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Course Description This course provides an introduction to accounting, within the context of business and
business decisions. Students obtain knowledge of the principles and concepts of
accounting as well as their application that will enable them to appreciate the production
of accounting data. Emphasis is placed on understanding the reasons underlying basic
accounting concepts and providing students with an adequate background on the
recording, classification and reporting function of accounting in a service and
merchandising concerns. Exposure through the use of practice sets in recording and
reporting transactions for service or merchandising firm is a requirement in this course.
Course Learning At the end of the course, students would be able to:
Outcomes 1. Define Accounting and differentiate the branches of Accounting
2. Enumerate and understand the users of Accounting information
3. Practice Accounting values and ethics
4. Internalize the Accountancy profession
5. Differentiate the qualitative characteristics of the Accounting Standards
6. Understand and solve problems on Accounting Equation
7. Prepare correct journal entries and posting
8. Perform the Accounting cycles of Service and Merchandising Companies
9. Prepare Financial Statements of Service and Merchandising Companies
Initiate adjusting entries for correction of Financial Statements.
Evidence of Students can perform the Accounting Cycles of Service and Merchandising companies
Learning/ and prepare financial statements of Service and Merchandising Companies. Quizzes,
Assessment Tools Exercises, Group problem solving, Major Examinations.
Module All activities must be written in a separate paper and to be submitted upon the
requirements collection of the offline module schedule. You may also opt to submit your output via
submission email or messenger if you will have the chance to access the internet (please check
instructions
your timeline for guidance).
Topics (Coverage) Topics:
Prelim
Session 1: Accounting and its Environment
Session 2: Accounting Concepts, Principles and Standards
Session 3: The Accounting Equation and the Double-entry System (Part 1)
Target First Year Students of the Bachelor of Science in Accountancy and Accounting
Participants Information System
Learning Time: 6 hours a week for 18 weeks, 108 total hours.
Means for Learner Allotment of consultation hour once a week, discussion through messenger.
Support
Ms. Caryl Deanne Villar
Email: caryl.deanne@cmdi.edu.ph
Messenger: Caryl Deanne Villar
Mobile No.: 0920-314-2521
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1. Define accounting and know its purpose, functions, scope and objectives.
2. Understand the branches of Accounting.
3. Enumerate the users of accounting information
4. Understand the Accountancy profession, its values and ethics, scope of practice, accreditation,
and the continuing professional education.
5. Narrate the history/origin of accounting.
6. State the forms of business organization and the types of business according to their activities.
7. Determine the purpose and phases of accounting.
Introduction
Whenever we hear the word “Accounting”, we often associate it with figures and then relate it to
business. We failed to realize that accounting is not for business alone. Actually, nearly everyone
practices accounting in one form or another everyday. Whenever we go and in everything we do which
involves decision-making, accounting is present. Whether we are at home, in school or anywhere else,
accounting has always been a part of our daily struggle for survival. This makes accounting to have a
universal existence.
Welcome to lesson 1 of module 1! This lesson introduces you to the development of accounting
and roles of ethics in business. You will also learn the forms, purpose and activities in business
organization. The definition, purpose, phases and branches of accounting will also be discussed as well as
the development and pertinent information related to the Accountancy in the Philippines. At the end of
this lesson, you come to reflect that accounting is essential to our everyday lives as we are living in an
era of accountability. Enjoy and keep reading!
Definition of Accounting
Nature of Accounting
• The industrial revolution and the share-issuing company (late 18th and early 19th
century) - New accounting practices were introduced like depreciation, allocation of Overhead,
inventory accounting, progression of accounting for business entities, intensified and improved
business regulations on financial reporting and new tax accounting systems and procedures.
• The arrival of income taxation and the conflict with financial accounting - Tax
Accounting was born as a specialized field of accounting with this development where CPAs are
infused with taxation works.
• Schmalenbach and the chart of accounts - Eugen Schmalenbach (1873-1955), believed that
chart of accounts are not mere carriers of balances but it contains significant information which
can be prepared regularly and speedily to respond rapidly to the external and internal
circumstances influencing the economic issues of an enterprise.
• The rise of the group of companies and the need for consolidated accounts - The
evolution of Business Combination accounting practices thru merger or consolidation.
• Internalization of markets and reporting - Some businesses are raising capital and trade
internationally with the intention of increasing the liquidity of their organizations.
Valuation - This gives emphasis on how accounting measures the value of the firm.
When the markets are perfect and complete, the assets and the changes in the book value of
owner's equity can be measured at their market value. While, when the markets are not perfect
and complete, accounting can still be used to approximate the change in the value of the entity.
Stewardship - Stewardship of the firm affects the value of the firm. Accounting information is
used to assess, monitor and control the activities of the entity.
Specialized Fields and Branches of Accounting
Standards - PSA
b. Tax Services - For tax compliance, accountants prepare various tax returns for income
taxes, business taxes and transfer taxes. He may also represent the client in tax
assessment and examinations conducted by BIR.
c. Management Advisory Services - giving advises to clients concerning finance,
accounting, budgeting, accounting systems, organization policies and procedures,
product costing, pricing and distribution, and other business undertakings.
2. Private Accounting - accountants are employed in private businesses and NGOs
a. Financial Accounting
Definition - bookkeeping of financial transactions and events of a business and
preparation of basic financial statements
Report - Financial statements: (1) General Purpose Financial Statements are prepared to
accommodate the information needs of persons who have no capability to request or acquire
information directly from the company and (2) Special Purpose Financial Statements - utilized
by internal parties to guide them in the decision making process for the company
Frequency - periodic
b. Cost Accounting - concerned with inventory costing and product costing of the
processed or manufactured goods
c. Tax Accounting - involved in tax compliance and tax planning
d. Management Accounting - deals with business and financial planning, strategic
planning, budgeting, analysis, monitoring and controlling the business.
e. Internal Auditing - concerned with safeguarding and protection of organization's
assets, reliability of accounting records, and adherence to established policies and
procedures of the company.
f. Private Accounting - accountants are employed in private businesses and NGOs
3. Government Accounting
Definition - accounting for the receipt and disposition of government fund and property
and interpreting the result thereof; used by all government agencies
Frequency - periodic
The Republic Act 9298 (RA9298) otherwise known as the "Philippine Accountancy Act of 2004"
serves as the regulating law for the certified public accountants (CPAs) in the Philippines. The act was
officially promulgated on July 28, 2003 by the Congress of the Philippines. Topics and its accompanying
details are included in the CPA Board Examinations as part of the Auditing Theory subject.
The Financial Reporting Standards Council (FRSC) was established by the Board of Accountancy
(BOA or the Board) in 2006 under the Implementing Rules and Regulations of the Philippine Accountancy
of Act of 2004 to assist the Board in carrying out its power and function to promulgate accounting
standards in the Philippines. The FRSC’s main function is to establish generally accepted accounting
principles in the Philippines.
Professional Organizations of CPAs
To promote and maintain high professional and ethical standards among accountants;
To advance the science of accounting;
To develop and improve accountancy education;
To encourage cordial relations among accountants, and
To protect the Certificate of Certified Public Accountant granted by the Republic of the
Philippines.
PICPA also functions as the policy making body of the following accounting organizations which
function as its implementing arms:
Advantage Disadvantage
1. ease of formation - do not go through rigid 1. unlimited liability - can go after personal
registration process and can be formulated properties even after extinguishing all
even with small amount of capital business assets to satisfy claims of creditors
2. owner has full control of the business - can 2. difficulty of raising additional capital - owner
single-handedly decide on matters is the only one who can provide additional
pertaining to the business capital
3. owners can mix personal and business 3. owner's bias - owner has the final word
assets - in case of difficulties, may use
personal assets to help the business
recover
4. owners have all profits for themselves
5. simple taxation
b. Partnership - contract whereby two or more persons bind themselves to contribute money,
property (other assets owned by a person), or industry (skills and expertise) to a common fund,
with the intention of dividing profits among themselves and may also be formed for the exercise
of a profession
Advantage Disadvantage
c. Corporation - artificial being created by the operation of law, having the right of succession and
the powers, attributes and properties expressly authorized by law or incident to its existence
Advantage Disadvantage
1. Service
Definition - generally use their employees to provide services to customers
Input - labor
2. Merchandising
Definition - buy finished or almost finished goods from suppliers and resell the same to
customers
3. Manufacturing (Manufacturers)
Definition - create their own products
Disadvantages - generally need production facilities; high conversion costs; cost of quality
control; managing inventory.
• Financing Activities-
Organizations require
financial resources to obtain
other resources in financial
markets are the methods an
organization uses to obtain
financial resources from
financial markets and how it
manages these resources.
(e.g., repaying creditors and
paying a return to the owners)
• Investing Activities
Involve the selection and management including disposal and replacement
of long-term resources that will be used to develop, produce and sell goods and
services. (e.g. Buying land, equipment, buildings and other resources that are
needed in the operation of the business and selling theses resources when they are
no longer needed.
• Operating Activities
Involve the use of resources to design, produce, distribute, and market
goods and services. (e.g. research and development, design and engineering,
purchasing, human resources, production, distribution, marketing and selling and
servicing.
Introduction
Every business organization whether in the public or private sector is established to achieve
certain objectives. This could be profit maximization as in the case of the private sector or efficient and
timely provision of essential services at a reduced price, as in the case of the public sector. Accounting
plays a vital role in the stewardship of an organization. It is regarded as a language of communication in
an organization. However, there are problems encountered in the process of communicating this
information. One of that of the problem of subjectivity in preparing the financial statements. Thus, it
becomes necessary that in preparing the financial statement, the accountant should be guided by some
basic assumptions, principles, concepts and conventions to ensure a high degree of standardization in
financial reporting.
This lesson introduces you to the accounting concepts and principles that is used in the
preparation of Financial Statements. The understanding of accounting concepts and principles is
important in the preparation and presentation of Financial Statements for proper analysis, interpreting
and reporting financial statements. So, Enjoy and keep reading!
Accounting Concepts refer to abstract ideas or assumptions which sets, governs, regulates and
standardizes practices in the accounting world.
Framework is the basis of the Financial Reporting Standards (IFRS-PFRS), which addresses the
concepts underlying the information presented in general purpose financial statements.
1. Statement of Financial Position shows the financial condition or position of the organization
at any given time.
2. Income Statement is the results of operating the business during a given time are reflected in
the Income Statement.
3. Statement of Changes in Equity shows movements of owner's capital for a particular period.
4. Cash Flow Statement reflects the financing and investing activities of the business or the
The objective of financial statements is to provide information about the financial position,
performance and changes in financial position of an entity that is useful to a wide range of users in
making economic decisions.
2. Matching principle states that expenses are recognized in the same period as the related
revenues are recognized. Meaning, expenses recognition is driven by a matching process.
b. Measurement is the process of determining the monetary amounts at which the elements of
the financial statements are to be recognized and carried in the statement of financial position
and income statement.
1. Historical cost principle states that the measurement of asset or liability must be based on
the amount given or received in the exchange transaction.
2. Current Cost - Assets are carried at the amount of cash or cash equivalents that would
have to be paid if the same or an equivalent asset was acquired currently. Liabilities are
carried at an undiscounted amount of cash or cash equivalents that would be required to
settle the obligation currently.
3. Realizable (settlement) Value - Assets are carried at the amount of cash or cash
equivalents that could currently be obtained by selling the asset in an orderly disposal.
Liabilities are carried at their settlement values; that is, the undiscounted amounts of cash or
cash equivalents expected to be paid to satisfy the liabilities in the normal course of business.
4. Present Value - Assets are carried at the present discounted value of the future net cash
inflows that the item is expected to generate in the normal course of business. Liabilities are
carried at their present discounted value of the future net cash outflows that are expected to
be required to settle the liabilities in the normal course of business.
Qualitative Characteristics
3. Reliability - Information has the quality of reliability when it is free from material error and bias
and can be depended upon by users to represent faithfully that which is either purports to
represent or could reasonably be expected to represent.
a. Faithful representation - A statement of financial position should represent faithfully the
transactions and other events that result in assets, liabilities and equity of the entity at the
reporting date which meet the recognition criteria.
b. Substance over form - If information is to represent faithfully the transactions and other
events that it purports to represent, it is necessary that they are accounted for and presented
in accordance with their substance and economic reality and not merely their legal form.
c. Prudence is the inclusion of a degree of caution in the exercise of the judgments needed in
making estimates required under conditions of uncertainty, such that assets or income are
not overstated and liabilities or expenses are not understated.
d. Completeness - To be reliable, the information in financial statements must be complete
within the bounds of materiality and cost. An omission can cause information to be false or
misleading and thus unreliable and deficient in terms of its relevance.
e. Neutrality - To be reliable, the information contained in financial statements must be
neutral, that is, free from bias.
4. Comparability - Users must be able to compare the financial statements of an entity through
time in order to identify trends in its financial position and performance. Users must be able to
compare the financial statements of different entities in order to evaluate their relative financial
position, performance and changes in financial position.
1. Consistency - The reported accounting information should conform to procedures and
methods that remain unchanged from one period to another. Comparisons over time are
difficult unless there is consistency in the way accounting principles are applied across fiscal
years.
Session 3: The Accounting Equation and the Double Entry System (Part 1)
Examples of assets:
Cash, Cash equivalents, notes receivable, accounts receivable, inventories, prepaid expenses, property, plant and
equipment, investments, intangible assets and other assets.
Classification of Assets
1. Current Assets- assets that are expected to be realized, sold or consumed within the enterprise’s normal
operating cycle.
2. Non-Current Assets - All other assets which are not current and are expected to be realized in more than 12
months
4. Notes Receivable
Written promises to the entity to receive cash at a later date and usually arise from the normal course of
business
Sometimes called promissory notes
5. Inventories
Includes raw materials, work-in-process items, finished goods and supplies
Raw Materials – inputs for producing other materials
Work-In-Process Items – raw materials entered into production but awaiting completion
Supplies – do not serve as input for a product but are used in the production
Finished Goods – end products upon completing production
6. Prepayments
Paid in advance for goods or services anticipated to be received by the entity in the future
Would only cease to be as such when they are finally used up
1. Investments
Most liquid of the noncurrent assets
Investments which are not expected to be realized within 1 year
2. Fixed Assets
Most tangible, longest-serving assets
Expected to not be converted into cash immediately and regularly placed as a means of production
Not usually consumable and are only used through utilization
Depreciation – deterioration with the passage of time, through usage, normal wear-and-tear, and obsolescence
(except land)
3. Intangible Assets
Lack physical substance and yet are similarly realizable over long periods of time
Value and assets are harder to measure and evaluate
Includes patents, copyrights, franchises, goodwill, trademarks and licenses
Often are represented by written documents or certificates stating their description and ownership
status
4. Other Assets
All remaining assets which do not fall into any of the accounts mentioned
Catch-all for assets which are usually very much unique or hard to classify
Liabilities- are obligations of the entity to outside parties who have furnished resources
Characteristics of a Liability:
1. Obligations- may be legal or not.
2. Transfer economic benefits- this could be transfer of cash, or other property, the provision of a service or the
refraining from activities which would otherwise be profitable.
3. Past events
4. Complementary nature of assets and liabilities- as should be evident from the above, assets and liabilities
are seen as mirror images of each other.
Examples of Liabilities
Notes payable, accounts payable, accrued liabilities, unearned revenues, mortgage payable, bonds payable, and
other debts of the enterprise.
Classification of Liabilities
1. Current Liabilities Expected to be settled or paid out within 12 months
Paying Out – not necessarily payment through cash, can also be conversion and/or refinancing
2. Noncurrent Liabilities- Form the residual portion of liabilities
Liabilities that are expected to be settled after more than a year, or have a legal or contractual capacity to
defer payment accordingly
Equity- Residual interest of the owners in the assets of the business after considering all liabilities
Owner’s Capital – equity of sole proprietorship and partnerships
Stockholder’s Equity – equity of corporations
Capital- this account is used to record the original and additional investments of the owner of the business
entity.
Withdrawals- When the owner of the business entity withdraws cash or other assets, such as recorded in the
drawing or withdrawal account rather than directly reducing the owner’s equity account.
Income Summary- It is a temporary account used at the end of the accounting period to close income and
expenses.
Stockholder’s Equity
1. Common Share
– Security which represents ownership in a corporation
Common Shareholders – those who own common stocks
Rights of a Common Shareholder:
• Right to vote in the stockholder’s meetings
• Right to receive dividends
• Pre-emptive right which is the right to be offered first to buy additional shares in the event of
future issuance
Par Value– legal nominal value assigned to stocks
2. Preferred Stock
Also, a security which represents ownership in a corporation
Has preference as to corporate dividends and/or liquidation
Preferred Stockholders – those who own preferred stocks
Treasury Shares – shares bought by the corporation itself and have the effect of decreasing total shareholder’s
equity
3. Additional Paid-in Capital
Also called share premium
Excess over par value contributed by the company’s shareholders in a stock issue
Arises from the selling of the stock at higher price than the par value
4. Retained Earnings
Accumulated net income from operations over several periods
Measure of how much the company earned since day one of its operations
Increases in Equity
Revenues – amounts received by a business earned as a result of selling something or rendering a service
1. Operating Revenue – originate from main business operations
a. Sales Revenue – main source of revenue for businesses that sells products
b. Service Revenue - main source of revenue for businesses that render services
2. Non-Operating Revenue – result of some side activities
a. Interest Revenue –earned as a result of investment in debt securities or receivables from other
entities
b. Dividend Revenue – earned as a result of dividend declaration of a company where in a
business has invested stocks
c. Contributions Revenue – earned by not-for-profit organizations usually in the form of
donations by outside parties
Gains – result of non-recurring activities or the increase in value of investments
Capital Contributions – result of transactions with owners and may be in the form of cash or non-cash assets
for the use in the business
Decreases in Equity
- Result of expenses, losses and distribution to owners
Expenses – amounts consumed by the business to operate and the result of attempting to generate revenues
1. Cost of Goods Sold – incurred by the company to make the inventory sell or buy them
2. Utility Expense – water and electricity
CARD-MRI Development Institute, Inc. Modular Learning Page 22 of 27
Fundamentals of Accounting || Module Content || Prelim || Lesson 1-4: Module 1-4
• INCOME – is increases in economic benefits during the period in the form of increases in assets, or decreases in
liabilities, that result in increases in equity, excluding those relating to investments by the business owner.
• EXPENSES – are decreases in economic benefits during the period in the form of decreases in assets, or
increases in liabilities, that result in decreases in equity, excluding those relating to distributions to the business
owner.
• The difference between income and expenses represents profit or loss.