American Association of Accountants

“Accounting is “the process of identifying, measuring, and communicating

economic information to permit informed judgement and decisions by users of
information.”
In accounting so our outputs would be the reports, these reports are called financial
statements.

Process:
a. Identifying – that particular item is something that accountable; only accountable
events are recognized: they would affect the accounting elements such as assets
down to expenses. The events are accountable if they have two sides: the value
received and the value parted with. For us to be able to gain something we should
also take away something
b. Measuring
c. Communicating – they’re informed on the sense that the decisions by these
various users or stakeholders would be dependent upon the information given to
them in the form of reports or financial statements.

Three important activities:

a. Identifying – the process of analyzing events and transactions to determine
whether or not they will be recognized. Only accountable events (business events)
are recognized.
b. Measuring – involves assigning numbers, normally in monetary terms, to the
economic transactions and events.
c. Communicating – the process of transforming economic data into useful
accounting information, such as financial statements and other accounting
reports, for dissemination to users. (This is where the reports are furnished to the
various users and stakeholders so that they can make decisions.)

Business Events:
1. External Events – events that involve an external party. (It happens between the
business and another business, so the business and an outside party.)
a. Exchange (reciprocal transfer) – reciprocal giving and receiving. (When one
entity gives something a consideration or an amount or the accounting
elements that have financial values to another party in which one party would
give and the other would receive, so it will be a give and take relationship.)
b. Non-reciprocal transfer – “one way” transaction. (One entity gives but the other
party just receive it without giving something in return.) One needs without
giving and one receives without giving.
i.e., gifts or charitable contributions so no receipt or the entity does not receive
anything at all because of the giving.
 c. External events other than transfer – an event that involves changes in the
economic resources or obligations of an entity caused by an external party or
external source but does not involve transfers of resources or obligations.
Whether reciprocal or non-reciprocal but the cost is outside of the
organizations. there are changes in economic resources or obligations but it is
caused by an external party or external source.
i.e., calamities, changes in the fair value and also the price levels so that’s the
market dictating: so if you say fair value changes so meaning the value of the
prices of the products will change in the market so it is caused by certain
parties meaning the buyers and sellers would be interacting in the market
resulting to established prices, obsolescence so when goods like technological
gadgets or items would be obsolete so they would decrease in value so it is
still dictated by the market factors or forces, vandalism when certain people
would be putting some graffities or writings on the company’s wall so those
things beyond the control of the organization

2. Internal Events - events that do not involve an external party. It happens within the
company.
a. Production – the process by which resources are transformed into finished
goods. Production, when we convert our raw materials or the direct materials
to be processed, the process is called production to become finished goods or
outputs
b. Casualty – an unanticipated loss from disasters or other similar events.

Measurement
• The several measurement bases used in accounting include, but not limited to, the
following:
1. Historical cost – based on what happened from the past, the amounts recorded
are based on already done or finished transactions, historical reports is
common but when we prepare for our reports it will be a mixture of costs of
historical costs and values. i.e., example is fair value
2. Fair value – which is the value by knowledgeable and willing buyers and sellers
and parties in an sctive market, so there’s really a market or mercado in which
that particular buying and selling activities would happen and the prices are
getting established would be made by them with no coercion no intimidation
no violence exerted in the process.
3. Present value – we can say we want 500,000 pesos in the future five years from
now, what is its value at the present
 4. Realizable value – if you say realize in accounting that means that the asset or
any other asset (asset is a resource owned by the company), so let’s say the
machine is sold in cash or on account so in this case it is realized through sale
so that’s the time we can say it is realizable. So the amount by which that
particular asset can be sold is called realizable value. On the other hand, it is a
liability or an obligation to pay for our creditors then the value in which then the
value that we have to pay to that particular amount of credit or account will be
the settlement value
5. Current cost – For example, we acquired a machine 10 years ago; for us to
acquire the same machine today like after 10 years how much would that be
6. Sometimes inflation-adjust costs – So there are some items in which we have
to adjust or incorporate because there are risks involved one of that is inflation
in the market. One key input is that if the item is based on market values with
interest because ethe interest should be able to capture the impact of inflation
so that’s why it is sometimes only
The most commonly used is historical cost. This is usually combined with the other
measurement bases. Accordingly, financial statements are said to be prepared using a
mixture of costs and values.

Valuation by fact or opinion

In accounting it will be the combination of fact or opinion: objective or subjective item.

So objective if it is fact meaning whatever is the amount that’s a historical cost, no
estimation. On the other hand, opinion is subjective based on estimate but the estimate
is done professionally, although this is an opinion but it is not a personal opinion rather a
professional opinion. Estimates is to opinion: fact is non-estimates.
• When measurement is affected by estimates, the items measured are said to be
valued by opinion.
• When measurement is unaffected by estimates, the items measured are said to
be valued by fact.

Basic Purpose of Accounting

The basic purpose of accounting is to provide information (this information is
quantitative meaning expressed in numbers specifically numbers are expressed in pesos
or any other currency for living in other countries) about economic activities intended to
be useful in making economic decisions.

Types of accounting information classified as to user’s needs

• General purpose accounting information – designed to meet the common needs
of most statement users. This information is governed by the Philippine Financial
 Reporting Standards. (If you can notice, it did not mention all the users but only
“most” users because whether we like it or not no report can address all the needs
of users, it will just address the needs which are common among the various users
of financial statements. The PFRSs is the standard that we are going to use which
are solely and clearly based on the international counterpart, international financial
reporting based in London, UK.
• Special purpose accounting information – designed to meet the specific needs of
particular statement users (these are now on the areas of accounting). This
information is provided by other types of accounting, e.g., managerial accounting
(it is about the management meaning internal users), tax basis accounting (for BIR
Bureau of Internal Revenue), etc.

Basic Accounting Concepts

• Double entry system – each accountable event is recorded in to two parts “debit
and credit” (Basically means that in accounting there are two sides for us to be
able to get something in return we should be giving also, so it’s also a give and
take relationship which is a basic concept in economics, so to get the benefit
sacrifice an amount) Debit is the value received, so the amount that is obtained in
the process. Credit is the amount value or parted with.
• Going concern – the entity is assumed to carry on its operations for an indefinite
period of time. (Which is known as continuity, the entity will continue for an
indefinite period of time.)
• Separate entity – the entity is treated separately from its owners. (So separate
business transactions from personal transactions.) This is also known as
Business Entity or Accounting Entity Concept.
• Stable monetary unit – amounts in the financial statements are stated in terms of
a common unit measure; changes in purchasing power are ignored. (This means
that we do not account for changes in purchasing power that is inflation [inflation
is the continuous rising of prices of the basic commodities or the continuous rising
general level of prices of basic commodities, so in that case if we have a timeline
or a time table we can notice that overall there is really an increase in the price].
Accounting basic concept is we do not account for changes in inflation so
whatever amounts that was obtained or given or paid in the transaction then that’s
it even if it is from the past.
• Time period (Periodicity) – the life of the business is divided into series or
reporting periods. (We cannot wait as to the time the business will end for us to
know how much we really the business earned in the process so that we can now
also divide it among the owners or give the share to the owners and other
stakeholders like creditors) We divide the life of the business into equal intervals
of time: annually or every 12 months, interim periods which means period that are
less than a year, semi-annual or semester which means every six months, quarterly
 which means every three months, and monthly which is every month; we call these
Accounting periods.
• Materiality concept – information is material if its omission or misstatement
could influence economic decisions. (We check if the values or amounts would be
material to the point that if we commit that amount or we wrongly place the value
or the amount of financial statements then the users would be doing other
decisions so meaning their decisions would change because of the omission
• Cost-benefit – the cost of processing and communicating information should not
exceed the benefits to be derived from it. (Overall rule, cost must not exceed be
benefits, cost must be lesser than the benefits
• Accrual Basis of Accounting – effects of transactions are recognized when they
occur (and not as cash is received or paid) and they are recognized in the
accounting periods to which they relate. (Income would be the earnings that we
have earned; Expenses are the values that we pay) In accordance basis of
accounting the timing of payment through cash is not important what is important
for as long as income is already earned and when does it become earned basically
if we already sold our goods or rendered the services [like massage, education], in
those situations the basis would be accrual so we are able to sell or deliver goods
even if no cash is collected yet. In expenses like electricity or utilities; we have
already use them but the payment will be after the usage. The opposite of this is
Cash Basis Accounting in which the basis would be when cash is received or
collected.
• Historical Concept – the value of an asset is determined on the basis of
acquisition cost. (Is when the value of the asset is based on the acquisition cost
or the value of that particular asset)
• Concept of Articulation – all of the components of a complete set of financial
statements are interrelated. (i.e., income statements are connected to the items
in the balance sheet)
• Full disclosure principle – financial statements provide sufficient detail to
disclose matters that make a difference to users, yet sufficient condensation to
make the information understandable, keeping in mind the costs of preparing and
using it.
• Consistency concept – financial statements are prepared on the basis of
accounting policies which are applied consistently from one period to the next.
• Matching – costs are recognized as expenses when the related revenue is
recognized.
• Residual equity theory – this theory is applicable where there are two classes of
shares issued, ordinary and preferred. The equation is “Assets – Liabilities –
Preferred Shareholders’ Equity = Ordinary Shareholders’ Equity”
• Fund Theory – the accounting objective is the custody and administration of
funds.
• Realization – the process of converting non-cash assets into cash or claims for
cash.
 • Prudence (Conservatism) – the inclusion of a degree caution in the exercise of the
judgements needed in making the estimates required under conditions of
uncertainty, such that assets or income are not overstated and liabilities or
expenses are not understated.

Common Branches of Accounting

• Financial Accounting – focuses on general purpose financial statements
• Managerial Accounting – focuses on special purpose financial reports for use by
an entity’s management
• Cost Accounting – the systematic recording and analysis of the costs of materials,
labor, and overhead incident to production.
• Auditing – the process of evaluating the correspondence of certain assertions
with established criteria and expressing an opinion thereon
• Tax Accounting – the preparation of tax returns and rendering of tax advice, such
as the determination of tax consequences of certain proposed business
endeavors
• Government Accounting – refers to the accounting for the government and its
instrumentalities, placing emphasis on the custody of public funds, the purposes
for which those funds are committed, and the responsibility and accountability of
the individuals entrusted with those funds.

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 – refers to employment in the private sector
in a position which involves decision making requiring professional knowledge in
 the science of accounting and such position requires that the holder thereof must
be a CPA
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 to a position in an
accounting professional group in the government or in a government -owned
and/or controlled corporation where decision making requires professional
knowledge in the science of accounting, or where civil service eligibility as a CPA
is prerequisite

Accounting Standards in the Philippines

• Philippine Financial Reporting Standards (PFRSs) are Standards and
Interpretations adopted by the Financial Reporting Standards Council (FRSC).
They comprise:
1. Philippine Financial Reporting Standards (PFRSs)
2. Philippine Accounting Standards (PASs)
3. Interpretations

The need for reporting standards

• Entities should follow a uniform set of generally acceptable reporting standards
when preparing and presenting financial statements; otherwise, financial
statements would be misleading
• The term “generally acceptable” means that either
a. The standard has been established by an authoritative accounting rule-making
body; or
b. The principle has gained general acceptance due to practice over time and has
been proven to be most useful.
• The process of establishing financial accounting standards is a democratic
process in that a majority of practicing accountants must agree with a standard
before it becomes implemented.