Overview of Accounting

Learning Objectives
• Define accounting and state its basic purpose.
• Explain the basic concepts applied in accounting.
• State the branches of accounting and the sectors in the practice of
accountancy.
• Explain the importance of a uniform set of financial reporting standards.

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 Definition of Accounting

• is “ the process of identifying, measuring, and

communicating economic information to permit informed
judgment and decisions by users of information.”

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 Three important activities

1. Identifying- the process of analyzing events and transactions to determine whether or

not they will be . Only are recognized.
2. Measuring - involves assigning numbers, normally in monetary terms, to the economic
transactions and events.
3. Communicating - the process of transforming economic data into useful accounting
information, such as financial statements and other accounting reports, for
dissemination to users.

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 Types of Events
– events that involve an .
– reciprocal
- – “ one way” transaction
an event that involves changes in the economic
resources or obligations of an entity caused by an external party or external
source but does not involve transfers of resources or obligations.

– events that do involve an external party.

– the process by which resources are transformed into finished goods.
– an unanticipated loss from disasters or other similar events.

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 Valuation by fact or opinion

• When measurement is affected by , the items measured are said to

be valued by .
• When measurement is unaffected by estimates, the items measured are
said to be valued by .

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 Measurement
• The several measurement bases used in accounting include, but not limited to, the following:
1. historical cost,
2. fair value,
3. present value,
4. realizable value,
5. current cost, and
6. sometimes inflation-adjusted costs.
• The most commonly used is . This is usually combined with the other measurement
bases. Accordingly, financial statements are said to be prepared using a
.

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 Basic purpose of accounting
• The basic purpose of accounting is to provide information about economic
activities intended to be useful in making economic decisions.

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 Types of accounting information classified as to users’ needs

• accounting information - designed to meet the

of most statement users. This information is governed by the
.

• accounting information - designed to meet the

of particular statement users. This information is provided by other
types of accounting, e.g., managerial accounting, tax basis accounting, etc.

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 Basic Accounting Concepts
• – each accountable event is recorded in – and .
• - the entity is assumed to carry on its operations for an indefinite period of time.
• – the entity is treated separately from its owners.
• - amounts in the financial statements are stated in terms of a common unit of
measure; changes in purchasing power are ignored.
• – the life of the business is divided into series of reporting periods.
• – information is material if its omission or misstatement could influence
economic decisions.
• – the cost of processing and communicating information should not exceed the benefits
to be derived from it.

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 Basic Accounting Concepts - Continuation
• – effects of transactions are recognized when they occur (and
not as cash is received or paid) and they are recognized in the accounting periods to
which they relate.
• – the value of an asset is determined on the basis of acquisition
cost.
• – all of the components of a complete set of financial statements
are .
• – financial statements provide sufficient detail to disclose
matters that make a difference to users, yet sufficient condensation to make the
information understandable, keeping in mind the costs of preparing and using it.
• – financial statements are prepared on the basis of accounting
policies which are applied consistently from one period to the next.

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 Basic Accounting Concepts - Continuation
• costs are recognized as expenses when the related revenue is recognized.
• – this theory is applicable where there are two classes of shares
issued, ordinary and preferred. The equation is

• – the accounting objective is the custody and administration of funds.

• – the process of converting non-cash assets into cash or claims for cash.
• (Conservatism) – the inclusion of a degree of caution in the exercise of the
judgments needed in making the estimates required under conditions of uncertainty ,
such that assets or income are not overstated and liabilities or expenses are not
understated.

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 Common branches of accounting
• - focuses on general purpose financial statements.
• – focuses on special purpose financial reports for use by an entity’ s
management.
• - the systematic recording and analysis of the costs of materials, labor, and
overhead incident to production.
• the process of evaluating the correspondence of certain assertions with established
criteria and expressing an opinion thereon.
• - the preparation of tax returns and rendering of tax advice, such as the
determination of tax consequences of certain proposed business endeavors.
• - refers to the accounting for the government and its instrumentalities,
placing emphasis on the custody of public funds, the purposes for which those funds are
committed, and the responsibility and accountability of the individuals entrusted with those
funds.

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 Four sectors in the practice of accountancy
involves the rendering of audit or accounting related services
to more than one client on a fee basis.
- refers to employment in the private sector in a position
which involves decision making requiring professional knowledge in the science of accounting
and such position requires that the holder thereof must be a CPA.
– employment in an educational institution which involves
teaching of accounting, auditing, management advisory services, finance, business law,
taxation, and other technically related subjects.
– employment or appointment to a position in an accounting
professional group in the government or in a government– owned and/or controlled
corporation where decision making requires professional knowledge in the science of
accounting, or where civil service eligibility as a CPA is a prerequisite.

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 Accounting standards in the Philippines

• Philippine Financial ReportingStandards (PFRSs) are and

adopted by the Financial Reporting Standards Council (FRSC). They comprise:
1. Philippine Financial ReportingStandards (PFRSs);
2. Philippine Accounting Standards (PASs); and
3. Interpretations

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 The need for reporting standards
• Entities should follow a uniform set of generally acceptable reporting standards when
preparing and presenting financial statements; otherwise, financial statements would be
misleading.
• The term “ generally acceptable” means that either:
a． the standard has been established by an authoritative accounting rule-making body; or
b． the principle has gained general acceptance due to practice over time and has been proven
to be most useful.
• The process of establishing financial accounting standards is a democratic process in that a
majority of practicing accountants must agree with a standard before it becomes
implemented.

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