FINANCIAL ACCOUNTING PART 1

DEFINING OF ACCOUNTING

Background Information for Learners

Accounting is relevant in the world of business especially these days that business and
society have become more complicated. No business could operate very long without
knowing how much it was spending. The core concepts behind accounting quantify
business communication and drive decisions among accounting information users.

The following are the most accepted definitions of accounting expressed by the following
authoritative bodies:
1. American Institute of Certified Public Accountants (AICPA): “The art of recording,
classifying and summarizing in a significant manner and in terms of money transactions
and events which are in part of at least of financial character and interpreting the results
thereof.”
2. Accounting Standards Council (ASC): “A service activity which functions to provide
quantitative information primarily financial in nature, about economic entities, that is
intended to be useful in making economic decisions.
3. American Accounting Association (AAA): “The process of identifying, measuring, and
communicating economic information to permit informed judgements and decisions by
users of the information.”

Meriam Webster Definition of

Accounting:
“The system of recording and
summarizing business and
financial transactions and
analyzing, verifying, and
reporting the results.”

Tasks Performed in Accounting

Reporting economic events and
interpreting financial statements
which includes:
● Statement of Financial Position
● Statement of Financial
Performance
● Statements of Changes in
Equity/ Retained Earnings
● Statement of Cash Flows
Activities:
Activity 1: “SEEK AND YOU WILL FIND”
Directions: Search for the words related to the definition of accounting and its functions.
You may find the words horizontally, vertically, or diagonally.

Activity 2: “FIX ME”

Word Scramble
Directions: Read the statements carefully then supply the missing words on the blanks. Use
the scrambled letters provided for your answers.
1. Economic events are reported in FINANCIAL STATEMENT and other reports. (FINCIALNA
STTAESTNEM)
2. In classifying, business TRANSACTIONS are sorted into the three categories- assets,
liabilities and owner’s equity. (TASCINSOTANR)
3. In accounting, MEASUREMENT are recorded, classified and summarized.
(MEAMENTSSURE)
4. Accounting is the systematic process of measuring and reporting relevant FINANCIAL
information of an economic organization. (FCILANANI)
5. The final task performed in accounting is INTERPRETING contents of financial statements
and other reports. (INPREGNITTER)
 DESCRIBING THE NATURE OF ACCOUNTING

Background Information for Learners:

From the definition of accounting, we now understand that accounting is a process with
the basic purpose of providing information about economic activities intended to be useful
in making business economic decisions.

1. Accounting is a science. Accounting is based on fundamental principles. It is a body of

knowledge that has been systematically gathered, classified and, organized.
2. Accounting is a process. A process refers to the method of performing any specific job
step by step according to the objectives, or target. Accounting is identified as a process as
it performs the specific task of collecting, processing and communicating financial
information. In doing so, it follows some definite steps like collection of data recording,
classification summarization, finalization and reporting.
3. Accounting is an art. Art is a way of performing something. Accounting uses techniques,
and its application requires creativity, interest, and expertise and experience to do the
work efficiently.
4. Accounting is an information system. Accounting is recognized and characterized as a
storehouse of information. Accounting as service function collects, processes, and
communicates the financial information of an entity.
5. Accounting is a means not an end. Accounting is a tool to achieve specific objectives. It is
not the objective itself. Accounting finds out the financial results and position of an entity
and communicates this information to its users.
6. Accounting is the language of business. It is one means of reporting and communicating
information about a business. So accounting needs to be learned and practiced to
communicate the business events.
7. Accounting is a profession. A profession is a career that involves the acquiring of a
specialized formal education before rendering any service.

Functions of Accounting

1. Keeping systematic record of business transactions

2. Protecting properties of the business
3. Communicating results to various parties in or connected with the business 8
4. Meeting legal requirements
Bookkeeping
➢It is the process of recording “systematically” the business transactions in a
“chronological manner”.
➢The recording aspect is just one of the four major functions of Accounting.
➢It is the how of accounting (mechanical aspects).

Accounting
➢It requires complete and accurate bookkeeping records.
➢It is the why of accounting (analytical and interpretative aspects).
➢Output is financial statement.
Activities:
Activity 1: WHAT IS THE REAL ME
Directions: Read each statement carefully. Place a Yen sign (¥) on the line if the statement
is TRUE and a dollar sign ($) if the statement is FALSE.
______¥________1. Accounting and bookkeeping both keep the record of the business
systematically.
_______________2.Bookkeeping can analyze the financial statements of the business.
_______________3.Bookkeeping can also be called the language of the business.
_______________4.Bookkeeping is a part of accounting.
_______________5.Both accounting and bookkeeping can be used in making decision.

Activity 2: MADE IT ESSAY

Why is accounting a science? Discuss it in 5 sentences at most. (5 POINTS)
__________________________________________________________________________
__________________________________________________________________________
__________________________________________________________________________
________________________
 NARRATING THE HISTORY AND ORIGIN OF ACCOUNTING

Background Information for Learners

Accounting, just like other disciplines, has a beginning. Egyptians refer to accountants as
the eye and ear of the kings. Romans used daybook to record receipts and payments.
Arabs used the Islamic accounting system and Chao dynasty (1122-256 B.C) used
sophisticated government accounts.

HISTORY OF ACCOUNTING AMONG NATIONS

● Ancient accounting in Egypt, Mesopotamia, Greece and Rome.
● 14th Century- The birth of double-entry bookkeeping.
● 19th Century- The dawn of Modern Accounting in Europe and America.
● 20th Century- The evolution of Modern Accounting Standards.
● The Information Age.
● 21st Century- Accounting in the modern times.

EVOLUTION OF ACCOUNTING
Accounting history is important to accounting pedagogy policy and practice. It makes it
possible to better understand our present and to forecast our future. Accounting history is
the "study of the evolution in accounting thought, practices and institutions in response to
changes in the environment and societal needs. It also considers the effect that this
evolution has worked on the environment."
Activities:
Activity 1: “NAME IT”
Directions: Examine the following images and identify the word/phrases being asked. Then,
based on your answers, supply the missing words in the statement provided below to
complete the idea.

Activity 2: “FILL ME”

Direction: Using the words/phrases in the box, supply the missing events to connect the
ideas based on the History of Accounting in the World.
 USERS OF ACCOUNTING INFORMATION - INTERNAL & EXTERNAL

Background Information for Learners

Accountancy encompasses the recording, classification, and summarizing of transactions

and events in a manner that helps its users to assess the financial performance and
position of the entity. The process starts by first identifying transactions and events that
affect the financial position and performance of the company. Once transactions and
events are identified, they are recorded, classified and summarized in a manner that helps
the user of accounting information in determining the nature and effect of such
transactions and events.
Accounting information helps users to make better financial decisions. Users of financial
information may be both internal and external to the organization.
ACTIVITIES:
Activity 1: ON THE RECORD
Identify the branch of accounting and give a user. Write your answer inside the box.
Activity 2- IT PUZZLED ME
Complete the puzzle after identifying the user who decides after knowing or getting the
accounting information.

Across
1. Whether the business need to make adjustment in the operation of the business
2. Whether or not to lend resources as capital or additional fund to the business and
analysis the risk before lending the funds
3. Whether or not to build relationship with the business.

Down
1. Checks if the business is profitable enough to provide compensation and other benefits
2. Uses the information in the operation of the business and in making decision.
3. Whether or not to invest in the business and examines if the investment is secured.

EXPLAINING THE VARIED ACCOUNTING CONCEPTS AND PRINCIPLES

Background Information for Learners:

Basic assumptions are important to understanding the financial information and the
manner of how data are presented. These assumptions are also important in the practice
of financial accounting. Business organizations like sole proprietorship, partnership,
corporation, and cooperatives utilize accounting information in the same manner for
business in the fields of service, merchandising and manufacturing. A service business
focuses on providing intangible products (services); a merchandising business is commonly
known as the “buy and sell” type of business; while in a manufacturing business, it requires
that materials be bought to create a new product.

The aforementioned types of businesses are a necessity in making basic accounting

assumptions in the preparation of financial information.
Types of Business Organizations:
1. Sole/ Single Proprietorship- this organization has a single owner called proprietor who
generally is also the manager.
2. Partnership- a business owned and operated by two or more persons who bind
themselves to contribute money, property, or industry to a common fund.

3. Corporation- a business owned by its stockholders and regarded as an artificial being

created by operation of law.
4. Cooperatives- a form of voluntary business organization composed of 5- 15 individuals
who organized themselves for their mutual benefit.

Generally Accepted Accounting Principles (GAAP)

GAAP is a widely accepted accounting set of rules, concepts, and principles. They are
considered as standards, assumptions, and concepts with general acceptability. It has been
developed by the accounting professionals to guide preparers in recording and reporting of
financial reports.
Underlying Accounting Assumptions:
1. Economic Entity Assumption- A business is considered a distinct entity from the owner
and therefore all business transactions are treated separately from the business owner’s
transactions.
2. Accrual Basis Assumption- Regardless of the time cash or its equivalent is received or
paid, revenue should be recorded in the period it is earned.
3. Going Concern Assumption- a company will continue to exist to carry out its objectives
and commitment and will not liquidate in the foreseeable future.
4. Monetary Unit Assumption- all recognizable events are measured and reported in
Philippine peso.
5. Time- Period Assumption- to provide periodic reports on economic activities, financial
statements are prepared at equal time intervals.

Basic Accounting Principles:

1. Cost Principle- refers to the amount spent (cash or the cash equivalent) when an item
was originally obtained, whether that purchase happened last year or ten years ago;
amounts are not adjusted upward for inflation.
2. Full Disclosure Principle- the accountant should include sufficient information to permit
the stakeholders to make an informed judgment about the financial condition of the
enterprise.
3. Matching Principle- revenues should have an equivalent expense recorded in a given
accounting period to show the true profit of the business.
4. Revenue Recognition Principle- as soon as goods have been sold (delivered to the
customers) or service has been rendered, regardless of when the money is received,
revenues are to be recognized.
5. Materiality Principle- to decide whether an amount is significant, or material requires
professional judgment and all business transactions that may affect the decision of the
user of the financial information and are considered important or material and must be
recorded properly.
6. Conservatism Principle- if a situation arises wherein an accountant has two acceptable
alternatives for reporting an item, it guides the accountant to choose the alternative that
will result in the less effect and/or less asset amount.
7. Objectivity Principle- requires that bookkeeping and financial recording be performed
with interdependence, that is free of bias and prejudice.
Activities:
Activity 1: TO INFINITY & BEYOND
Directions: Identify whether the statement is an underlying accounting assumption or a
basic accounting principle. Draw an infinity symbol ∞ on the appropriate column.

Activity 2: TRUE OR FALSE

Directions: Read and analyze each statement carefully. Draw a star ✩if the statement is
correct and a heart ❤is incorrect.
1. GAAP refers to generally accepted auditing principles.
2. In the practice of accounting, basic assumptions are important.
3. GAAP is exceedingly useful because it has standardized
accounting assumptions and methods.
4. A company will continue to exist long enough to carry out its
objectives and commitments.
5. A time interval or period must be shown in the heading of a
financial statement.

Activity 3: WORD SEARCH

Directions: Read and analyze each statement carefully. Select and copy the correct
word/phrase that best describes each statement. No points for misspelled and incomplete
answers.

Time- Period Assumption Materiality Principle Cost Principle

Matching Principle Full Disclosure Principle Revenue Recognition
Principle
1. An artist who performs services for a client should record
revenue.
2. Statement of financial position should be recorded as of
December 31,
2020.
3. A company that purchases furniture should record it at its
acquisition price.
4. All relevant information should be included in the financial
reports.
5. Expenses should be recorded in the period when the revenue is
generated.
 SOLVING EXERCISES ON ACCOUNTING PRINCIPLES AS APPLIED IN
VARIOUS CASES

Background Information for Learners:

Let us now apply what you have learned about basic accounting assumptions, accounting
concepts and principles by analyzing the following scenarios:

Underlying Accounting Assumptions:

1. Economic Entity Assumption

2. Accrual Basis Assumption

3. Going Concern Assumption

4. Monetary Unit Assumption

5. Time- Period Assumption

Basic Accounting Principles:

1. Cost Principle
2. Full Disclosure Principle

3. Matching Principle

4. Revenue Recognition Principle

5. Materiality Principle

6. Conservatism Principle
7. Objectivity Principle

ACTIVITIES:
Activity 1: IDENTIFICATION

Directions: Given the following statements, what accounting principle, assumption or concept can
be applied in the various events presented below. Answers can be found inside the table. No
points for misspelled and incomplete answers.

Economic Entity Assumption Accrual Basis Assumption

Time- Period Assumption Materiality Principle
Monetary Unit Assumption Cost Principle

1. The manager bought a laptop for personal use. The invoice was given
to the accountant who recorded it as an asset of the business.
2. The statement of financial position of a company included a material
purchased from Japan for 50,000 yen. It was reported at that amount in the statement of financial
position while all the other assets were reported in Philippine pesos.
3. Aside from owning a jewelry shop, Ava operates a computer shop.
The assets of the computer shop are reported in the statement of financial position of the jewelry
shop.
4. The company bought an equipment amounting to ₱80,000 but
recorded it as ₱90,000.
5. The company did not prepare any financial statement for the last 3yrs. of
their business.
Activity 2: X’s a n d Y’s
Directions: Read each statement and carefully analyze each underlined word. Write X if the
statement is correct and Y if the statement is erroneous. Write your answers on the space
provided.

1. LBC company selects May 31st as its fiscal year-end. She will report all activity for her
business in its formal financial statements base from the time-period assumption.
2. The services rendered should be recorded in the revenue account.
3. Cost paid for paper clips should not be recorded in the company’s financial information.
_____ 4. There are instances when the company’s policy should not be followed at all times.
5. Travel costs for a family vacation and a certain amount that Mara paid for her meals and
personal use are not recorded in Mara’s printing business accounting records.
 Activity 3: THINK TWICE
Directions: Read and analyze the situation below. Using the underlined word/s in each statement,
identify if what accounting assumption, principle or concept is being followed.

Mr. Grageda, the owner and manager of a Motorcycle parts and services, purchased
the following:

ITEM COST

Tires ₱15,000.00

Backseat Cover ₱2,000.00

Drive Disk ₱900.00

Sprocket Seat ₱2,700.00

Rear Shock ₱5,000.00

Mr. Grageda (1.) presented the receipt of his purchase to his bookkeeper and (2.) recorded
it at cost. They also perform motorcycle services like engine checks worth ₱500, tune up ₱300,
spray chain oil ₱300 and other minor services. (3.) All services rendered are recorded by his
bookkeeper as included in the revenue account. Mr. Grageda also owns a water refilling station and
(4.) reported it_separately in its financial statements. (5.) They report its financial statements
annually.