INTRODUCTION TO ACCOUNTING INFORMATION

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FINANCIAL REPORTING SYSTEM

Module 009

Financial Reporting System

LEARNING OBJECTIVES (LO)

After completing this module, the student is expected to:

1. Define what is financial reporting system

2. Review of what is accounting
3. Specify the financial reporting processes

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The Financial Reporting System
The management has the primary responsibility of providing information to both external
and internal parties of which such information provided takes the form of standard
financial statements, tax returns, and documents required by regulatory agencies such as
the Securities and Exchange Commission (SEC) and the Bureau of Internal Revenue (BIR).

The primary recipients of financial statement information are external users, such as
stockholders, creditors, and government agencies.

Generally speaking, external users of information are interested in the performance of the
organization as a whole. Therefore, they require information that allows them to observe
trends in performance over time and to make comparisons between different
organizations.

Given the nature of these needs, financial reporting information must be prepared and
presented by all organizations in a manner that is generally accepted and understood by
users of such financial reports.
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FINANCIAL REPORTING SYSTEM

What is Accounting?
LO 2
During your basic accounting classes, you have exhaustively discussed in detail the full
accounting cycle of which you were also taught that the end product of accounting are the
sets of financial statements.

As a review, a brief review of the entire accounting cycle which makes up the financial
reporting system will be discussed on this Module.

Accounting is being defined in so many forms. Nonetheless, it will still arrive at the basic
notion that accounting is conclusively the “language of business”.

On this course, we will be defining accounting in the sense that will reflect the summary
of all the accounting definition that you will read.

Accounting is a systematic process of providing financial information about the economic

activities of an organization or unit that is intended to be useful in making economic
decisions.

Systematic Process
- Accounting involves three important activities that encompass the
accounting processes, namely:
o Identifying
o Measuring
o Communicating

Identifying
▪ This activity involves the process of recognition or
nonrecognition of business transactions.

It must be noted that not all business transactions are

being recognized for accounting purposes.
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 Consequently, business transactions that affects the
assets, liabilities and equity are only being recognized.
Measuring
▪ This activity involves the process of determining the
monetary amounts that is being carried by each account
in the financial statement.

Accordingly, the Philippine peso is the unit of

measurement being used to account for the business
transactions that must be recognized and accounted as
part of financial statements.

The measurement bases are:

• Historical cost
• Current cost
• Realizable value
• Present value

Among the measurement bases as mentioned above,

historical cost is commonly used.

Communicating
▪ This activity involves the process of preparing and
distributing the financial reports to the users of
accounting information.

This process is the reason why accounting has been

called as the “language of business”.
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FINANCIAL REPORTING SYSTEM

Providing Financial Information

- Financial reporting is the final step in the overall accounting process
that begins in the transaction cycles, as discussed on the previous
modules.

The process begins every start of a new business year.

Takes note that only the permanent or real accounts (balance

sheetaccounts), namely, asset accounts, liability accounts and equity
accounts, are carried forward from the previous year.

The steps of the accounting process are discussed briefly below:

LO 3
1. Analyze business transactions
▪ Capture the transaction. Within each transaction cycle,
transactionsare recorded in the appropriatetransaction
file.
2. Journalize business transactions
▪ Record in journals.
There are two types of journals, namely:
• General Journal
- this is the book of original entries
• Special Journal
- this is where frequently occurringclasses of
transactions, such as sales, are captured in
special journals.

Those that occur infrequentlyare recorded

in the general journal or directly on a
journal voucher.

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3. Post to ledgers
▪ There are two types of ledgers, namely:
• General Ledger (GL)
- Periodically, journal vouchers, summarizing
the entries made to the special journals and
subsidiary ledgers, are prepared and posted
to the GL accounts. The frequency of
updates to the GL will be determined by the
degree of system integration

• Subsidiary Ledger (SL)

- This is where the details of each transaction
are posted to the affected subsidiary
accounts.

4. Prepare the unadjusted trial balance

▪ At the end of the accounting period, the ending balance of
eachaccount in the GL is placed in a worksheet and
evaluated in total for debit–credit equality.
5. Make adjusting entries
▪ Adjusting entries are made to the worksheet to correct
errors and to reflect unrecorded transactions during the
period, such as depreciation and accruals.
▪ The following are the usual adjustments:
a. Accrued Expenses
✓ These are expenses already incurred
✓ Not yet paid
✓ Not yet recorded
b. Accrued Income
✓ These are income already earned
✓ Not yet collected
✓ Not yet earned
c. Prepaid Expense
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FINANCIAL REPORTING SYSTEM

✓ These are expenses that are paid in advance

✓ Not yet incurred in its entirety
✓ Adjusted to reflect what is the expense portion
and the asset portion in order to conform with
the accrual basis of accounting
d. Deferred Income
✓ These are income not yet earned but collection
has been made already
✓ Adjusted to reflect what is the income portion
and the liability portion in order to conform
with the accrual basis of accounting
e. Depreciation
✓ This is the recognition of periodic reduction in
value of asset due to passage of time
f. Doubtful Accounts
✓ This is the estimated amount of receivables
that are unlikely to be collectible.

6. Journalize and post adjusting entries

▪ Journal vouchers for the adjusting entries are prepared
andposted to the appropriate accounts in the GL.

7. Prepare the adjusted trial balance.

▪ From the adjusted balances, a trial balance is prepared
thatcontains all the entries that should be reflected in the
financial statements.

8. Prepare the financial statements.

▪ The statement of financial position (balance sheet), statement
of comprehensive income (income statement), statement of
changes in equity, statement of cash flowsand the notes to
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 financial statements are prepared using the adjusted trial
balance.

9. Journalize and post the closing entries

▪ Journal vouchers are prepared for entries that close out
thetemporary or nominal accounts, namely, income accounts,
expenses accounts and drawing accounts, and subsequently
transfer to retained earnings. Finally,these entries are posted
to the GL.

10. Prepare the post-closing trial balance

▪ A trial balance worksheet containing only the balance
sheetaccounts may now be prepared to indicate the balances
being carried forward to the next accountingperiod.
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FINANCIAL REPORTING SYSTEM

FIGURE 1
(excerpted from Accounting Information System by James Hall)

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Economic Activities
- This simply pertains to the business transactions of the company where
transaction cycles are being processed.

Organization or Unit
- This is business itself.
Three (3) forms of businesses:
o Sole proprietorship
o Partnership
o Corporation
Three (3) operations of businesses:
o Service
o Merchandising
o Manufacturing

Intended to be Useful in Making Economic Decisions

- This section mainly answers the question, “who make decisions?”
- Decision makers are those users of financial information which could
either be the internal users of external users.

END OF MODULE
 INTRODUCTION TO ACCOUNTING INFORMATION
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FINANCIAL REPORTING SYSTEM

References and Supplementary Materials

Books and Journals

1. Hall, James A (2016). Accounting Information System (9th ed). Boston City:
Cengage Learning.
2. Gleim, Irvin N (2018). Gleim CIA Review. Gainesville, FL: Gleim Publications,
Inc.
3. Valix, Conrado T. and Valix, Christian Aris M (2016). Theory of Accounts.
Manila City: GIC Enterprises & Co. Inc,

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