Financial Accounting and Reporting External Users – not directly involve in
managing the business. Focuses on financial
Chapter 1: Introduction of Acctg.
Accounting
- A process of identifying, recording and
communicating economic information.
1. Identifying – accountant analyzes each
business transaction and identifies
whether the transaction is an
“accountable event (affect the
ass,lia,eq)", or "non-accountable event”
2. Recording – recognizes the identified
“accountable events”. The process
called “journalizing”. And posting the
process where they classify the effects
of the event on the accounts.
3. Communicating – end of the acctg
period, accountants summarize the
information to be communicated to
interested users.
Nature of Acctg.
Types of information provided by the
accountant:
1. Quantitative information- expressed in
number.
2. Qualitative information- expressed in
words.
3. Financial information- expressed in
money.
Bookkeeping
- The process of recording the accounts.
Ends with the preparation of the trial
balance. Does not require
interpretation.
Accounting
- Covers the whole process of identifying,
recording, and communicating
information.
- Referred as the “language of business”
Two broad functions in a business:
1. Provide external users the information
that is useful in making, among others,
investment, and credit decisions
2. Provide internal users in managing the
business.
Internal Users – directly involve in managing the
business. Focus on management accounting
• Owners
• Board of directors
• Managerial personnel
accounting
• Investor
• Lenders and creditors
• Government
• Customer
• Public
Types of accounting information:
1. General purpose accounting
information – to meet the common
needs of external users.
2. Special purpose – to meet the specific
needs of particular statement
The common branches of accounting
1. Financial Accounting
- Branch that focuses on general purpose
financial statements.
2. Management accounting
- Accumulation and communication of
information for use by internal users.
3. Government accounting
- Focusing attentions on the custody of
public funds.
4. Audit
- The inspection of an entity’s financial
statements
5. Tax accounting
- Preparation of tax returns, and
rendering tax advice.
6. Cost accounting
- Systematic recording, and analysis of
the costs of materials, labor, and
overhead incident.
7. Accounting education
- Teaching accounting and accounting-
related subject.
8. Accounting research
- Careful analysis of economic events and
other variables to understand their
impact on decisions.
Different form of Business
Sole Proprietorship
- Owned by 1 person
- Advantages: owner keep all the profit,
make decision, and easy to form and
operate
- Disadvantage: life of the business is
limited, amount of capital is limited
- Department of Trade and Industry (DTI)
Partnership
 - Owned by 2 or more person
- Advantages: higher capital, easy to
operate
- Disadvantage: can be held liable by
both used beyond their contribution.
- Securities and Exchanges Commission
(SEC)
Corporation
- Owned by more than one individual.
Created by operation of law rather than
a contract. Ownership is represented by
shares of stock. Owners are called
stockholders or shareholders
- Advantages: easily raise additional
funds by selling shares, shareholders
are not liable for the debts, their
liability is limited to their equity.
- Disadvantages: relatively complicated
set up, subject to several legal
restriction as a listed in the corporation.
- Securities and Exchanges Commission
(SEC)
Cooperative
- Owned by more than 1 individual.
Formed in accordance with the
provisions of the Philippine Cooperative
code of 2008. Owners are called
members.
- Advantages: enjoy certain tax
exemption privilege, promotes the
concept of sharing resources
- Disadvantage: limited distribution of
surplus, Requires continuous education
program
- Cooperative Development Authority
Types of Business
1. Service business – offers services as its
main product.
2. Merchandising
- (Trading business) is one that buys and
sells goods without changing their
physical form
- General merchandise (grocery store,
department store, hardware)
- Distributors and dealers (rice
wholesalers, vegetable dealers, 2nd
hand cars dealers)
3. Manufacturing
- Buys a raw material and process them
into final product.
CHAPTER 2: ACCTG CONCEPTS AND
PRINCIPLES
Accounting concepts and principles
(assumptions or postulates)
- A set of logical ideas and procedures
that guide the accountant.
- These concepts and principle provide a
reasonable assurance that the
information communicated to the users
is prepared in a proper way.
PFRS – Philippine Financial Reporting Standards
CFFR – Conceptual Framework for Financial
Reporting
Basic Concepts
1. Separate entity concept – business is
viewed as a separate person.
2. Historical cost concept – initially
recorded at their acquisition cost
- Sa balance sheet, original cost ang
irecord.
3. Going Concern – expected that the
business will continue for 12 months.
Opposite is liquidating concern.
4. Matching – initially recorded as an asset
and charged as expense only when the
related revenue is recognized.
5. Accrual Basis of Acctg – recorded the
event in which they occur. Income is
recognized in the period when it is
earned rather than collected.
- Marecognized na siya basta nabuhat na
ang event.
6. Prudence – observe some degree of
caution when exercising judgements.
7. Time Period – the life of the business is
divided into series of reporting periods.
- Calendar year: starts in January 1 ends
is in December 31
- Fiscal Year: starts other than January
(e.g July 1, 2019 – June 30, 2020)
8. Stable monetary unit – are stated in
monetary. Purchasing power of the
peso is regarded as stable.
9. Materiality Concept – guides the
accountant when applying accounting
principles because accounting principles
are applicable only to material items.
Consider as a material if it could
influence economic decision.
10. Cost-benefit – mag evaluate ug
decisions.
11. Full disclosure principle – related to
both materiality and cost-benefit.
 12. Consistency concept – apply accounting
policies consistently.
Qualitative Characteristic
- Traits that determine whether an item
information is useful to the users.
1. Fundamental qualitative characteristic
– characteristic that make the
information useful to users.
i. Relevance – can affect the
decision of users.
a. Predictive value – help
users to make predictions
about future outcomes
b. Confirmatory value – can
help users confirm their
past predictions
c. Materiality – it depends on
the facts and circumstances
surrounding a specific
entity.
ii. Faithful representation –
represent the actual effects of
events that have taken place.
a. Completeness – complete
understanding of the
financial statement.
b. Neutrality – selected or
presented without a biased.
It is not manipulated to
increase its favorability.
c. Free from error – means
the information is not
materially misstated.
2. Enhancing qualitative characteristic
– support the fundamental
characteristic. Enhance the information.
i. Comparability – help users
identify similarities and
differences between different
sets of information.
ii. Verifiability – if different users
could reach a general
agreement
iii. Timeliness – information is
timely if it is available to users
in time to be able to influence
their decisions.
iv. Understandable – it is
presented in a clear and concise
manner.
CHAPTER 3: THE ACCTG EQUATION
Basic Acctg Equation
Asset = Liability + Equity
Assets – economic resources you control and
can provide you with economic benefits.
Liability – are your present obligations that have
resulted from past events
- Obligation – means a duty or
responsibility
a. Legal obligation – results from
contract legislation.
b. Constructive obligation – results
from past actions.
Equity – asset minus liability
Expanded Equation
Asset = Liability + Equity + Income – Expense
Income – is increased in economic benefits
during the period in the form of increase in
assets.
Expense – decrease in economic benefits during
the period in the form of decrease in assets.
Profit – income is greater that expense
Loss – expense is greater than income
CHART OF ACCOUNTS
Assets
• Cash
• Accounts receivable
• Allowance for bad debts
• Notes receivable
• Inventory
• Prepaid supplies
• Prepaid rent
• Prepaid insurance
• Land
• Building
• Accumulated depreciation bldg..
• Equipment
• Accumulated depreciation equipment
Liability
• Accounts payable
• Notes payable
• Interest payable
• Salaries payable
• Utilities payable
 • Unearned payable

Equity

• Owners’ capital
• Owners’ drawing

Income

• Service fee
• Sales
• Interest Income
• Gain

Expense

• Cost of sales
• Freight out
• Salaries expense
• Rent expense
• Utilities expense
• Supplies expense
• Bad debt expense
• Depreciation expense
• Advertising expense
• Insurance expense
• Taxes and Licenses
• Transportation and travel expense
• Interest expense
• Miscellaneous expense
• Losses