COLLEGE OF ACCOUNTANCY AND BUSINESS ADMINISTRATION

FINANCIAL ACCOUNTING AND

REPORTING

PROF. ADRIAN A. ILAGAN, CPA, MBA

FINANCIAL ACCOUNTING AND REPORTING 1

 COLLEGE OF ACCOUNTANCY AND BUSINESS ADMINISTRATION

Lesson 1

ACCOUNTING AND ITS ENVIRONMENT

Learning Objectives:
At the end of the lesson, you should be able to:
• Define accounting and explain it role in business.
• Explain the fundamental accounting concepts and principles.

Lesson Overview:

As business and society become more complex, accounting develops new

concepts and techniques to meet the ever-increasing needs for financial
information. Without such information, many complex economic development
and social programs may never have been undertaken. Without accounting, a
business could not function optimally (Ballada, 2019).

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Engagement

Did you know?

https://www.facebook.com/PhilCIPAG/posts/the-richest-person-in-the-philippines-is-a-
cpa/1226959837471025/

Do you know wo this person is? What do you think this person did to become this
rich?
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FINANCIAL ACCOUNTING AND REPORTING 3

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Explore
A. Definitions of accounting.
Accounting in its broadest sense is the language of business. Several
institutions have defined accounting for us to better understand its essence.
• The Accounting Standards Council (ASC)
o Accounting is a service activity. Its function is to provide quantitative
information, primarily financial in nature, about economic entities that
is intended to be useful in making economic decisions.
• American Accounting Association (AAA)
o Accounting is the process of identifying, measuring and
communicating economic information to permit informed judgments
and decisions by users of the information.
• American Institute of Certified Public Accountants (AICPA)
o Accounting is the art of recording, classifying and summarizing in a
significant manner and in terms of money, transactions and events
which are, in part at least, of a financial character, and interpreting the
results thereof.

B. Double-entry Bookkeeping

Luca Pacioli is considered the father of double-entry bookkeeping. He

introduced this concept in his book entitled “Summa de Arithmetica,
Geometria, Proportioni et Proportionalita”.
• In this concept, he mentioned that for every debet dare (should give)
there exists a debet habere (should have or should receive).
• In modern applications, it simply states that for every debit, there exists a
corresponding credit.
Note: We will discuss the application of double-entry bookkeeping in
the next lesson.

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C. Fundamental Concepts and Basic Principles in Accounting

To further understand accounting, we delve deeper into what makes
accounting a useful tool in decision making. There are fundamental concepts
and basic principles which we should all be familiar of.
• Fundamental Concepts
o Entity Concept
▪ An accounting entity is an organization or a section of an
organization that stands apart from other organizations and
individuals as a separate economic unit.
▪ Simply put, the owner is separate and distinct from the
business.
o Periodicity Concept
▪ An entity’s life can be meaningfully subdivided into equal
time periods for reporting purposes.
▪ For purposes of reporting to outsiders, one year is the usual
accounting period.
o Stable Monetary Unit
▪ It allows accountants to add and subtract peso amounts as
though each peso has the same purchasing power as any
other peso at any time.
▪ Simply put, we ignore the effects of inflation in the
accounting records.
o Going Concern
▪ Financial statements are normally prepared on the
assumption that the reporting entity will continue in
operation for the foreseeable future.
• Basic Principles
o Objectivity
▪ Accounting records and statements are based on the most
reliable data available so that they will be as accurate and as
useful as possible.
o Historical cost
▪ It states that acquired assets should be recorded at their
actual cost and not at what management thinks they are
worth at reporting date.

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o Revenue recognition principle

▪ Revenue is to be recognized in the accounting period when
goods are delivered or services are rendered or performed.
o Expense recognition principle
▪ Expenses is to be recognized in the accounting period in
which goods and services are used up to produce revenue
and not when the entity pay for those goods and services.
o Adequate disclosure
▪ Requires that all relevant information that would affect the
user’s understanding and assessment of the accounting entity
be disclosed in the financial statements.
o Materiality
▪ Financial reporting is only concerned with information that
is significant enough to affect evaluations and decisions.
Materiality depends on the size and nature of the item
judged in the particular circumstances of its omission.
o Consistency principle
Firms should use the same accounting method from period to period to achieve
comparability overtime within a single enterprise.

FINANCIAL ACCOUNTING AND REPORTING 6

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Explain and Extend

NAME: _______________________________________________ SCORE: ______________
COURSE: _____________________________________________ DATE: _______________

In your own words and understanding, answer briefly the following questions.
1. Why is accounting the language of business?
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2. What is going concern?

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3. What is double entry bookkeeping?

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EVALUATE

NAME: _______________________________________________ SCORE: ______________

COURSE: _____________________________________________ DATE: _______________

Answer briefly the following questions.

1. Can we include a purchase of house and lot of Mr. A in the books of his
business? Why?
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2. Can we have financial statements prepared on a monthly basis?
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