Financial Accounting and Reporting
PRELIM Notes
AEC 12 | Ms. Zola Mae D. Caumban | 1ST YR - SEM 1
Objectives
1. Introduction to Accounting
• Define accounting.
• Describe the nature and purpose of
accounting.
• Give examples of branches of
accounting.
• State the function of accounting in a
business.
• Differentiate between external and ● Identifying
internal users of accounting information.
• Narrate the history/origin of accounting.
• State the forms of business organization.
• State the types of business according to
their activities.
INTRODUCTION TO ACCOUNTING
DEFINITION
By the Accounting Standards Council,
Accounting is a service activity. The
accounting function is to provide ● Types of Events
quantitative information, primarily financial
in nature, about economic entities, that is
intended to be useful in making economic
decision.
By the American Institute of Certified
Public Accountants (AICPA)
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.
By the American Accounting Association
(AAA)
Accounting is the process of identifying,
measuring and communicating economic
information to permit informed judgment
and decision by users of the
information ● Recognition
THREE IMPORTANT ACTIVITIES
1. Identifying
2. Measuring
3. Communicating
IDENTIFYING
○ The process of analyzing events
and transactions to determine
whether or not they will be
recognized. Only accountable events
are recognized. In general,
accountable events and transactions
🏛️
should be:
💰
■ Related to the business,
■ measurable in terms of
📝
money,
■ and documented or supported
by evidence.
○ External events - events that involve
an external party.
■ Exchange (reciprocal transfer) -
reciprocal giving and receiving
■ Non-reciprocal transfer - "one
wav" transaction
■ External event other than transfer
- 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.
○ Internal events - events that do not
involve an external party.
■ Production - the process by
which resources are transformed
into finished goods.
■ Casualty - an unanticipated loss
from disasters or other similar
events.
○ identifying something from previous
encounter or knowledge as well as
acknowledgment existence of validity
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Financial Accounting and Reporting
PRELIM Notes
AEC 12 | Ms. Zola Mae D. Caumban | 1ST YR - SEM 1

MEASURING

● Measuring
○ Involves assigning numbers,
normally in monetary terms, to
the economic transactions and
events. The several
measurement bases used in
accounting include, but not
limited to, the following:
■ historical cost,
■ fair value,
■ present value,
Types of accounting information
■ realizable value,
■ current cost,
classified as to users' needs
■ and sometimes
1. General purpose accounting
inflation-adjusted cost
information
○ The most commonly used is
a. designed to meet the
historical cost. This is
common needs of most
usually combined with the
statement users.
other measurement bases.
b. This information is governed
Accordingly, financial
by the Philippine Financial
statements are said to be
Reporting Standards
prepared using a mixture of
(PFRSs).
costs and values.
2. Special purpose accounting
● Valuation by fact or opinion
information
○ When measurement is a. designed to meet the specific
affected by estimates, the needs of particular statement
items measured are said to be users.
valued by opinion. b. This information is provided
○ When measurement is by other types of accounting,
unaffected by estimates, the e.g., managerial accounting,
items measured are said to be tax basis accounting, etc.
valued by fact.

COMMUNICATING Users of Accounting Information &

Products of Accounting
● Communicating
○ The process of transforming Users of Accounting Information are classified
economic data into useful accounting as:
information, such as financial ● Internal users
statements and other accounting ○ those who are directly involved in
reports, for dissemination to users. managing the business
○ Examples:
■ Business owners who are directly
involved in managing the
business,
■ Board of directors
■ Managerial personnel

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Financial Accounting and Reporting
PRELIM Notes
AEC 12 | Ms. Zola Mae D. Caumban | 1ST YR - SEM 1

● External users
○ those who are not directly involved in
managing the business.
○ Examples:
■ existing and potential investors
(e.g., stockholders who are not
directly involved in managing the
business)
■ Lenders (e.g., banks) and
Creditors (e.g., suppliers)
■ Non-managerial employees
■ Public
Products of accounting are:
● Financial statements
○ The structured representation of an
entity's financial position and results
of its operations.
○ They are the end product of the
accounting process and the means
by which information gathered and
processed are periodically
communicated to users.
● Accounting reports
○ includes the financial statements
plus other information provided
outside the financial statements that
assists in the interpretation of a
complete set of financial statements
or improves users' ability to make
efficient economic decisions.
Financial Accounting Reports
statements
Brief History of Accounting
● Accounting can be traced as far back as
the prehistoric times, perhaps more than
10,000 ears ago.
● Archaeologists have found clay tokens as
old as 8500 B.C. in Mesopotamia which
were usually cones, disks, spheres and
pellets. These tokens correspond to
commodities like sheep, clothing or bread.
They were used in the Middle West in
keeping records. After some time, the
tokens were replaced by wet clay tablets.
During such time, experts concluded this
to be the start of the art of writing.
(Source:
http://EzineArticles.com/456988)
● Double entry records first came out during
1340 A. D. in Genoa.
● In 1494, the first systematic record
keeping dealing with the "double entry
recording system" was formulated by Fra
Luca Pacioli, a Franciscan monk and
mathematician. The "double entry
recording system" was included in
Pacioli's book titled "Summa di
Arithmetica Geometria Proportioni and
Proportionista," published on November
10, 1494 in Venice.
● The concept of "double entry recording" is
being used to this day. Thus, Fra Luca
Pacioli is considered as the father of
modern accounting.

1. Statement of 1. Statement of PURPOSE OF ACCOUNTING

financial position financial position
2. Statement of profit 2. Statement of profit
or loss and other or loss and other OVERALL OBJECTIVE OF ACCOUNTING
comprehensive comprehensive
income income ● To provide quantitative financial
3. Statement of 3. Statement of information about a business that is useful
changes in equity changes in equity
to statement users, in making economic
4. Statement of cash 4. Statement of cash
flows flows decisions.
5. Notes 5. Notes ● The essence of accounting:
6. Additional statement 6. Additional statement ○ DECISION - USEFULNESS
of financial of financial
position position
7. Other information

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Financial Accounting and Reporting
PRELIM Notes
AEC 12 | Ms. Zola Mae D. Caumban | 1ST YR - SEM 1

COMMON BRANCHES OF
ACCOUNTING

● Financial accounting
○ focuses on general purpose
financial statements.
● Management accounting
○ focuses on special purpose
financial reports for use by an
entity's management.
● Cost accounting
○ the systematic recording and
analysis of the costs of
materials, labor, and overhead
incident to production.
● Auditing
○ the process of evaluating the
correspondence of certain
assertions with established
criteria and expressing an
opinion thereon.
● Tax accounting
○ the preparation of tax returns
and rendering of tax advice,
such as the determination of
Forms of Business Organization
tax consequences of certain
proposed business
endeavors.
● Government accounting
○ 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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Financial Accounting and Reporting
PRELIM Notes
AEC 12 | Ms. Zola Mae D. Caumban | 1ST YR - SEM 1

Advantages and Disadvantages of the

Different Forms of Business
Organization

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Financial Accounting and Reporting
PRELIM Notes
AEC 12 | Ms. Zola Mae D. Caumban | 1ST YR - SEM 1

the eggs as ingredient in making

Types of Business
cakes for sale is a manufacturing
According to Activities
business.
○ Examples of manufacturing
● Service Business businesses include:
○ A service business is one that offers ■ Car manufacturers (Toyota, Isuzu,
services as its main product rather Volkswagen, etc.)
than physical goods. A service ■ Technology companies (Apple,
business may offer professional Samsung, Sony, etc.)
skills, expertise, advice, lending ■ Food processing companies (San
service, and similar services. Miguel Pure Foods, Silver Swan,
○ Examples: etc.)
■ Schools ■ Factories (clothing factories,
■ Professionals (accounting firm, animal feeds factories, plastic
law firm, electrician, etc.) wares factories, etc.)]
■ Hospitals and clinics ● Some businesses, called hybrid
■ Banks and other financial businesses, engage in more than one
institutions type of activity. For example, a restaurant
■ Hotels and restaurants uses ingredients to cook a meal
■ Transportation and travel (taxi (manufacturing), sells Coca-Cola drinks
operator, travel agency, etc.) (merchandising), and serves food to
■ Entertainment and event planners customers (service).
(wedding planners, concert ● Nevertheless, a hybrid business is
promoters, etc.) classified into one of the major types
● Merchandising Business based on the activity that is most in line
○ A merchandising business (or with the business purpose. Restaurants
trading business) is one that buys are expected to fill-in customer orders and
and sells goods without changing provide dining services, thus, they are
their physical form. more of a service-type business.
○ Examples of merchandising
businesses include:
■ General merchandise resellers
(grocery stores, department
stores, hardware stores,
pharmacies, online stores,
sari-sari stores, etc.)
■ Distributors and dealers (rice
wholesalers, vegetable dealers,
2nd-hand cars dealers, etc.)
● Manufacturing business
○ A manufacturing business is one that
buys raw materials and processes
them into final products. Unlike a
merchandising business, a
manufacturing business changes the
physical form of the goods it has
purchased in a production process.
○ For example, a business that buys
and sells eggs is a merchandising
business. On the other hand, a
business that buys eggs and uses

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Financial Accounting and Reporting
PRELIM Notes
AEC 12 | Ms. Zola Mae D. Caumban | 1ST YR - SEM 1

Chapter 1 Summary
● Accounting is a process of identifying,
measuring and communicating economic
information that is useful in making
economic decisions.
● Only "accountable events" are recorded in
the books of accounts. Accountable events
are those that affect the assets, liabilities,
equity, income or expenses of a business.
● The information processed in an
accounting system is communicated to
interested users through accounting reports
(e.g., financial statements).
● Accounting is considered the "language of
business" because it is essential in the
communication of financial information.
● Accounting provides information that is
useful in making economic decisions.
● The common branches of accounting
include the following: (1) Financial
accounting, (2) Management accounting,
(3) Government accounting, (4) Auditing,
(5) Tax accounting, (6) Cost accounting, (7)
Accounting education, and (8) Accounting
research.
● Financial accounting focuses on the
information needs of external users, while
management accounting focuses on the
information needs of internal users.
● External users are those who are not
directly involved in managing the business.
Internal users are those who are directly
involved in managing the business.
● Accounting information may be either (a)
general purpose or (b) special purpose.
General purpose accounting information is
provided by financial accounting and is
prepared primarily for external users.
Special purpose accounting information is
provided by management accounting or
other branches of accounting and is
prepared primarily for internal users.
● The different forms of business
organization are: (1) Sole proprietorship,
(2) Partnership, (3) Corporation, and (4)
Cooperative.
● The types of business according to
activities are: (1) Service business, (2)
Merchandising business, and (3)
Manufacturing business.