Lesson 1: Accounting Terminologies

Definition of Accounting:
● 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. (Accounting Standards Council)
● 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. (American Institute of CPAs)
● Accounting is the PROCESS of identifying, measuring and communicating economic
information to permit informed judgment and decision by users of the information.
(American Institute of CPAs)

Bookkeeping vs. Accounting

● In terms of scope, accounting is broader as it includes the bookkeeping function.
Bookkeeping on the other hand, is just confined with the recording of monetary
transactions, which is one part of the accounting process.

Objective of Accounting:
● to provide financial information about a business that is useful to statement users
particularly owners and creditors in making economic decisions.

Primary Task of Accounting:

● Supply financial information so that statement users can make informed judgment.

Functions of Accounting:
1. Keeping systematic record of business transactions.
2. Protecting properties of the business.
3. Communicating results to various parties in or concerned with the business.
4. Meeting legal requirements.
5. To support daily operations of the business.
6. To fulfill stewardship function of the management
Lesson 2: History of Accounting
2000 BCE - 3500 BCE
● Cradle of Civilization
● Clay Tablets
● Mesopotamia, China, India, Central/South America

1339
● Freris Bonis of Montauban
● Double-Entry System
● France & Italy

1458
● Benedetto Cotrugli
● First Accounting Book; On Trade & The Perfect Merchant
● Book published in 1573 so credits for first ever accounting book does not go to him but
rather the first one to write one.

1494
● Father Luca Pacioli
● Father of Modern Accounting
● Suma De Arithmetica, Geometrica, Proportioni Et Proportionalita

15th Century
● Italy
● Italians use Accounting
● Origin of Debit & Credit

1700s
● French Revolution
● First boom of the accounting method
● Study and Development of accounting

1760-1830
● Industrial Revolution
● Importance on Fixed Assets
● Mass Production

21st Century
● Accounting Systems
● Computers, Applications & Internet
Lesson 3: Components of Financial Statements
1. Statement of Financial Position
● The elements directly related to the measurement of financial position are assets,
liabilities and equity.

2. Statement of Financial Performance

● Profit is frequently used as a measure of performance or as the basis for other
measures, such as return on investment or earnings per share.
● The elements directly related to the measurement of profit are income and
expense.
● The recognition and measurement of income and expenses, and hence profit
depends in part on the concepts of capital and capital maintenance used by the
entity in preparing financial statements.

3. Statement of Changes in Equity

● Also known as a statement of retained earnings that measures the changes in
owners' equity throughout a specific accounting period. It covers the following
elements: Net profit or loss. Dividend payments.

4. Statement of Cash Flow

● Provides aggregate data regarding all cash inflows a company receives from its
ongoing operations and external investment sources. It also includes all cash
outflows that pay for business activities and investments during a given period.

5. Notes to financial statement

● Disclose the detailed assumptions made by accountants when preparing a
company's: income statement, balance sheet, statement of changes of financial
position or statement of retained earnings.
Lesson 4: Users and their information needs
1. Investors
● The providers of risk capital and their advisers are concerned with the risk
inherent in, and return provided by, their investments.
● They need information to help them determine whether they should buy, hold or
sell. Shareholders are also interested in information which enables them to
assess the ability of the entity to pay dividends.
2. Employees
● Employees and their representative groups are interested in information about
the stability and profitability of their employers.
● They are also interested in information which enables them to assess the ability
of the entity to provide remuneration, retirement benefits and employment
opportunities.
3. Lenders
● Lenders are interested in information that enables them to determine whether
their loans, and the interest attaching to them, will be paid when due.
4. Suppliers & other trade creditors
● Suppliers and other creditors are interested in information that enables them to
determine whether amounts owing to them will be paid when due.
● Trade creditors are likely to be interested in an entity over a shorter period than
lenders unless they are dependent upon the continuation of the entity as a major
customer.
5. Customers
● Customers have an interest in information about the continuance of an entity,
especially if they have a long-term involvement with, or are dependent on, the
entity.
6. Government & their Agencies
● Governments and their agencies are interested in the allocation of resources
and, therefore, the activities of entities.
● They also require information in order to regulate the activities of entities,
determine taxation policies and as the basis for national income and similar
statistics.
7. Public
● Entities affect members of the public in a variety of ways. For example, entities
may make a substantial contribution to the local economy in many ways including
the number of people they employ and their patronage of local suppliers.
● Financial statements may assist the public by providing information about the
trends and recent developments in the prosperity of the entity and the range of its
activities.
Lesson 5: Branches of Accounting
1. Public Accounting
● In essence, the practice of the accounting profession.
● Auditing
○ Auditing or specifically auditing in the examination of financial statements by
independent certified public accountant for the purpose of expressing an opinion
as to the fairness with which the financial statements are prepared.
● Taxation
○ Includes the preparation of annual income tax returns and determination of tax
consequences of certain proposed business endeavors.
○ The CPA does not infrequently represent the client in tax investigations.
● Management Advisory Services
○ Generally, this area of practice refers to services to clients on matters of
accounting, finance, business policies, organization procedures, costs,
distribution and other phases of business conduct and operations.

2. Private Accounting
● It means that Certified Public Accountants are employed in business entities in various
capacities in accounting staff, chief accountant, internal auditor and controller (Highest).
● The major objective of the private accountant is to assist management in planning and
controlling the operation of the entity.
● The private accountant has also the responsibility for the determination of the various
taxes the business is obliged to pay.

3. Government Accounting
● Encompasses the process of analyzing, classifying, summarizing and communicating all
transactions involving the receipt and disposition of government funds and property and
interpreting the results thereof.
● The focus of government accounting is the custody and administration of public funds.
● Many CPAs are employed in many branches of the government, more particularly the
BIR, COA, DBM, SEC and even in a police agency like the NBI.
Lesson 6: Types of Business According to Ownership & Activities
Types of Business According to Ownership
1. Sole proprietorship
● Form of business organization initiated, organized, owned or capitalized and managed
by a single person.
● As defined, the entrepreneur is the capitalist, the manager, and administrator, and in the
beginning of the business, he practically does everything for the business.
Advantages Disadvantages

- Easy and Simple to Organize - Limited access to Resources/Capital

- Owner gets all the Profit
- Decision making rests on the owner
- Easy to Discontinue
- All Rewards to Owner
- Minimum Regulation & Taxation
- Limited to the knowledge and skills of
the owner
- Unlimited Personal Liability

2. Partnership
● “By the contract of partnership two or more persons bind themselves to contribute
money, property, or industry to a common fund, with the intention of dividing the profits
among themselves.” (Article 1767 Civil Code of the Philippines)
Advantages Disadvantages

- Easy to establish - Unlimited liability of at least one

- Skills and knowledge of partners
complement one another
- Large pool of capital
- Not too strict government regulation
partner
- Lack of continuity
- Inconvenience and struggle in
disposing of partnership interest
- Problems in share liquidation

3. Corporation
● It is an artificial being, invisible, intangible, and exists only in contemplation of law.
● Its owners are the stockholders who can sell their interests in the corporation without
affecting the continuity of its operations because the life of the corporation is dependent
or distinct from that of the owners or stockholders.
Advantages Disadvantages

- Transferable ownership - Strict government regulation

- Large pool of knowledge, skills, and
expertise
- Limited liability of the stockholders
- Ready transferability of ownership
- Employee benefits
- Legal entity
- Difficult to organize
- More costly taxation scheme
- Cost and time involved in the
incorporation process
- Potential loss of control by founders of
the corporation
Types of Business according to Activities
1. Service Business
● A service type of business provides intangible products (products with no physical form).
● Service type firms offer professional skills, expertise, advice, and other similar services.

Advantages Disadvantages

- No need for inventory. - Services are harder to value.

- Skills can be improved and can - Less demand during economic
produce better service. downturns.

2. 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.

Advantages Disadvantages

- Good merchandising attracts more - Profits are highly dependent on prices

customers. set by merchandise suppliers.
- It is flexible to changes. - Merchandise inventory may be
perishable.

3. Manufacturing 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.

Advantages Disadvantages

- There is a continuous demand on - Because of the scope of activities,

manufactured goods.
- The creation of a manufactured
product leads to higher job
satisfaction.
manufacturing firms are often more
labor and capital intensive.
- The cost of the manufactured
products highly depends on the price
and availability of the raw materials.

4. Hybrid Business
● Hybrid businesses are companies that may be classified in more than one type of
business.
Lesson 7: Accounting Concepts and Principles
Generally Accepted Accounting Principles (GAAP)
● Set of Guidelines, principles and procedures that companies and accountants follow
when preparing financial statements and reporting it to the users of financial information.
● Ensure that a financial report is complete, consistent and comparable.

1. Business Entity Concept

○ Recognizes the business as a separate entity.
○ Separate records for personal and financial transactions.
2. Monetary Unit Principle
○ Only include information on transactions that can be quantified or measured in
terms of money.
3. Going Concern Principle
○ A business entity would continue operations; stable and can meet its obligations.
4. Time Period Principle
○ Reporting financial transactions over a standard accounting period.
○ Calendar year - 12 month period starting from January 1 to December 31
○ Fiscal year - 12 month period which may not necessarily start from January 1
5. Objectivity Principle
○ Reporting based on solid evidence & avoiding opinionated financial statements.
6. Cost Principle
○ Recording acquired assets, liabilities & equity at its acquired/original cost.
7. Accrual Accounting Principle
○ Recording revenue & expenses when incurred rather than payment received.
8. Revenue Recognition Principle
○ Recognizing revenue when it is realized and earned.
9. Matching Principle
○ Reporting revenue and related expenses in the same time period
○ Showing the cause and effect relationship in a transaction
10. Full Disclosure Principle
○ Including all relevant and necessary information that would affect the user’s
understanding of the financial statement.
11. Conservatism Principle
○ Assets and revenue should not be overstated.
○ Liabilities and expenses should not be understated.
12. Materiality Principle
○ Businesses deal with significant information, those considered business-critical.