\WIN;Ballada’ycraYcpe yMpay x (ropy2\icPAyBoard| or rae Ss aeboemte yt gaCompliantjwithythe]2018{Conceptuallframework) Updated}perfRevised(Corporation|Codejofithe}Philippines) ~ “Conceptual. Clear)Discussions4Updated {Reliable Mauay=g nato Minds Bey Bock pig wm sosbookcon/nvatads BASIC ACCOUNTING and Reperting WIN Ballada, cpa, CBE, MBA ‘Top 2, CPA Board Author Susan Ballada, cra Consulting Editor ‘Enhanced Basic Accounting 2021 Issue - 24th Edition From Your Trusted Author Since 1996. Compliant with the 2018 Conceptual Framework. Updated per Revised Corporation Code of the Philippines Conceptual. Clear Discussions. Updated. Reliable. OlomesTABLE OF CONTENTS Basic Financial Accounting and Reporting (Enhanced Basic Accounting) 2021 Issue — 23rd Edition by Prof. WIN Ballada, CPA, CBE, MBA Part One INTRODUCTION 1 Accounting and Its Environment Learning Objectives Real World Situation Introduction Definitions of Accounting Evolution of Accounting Primitive Accounting Use of Bullae Code of Hammurabi Scribe Clay Tablets Middle Ages Use of Arabic Numerals, Quipu The Florentine Approach Giovanno Farolfi & Company ‘Amatino Manucci ‘The Method of Venice Luca Pacioli Savary and Napoleonic Commercial Code Napoléon Bonaparte, Jacques Savary Nicolas Petri, Benjamin Workman Industrial Revolution Corporate Organization Railroads United States Steel Schmalenbach and The Model Chart of Accounts Imposition of income Tax and Conflicts with Financial Accounting Reus Information Age ASEAN Establishment and Member States Vision Opportunities Four Pillars of ASEAN Economic Community ua xv‘cation Reference Framework Fundamental Business Model Types of Business Forms of Business Organiz: Sole Proprietorship Partnership Corporation Micro, Small and Medium Enterprises Republic Act No. 9501, Definitions of MSMES Activities in Business Organizations Financing Activities Investing Activities Efficient versus Effective Operating Activities Purpose and Phases of Accounting Pacioli’s Double-Entry Bookkeeping and Its Evolution Three Essential Things . Three Books in the Summa Three Basic Questions of Owners Fundamental Concepts Entity Concept Periodicity Concept Stable Monetary Unit Concept Going Concern Criteria for General Acceptance of an Accounting Principle GAAP Relevance Objectivity Feasibility Basic Principles Objectivity Principle Historical Cost Revenue Recognition Principle Expense Recognition Principle Adequate Disclosure Materiality Consistency Principle—per revised PAS No. 1 Accountancy in the Philippines Prominent Certified Public Accountants Developments xvi 23 15 16 7 18 18 19 21 21 22 23Accountancy Act of 2004 26 Scope of Practice Practice of Public Accountancy Practice in Commerce and Industry Practice in Education/Academe Practice in Government ) The Professional Regulatory Board of Accountancy & Its Composition Qualifications of Members of the Professional Regulatory Board ‘The Certified Public Accountant Examinations Qualifications of Applicants for Examinations Scope of Examination Rating in the Licensure Examination Report of Ratings Failing Candidates to Take Refresher Course Professional Organization 29 Philippine Institute of Certified Public Accountants ‘Changes Due to Amended By-Laws, dated Nov. 26, 2005 Accounting Standards in the Philippines 30 Accounting Standards Council Financial Reporting Standards Council Core Competencies Framework for Accountants 31 Knowledge Skilts Values Role of Ethics in Business 34 Definition of Ethics ~ Ethical Dilemma Ethical Reasoning Sleep-Test Ethics ations —White-Collar Crime, Whistle-Blowing, Conflicts of Interest, Fiduciary Responsibilities, Sexual Harassment, Discrimination Ethical Financial Reporting Sarbanes-Oxley Act Code of Corporate Governance Code of Ethics for Professional Accountants in the Philippines . 38 International Federation of Accountants Introduction to the Code Fundamental Principles Integrity Objectivity Professional Competence and Due Care Confidentiality Professional Behavi xviiThe Accountancy Profession aa Characteristics Career Opportunities Public Practice Commerce and Industry Government Service Education/Academe Branches of Accounting 43 Auditing Bookkeeping Cost Bookkeeping, Costing and Cost Accounting Financial Accounting Financial Management Management Accounting Taxation Government Accounting Academicians, Students and Educators Alliance (ASEAN Party 46 List) Philippine Association of Collegiate Schools of Business 47 Philippine Council of Deans and Educators in Business 48 Discussion Questions 50 Exercises 51 Accounting Equation and the Double-Entry System Learning Objectives : 63 Real World Situation 63 Parts of an Information System 64 Accounting information System 66 Cost-Benefit Principle Control Principle Compatibility Principle Flexibility Principle Types of Accounting Information Systems 67 Manual System Computer-Based Transaction Systems Database Systems Stages of Data Processing 68 Elements of Financial Statements (per 2018 Conceptual Framework) 68 Financial Position Assets Liabilities Equity Financial Performance—Income and Expenses xviiThe Account The Accounting Equation Debits and Credits--The Double Entry System Balance Sheet Accounts Income Statement Accounts Normal Balance of an Account Accounting Events and Transactions Types and Effects of Transactions Source of Assets Exchange of Assets Use of Assets Exchange of Claims Typical Account Titles Used Statement of Financial Position Assets—Current and Non-current Liabilities—Current and Non-current Owner's Equity . Income Statement income Expenses Accounting for Business Transactions Financial Transaction Worksheet Use of T-Accounts Distinction Between Revenue and Receipts Discussion Questions : Exercises Part Two ACCOUNTING FOR A SERVICE BUSINESS" 3 Recording Business Transactions Learning Objectives Real World Situation Transaction Analysis (Step 1) Source Documents Accounting Cycle: Sequential Steps and Aims The Journal : Format Simple and Compound Entry Transactions are Journalized (Step 2) Initial Investment (Source of Assets) Reint Paid in Advance (Exchange of Assets) Note Issued for Cash (Source of Assets) Service Vehicle Acquired for Cash (Exchange of Assets) xix 71 72 73 74 74 74 75 79 89 90 91 17 118 118 118 119 121 122Insurance Premiums Paid (Exchange of Assets) Office Equipment Acquired on Account (Exchange and Source of Assets) ‘Supplies Purchased on Account (Source of Assets) Accounts Payable Partially Settled (Use of Assets) Revenues Earned and Cash Collected (Source of Assets) Salaries Paid (Use of Assets) Unearned Revenues Collected (Source of Assets) Revenues Earned on Account (Source of Assets) Withdrawal of Cash by Owner (Use of Assets) Expenses Incurred but Unpaid (Exchange of Claims) Accounts Receivable Partially Collected (Exchange of Assets) Expenses Incurred and Paid (Use of Assets) ‘The Ledger Permanent Accounts ‘Temporary Accounts Chart of Accounts Posting (Step 3) Ledger Accounts After Posting : Trial Balance (Step 4) Locating Errors Discussion Que: Exercises Adjusting the Accounts . Learning Objectives Accrual Ba Periodicity Concept Recognition and Derecognition The Need for Adjustments Deferrals and Accruals Adjustments for Deferrals (Step 5) Allocating Assets to Expenses Prepaid Expenses , Depreciation of Property and Equipment Allocating Revenues Received in Advance to Revenues Adjustments for Accruals (Step 5) Accrued Expenses Accrued Revenues ‘ Accrual for Uncollectible Accounts. Effects of Omitting Adjustments Analysis Using T-Accounts Summary of Adjusting Entries 129 130 130 131 133 134 136 137 167 167 168 169 170 171 172 177 180 181 182 184Appendix—Alternative Methods of Recording Deferrals Prepaid Expenses Unearned Revenues \ Discussion Questions Exercises Worksheet and Financial Statements Learning Objectives The Worksheet Preparing the Worksheet (Step 5) Essence of Financial Statements Complete Set of Financial Statements (per revised PAS No. 1) Preparing the Financial Statements (Step 6) Statement of Comprehensive Income Statement of Changes in Equity Statement of Financial Position Liquidity Financial Flexibility Solvency Format Classification ‘Statement of Cash Flows (per PAS No. 7) Cash Flows from Operating Activities: Direct and Indirect Method Cash Flows from Investing Activities : Cash Flows from Financing Activities Relationships Among the Financial Statements Discussion Questions Exercises Completing the Accounting Cycle Learning Objectives ‘Adjustments are Journalized and Posted (Step 7) Closing Entries are Journalized and Posted (Step 8) Preparation of a Post-Closing Trial Balance (Step 9) Reversing Entries (Step 10) Discussion Questions Exercises xxi 185 188 189 225 225 225 232 232 233 239 240 241 265 265 266 268 269 274 272Part Three ACCOUNTING FOR A MERCHANDISING BUSINESS 7 Merchandising Operations Learning Objectives Real World Situation Comparison of Income Statements Operating Cycle of a Merchandising Business Source Documents: with Specimen of Sales Invoice, Statement of Account, Official Receipt, Peso Deposit Slip, Check, Purchase Order Steps in a Purchase Transaction Terms of Transactions Cash Discounts—Purchases and Sales Discounts Trade Discounts Transportation Costs FOB Shipping Point 7 FOB Destination Freight Prepaid or Freight Collect Inventory Systems Perpetual Inventory System Periodic Inventory System Net Sales Gross Sales Sales Discounts Sales Returns and Allowances Transportation Out FOB Destination, Freight Prepaid FOB Shipping Point, Freight Collect, FOB Destination, Freight Collect FOB Shipping Point, Freight Prepaid Cost of Sales Merchandise Inventory Net Cost of Purchases Purchases Purchases Returns and Allowances Purchases Discounts - Transportation In FOB Destination, Freight Prepaid FOB Shipping Point, Freight Collect FOB Destination, Freight Collect FOB Shipping Point, Freight Prepaid Value-Added Tax Entries Operating Expenses ‘Appendix—Periodic and Perpetual Inventory Systems Compared 289 289 290 292 292 293 294 300 301 304." 309 310 311Discussion Questions Exercises Completing the Cycle for a Merchandising Business Learning Objectives Need for a Physical Count Merchandise Inventory at the End of the Period The Adjusting Entry Method The Closing Entry Method Preparing the Worksheet Preparing the Financial Statements (per revised PAS No. 1) Income Statement Nature of Expense Method Function of Expense Method Statement of Changes in Equity Balance Sheet Adjusting and Closing Entries Post-Closing Trial Balance Appendix—Worksheet in a Perpetual Inventory System Discussion Questions Exercises Special and Combination Journals, and Voucher System Learning Objectives Control Accounts and Subsidiary Ledgers Special Journals ‘Advantages of Using Special Journals Sales Journals Cash Receipts Journal Purchases Journal Cash Disbursements Journal General Journal Proving the Ledgers Flexibility of Special-Purpose Journals Voucher System: Voucher Voucher Register 4Unpaid Voucher File Check Register Paid Voucher File Special Problems in a Voucher System Gross or Net Amounts Recording Purchases Returns and Allowances Recording Partial Payments Combination Journal xxii 313 314 355 355 356 358 359 364 365 366 366 367 383 384 385 387 389 391 392 395 395 395 396 399 400Discussion Questions 401 402 Exercises Part Four * OTHER TOPICS 10 Manufacturing Operations Learning Objectives a9 Real World Situation 419 Comparing Merchandising and Manufacturing Activities 420 Elements of Manufacturing Costs 421 Direct Materials Direct Labor Manufacturing Overhead Manufacturing Inventory Accounts 421 Fi 1ed Goods Inventory Work in Process Inventory Raw Materials Inventory > Factory Supplies Inventory Accounting for Manufacturing Activities 422 Cost System Non-Cost System Pro-Forma Journal Entries Manufacturing Summary Statement of Cost of Goods Manufactured 425 Statement of Cost of Goods Sold 426 Worksheet for a Manufacturing Company 426 ” Exercises 427 11 Payroll Learning Objectives 433 Accounting for Payroll 433 Definition of Terms Gross Pay Employee Benefits Employees’ Payroll Deductions and Employer's Payroll Expenses Net Pay The Payroll System Payroll Entries Remittances Internal Control over Payrolls ‘Sample Payroll Register 585 and EC Contributions Schedule for Employed Members Revised Semi-Monthly Withholding Tax Table xxiv12 13 Partnerships: Basic Considerations and Formation Learning Objectives Real World Situation Definition Characteristics of a Partnership Mutual Contribution Division of Profits or Losses Co-Ownership of Contributed Assets ‘Mutual Agency Limited Life Unlimited Liability Income Taxes Partners’ Equity Accounts ‘Advantages and Disadvantages of a Partnership Partnership Distinguished from Corporation Manner of Creation Number of Persons Commencement of Juridical Personality Management Extent of Liability Right of Succession Terms of Existence Classifications of Partnerships Kinds of Partners Articles of Partners SEC Registration Accreditation to Practice Public Accountancy Accounting for Partnerships Owners’ Equity Accounts Partner's Capital Account Partner’s Drawing Account Loans Receivable From or Payable to Partners Partnership Formation Valuation of Investments by Partners Adjustment of Accounts Prior to Formation Opening Entries of a Partnership Upon Formation Individuals with No Existing Business Form a Partnership ASole Proprietor and Another Individual Form a Partnership Two or More Sole Proprietors Form a Partnership Review Questions Exercises Partnership: : Operations and Financial Reporting Learning Objectives Partners’ Equity in Assets Contrasted with Share in Profits or Losses xxv 445 445 447 447 ag 449 449 450 451 451 452 453 455 466 467 479 47914 Factors to Consider in Arriving at a Plan for Dividing Profits or 480 Losses . Money, Property or Industry Performance Methods Rules for the Distribution of Profits or Losses 481 Correction of Prior Period Errors 482 ribution of Profits or Losses Based on Partners’ Agreement 483 Equally or in Other Agreed Ratio Based on Partners’ Capital Contributions Ratio of Original Capital Investments Ratio of Capital Balances at the Beginning of the Year Ratio of Capital Balances at the End of the Year Ratio of Average Capital Balances By Allowing Interest on Capital ‘Comparison of Distribution—Capital Ratios and Interest on Capital By Allowing Salaries to Partners By Allowing Sonus to the Managing Partner Before Bonus After Bonus By Allowing Salaries, Interest on Capital, and Bonus to Partners After Salaries, Interest but Before Bonus After Salaries, Interest and After Bonus Financial Reporting 493 Purpose of Financial Statements Overall Considerations per IAS No. 1 (revised 2007) Fair Presentation and Compliance with IFRS Going Concern * Accrual Basis of Accounting Materiality and Aggregation Offsetting Frequency of Reporting and Comparative Information Consistency of Presentation Identification of Financial Statements Complete Set of Financial Statements per IAS No. 1 (revised 2007) Statement of Comprehensive Income Statement of Changes in Partners’ Equity 7 Statement of Financial Position Statement of Cash Flows per IAS No. 7 Review Questions 499 500 Exercises Corporations: Basic Considerations (per Revised Corporation Code) Learning Objectives 519 Real World Situations—Pareto Principle, ASEAN SMEs, GMC 519 Revised Corporation Code 520 Definition 521 Attributes of a Corporation 521 Advantages of a Corporation 522 xvi15 Disadvantages of a Corporation Classes of Corporations—Stock and Non-Stock Other Classifications of Corporations Components of a Corporation Corporators, Incorporators Shareholders, Members Subscribers, Promoters, Underwriters Independent Director, Corporations Vested with Public Interest Additional General Powers Classes of Shares in General Articles of Incorporation Contents Prescribed Form Comparison of AO} per RCCP and Corporation Code Registration, Incorporation and Commencement of Corporate Existence Non-Use of Corporate Charter and Continuous Inoperation By-Laws No Minimum Capital Stock Basic Corporate Organizational Structure Rights of a Shareholder Corporate Books and Records One Person Corporation Review Questions Exercises Corporations: Share Capital, Retained Earnings and Financial Reporting Learning Objectives Overview of Shareholders’ Equity Share Capital Legal Capital Share Premium ‘Two Basic Types of Shares Ordinary Share Preference Share Terms Related to Share Capital Authorized Share Capital ‘ Issued Share Capital Subscribed Share Capital Outstanding Share Capital Treasury Stock Accounting for Issuance of Share Capital With Par Value Without Par Value xxvii 522 522 523 524 526 527 528 530 531 531, 532‘ 533 533 534 535 536 + ae 538 545 545 546 547 547 548Considerations for Issuance of Shares 548 Share Issue Costs (per IAS No. 32), Listing (per PIC) and Joints Costs Share Issuances for Cash 549 With Par Value Issuing Share Capital at Par Issuing Share Capital Above Par Without Par Value Issuing No-Par Share Capital Issuing No-Par Share Capital with Stated Value Subscription of Shares 551 Regular Subscriptions . 7 Delinquent Subscriptions Treasury Stocks per IAS No. 32 553 Purchase Re-issuance Retirement Summary of the Effects on Assets, Liabilities and Equity 556 Overview of Retained Earnings 556 Dividends in General 557 Date of Declaration Date of Record Date of Payment Cash Dividends 558 Share Dividends 559 ‘Small Share Dividends Large Share Dividends Summary of the Effects of Dividends s 562 Statement of Retained Earnings 562 Statement of Changes in Shareholders’ Equity 563 Review Questions 565 Exercises : 566 Adjunct Material-- Practice Set ‘Note About Chapters 12 to 15 Above: if you have not revised your offering and thus, PartCorp Accounting is not yet taken 2s 2 separate subject n your school, then the last four (4) chapters may be covered in this subject. Note that these ae just introductory chapters (only 144 pages) so the coverage, discussions andthe reloted exercises are notas comprehensive and in depth as that in our other book, Partnership & Corporation Accounting 2020 Issue ~ 22nd Edition (472 pages). ‘i You can consider enhancing your BSA, BSMA, BSAIS and BSIA curricula by adding the subject, Partnership (PAR) and ‘Corporation (COR) Accounting, considering that these two important topies are frequently covered in two Board Subjects inthe CPALE (FAR and AFAR: Partnership Accounting in AFAR and Corporation Accounting in FAR). Per 2016 TOS, PAR accounts fo ten (10) items out of 70 (or 14.28%) In the AFAR Board Subject while COR is asked in ten (20) tems out of 70 (or 14.28%) inthe FAR Board Subject. Per latest TOS effective May 2019 exams, PAR and COR will have eight (8) items each or 11.43% of the questions (8 out of 70) for both the FAR and AFAR Board Subjects, Thes® items ean spell the difference in the success of your candidates. Every item counts xvi a eteBasic Financial Accounting & Reporting Accounting and Its Environment Learning Objectives: After studying this chapter, you should be able to: 1. Define accounting and explain its role in business. 2. Have a fair knowledge of the evolution of accounting and find how it affected accounting pedagogy, policy and practice. . 3. Discuss the basics of ASEAN and recognize how it will affect accountancy practice in the region. 4, Describe the fundamental business model and find how it is applied to the various types of businesses. Distinguish between the different forms and activites of business organizations. Explain the importance of the purpose and phases of accounting. Ascertain the need to adapt Fra Luca Pacioli's system for the modern times. Explain the fundamental accounting concepts and principles. Summarize the salient features of the Accountancy Act of 2004, the Core Competencies Framework and the Code of Ethics for Professional Accountants and harness them to attain professional advancement. 10. Explain why ethics are crucial in accounting. 11. Identify and discuss the career opportunities open to accountants. s pang Dennis Rodman, 56-years old this year, is born in Dallas, USA and deserted by his father (who is incidentally residing here in the Philippines) at age three. His mother, Shirley, raised Rodman in a housing project. At 20, he was working as a janitor at the Dallas Airport for $5.0 an hour, but a year later he was arrested there for stealing fifty watches; the charges were dropped when the authorities were able to recover the goods. Rodman had given them to friends. Then, when he was 21, a local junior college basketball scout suggested that Rodman, who had grown a good half-foot since high school, to try basketball. He tried and failed at first try but on second try at Southeastern Oklahoma State, he made All-American2. | Basic Financial Accounting and Reporting 2021 Edition by Prof, WIN Ballada ——E and the grades required to stay in school. Rodman was 25—ancient for a rookie—when he finally landed in the National Basketball Association (NBA). Though Rodman proved his talent as a pivotal member of the two-time champion Detroit Pistons, it took him a long time to catch up in the salary game. He has long been one of the league’s best rebounders, grabbing an average of 15 boards a game, but until 1997, he never earned more than $2.5 million in a single year.” During the 1995 playofis, on a day off (at that time he’s playing for the San Antonio Spurs), Rodman was sitting in his kitchen pondering his financial woes with Manley, Manley is his best friend and agent. His $3,800 Ferrari payment was more than a week late. A $9,000 alimony check to ex-wife Annie was looming, And to make matters worse, a half-million dollars he’d borrowed from the Pistons to buy his first house years earlier had gone unpaid for five years now, had ballooned to $745,000 including interest. There are still other dues. All told, Rodman was close to $1.0 million in debt, Turning to his friend, he said plainly, “I need you to make me some money, Bro.” Manley’s first move was to line up Rodman in autograph sessions for $50 per signature. He negotiated with Rodman’s creditors, telling them if they wanted to get paid in full they'd have to wait awhile, and if they wanted cash today, they could take a discount. ‘And he put together a seven-figure deal to publish Rodman's autobiography, Bad As | Wanna Be (Delacorte, 1996), which became an instant bestseller, Rodman agreed to be placed by Manley on $1,000 weekly allowance. He exchanged his American Express card for a debit card. In the midst of Rodman’s financial makeover, another lucky break: Rodman was traded to the Chicago Bulls. At first, he was not up to the idea. But Manley convinced Rodman that playing with Michael Jordan and Scottie Pippen was the best conceivable way to boost his marketing muscle. By the end of the 1996 NBA season, Rodman had $1.0 million in the bank,-a chunk of it from the $150,000 bonus he earned for helping the Bulls make their way to the NBA Championship. He was on track to hit $2.0 million by the end of the year. Plus, he now has a sizeable investment portfolio (in mutual funds, tech stocks, a controlling interest in a $10 million in sales excavation company). He made a killing in Oakley—maker of the sunglasses he wears “every damn day.” : In 1997, according to the Chicago press, Rodman signed an $8.0 million deal with the Bulls. He has endorsement deals, with Kodak, Converse and Carl's Jr. amiong others. He did a movie with Jean Claude Van Damme. He has two more books in production and more scripts than he can count. Appearances in MTV and in wrestling. Romantic episodes with Madonna, Carmen Electra and other celebrities. Rodman, who spends $100 to change his hair from blue to orange to white to whatever, is now out of the NBA because of his eccentricities nonetheless he’s come very far. He is in the news lately because of charges related to child-support. Adapted with editorials from the book—The Rich and Famous Money Book, By Chatzky and other relevant articles.Accounting and its Environment | 3 What role does accounting play in the life of Dennis Rodman? Rodman, through the efforts of Manley, used accounting information in one form or another. His manager utilized “budgeting” to help Rodman with his finances. Manley tapped his financial sense in coming out with the idea of “wait awhile to be paid in full or cash today but at a discount.” He certainly did a lot of financial analysis when he positioned Rodman in strategic investments and endorsement deals. Manley needed and relied on accounting information to guide him in his dealings for Rodman. It is his single most important business tool in steering his client, Rodman, from the brink of bankruptcy to possible financial prosperity. INTRODUCTION Accounting has evolved, as in the case of medicine and law, in response to the social and economic needs of society. As business and society become more complex, accounting develops new concepts and techniques to meet the ever-increasing needs for‘ financial information? Without such information, many complex economic developments and social programs may never have been undertaken. In a market economy, information helps decision-makers make informed choices regarding the allocation of scarce resources under their control. When decision-makers are able to make well-informed decisions, resources are allocated in a way that better meets the needs and goals of those within the market. Accounting is relevant in all walks of life, and it is absolutely essential in the world of business. Accounting is the system that measures business activities, processes that information into reports and communicates the results to decision-makers. Accounting quantifies business communication. For this reason, accounting is called the language of business. The task of learning accounting is very similar to the task of learning a new language; thus, the need for this book which teaches the Basics of Accounting in a very conceptual manner. No business could operate very long without knowing how much it was earning and how much it was spending. Accounting provides the business with these information and more. So, accountants can be called the scorekeepers of business. Without accounting, 2 business couldn't function optimally; it wouldn’t know where it stands financially, whether it’s making a profit or not, and it wouldn’t know its financial situation. Also, a sound understanding of this language will bring about a better management of the financial aspects of living. Personal financial planning, education expenses, car amortization, business’ loans, income taxes and investments are based on the information system that we call accounting.4 | Basic Financial Accounting and Reporting 2021 Edition by Prof. WIN Ballada — DEFINITIONS 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 (Statement of Financial Accounting Standards No. 1, “Basic Concepts and Accounting Principles Underlying Financial Statements of Business Enterprises” (Manila: Accounting Standards Council, 1983), par. 1) Accounting is an information system that measures, processes and communicates financial information about an economic entity (Statement of Financial Accounting Concepts No. 1, “Objectives of Financial Reporting by Business Enterprises" (Norwalk, Conn.: Financial Accounting Standards Board, 1978), par. 9). M Accounting is the process of identifying, measuring and communicating economic information, to permit informed judgments and decisions by users of the information (American Accounting Association, “A Statement of Basic Accounting Theory” (Evanston, IIL: American Accounting Association, 1966), par. 1; Accounting Principles Board, Statement No. 4, “Basic Concepts and Accounting Principles Underlying Financial Statements of Business Enterprises” (New York: AICPA, 1970), par. 40)... . 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 Certified Public ‘Accountants, “Review and Resume”, Accounting Terminology Bulletin No. 1 (New York: AICPA, 1953), par. 9). 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.” Primitive Accounting People have counted and kept records throughout.history. The origin of keeping accounts has been traced as far back as 8500 B.C., the date archaeologists have established for certain clay tokens—cones, disks, spheres and pellets—found in Mesopotamia (modern Iraq). These tokens represented such commodities as sheep, jugs of oil, bread or clothing and were used in the Middle East to keep records. The tokens were often sealed in clay balls, called bullae, which were 1 Committee on Accounting History, Report of the Committee, Accounting Review, supplement to Vol. XLV, 1920, p. 53. :Accounting and Its Environment | 5 broken on delivery so the shipment could be checked against the invoice; bullae, in effect, were the first bills of lading. Later, symbols impressed on wet clay tablets replaced the tokens. Some experts consider this stage of record keeping the beginning of the art of writing, which spread rapidly along the trade routes and took hold throughout the known civilized world. ‘Account records date back to the ancient civilizations of China, Babylonia, Greece and Egypt. People in these civilizations maintained various types of records of business activities. During the 1% dynasty, of Babylonia (2286-2242 B.C), its law which was based on the Code of Hammurabi, requires merchants trading goods to give buyers a sealed memorandum containing the agreed price before it can be considered enforceable. The agreed-upon transaction was recorded by the Scribe (the predecessor of the modern accountant) on a small mound of clay with the parties affixing “their signatures” on it. This clay was allowed to dry and served as the record of the transaction. For the more important ones, the record can be kiln- dried. ‘At around 3600 B.C. in Babylonia, clay tablets also recorded payments of wages. The rulers of these civilizations uséd accounting to keep track of the costs of labor and materials used in building structures as in the case of the pharaohs of Egypt in building their great pyramids. Accounting is one of our oldest skills. The earliest collections of understandable writing track how many bushels of grain came into the king's warehouse. Tablets recorded who brought in the grain and how much the king took as his share. Even in the early days, tax collecting is an activity closely linked to accounting. The presence of-bookkeeping in the ancient world has been attributed to various factors including (i) the invention of writing; (ii) the introduction of Arabic numerals; (ii) the decimal system; (iv) the diffusion of knowledge of algebra; (v) the presence of inexpensive writing materials; (vi) the rise of literacy; and (vii) the existence of a standard medium of exchange. A. C. Littleton in Accounting Evolution to 1900 lists seven preconditions for the emergence of systematic bookkeeping: The Art of Writing, since bookkeeping is first of all a record; Arithmetic, since the mechanical aspect of bookkeeping consists of a sequence of simple computations; Private Property, since bookkeeping is concerned only with recording the facts about property and property rights; Money (ie, among economy), since bookkeeping is unnecessary except as it reduces all transactions in properties or property rights to this common denominator; Credit uncompleted transactions), since there would be little impulse to make any record whatever if all exchanges were completed on spot; Commerce, since a merely local trade would never have created enough pressure (volume of business) to stimulate men to coordinate diverse ideas into a system; Capital, since without capital commerce ‘would be trivial and credit would be inconceivable.6 | Basic Financial Accounting and Repoiting 2021 Edition by Prof. WIN Ballada Middle Ages As a result of the Crusades from the 11" to the 13 centuries, Northern Italy’s literacy has become widespread. Arabic numerals were also being used as a result of trade with the Near East allowing columns of numbers to be .added and subtracted. The use of credit was prevalent and a semblance of an international banking system was also functioning. The Inca Empire, which spanned the west coast of South America throughout the 11" to 14 centuries, used knotted cords of different lengths and colors called quipu to keep accounting records. Development of more formal account-keeping methods is attributed to. the merchants and bankers of Florence, Venice and Genoa during the 13" to 15™ centuries. Double-entry bookkeeping is not a discovery of science; it is the outcome of continued efforts to meet the changing necessities of trade. German philosopher Oswald Spengler wrote in The Decline of the West (1928) that the invention of double-entry bookkeeping was the decisive event in European economic history. The Florentine Approach Renaissance Florentine markets were a fascinating combination of formalization, in the form of account books and double-entry bookkeeping, and of informal social networks, constructed out of the surrounding rules of Florentine sociality. To them, doing business and living life were extensions of each other. Business was conducted on logic of friendship, but friendship in turn was instrumental, as well as emotional. Account books were not inconsistent with social exchange; rather, they formalized and made social exchange easier. The explosion of commercial credit, at that time, required a system of recording. The earliest evidence of business bookkeeping in Florence, France was evidencéd by the bank ledger fragments of 1211 (transcribed in 1887 by Pietro Santini) and with the development of accounting in Tuscany, Italy during the 13th century, as evidenced in the account-books or extracts. But, these were within the framework of the “narrative” or “paragraph” type of accounting record (a sezioni sovrapposte), perhaps derived from the “charge and discharge” format used in public accounts. The system was primitive; accounts were not related in any special way (in terms of equality for entries), and balancing of the accounts was lacking. The emergence of double entry itself, was first witnessed in the “ledgers” of Renieri (or Rinieri) Fini & Brothers (1296-1305) and Giovanni Farolfi & Company (1299- 1300). Giovanno Farolfi & Company, as appears from the “ledger”, was a firm of Florentine merchants whose head office was at Nimes in Languedoc, in the kingdom of France. The ledger, however, relates exclusively to the branch at Salon, a town in the independent county of Provence, Amatino Manucci was a partner in Giovanni Farolfi & Company, a merchant partnership based in Florence,Accounting and Its Environment | 7 ~ Financial records that he kept for the firm’s branch in Salon, Provence, survive from 1299-1300, Although these records are incomplete, they show enough detail to be identified as double-entry bookkeeping. These details include the use of debits and credits and duality of entries. They are the oldest known existing examples of the double-entry system. Amatino Manucci was the inventor of double-entry bookkeeping. He managed to construct a comprehensive and fully-articulated set of double-entry records, with a regular balancing procedure on closure of the General Ledger. He used five books—general ledger, two merchandise ledgers, expenses ledger, and cash book (with the white ledger as a sixth)—constituted what looks very like a true double-entry system. In addition, there were at least two subsidiary books. He gave importance to the aspect of financial control. The books were logically subdivided, with segregation of cash and goods accounts from the main ledger, a perpetual inventory of each line of agricultural produce and each grade of cloth or yarn dealt in, and full records of debtors and creditors, expenses, profits, interest and partners’ drawings, as well as the state of account with the head office at Nimes, and an estimate (15% per annum) of the expected rate of return on capital employed.? The Method of Venice Luca, Pacioli, a Franciscan friar and a celebrated mathematician, is generally associated with the introduction of double-entry bookkeeping. In 1494 he published his book, Summa de Arithmetica, Geometria, Proportioni et Proportionalita or “Everything about Arithmetic, Geometry, Proportions and Proportionality,” which includes, Particularis de Computis et Scripturis or “Details of Calculation and Recording," describing double-entry bookkeeping. His treatise reflected the practices of Venice at the time, which became known as the Method of Venice or the Italian method. Therefore, he did not invent double-entry bookkeeping, but rather described what were prevalent accounting practices of the day. Although Pacioli made no claim to developing the art of bookkeeping, he has been regarded as the father of double-entry accounting. He stated that the purpose of bookkeeping was “to give the trader without delay information as to his assets and liabilities.” Pacioli also advised the computation of a periodic profit and the closing of the books. He said, “It is always good to close the books each year, especially if you are in a partnership with others. Frequent accounting makes for long friendship.” 2 G.A. Lee (1977), "The Coming of Age of Double Entry: The Giovanni Faroli Ledger of 1299-1300", ‘Accounting Historians Journal, 4(2): 79-95.8 | Basic Financial Accounting and Reporting 2021 Edition by Prof. WIN Ballada a a EIS This Italian bookkeeping prospered with the development of the commercial republics of Italy and the use of the double-entry method in the fourteenth century. Goethe, the famous German poet and dramatist, referred to double-entry bookkeeping as “one of the finest discoveries of human intellect.” Werner Sombart, an eminent economist-sociologist, believed that “double-entry bookkeeping is born of the same spirit as the system of Galileo and Newton.” Savary and Napoleonic Commercial Code The earliest systematized form of accounting regulation developed in continental Europe, starting in France in 1673. The government introduced the submission of an annual fair value statement of financial position to protect the economy from bankruptcies. This legal requirement for businesses to keep accounting records was first introduced in the Ordonnance de Commerce of 1673 which was put through by Jean-Baptiste Colbert during the reign of Louis XIV, and the Napoleonic Commercial Code of 1807, that influenced the bookkeeping provisions of commercial law throughout Continental Europe, Francophone Africa, and beyond. ‘The Napoleonic Code or Code Napoléon is the French civil code, established under Napoléon Bonaparte on March 21, 1804. The Commercial Code was adopted in 1807. Jacques Savary, the elder (1622-1690) in an early accolnting text stated, “If this merchandise is starting to deteriorate, or go out of style, or is that which one judges he could find at the factory or wholesalers at 5% less, it must be reduced to this price.” Although this is the oldest known formulation of the lower-of-cost-or- market principle, Vance? reported that several earlier accounting texts recommended current cost rather than historical cost valuation of inventory in specific examples where the market valuation was lower. Inventory valuation at the lower-of-cost-or-market was required by the Code of Commerce in France in 16734, in Prussia in 1794 (Vance, 1943), and in the German Commercial Code of 1884 (Schmalenbach, 1959, p. 17). As Savary was the principal author, the French Commercial Code of 1673 was also called the Code Savary. In the 17 century, Nicolas Petri was the first person to group similar transactions in a separate record and enter the monthly totals in the journal, rather than recording all transactions seriatim, that is, in a series. In 1769, Benjamin Workman published The American Accountant, the earliest- known American accounting textbook. /ance, L., 1943, The authority of history in inventory valuation. The Accounting Review 28 (3), 219-27. « Uttleton, A.C, 1941. A genealogy for “cost or market.” The Accounting Review 16 (2), 161-67.Accounting and Its Environment | 9 ———— Industrial Revolution, Corporate Organization, Railroads, United States Steel Accounting practice really dates from antiquity but the formation of an accounting profession was closely tied to the rise of a modern industrial society in Britain during the late 18" century. The need for accounting services emerged slowly, but by the early decades of the 19" century a flurry of textbooks and handbooks on accounting had appeared, reflecting the impact of the Industrial Revolution. This revolution, which occurred in England from the mid-18" to the mid-is" century, changed the method of producing commercial goods from the handicraft method to the factory system. With this change came the problem of costing for a large volume of products. The specialized field of cost accounting emerged to meet this need for the analysis of various costs. The expanded business operations initiated by the Industrial Revolution required increasingly large amount of funds to build factories and purchase machinery. This need resulted to the development of the corporate form of organization. The growth of corporations spurred the development of accounting. Corporate owners, the shareholders, were no longer the managers of their business. Managers had to create accounting systems to report to the owners the results of their stewardship of the business. This situation created a need for an independent report to provide assurance that management's financial representations are reliable. Accountancy was still an indeterminate calling in Britain as late as the 1830s. Men then engaged in accounting not only made simple accounts but also found it financially necessary to act as auctioneers, appraisers, agents and debt collectors. The profession was shaped by legislation. Accountancy reached the shores of the United States of America as a natural result of the investments being made by British businessmen into the land of opportunities.” Railroads, heavy users of debt financing in the late 1800s, were the first American firms to issue balance sheets to absentee creditors. By 1880, the US railroad system had accumulated $4.6 billion of investments which was roughly equivalent to 40% of the American economy's annual output. Depreciation was formally considered given that the railroad companies used higher value and longer-lived equipment— locomotives, rail cars and track—than previous established enterprises. With the hauling of freight, the equipment gradually lost productive capacity and needed to be replaced. This lost presented a financial reporting problem since it was never clear when the wear and tear took place. Also, there’s the problem of matching of revenues and expenses. The concept of depreciation was largely ignored until the 1909 US corporate income tax law permitted a deduction for depreciation charges in the calculation of taxable income. At the beginning of the 20" century, some managers began to use depreciation to smooth reported earnings. A 1912 Journal of Accountancy editorial complained that that depreciation had become a tool used by management to counter fluctuations in profits. In good years, heavy depreciation charges were made. Bad years saw no provision or an inadequate charge.10 | Basic Financial Accounting and Reporting 2021 Edition by Prof. WIN Ballada On Mar. 12, 1903, United States Stee! published consolidated financial statements as of Dec. 31, 1902, together with Price Waterhouse & Company's (PW) assurance that they were audited and found correct. US Steel resulted from the amalgamation of various steel producers at that time. It’s the first billion-dollar corporation. It controlled 75% of the US steel business. There existed complex relationships between US Steel and its many subsidiaries such that PW Managing Partner Arthur Lowes Dickinson believed that the stockholders could be informed adequately of the entity’s relative financial condition only through a consolidation of accounts. US Steel's consolidated financial statements rapidly became a landmark in accounting history. The era of modern financial accounting had dawned. Scientific American wrote that it was “the most complete and circumstantial report’ ever issued by any great American corporation,” noting that the company’s total assets of over $1.50 billion dwarfed the $50 million appropriated by Congress for the Spanish-American War several years earlier. ‘Schmalenbach and The Model Chart of Accounts Eugen Schmalenbach (1873-1955) was a German academic and economist. He was born in Halver, and attended the Leipzig College of Commerce starting in 1898. Schmalenbach was a professor at the University of Cologne and as a contributor to German language journals on the subjects of economics, business management and financial accounting. In the early 1920s, Professor Schmalenbach was frustrated repeatedly with his failure to compare meaningfully the financial data made available by different companies. This led to a research on the problem and the publication of his book, The Model Chart of Accounts. With this book, he laid the foundation for all subsequent developments in uniform accounting in Germany. It also became the basis for corresponding efforts in other European countries. Schmalenbach claimed that important information could be gained from a firm’s accounts. The results of one’s firm should show through-flows more usefully than balances. What he termed "Dynamic Balances" were to be promptly and regularly prepared and presented, so that external changes and internal efficiencies could be gauged. Inter-firm comparisons were also to be facilitated. Imposition of Income Tax and Conflicts with Financial Accounting In the year 10 CE, Xin Dynasty’s Emperor Wang Mang instituted an unprecedented tax—the income tax—at the “rate of 10% of profits, for professionals and skilled labor.” , To pay for weapons and equipment in preparation for the Napoleonic wars, William Pitt the Younger of Britain levied an income tax in his budget of December 1798. The 1862 Union Government established the Bureau of Internal Revenue to asséss personal and corporate income taxes to help finance the Civil War. In 1943, the US Congress passed income tax withholding as the only way to collect on high tax ratesAccounting and its Environment | 11 ———Se eS to fund World War II. The Philippines’ Bureau of Internal Revenue (BIR) was created through the passage of Reorganization Act No. 1189 dated July 2, 1904. On August 1, 1904, the BIR was formally organized and made operational under the Secretary of Finance. Financial accounting is conservative and it’s about matching efforts and results. Tax accounting, in turn, is about improving the amount and timing of collections. Note that “taxes are the lifeblood of the government and their prompt and certain availability are an imperious need (Commissioner vs. Pineda, 21 SCRA 105).” This difference in perspective produces conflicts. Note that all returns required to be filed by the Tax Code shall be prepared always in conformity with the provisions of the Tax Code. In case of conflicts with generally accepted accounting principles (GAAP), in the final reckoning, the Tax Code will prevail. Information Age Dan Brinklin and Bob Frankston wrote VisiCalc for the Apple Il, the first electronic spreadsheet, the most important business application for the personal computer. Tremendous advances in information technology have further revolutionized accounting in recent years. Tasks those are time-consuming when done manually can now be done with speed, consistency, precision and reliability by computers. There is an abundance of accounting applications and modules to suite the businesses’ various needs. With the proliferation of netbooks and smartphones along with its mind-boggling array of applications, surely, doing business will change. This will necessarily bring changes to the field of accounting. As they say, information technology is it, you either breathe it or perish. ASEAN Establishment and Member States The Association of Southeast Asian Nations, or ASEAN, was established on Aug. 8, 1967 in Bangkok, Thailand, with the signing of the ASEAN Declaration (Bangkok Declaration) by the Founding Fathers of ASEAN, namely: Indonesia, Malaysia, Philippines, Singapore and Thailand. Brunei Darussalam then joined on Jan. 7, 1984, Viet Nam on July 28, 1995, Lao PDR and Myanmar on July 23, 1997 and Cambodia on April 30, 1999, making Up what is today the ten Member States of ASEAN. Vision What is ASEAN? In a nutshell, the Vision: "a stable, prosperous and highly competitive ASEAN Economic Region in which there is a free flow of goods, services, investment and a freer flow of capital, equitable economic development and reduced poverty and socio- economic disparities."12 | Basic Financial Accounting and Reporting 2021 Edition by Prof. WIN Ballada Opportunities What are the opportunities? Ten member states with a 2013 population of 625 million, ASEAN is characterized by rising incomes, young population, with combined gross domestic product (GDP) at current prices of US$2,399 billion or a GDP per capita at current prices of USS3,839 and GDP growth rate of 5.1. Four Pillars of ASEAN Economic Community The ASEAN Community is comprised of three pillars, namely: the ASEAN Political- Security Community, ASEAN Economic Community and ASEAN Socio-Cultural Community. In turn, the ASEAN Economic Community (AEC is the blueprint) has four pillars. They are as follows: Single market and production base (measures to ensure the free flow of goods, services, investment, capital, skilled labor, priority integration sectors), competitive economic region (actions on competition policy, consumer protection, intellectual property rights, infrastructure development, taxation, e-commerce), equitable economic development (SME development, initiative for ASEAN integration) and integration into the global economy (coherent approach towards external economic relations, enhanced participation in global supply networks). What are the priority integration sectors? Goods (agro-based goods, automotive products, 'electronics/electrical, fisheries, rubber-based goods, textiles/clothing and wood-based products). Services (air transport, e-ASEAN, health care services, logistic, tourism). ASEAN Framework Agreement on Services ASEAN is a government-to-government cooperation. To realize its dreams, ASEAN has progressively entered into more legally binding and institutionalized agreements through the adoption of the-ASEAN Trade in Goods Agreement (ATIGA), the ASEAN ‘Comprehensive Investment Agreement (ACIA) and the ASEAN Framework Agreement on Services (AFAS). AFAS aims to provide greater mobility of ASEAN professionals to provide their services in the region. This will require rounds of negotiations to liberalize trade in services. ‘ Mutual Recognition Arrangements and ASEAN Chartered Professional Accountant MRAs (mutual recognition arrangements) are contracts between a National ‘Accountancy Body (NAB) and/or Professional Regulatory Authority (PRA) from countries that have signed the General Agreement on. Trade in Services in 1995 allowing professional service providers registered in signatory countries to be equally recognized in another signatory country. The existing MRAs: for engineering (MRA 2005), nursing (MRA 2006), architectural (MRA 2007), medical (MRA 2009), dental (MRA’ 2009), accountancy (MRA 2014) and surveying (MRA Framework 2009) services. 4 Professional Accountant is eligible to apply through the Monitoring Committee of his Country of Origin, to be registered as an ASEAN Chartered Professional Accountant (ACPA) on the ASEAN Chartered Professional Accountant Register (ACPAR) subject toAccounting and Its Environment | 13 certain qualifications enumerated in Article 4 of th e Services signed last Nov. 13, 2014, ASEAN MRA on Accountancy The Monitoring Committee shall assess the Professional Accountant according to th. Guidelines on Criteria and Procedures in Appendix Il of the MRA. d guided oy Appendix Il in preparing an Assessment Statement for the purpose ofthe "1 fcatl n. it will then submit the application to the ASEAN Chartered Professional, Accountant Coordinating Committee (ACPACC). ACPACC shall have the authority to confer and withdraw the title of ACPA or ASEAN Chartered Professional Accountant. To practice in a host country, an ACPA need to apply to become a Registered Foreign Professional Accountant (RFPA). Upon approval, the successful ACPA applicant shall be subject to the domestic regulations, be permitted to work as a RFPA, not in independent practice, but in collaboration with designated Professional Accountants in the host country, within such area of his own competency as may be approved by the NAB (in our case, the Philippine Institute of CPAs) and/or PRA (the Professional Regulation Commission and the Board of Accountancy) of the host country. ASEAN Qualifications Reference Framework (AQRF) AQRF, a common reference framework, functions as a device to enable comparisons of qualifications of skilled labor across ASEAN Member States. The framework, among others, supports recognition of qualification, promote quality of education and learning, and facilitate labor mobility. It addresses all education and training, including formal, non-formal and informal learning. Noting that ASEAN Member, States are at different stages of development, each country is expected to voluntarily comply with the AQRF at their own capacity and start the referencing process by 2016 and at the latest by 2018. The development of an AQRF specifically supports the implementation of ASEAN Economic Community Blueprint, It aims to facilitate the free flow of services through recognition of professional qualifications as well as the ASEAN Socio-Cultural Community Blueprint which targets to’ establish national skills frameworks as an incremental approach towards an ASEAN skills recognition framework. According to former PRC Chair Teresita’. Manzala, the ASEAN Member States have agreed on 2018 as the target for the referencing of their national qualifications frameworks with the ASEAN Qualifications Reference Framework. This framework will function as a device to enable comparisons of qualifications and providing the concept of “best fit” between qualifications from different countries. FUNDAMENTAL BUSINESS MODEL For a business to be successful, it needs to develop a product or service that customers will pay for and thus create a revenue stream. It can be a new product or service that meets specific needs. It can also be a better product or service. Or, it can a product or ‘ service that offers a better value proposition. A business requires investments to enable it to pay for the infrastructure, equipment and personnel. Only after a skillful combination of these elements can a business generate a revenue stream. (i4 | Basic Financial Acco ing and Reporting 2021 Edition by Prof. WIN Ballada Figure 1-1 illustrates how a business is structured to provide a customer proposition, The business model is built on five activi 1. First, the investors provide the required capital for the business. The cash investment will then be held in a bank account. 2. The cash in the business can be: + converted into another type of asset that will be used in the business (e.g. equipment) or sold (e.g. inventory); or + spent on operating costs such as salaries, rentals and utilities. = 4 4 - Business Owner 4 Operating Products or Cash Assets Services Banks 2 - 2 3 Return zi mae Figure 2-1 Fundamental Business Model 3, The combination of business resources provides the basis for producing the products or services. 4, The sale of a product or service generates an asset called a receivable. This asset once collected will produce a cash inflow for the business. 5. If there's an existing debt from banks, the cash inflow from collections will be used to provide the debt providers with interest on their loans to the company. The rest of the cash can be sent back to the cycle by being converted into other assets or spent on operating costs (back.to stage 2). In the normal course of business, this whole process will earn profits on which tax will have to be paid. Any profit after tax can continue to be reinvested in the cycle or paid out to the. owners as a "return" on their investments.Accounting and Its Environment | 15 ‘The model illustrates the way money flows around a business and provides the basis of accounting. To manage a business effectively it is important to know how the cash has been spent and how profitable the products or services have been to the business. The availability of this historic information helps management to make judgments on how to improve the performance of business. TYPES OF BUSINESS Although the fundamental business model does not vary, there are infinite ways of applying it to provide the range of products and services that fake up the business world, However, the range of products and services can be summarized in seven broad categories, they are as follows: Type Activity Services Selling people's time Trader Buying and selling products Manufacture Designing products, ‘aggregating |, components and assembling finished products Raw materials Growing or extracting, raw materials Infrastructure Selling the utilization of infrastructure Structure Hiring skilled staff and selling their time Buying a range of raw materials and manufactured goods and consolidating them, ‘making them available for sale in locations near to their customers or online for delivery Taking raw materials and using equipment and staff to convert them into finished goods Buying blocks of land and using them to provide raw materials Buying and operating assets (typically large assets); selling ‘occupaney often in combination with services Examples Software development, Accounting Legal Wholesaler Retailer Vehicle Assembly Construction Engineering Electricity, Water Food and drink Chemicals Media Pharmaceuticals Farming Mining oil Transport (airport operator, airlines, trains, ferries, buses) Hotels Telecoms Sports facilities Property managementnd Reporting 2021 Edition & Type Activity Structure Examples, Financial Receiving deposits, Accepting cash from Bank lending and investing depositors and paying them ‘Investment house money interest; using the money to provide loans to borrowers, charging them fees anda higher rate of interest than the depositors receive Insurance Insurance Pooling premiums of Collecting cash from many many to meet claims of customers; investing the money to pay the losses, experienced by afew customers. By understanding the risk accepted and the likelihood of a claim, more premium income can be earned than claims paid afew, FORMS OF BUSINESS ORGANIZATIONS Any of the above types of activities may be performed by a business organization be it a sole proprietorship, a partnership or a corporation. A business generally assumes one of the three forms of organization. The accounting procedures depend on which form the organization takes. Sole Proprietorship. This business organization has a single owner called the proprietor who generally is also the manager. Sole proprietorships tend to be small service-type (eg. physicians, lawyers and accountants) businesses and retail establishments. The owner receives all profits, absorbs all losses and is solely responsible for all debts of the business. From the accounting viewpoint, the sole proprietorship is distinct from its proprietor. Thus, the accounting records of the sole proprietorship do not include the proprietor’s personal financial records. Partnership. A partnership is a business owned and operated by two or more persons who bind themselves to contribute money, property, or industry to a common fund, with the intention of dividing the profits among themselves. Each partner is personally liable for any debt incurred by the partnership. Accounting considers the partnership as a separate organization, distinct from the personal affairs of each partner. Corporation. A corporation is a business owned by its stockholders. It is an artificial being created by operation of law, having the rights of succession and the powers, attributes and properties expressly authorized by law or incident to its existence. The stockholders are not personally liable for the corporation's debts. The corporation is 2 separate legal entity.Accounting and Its Environment | 17 ——————_—————— MICRO, SMALL. AND MEDIUM ENTERPRISES Big business may be the country’s top taxpayers and highest paying employers. Collectively, though, micro, small and medium enterprises (MSMEs) provide employment for 61% of the country’s labor force. According to the National Statistics Office, MSMEs in 2010 accounted for 99.6% of the total business enterprises at 777,687. The 99.6% is broken down as follows: micro enterprises, 91.6% and SMEs, 8%. In terms of economic output, MSMEs account for only 32%. Then, 68% of the economy's total output can be attributed to the largest 0.4% of Philippine enterprises, or 3,023 out of a total 777,687 firms counted in 2010. But MSMEs hold the key to our economic progress, the challenge lies in being able to increase productivity of the MSMEs; also, there’s a need to further increase their number and in the process help create more jobs. MSMEs in China provide 74% of the jobs and in Japan, 78%; in ASEAN, 68% in Singapore, 77% in Thailand and 97% in Indonesia. Indonesia's MSMEs contribute 57% to gross domestic product. On May 23, 2008, Republic Act No. 9501 was signed into law by President Gloria Macapagal-Arroyo, This law seeks to address problems facing MSMEs, particularly the lack of capital and access to credit. Under the law, banks and lending institutions are now required to allocate at least 10% of their total loan portfolio to MSMEs, broken down as follows: 8% to micro and small enterprises, and 2% to medium enterprises. ‘The old law provided only for a total of 89. The new law also gives the Small Business Corporation, the government financial institution created to assist MSMEs, more financial muscle by increasing its authorized Capital stock to P10.0 billion. The law also updated the definitions of MSMEs by increasing the net assets threshold. Micro enterprises are those with assets, before financing, of P3.0 (before P1.5 million) or less and employ not more than nine workers. Small enterprises are those with assets, before financing, of above P3.0 (before P1.5 million) to P15 million and employ 10 to 99 workers. Medium enterprises have assets, before financing, of above P15 million to P100 million and employ 100 to-199 workers. More than ever, the government should promote and build an entrepreneurial culture and environment to spark an entrepreneurial revolution among the Filipino youth. In the US, 97% of the 28 million firms are small-and medium-scale enterprises (SMEs) with less than US$1.0 million annual gross sales. This means. that even in advanced economies, SMEs make up a big majority in terms of numbers./ In China, entrepreneurship has taken 250 million Chinese out of poverty over the last decades.18 | Basic Financial Accounting and Reporting 2021 Edition by Prof. WIN Ballada ACTIVITIES IN BUSINESS ORGANIZATIONS Many types of decisions are made in business organizations. Accounting provides important information to make these decisions. The three types of organizational activities are as follows: financing, investing, and operating. Financing Activities Organizations require financial resources to obtain other resources used to produce goods and services. They compete for these resources in financial markets. Financing activities are the methods an organization uses to obtain financial resources from financial markets and how it manages these resources. Primary sources of financing for most businesses are owners and creditors, such as banks and suppliers. Repaying the creditors and paying a return to the owners are also financing activities. Investing Activities Managers use capital from financing activities to acquire other resources used in the transformation process—that is, to transform resources from one form to a different form, which is more valuable, to meet the needs of the people. Having the right mix of. resources is essential to efficient and effective operations. An efficient business is one that provides goods and services at low costs relative to their selling prices. An effective business is one that is successful in providing goods and services demanded by the customers. 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. Investing activities include buying land, equipment, buildings and other resources that are needed in the operation of the business, and selling these resources when they are no longer needed. Operating Activities Operating activities involve the use of resources to design, produce, distribute, and market goods and services. Operating activities include research and development, design and engineering, purchasing, human resources, production, ‘distribution, marketing and selling, and servicing. Organizations compete in supplier and labor markets for resources used in these activities. Also, they compete in product markets to sell the goods and services created by operating activities. PURPOSE AND PHASES OF ACCOUNTING The accounting function is part of the broader business system, and does not operate in isolation. It handles the financial operations of the business but also provides information and advice to other departments. Business transactions are the economic activities of a business. Recording these historical events is a significant function ofAccounting and Its Environment | 19 ee accounting. Accounts are produced to aid management in planning, ont and decision-making and to comply with regulations, Before the effects of transactions can be recorded, they must be measured. In order that accounting information will be useful, it must be expressed in terms of a common financial denominator—money. Money serves as both a medium of exchange and a measure of value, ‘ To measure a business transaction, the atcountant must decide when the transaction * occurred (recognition issue), what value to lace on the transaction (valuation issue) and how the components of the transaction shOyld be classified (classification issue). By simply measuring and recording transactions, te resulting information will be of limited use. To be useful in making decisions, the retgrded data must be classified and summarized. Classification reduces the effects of numerous transactions into useful groups or categories. Summarization of financial deta is achieved through the preparation of financial statements. These summariz§ the effects of all business transactions that occurred during some period. After going through the preceding phases, it is imperative that the result of the summarization phase be interpreted or analyzed to evaluate the liquidity, profitability and solvency of the business organization. Accounting provides the decision-makers with information to make reasoned choices among alternative uses of scarce resources in the conduct of business and economic activities. PACIOLI’S DOUBLE-ENTRY BOOKKEEPING AND ITS EVOLUTION In Fra Luca Pacioli’s book, Summa, there are 36 short chapters on bookkeeping. Luca states that to be successful every merchant needs three essential things: sufficient cash ‘or credit, a good bookkeeper, and an accounting system to view the business affairs at a glance. He discusses three books in the Summa: the memorandum, the journal and the ledger. In Pacioli’s book, he introduces the double-entry accounting system—in which for every debet dare (should give) there exists a debet habere (should have or should receive). Modern’ bookkeeping systems are still based on principles established in the 15" century, although they have had to be adapted to suit modern conditions. In Summa, the memorandum is the book where all transactions are recorded, in the currency in which they are conducted, at the time they are conducted. The memorandum, prepared in chronological order, is @ narrative description of the business's economic events. The mémorandum is necessary because there are no documents to support transactions.cial Accounting and Reporting 2021 Edition by Prof. WIN Ballada The second book, the journal, is the merchant's private book. ‘The entries made here are in one currency, in chronological order, and in narrative form. The last book, known as the ledger, is an alphabetical listing of all the business’s accounts along with the running balance of each particular account. What is interesting is that Pacioli never discusses financial statements, that is, statements prepared to communicate the results of business activities to interested users. At that time, financial statements are unnecessary because businesses are still closely controlled by owners who can examine the business's records. However, Pacioli does advocate an annual balancing to determine the success or failure of the business and to find errors. Why has a recording system devised in medieval times lasted for so long? There are two main reasons: 1. it provides an accurate record of what has happened to a business over a specified period of time; and . 2. information extracted from the system can help the owner or the manager operate the business much more effectively. In essence, the system provides the answers to three basic questions which owners want to know: What profit has the business made? How much does the business owe? How much is owed to it? The medieval system dealt largely with simple agricultural and trading entities. Modern systems have to reflect complex industrial operations and sophisticated financial arrangements. Furthermore, a business may be so big or so complex nowadays that the ‘owners have to employ managers to run it for them. Indeed, the senior managers themselves may largely depend upon their junior colleagues to tell them what is happening. A traditional bookkeeping system did not have to deal with situations where owners were separated from managers. It was designed largely to supply summarized information only to the owner-managers of a business who knew in detail from their ‘own experience what was going on. The system was not intended to cope with frequent day-to-day reporting remote from production or trading operations. As a result, Pacioli’s system had to be adapted for modern business practice so that it can satisfy the demand for information from two main sources: 1. from owners, who want to know from time to time how the business is doing; 2, from the managers, who need information in order to help plan and control it. Owners and managers do not necessarily require the same information and so based on this accounting has developed into two main specializations: 1. Financial Accounting, which is concerned with the supply of information tothe owners of an entity; and d 2. Management Accounting, which is concerned with the supply of information to the managers of an entity.Accounting and Its Environment | 21 a while it is useful to classify accounting into these two broad categories, accountants are ow involved in supplying information to a wide range of other interested parties, such as customers, employees, governments and their agencies, investors, lenders, the public and suppliers and other trade creditors. FUNDAMENTAL CONCEPTS Several fundamental concepts underlie the accounting process. In recording business transactions, accountants should consider the following: Entity Concept. The most basic concept in accounting is the entity concept. An accounting entity is an organization or a section of an organization that stands apart from other organizations and individuals as a separate economic unit. Simply put, the transactions of different entities should not be accounted for together. Each entity should be evaluated separately. Periodicity Concept. An entity's life can be meaningfully subdivided into equal time periods for reporting purposes. It will be aimless to wait for the actual last day of operations to perfectly measure the entity's profit, This concept allows the users to obtain timely information to serve as a basis on making decisions about future activities. For the purpose of reporting to outsiders, one year is the usual accounting period. Stable Monetary Unit Concept. The Philippine peso is a reasonable unit of measure and that its purchasing power is relatively stable. It allows accountants to add and subtract peso amounts as though each peso has the same purchasing power as any other peso at any time. This is the basis for ignoring the effects of inflation in the accounting records. Going Concern. Financial statements are normally prepared on the assumption that the reporting entity is a going concern and will continue in operation for the foreseeable future: Hence, it is assumed that the entity has neither the intention nor the need to enter liquidation or to cease trading, This assumption underlies the depreciation of assets over their useful lives. CRITERIA FOR GENERAL ACCEPTANCE OF AN ACCOUNTING PRINCIPLE Accounting practices. follow certain guidelines, GAAP, which stands for generally accepted accounting principles, encompass the conventions, rules and procedures necessary to define accepted accounting practice at a particular time. Accounting principles are established by humans. Unlike the principles of physics, chemistry, and the other natural sciences, accounting principles were not deduced from basic axioms, nor can they be verified by observation and experiment. Instead, they have evolved. This evolutionary process is going on constantly; accounting principles are not eternal truths. The general acceptance of an accounting principle usually ‘depends on how well it meets three criteria: relevance, objectivity and feasibility.by Prof. WIN Ballado 22 | Basic Financial Accounting and Report A principle has relevance to the extent that it results in information that is meaningful and useful to those who need to know something about a certain organization. A principle has objectivity to the extent that the resulting information is not influenced, by the personal bias or judgment of those who furnish it. Objectivity connotes reliability and trustworthiness. It also connotes verifiability, which means that there is some way of finding out whether the information is correct. A principle has feasibility to the extent that it can be implemented without undue complexity or cost. These criteria often conflict with one another. In some cases, the most relevant solution may be the least objective and the least feasible. BASIC PRINCIPLES In order to generate information that is useful to the users of financial statements, accountants rely upon the following principles: Objectivity Principle. Accounting records and statements are based on the most reliable data available so that they will be as accurate and as useful as possible. Reliable data are verifiable when they can be confirmed by independent observers. Ideally, accounting records are based on information that flows from activities documented by objective evidence. Without this principle, accounting records would be based on whims and opinions and is therefore subject to disputes. Historical Cost. This principle states that acquired assets should be recorded at their actual cost and not at what management thinks they are worth as at reporting date. Revenue Recognition Principle. Revenue is to be recognized in the accounting period when goods are delivered or services are rendered or performed. Expense Recognition Principle. Expenses should be recognized in the accounting period in which goods and services are used up to produce revenue and not when the entity pays for those goods and services. Adequate Disclosure. Requires that all relevant information that would affect the user's understanding and assessment of the accounting entity be disclosed in the financial statements. Materiality. Financial reporting is only concerned with information that is significant enough to affect evaluations and decisions. Materiality depends on the size and nature of the item judged in the particular circumstances of its omission. In deciding whether an item or an aggregate of items is material, the nature and size of the item are evaluated together. Depending on the circumstances, either the nature or the size of the item could be the determining factor.Accounting and its Environment | 23 ——————————————— Consistency Principle. The firms should use the same accounting method from period to period to achieve comparability over time within a single enterprise. However, changes are permitted if justifiable and disclosed in the financial staternents. Per revised Philippine Accounting Standards (PAS) No. 1, Presentation of Financial Statements, the presentation and classification of items in the financial statements should be retained from one period to the next unless: © itis apparent, following a significant change in the nature of the entity's operations or a review of its financial statement presentation, that another presentation or classification would be more appropriate having regard to the criteria for the selection and application of accounting policies in Philippine Accounting Standards (PAS) No. 8, Accounting Policies, Changes in Accounting Estimates and Errors; or a Philippine Financial Reporting Standards (PFRS) requires a change in presentation. ACCOUNTANCY IN THE PHILIPPINES Although accounting has been practiced in the Philippines since the Spanish period and possibly even before, the seeds of Philippine accountancy as a recognized profession were planted on March 17, 1928, when Act No. 3105 was approved by the Sixth Legislature. Entitled “An Act Regulating the Practice of Public Accounting; Creating the Board of Accountancy; Providing for Examination, for the Granting of Certificates, and the Registration of Certified Public Accountants; for the Suspension or Revocation of Certificates; and for Other Purposes,” the law paved the way for local accountants to do the work which, up to that time was performed by foreign accountants in the country. Since then, both the profession and the body that directly regulates it have grown rapidly. From 43 registered accountants in 1923, the number of CPAs has grown to over 100,689 by 1999 and conservatively, at least 160,000 as at today. In May 2015, 2,132 new CPAs were added to the roster. In Oct. 2014, it’s 4,123. In July 2024, it's 1,107. In Oct. 2013, it’s 4,246. In May 2013, it’s 1,553. In Oct. 2012, it’s 4,772. In May 2012, it's 1,995. In Oct. 2011, it's 4,066. In May 2014, it’s 2,130. In 2010, it was 5,859. In 2009, it’s 4,119." In 2008, it’s 3,710; in 2007, 3,705. Many of these professionals have distinguished themselves not only in the field of accountancy itself but in many other areas of human endeavor. To the roster of Philippine CPAs belong such luminaries, past and present: = Don Vicente Fabella, in 1915, became the first Filipino CPA in the United States {passed the, Milwaukee, Wisconsin CPA Board Exams), and founder of Jose Rizal University (JRU) in 1919; Dr. Nicanor Reyes, founder and first President of the Far Eastern University (started in 1928 as the Institute of Accountancy, which later became the Institute of Accounts, Business and Finance, and then registered as the Far Eastern University in Jan, 31, 1934 [the official birthday, though, is Nov. 5, 1933]), Mr. FEU died a hero during wwil;+ Jaime Hernander + Washington SyCip, past president of the International Federation of Accountants, the only Asian who has held the position and Founder and Past Chairman of SGV & Co, the leading accountancy firm in the country; + Jose W. Diokno, former Senator of the Philippines and Secretary of Justice; + Wenceslae Lagumbay, former Senator of the Philippines; + Alterto Romulo, former Senator of the Philippines, Executive Secretary and Secretary of Foreign Affairs; + Andres Soriano, founder of one of the country’s leading conglomerates; and + Manuel Morales, was a full-time member of the Monetary Board of the Bangko Sentral ng Pilipinas during the Ramos presidency, had a long career in private banking (41 years), 21 years of which were spent as Board Chair of Manila Banking Corp. and Equitable Bank; a working student in FEU and was the one who decided to award to this humble author a college scholarship (in 1988-1991) under the Go kim Pah Scholarship of Equitable Bank; and + many athers who have been cabinet members, heads of government agencies, chairmen and members of corporations and institutions, deans, heads and professors in the academe, and entrepreneurs. Local accounting firms and partnerships have likewise entered the mainstream of international practice, establishing tie-ups with the Big Five of the accounting world, namely, Arthur Andersen (now defunct), PriceWaterhouseCoopers, Ernst & Young, KPMG, and Deloitte Tohmatsu International. The biggest of the local firms, SGV & Co., was the first to offer services outside the country and initiated the establishment of The ‘SGV Group composed of leading national accounting firms in East and Southeast Asia. The increasing complexity of professional regulation and the developments in the practice of the profession have occasioned the expansion of the Board of Accountancy — from three members (president and two members) under Act No. 3105 in 1923, through (chairman and five members) under Republic Act No. 5166 ("The Accountancy Act of 967" in 1967, to seven (chairman and six members) under Presidential Decree No. 692 (The Revised Accountancy Law") in 1975. Republic Act No, 9298 ("The Philippine ‘Act of 2004”) still provides for the same composition. Under the stewardship of the Professional Regulation Commission (PRC), the Board of Accountancy discharges its mandate of supervising, controlling and regulating t practice of accountancy with authority and distinction. But over and above i functions of standardizing and regulating accounting education,Accounting and its Environment | 25 RES examinations for registering CPAs, and maintaining the rules of the practice, the Board has taken the lead in raising the standards of the profession to a very high level of excellence, as evidenced by the following developments: Full computerization of the CPA licensure examinations. The accounting profession was the first among the professions to achieve this, paving the way for the current record one-day release of examination results. "Upgrading of the quality of accounting education. With the PRC, the Board made fepresentations with the then DECS for the adoption of standards for the organization and operation of professional accounting programs leading to the prescription of a common baccalaureate degree - Bachelor of Science in Accountancy. The Board periodically reviews school curricula and syllabi to maintain their relevance, particularly in the area of information technology. It also initiated the continued monitoring of schools’ performance in the CPA examinations and the recommendation of corrective measures, as necessary. + Regulation of CPA firms and partnerships. To assure compliance of their staff and partners with standards and regulations of the practice, the Board moved for the registration of firms or partnerships of CPAs with both the PRC and the Board of Accountancy. © Requirement of CPAs in civil service. The Board made representations with the Civil Service Commission to require that only CPAs be appointed as accountants and auditors or to hold allied positions in government. In 1975, with the accreditation by the PRC of the Philippine Institute of Certified Public Accountants (PICPA) as the bona fide professional organization representing CPAs in the country, the Board has coordinated with PICPA to further strengthen the profession. With PICPA, it has worked for the passage of The Accountancy Act of 1967; the issuance of the Code of Professional Ethics in 1978; the issuance of guidelines in 1987 for the mandatory continuing professional education (CPE) program for CPAs; the integration of the accounting profession completed in 1987; the biennial oath-taking of new CPAs; standards setting for the profession through membership in the Accounting Standards Council (now FRSC) and the Auditing Standards Practices Council (now AASC); the declaration of the Accountancy Week, the new Code of Ethics (eff. June 30, 2008), and The Accountancy Act of 2004, As the global professional environment unfolds, with the onset of the 21st century, accountancy continues its trailblazing efforts. It is the first among the Philippine professions to be included under the World Trade Organization's (WTO) policy of liberalization of services. This means that Philippine accountants will be freely competing with in the global playing field against accountants from other parts of the world and will be able to hold their own. This is due, in no small measure, to the long and distinguished careers of the country’s accountants, to the linkages that local firms have forged with the world’s biggest accounting firms, and to the integrity with which the Board of Accountancy and the Professional Regulation Commission are now administering a profession that has acquired a global perspective.ACCOUNTANCY ACT OF 2004 Republic Act No. 9298, known aé the Philippine Accountancy Act of 2004 was signed into law by President Gloria Macapagal-Arroyo on May 13, 2004. This law repealed Presidential Decree No. 692, the Revised Accountancy Law, which was enacted May 5, 1975. Some sections of the law are presented as follows: Scope of Practice (Sec. 4) The practice of accountancy shall include, but not limited to, the followin Practice of Public Accountancy = shall constitute in a person, be it his/her individual capacity, or as a partner or as a staff member in an accounting or auditing firm, holding out himself/herself as one skilled in the knowledge, science and practice of accounting, and as a qualified person to render professional services as a certified public accountant (CPA); or offering or rendering, or both, to more than one client on a fee basis or otherwise, services such the audit or verification of financial transaction and accounting records; or the preparation, signing, or certification for clients of reports of audit, balance sheet, and other financial, accounting and related schedules, exhibits, statements or reports which are to be used for publication or for credit purposes, or to be filed with a court or government agency, or to be used for any other purpose; or the design, installation, and revision of accounting system; or the preparation of income tax returns when related to accounting procedures; or when he/she represents clients before government agencies on tax and other ‘matters related to accounting or renders professional assistance in matters relating to accounting procedures and the recording and presentation of financial facts or data. Practice in Commerce and Industry ~ shall constitute in a person involved in decision making requiring professional knowledge in the science of accounting, or when such employment or position requires that the holder thereof must be a certified public accountant. Practice in Education/Academe ~ shall constitute in a person in-an educational institution which involve teaching of accounting, auditing, management advisory services, finance, business law, taxation, and other technically related subjects: Provided, That members ofthe Integrated Bar ofthe Philippines may be allowed to teach business law and taxation subjects. Practice in Government ~ shall constitute in a person who holds, or is appointed to, a position in an accounting professional group in government or in a government-owned and/or ~controlled corporation, including those performing proprietary functions, where decision making requires professional