Over the time, accounting was defined in different
Accounting could provide you the
ways. The following were the versions:
Accounting is a service activity. Its function is to
provide quantitative information, primarily financial
in nature, about economic entities that will be useful
in making 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 or at least of a financial character and
interpreting the results thereof. (American Institute
of CPAs)
The latest version of the definition is:
Accounting is the process of identifying,
measuring, and communicating economic
information to permit informed judgement and
decision by users of the information. (American
Accounting Association)
Elements of the Definition
1. Identifying. You refer to this as the analysis
and identification of accountable events. Not
all activities of the business entity are an
accountable or economic event. You can
identify an event as accountable when it
affects the assets, liabilities, equity,
revenues and expenses of the business.
2. Measuring. You refer to this as the
assigning of monetary values of the
business’ accountable events.
3. Communicating. You refer to this as the
summary of the information processed in
the accounting system in order to produce
and communicate relevant information to
intended users.
Accounting is a special kind of language. You
have to use technical terminologies to
communicate information to users of financial
information. This is a tool that enables us,
accountants to communicate to data users
certain information about the financial activities
of a business entity.
Information Needs of Data Users
You prepare and present financial reports
periodically, at least once a year. Financial
statements are your means to communicate
common information to decision makers or data
users.
following information:
1. The financial position of the business entity
which you enumerate the type and value of
assets and liabilities it holds at a point in
time; as well as the financial status of the
owners.
2. The results of operations of a business
entity during a given period of time will
either be a profit or loss.
3. The operating, financing and investing
activities that were responsible for the
changes in the cash balance during a period
of time.
4. The reasons why the owner’s equity of the
business changed during the period of time.
Users of Accounting Information
1. Internal Users – These are people who are
directly involves in managing and controlling
the business. You include the managers,
and owners who are directly involved in the
management under this group.
2. External users – These are people who are
not directly involved in the management of
the business. You include investors, bank
creditors, suppliers, customers, government
agencies, owners that are not involved in
the management and the general public.
Branches of Accounting and Their Uses
1. Financial Accounting – General record
keeping (bookkeeping) Preparation of
general-purpose financial statements.
Users: All business entities use financial
accounting in their recordkeeping and
provide financial statements which will be
used by the other branches of accounting.
2. Managerial Accounting – Preparation of
specifically tailored management reports.
Users: Prepares report specifically required
and needed by management in performing
their stewardship functions.
3. Government Accounting – General record
keeping of the government and its agencies.
This also includes the preparation of the
annual budget and audit reports. Users:
Required by the government for
transparency and accountability of public
funds.
4. Tax Accounting – Compliance to the tax 2. Partnership – the association of two or more
code which includes registration, filing, individuals who contribute money, property
payment and updating of revenues and or industry into a common fund. With the
expenses. This branch also includes tax intention of dividing profits among
consultancy and advices given to clients. themselves.
Users: This service is required by all 3. Corporation – an artificial being created by
business and other entities required to operation of law, having the right of
register, file and pay taxes by the succession and the power attributes, and
government. properties expressly authorized by law or
5. Cost Accounting – This refers to analyzing incidental to its existence.
the costs incurred in providing goods or 4. Cooperative – an autonomous and duly
services by the business. Users: This registered association of persons, with a
service is used to analyze the cost of common bond interest, who have voluntarily
products or services and the effects of the joined together to achieve their social,
costs in pricing strategy, meeting economic, and cultural aspirations by
competitions and other financial policies. making equitable contributions to the capital
6. Accounting Education – Teaching of required, patronizing their products and
accounting and related courses. Users: services and accepting its fair share of the
Required by business students, owners and risks and benefits of the undertaking in
accounting professionals in their accordance with universally accepted
professional growth and development. cooperative principles.
7. Accountancy Research – Creation of
Legal Requirements for Starting a Business
research, position papers, case study
writing, journal articles and other similar Starting a business in the Philippines require many
endeavors. Users: This service is required legal documents. The following summarizes the
by business owners and managers, essential steps you need to follow for starting a
government agencies, professional business:
organizations and other interested parties.
8. Auditing – Expression of an opinion on the 1.
correspondence between management
assertions and subscribed criteria.
What is Accounting in the 21st century?
Accounting is a technical, social and moral
practice concerned with the sustainable
utilization of resources and proper
accountability to stakeholders to enable the
flourishing of organizations, people and nature.
Forms of Business Organization
A business organization describes how
businesses are structured and how the
structure helps them meet the goals. A
business is designed to focus either on
generating profits or improving society. You
categorize business that is simplest and most
common is the one owned by only one
individual.
1. Sole or single proprietorship – the business
that is simplest and most common is the
one owned by only one individual.
Accounting Concepts and Principles
There are two types of accounting information
dependent on the needs of the users, to wit:
General purpose accounting information –
designed to meet the common needs of most
statement users. This information is governed by
the Philippine Financial Reporting Standards
(PFRSs).
Special purpose accounting information – designes
to meet the specific needs of particular statement
users. This information is provided by other types of
accounting, e.g., managerial accounting, tax basis
accounting, etc.
Accounting Concepts
1. Double-entry system – each accountable
event is recorded in two parts – debit and
credit
2. Going concern – the entity is assumed to
carry on its operation for an indefinite period
of time.
3. Separate entity – the entity is treated
separately from its owners.
4. Stable monetary unit – amounts in the
financial statements are stated in terms of a
common unit of measure; changes in
purchasing power are ignored. It assumes
that the value of a specific monetary unit is
stable over time.
5. Time period – the life of the business is
divided into series of reporting periods.
6. Materiality concept – information is
material if its omission or misstatement
could influence economic decisions. All
items that are reasonably likely to impact
investors’ decision making must be
recorded.
7. Cost-benefit – the cost of processing and
communicating information should not
exceed the benefits to be derived from it.
The cost of providing the information in the
financial statements should not exceed the
benefits that the users get from reading
those statements.
8. 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.
9. Historical cost concept – the value of an
asset is determined on the basis of
acquisition.
10. Concept of Articulation – all of the
components of a complete set of financial
statements are interrelated. The income
statement, balance sheet, retained earnings
statement, and financial position are all
linked together.
11. 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.
Only disclose information about events that
are likely to have a material impact on the
entity’s financial position.
12. Consistency concept – financial
statements are prepared on the basis of
accounting policies which are applied
consistently from one period to the next.
Once you adopt an accounting principle or
methos, continue to follow it consistently in
future accounting periods. Only change an
accounting principle or method if the new
version in some way improves reported
financial results.
13. Matching – costs are recognized as
expenses when the related revenue is
recognized. If there is a cause-and-effect
relationship between revenue and
expenses, then record them at the same
time.
14. 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.”
15. Fund theory – the accounting objective is
the custody and administration of funds. It is
a system of accounting used by non-profit
entities to track funds assigned to different
purposes and the usage of that cash. The
focus of fund accounting is on
accountability, rather than profitability.
16. Realization – the process of converting
non-cash assets into cash or claims for
cash.
17. Prudence (Conservatism) – The inclusion
of a degree of 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. The tendency under the
prudence concept is to either not recognize
profits or to at least delay their recognition
until the underlying transactions are more
certain.
1. Fundamental qualitative characteristics
Relevance
Information is relevant if it can affect the
decisions of users. Relevant information
has the following:
A. Predictive value – the information
can be used in making predictions.
B. Confirmatory value – the information
can be used in confirming past
predictions
Faithful Representation
Faithful representation means the
information provides a true, correct and
complete depiction of what it purports to
represent. Faithfylly represented
information has the following:
A. Completeness – all information
necessary for users to understand
the phenomenon being depicted is
provided.
B. Neutrality – information is selected
or presented without bias.
C. Free from error – there are no errors
in the description and in the process
by which the information is selected
and applied.
2. Enhancing qualitative characteristics
a. Comparability – the information helps
users in identifying similarities and
differences between different sets of
information.
b. Verifiability – different users could reach
consensus as to what the information
purports to represent.
c. Timeliness – the information is available
to users in time to be able to influence
their decisions.
d. Understandability – users are expected
to have:
• Reasonable knowledge of
business activities;
• And willingness to analyze the
information diligently.
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);
and
3. Interpretations
Why is there a need for reporting standards?
1. Entities should follow a uniform set of
generally acceptable reporting standards
when preparing and presenting financial
statements; otherwise, financial statements
would be misleading.
2. 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.
3. 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.
The PFRS are issued by the Financial Reporting
Council (FRSC) which is the official accounting
standard setting body in the Philippines. These are
patterned from the International Financial Reporting
Standards (IFRSs) which are issued by the
International Accounting Standards Board (IASB).
This means that the accounting standards used
here in the Philippines are similar to those used in
other countries worldwide.
Relevant regulatory bodies
Other than the Financial Reporting Standards
Council (FRSC), the following also affect the
accounting policies used by businesses and their
financial reporting:
1. Securities and Exchange Commission
(SEC) – The SEC is tasked with regulating
corporations, including partnerships. SEC
required corporations and partnerships to
file audited financial statements.
2. Bureau of Internal Revenue (BIR) – The BIR
is tasked in collecting national taxes and
administering the provisions of the Tax
Code.
3. Bangko Sentral ng Pilipinas (BSP) – BSP is
tasked in regulating banks and other entities
performing banking functions. BSP
influences the selection and application of
accounting policies by these businesses.
4. Cooperative Development Authority – CDA
is tasked in regulating cooperatives. The
CDA influences the selection and
application accounting policies by
cooperatives.
Accounting Equation
The basic features of the accounting model that we
use today came from Fray Luca Pacioli, the Father
of Accounting. He developed a method for tracking
the trading ventured of businessmen 500 years
ago. The same foundation that serves the most
modern and most elaborate computerized
accounting systems of today. The core of the
system is the notion that a business organization
can be described as a collection of assets (left side)
and the corresponding claims against those assets
(right side). The claims can be divided into the
claims of creditors (liabilities) and owner (owner’s
equity)
ELEMENTS OF THE ACCOUNTING EQUATION
Assets
These are the resources that you control that have
resulted from past events and can provide you with
future benefits. Control means that you are able to
gain the economic benefits from the use of the
assets. The control of a resource have resulted
from a past event or transaction. Therefore,
resources for which control is yet to be obtained in
the future do not qualify as an asset. Future benefit
means the resource is expected to provide
economic benefits over more than one accounting
period.
Economic benefit means the potential of the
resource to provide you, directly or indirectly, with
cash through:
a. Sold or exchanged for other assets
b. Used to produce goods or service
c. Used to settle a liability
d. Distributed to owners
Liabilities
These are your present obligations that have
resulted from past events and can require you to
give up resources when settling them in the future.
Present obligation means that right now, you have
a responsibility to pay someone because an
obligating event has transpired (past event). And
you have to settle these obligations by paying cash,
transferring another asset or rendering service.
Equity
This refers to the claims of the owner to the assets
of the business after satisfying the claims of the
creditors. Equity simply means assets minus
liabilities. Other terms for equity are capital, net
assets or net worth.
Now, we shall talk about the Expanded
Accounting Equation. We can expand the basic
accounting equation by including two more
elements – income and expenses. The expanded
accounting equation shows all the financial
elements. The expanded accounting equation is:
Assets = Liabilities + Equity + Income - Expense
Notice that the income is added while the expenses
are deducted in the equation. These are because
income increases equity while expenses decrease
equity.
Income
This refers to the increase in economic benefits
during the period in the form of inflows or
enhancements of assets or decreases in liabilities
that resulted in increases in equity, excluding those
related to investment by owners.
Expenses
These are decreases in economic benefits during
the period in the form of outflows or depletion of
assets or increases of liabilities that result in
decreases in equity, excluding those related to
distributions to owners.
The difference between income and expenses
represents profit or loss.
• If income is greater than expense, the difference
is profit.
• If income is less than expense, the difference is
loss.
Another variation of the expanded accounting
equation is:
Assets = Liabilities + Equity + Profit/-Loss
Profit increases equity while loss decreases equity.
The Accounts
The elements in the accounting equation are
represented by accounts. The account is the basic
storage of information in accounting. It is the record
of the increases and decreases in a specific Item of
asset, liability, equity, income or expense.
The simplest depiction of an account is through the
T-account. It is called as such because it resembles
the letter “T”.
A T-account has three parts, namely:
• Account title – describes the specific item of
asset, liability, equity, income or expense.
• Debit side – the left side of the account
• Credit side- the right side of the account
Whether the debit or credit represents an increase
or decrease depends on the type of account.
Accounts on the left side of the equation (assets)
are increased by debit entries and decreased by
credit entries. Accounts on the right side of the
accounting equation (liability and equity) are
increased by credit entries and decreased by debit
entries.
The difference between the total debits and credits
in the account represents the balance of the
account. In the preceding sample, the balance is
P700 (1,700 – 1,000) If total debit is more than the
total credits, the account has a debit balance. If the
total credit is more than the total debits, the account
has a credit balance. Therefore. in the preceding
sample the Cash has a debit balance of P700.
Now, we shall discuss the classification of
accounts. The five major accounts, also called the
elements of the financial statements are actually
the items in the expanded accounting equation. Let
us recall them:
1. Assets
2. Liabilities
3. Equity
4. Income
a. Revenue – arises in the ordinary activity
of the of business such as sales or service
fee
b. Gains – represents other item that meet
the definition of income and may or may not
arise in the course of ordinary activities of
the business.
5. Expenses
a. Expense – arise in the course of the
ordinary activities of a business.
b. Loss – represents other items that meet
the definition of expenses and may or may
not arise in the course of ordinary activities
of the entity.
Classifications of the Five Major Accounts
1. According to financial statements where they
appear
a. Balance sheet accounts – accounts that are the
components of the statement of financial position.
b. Income Statement Accounts - accounts shown in
the statement of comprehensive income.
2. Traditional classification a. Permanent or real
accounts – this refers to accounts that are not
closed (bring down to zero) at the end of every
accounting period. These are accounts found in the
balance sheet. The Accounting Equation and Types
of Accounts • NU LAGUNA 9 b. Temporary or
nominal accounts - this refers to accounts that are
closed at the end of every accounting period.
These are accounts found in the income statement.
c. Mixed accounts – this refers to accounts that are
partly real and partly nominal at initial recording. d.
Companion accounts – this refers to the account
that is always shown with another account. There
are two types of companion accounts: i. Contra
accounts – an account with a balance opposite the
normal accounts in its category. An example of a
contra account is Accumulated Depreciation. It has
a credit balance and shown among the assets
( with debit balances). A contra account decreases
the valuation of an account. ii. Adjunct accounts –
an account with a balance similar to the normal
accounts in its category. An example of adjunct
account is Premium on Bonds Payable. It has a
credit balance and shown among the liabilities
(credit balance). An adjunct account increases the
valuation of an account. Chart of Accounts The
chart of accounts is a list of all the accounts used
by a business in recording its transactions. The
following is an example of a basic chart of accoun