to
outside parties like banks, financing
companies, and suppliers of goods
and services
- Present obligation arising from a past
event wherein the settlement is
expected to result in an outflow of
resources from the enterprise
- Usually paid in cash but may also be
paid using property or service
Net assets or net worth ​- determined by
deducting total liabilities from total assets
Owner’s equity​ - net assets claimable by the
owner
Equity ​- residual right or interest of the
owner(s) in the entity’s net worth
- Can be called Partners’ Equity
(partnership) and Shareholders’
Equity (corporation)
Account ​- device used to record the changes
(increases or decreases) in the accounting
elements
Asset Accounts
● Cash​ refers to currencies, coins,
checks, and bank drafts.
a. Cash on Hand​ - located within
the entity
b. Cash in Bank​ - monies
deposited in a bank
● Furniture and Fixtures​ refer to
tables, chairs, desks, and cabinets
● Equipment ​- machines, printers,
computers, aircon, etc.
Liability Accounts ​- usually identified as
payable ​or d
​ ue to​.
● Accounts payable
● Notes payable
● Loans payable
● Mortgage due to Land Bank, etc.
Owner’s Equity Accounts
● Owner’s Capital - investments made
by the owner
● Owner’s Drawing - withdrawal of
business assets for personal use
● (Revenues and expenses also
represent changes in capital)
Transaction ​- exchange of values between 2 EFFECTS OF TRANSACTIONS
parties expressed in monetary terms. The Transactions Assets Liabilities Equity
values exchange are assumed to be of equal
amount Investment of
Double Entry Bookkeeping ​- for every value assets + +
received, there is an equal value parted Withdrawal of
- Also called ​Venetian Model assets - -
Monetary Measurement Principle ​-
Purchase of
transaction must be stated in terms of money
assets in cash +/-
YOU DO NOTE: ​Transactions that are Purchase of
considered non-financial in nature (no assets in account + +
exchange of values) should ​not​ ​be recorded
Settlement of
EXAMPLES: liabilities in cash - -
- The business hired tourist guides for a
Settlement of
salary of Php 10,000 each
- The business signed a lease contract
liabilities with a +/-
note
for the use of office space
- An order for office supplies was Settlement of
placed for Php 5,000 liabilities using - +
personal cash
(Just because may value na naka-indicate, it
doesn’t mean na irerecord na agad siya.
Dapat minention na nagbayad na like: QUALITATIVE ATTRIBUTES OF
- The travel agency paid cash for FINANCIAL INFORMATION
services rendered by tourist guides (TIP: it’s better if basahin to sa book kasi may
- The business used the office space mga explanation siya and stuff)
and paid the lessor
- The business received the supplies 1. Understandability
and paid cash - must use clear terminologies
- orderly presentation of reports
Statement of Financial Position ​- list of - users must have reasonable
assets, liabilities, and owner’s equity knowledge of finance accounting and
- Formerly called Balance Sheet economics to come up with good
- Informs users of the business’ assessment and sound judgment
accumulated wealth and obligations
- Used to determine liquidity and 2. Relevance
solvency of the business - prescribes the quality of information
- Usually prepared yearly that will influence the user to make a
- Interim statement may be prepared sound decision
(monthly or quarterly) - must give the ​feedback value ​(past
● Accounts Payable is a liability performance of business) to project
represented by an oral promise to pay what might happen in the future
● Notes Payable is a liability supported (predictive value)
by a promissory note
Constraints in reporting Relevant Information
a. Materiality. depends whether an item
(by nature or size) will influence the
user’s decision or not. ​(read p. 52 for
more!)
b. Timeliness. reports must be given
within the period needed to form
judgment
3. Reliability
- can the financial statements be
depended upon by the users?
- Should be objective and free from
errors or misstatements
Four Things to be Considered:
a. Faithful representation - information
must not mislead users
b. Substance over form -
c. Prudence - exercise caution when
using estimates
- never overstate or understate
accounts
d. Neutrality - information should be
useful to ALL users, it should not
show any form of bias
e. (extra?) Completeness - value of
information may be enhanced to help
users make informed judgment
4. Comparability
- helps identify the changes that take
place in the entity between two or
more periods
- users can determine the change or
trend of the entity’s performance
- Rule of Comparability complements
the Rule of Consistency
- Consistency​ requires uniformity of
accounting treatment in every period
ACCOUNTING PRINCIPLES (GAAP)
- norm of conduct of a place of
standards promulgated by an
authoritative body
Principles - ​laws or rules that guide the
conduct and practice of the profession
- used in identifying, measuring, and
reporting financial information
The accounting principles depend on
the pronouncement made by the PICPA
through its Accounting Standards Council
(​now​ called Financial Reporting Standards
Council or FRSC).
FRSC has members coming from:
1. PICPA
2. SEC
3. BIR
4. CHED (Commission on Higher
Education)
5. Financial Executives (FINEX)
6. PRC
HOW STANDARDS ARE PROCESSED
● FRSC prepares exposure drafts that are
disseminated to the accounting members
● Series of dialogues with members
● The council meets & finalizes the
standards
● Standards are circulated via bulletins
● Seminars are conducted to enlighten
members on how the standard should be
applied
● Standard is formalized and approved by
FRSC
● Standard forms part of the Financial
Reporting Standards (FRS)
ACCOUNTING PRINCIPLES USED IN
PREPARATION AND PRESENTATION OF
FINANCIAL STATEMENTS FROM PAS 1
(Read book for more info!)
1. Going Concern Principle
- primary guide in preparing FS
- it is expected that the business will
continue to exist indefinitely
 - financial statements should be
prepared on a going concern basis
unless management intends to close
the business

Assets like properties should be

recognized at cost without regard to the
changes in market values (same lang dapat
yung value kung magkano siya nabili.
Mag-iiba lang dapat yung value upon exit of
the business)

2. Business Entity Concept

- A business enterprise is separate and
distinct from its owner/investor
- only the assets, liabilities, revenue,
and expenses of the entity should be
included, NO personal assets & liab

3. Exchange Price or Cost Principle

4. Measurement in Terms of Money

5. Accrual Assumption
6. Objectivity
7. Reporting Period