CHAPTER 1

ACCOUNTANCY PROFESSION
DEFINITION OF ACCOUNTING

• Service Activity
 provides quantitative information
 financial in nature
 useful in making economic decisions

• Art of recording, classifying and summarizing

• process of identifying, measuring and

communicating
ACCOUNTING PROCESS
Identification Measuring Communication
Accounting
Reports

Assign peso amounts Prepare

Select economic accounting reports
events
(transactions) SOFTBYTE
Annual Report

Analyse and interpret

Record, classify, for users
and summarize
ACCOUNTANCY PROFESSION
• R.A. 9298 - Philippine Accountancy Act of 2004
• Board of Accountancy - under the supervision of PRC
 promulgate rules and regulations
 standardize and regulate accounting education
 conduct examinations for registering CPAs
• Sectors:
 Public Practice
 Commerce and Industry
 Government
 Academe
ACCOUNTANCY PROFESSION

• Continuing Professional Development - raises and

enhances the technical skill and competence of the CPA
– requirement for renewal of license and accreditation of CPA
– proposed CPD credit units: 60 - 2016; 80 - 2017; 100 - 2018,
120 - 2019
ACCOUNTING AUDITING BOOKKEEPING

Encompasses auditing and Branch of accounting Branch of Accounting

bookkeeping

Internal Auditing - concerns on involves recording of economic

internal control events and transactions

External Auditor - express mechanical and procedural

opinion on the fairness of FS (recording and record keeping)
FINANCIAL ACCOUNTING MANAGERIAL ACCOUNTING

Financial Statement Managerial Accounting reports

External users Internal Users

Past Transactions Future oriented

Entire Organization segmented information

verifiability, objectivity, precision relevance, flexibility, timeliness

must conform to GAAP need not conform to GAAP

GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES
• encompass conventions, rules and procedures necessary
to define accepted accounting practice at a particular time
FINANCIAL REPORTING STANDARDS COUNCIL
• successor of ASC
• to establish GAAP in the Philippines and to assist BOA in
monitoring the conditions affecting the practice of
accountancy.
• composed of 15 members with a chairman
INTERNATIONAL ACCOUNTING INTERNATIONAL ACCOUNTING
STANDARDS COUNCIL (IASC) STANDARDS BOARD (IASB)

Independent private sector body replaces IASC

approved statement: International approved statement: International Financial

Accounting Standards (IAS) Reporting Standards (IFRS)

FRSC's PRONOUNCEMENT
PFRS corresponds with IFRS

PAS corresponds with IAS

PIC (Philippine Interpretation Committee) corresponds with IFRIC (International

Financial Reporting Interpretation
Committee)

corresponds with SIC (Standing

Interpretation Committee)
ELEMENTS OF FINANCIAL STATEMENTS AND ACCOUNT TITLES USED
The elements of financial statements that are directly related to measurement of financial condition in
the balance sheet are assets, liabilities and equity while the elements that are directly related to measurement of
performance in the income statement are income and expenses. These accounting elements are given account
names or account titles.

Account titles are identification or brief description of items that fall to the same kind, class or nature.

 STATEMENT OF FINANCIAL POSITION OR BALANCE SHEET ACCOUNTS (permanent accounts)

ASSETS – resources controlled by the enterprise as a result of past transactions and events and from which future
economic benefits are expected to flow to the enterprise.
1. CURRENT ASSETS – assets that are expected to be realized, sold or consumed within the entity’s normal
operating cycle.
 Cash - describe money, either in paper or in coins and substitutes like checks, postal money orders, bank
drafts and treasury warrants.
 Cash Equivalents - short term, highly liquid instruments that are readily convertible into cash and they
present insignificant risk of changes in values.
 Petty Cash Fund – money placed and set aside for petty or small expenses.
 Notes Receivable – promissory note that is received by the business from the customer arising from
rendering of services or sale of merchandise.
 Accounts Receivable – amounts collectible arising from services rendered to a customer on credit or sale
of goods to customers on account.
 Allowance for Doubtful Accounts – contra-asset account, provides allowance for possible losses from
uncollected accounts.
 Advances to Employees – amounts collectible from employees for allowing them to make cash advances
which are deductible in their salaries or wages.
 Inventories – assets which are held for sale in the ordinary course of business, in the process of
production for such sale, and in the form of materials or supplies to be consumed in the production
process or in the rendering of services.
 Prepaid Expenses – expenses that are paid in advance but are not yet incurred or have not yet expired.

2. NONCURRENT ASSETS
 Property and Equipment – tangible assets which are held by an enterprise for use in production or supply
of goods and services, for rentals to others, or for administrative purposes, and which are expected to be
used for more than one period.
 Land – area where the building used as office or store is constructed.
 Building – finished construction owned by the business where operations and transactions took place
 Equipment – includes calculators, typewriters, adding machines, computers, steel, filing cabinets and the
like.
 Furniture and Fixtures – include chairs, tables, counters, display cases and the like
 Accumulated depreciation – contra-asset account for fixed assets subject to depreciation.
 Intangible assets – identifiable, non-monetary assets without physical substance held for use in
production or supply of goods or services.
*LIABILITIES – present obligations of the enterprise arising from past events, the settlement of which is expected
to result in an outflow from the enterprise of resources embodying economic benefits.
1. CURRENT LIABILITIES – financial obligations of the enterprise which are expected to be settled in the
normal course of the operating cycle, due to be settled within one year.
 Accounts Payable – financial obligation of an enterprise typically related to operational transactions.
 Notes payable (short term) – obligation is evidenced by a promissory note.
 Accrued expenses – expenses incurred by the enterprise but are not yet paid.
 Unearned income – income collected or received in advance but services has not been rendered yet.

2. NONCURRENT LIABILITIES
 Notes payable (long term) – requires payment for more than one year.
 Mortgage payable – a financial obligation which requires a fixed or tangible property to be pledged as
collateral to ensure payment.

EQUITY – residual interest in the assets after deducting all its liabilities
 Authorized Share Capital – maximum amount fixed by the corporate charter or articles of incorporation to
be subscribed and paid in by the shareholders.
 Share Capital – amount of shares which have been fully paid and the share certificates have been issued.
 Subscribed Share Capital – amount of shares which have been subscribed but not yet fully paid.
 Treasury shares – corporation’s own share which has been issued but later reacquired.
 Share Premium – representing the paid in capital in excess of the par value or stated value
 Retained earnings – represents the cumulative income and expense from the start it operates up to the
present.

 STATEMENT OF FINANCIAL PERFORMANCE OR INCOME STATEMENT ACCOUNT (temporary accounts)

 INCOME or REVENUE – increases economic benefits during the accounting period in the form of
inflows or enhancements of assets or decreases of liabilities that result in increases in equity,
other than those relating to contributions from equity participants.

 EXPENSES – decreases economic benefits during the accounting period in the form of outflows or
depletion of assets or incurrence of liabilities that result in decrease in equity, other than those
relating to distributions to equity participants.
Why do we study ACCOUNTING?

Accountability – the fact of being responsible for what you do and able to give
a satisfactory reason for it (Cambridge Dictionary); obligation to pay income
taxes, house rentals, and utilities.

Language of business – set goals, measure results and evaluate

performance

Accounting is reliable for decision making and can enhance business

operations as to their profitability, solvency, and stability which can be even go
further to business diversification.

Accounting is a systematic process of identifying, recording, measuring,

classifying, verifying, summarizing, interpreting and communicating financial
information. It provides feedback to management regarding the financial results
and status of an organization. It may be handled by a bookkeeper or an
accountant at small firms or by sizable finance departments.

Accounting Concept

1. Going Concern Assumption – reflects that the business will continue

operating instead of being closed or sold
2. Business Entity Assumption – a business is accounted for separately from
other business entities, including its owner
3. Monetary Unit Assumption – express transactions and events in monetary,
or money, units.
4. Time Period Assumption – presumes that the life of a company can be
divided into time periods, such as months and years

History

Luca Pacioli, a Franciscan friar in Medieval Venice, wrote the ―Summa de

arithmetica, geometria, proportioni et proportionalità‖ in 1494. In it, he detailed
a system of financial recordkeeping in which every debit (Latin for ―he owes‖)
was matched to a credit (―he trusts‖). In his system, Pacioli included asset,
liability, capital, income, and expense accounts: exactly those categories you
would find on your own balance sheet and income statement. Although he is
not credited with having invented the system (that designation goes to the
Venetian merchants who used it), he is nonetheless known as the ―Father of
Accounting‖ for having put it to paper. Although modern accounting revolves
around double-entry bookkeeping, accounting as a technical craft existed long
before Pacioli. Financial records of goods sold and money exchanged stretch
back to ancient Mesopotamia, Assyria, Babylon, and Sumeria, where it likely
functioned as an expedient to taxation and the operation of temples. There is
even record of a state official in Egypt holding the title of―comptroller.

Types of business organization

Service Business - A service type of business provides intangible products (no

physical form). Service type firms offers professional skills, expertise, advice, and
other similar products.

Examples: salon, repair shops, schools, banks, accounting and law firms

Merchandising Business - This type of business buys products at wholesale price

and sells the same at retail price. They are known as “buy and sell” businesses.
They make profit by selling the products at prices higher than their purchase
costs. A merchandising business sells a product without changing its form.

Examples: grocery stores, convenience stores, distributors, and other resellers

Manufacturing Business - Unlike a merchandising business, a manufacturing

business buys products with the intention of using them as materials in making a
new product. Thus, there is a transformation of the products purchased. A
manufacturing business combines raw materials, labor, and factory overhead in
its production process. The manufactured goods will then be sold to customers.

Examples: furniture shops, gardenia, car dealers

Hybrid Business - Hybrid businesses are companies that may be classified in more
than one type of business. A restaurant, for example, combines ingredients in
making a fine meal (manufacturing), sells a cold bottle of wine (merchandising),
and fills customer orders (service). Nonetheless, these companies may be
classified according to their major business interest. In that case, restaurants are
more of the service type – they provide dining services.
Forms of business organization

1. Sole Proprietorship – the ownership of the business is only one. This usually
holds true for small and medium-sized business enterprises.
2. Partnership – the ownership of the business enterprise ranges from two or
more persons. The owners are called partners. They divide their profit
according to their agreement.
3. Corporation – the ownership of the business enterprise ranges from five to
more persons. The generic name of the owner is called corporator. To be
specific, stockholder or shareholder owns a stock corporation, while
member owns a non-stock corporation. The ownership of the corporation
is divided into shares of stock. Profits of this business form of business
enterprise are in a form of a dividend that is declared by the Board of
Directors.