OVERVIEW OF ACCOUNTING

Definition of Accounting
Accounting is the process of identifying, measuring, and communicating economic information to permit informed
judgements and decisions by the user of information.
I. IDENTIFYING – the process of analyzing events and transactions to determine whether or not they will be
recognized.
 Recognition refers to the process of including the effect of an accountable event in the statement of financial
position or the income statement through a journal entry.
 Only accountable events are recognized. Accountable events are the ones that affect the asset, liability, equity,
income or expense of an entity. This is also known as economic activity.
 Non-accountable events are not recognized but disclosed only in the notes, if they have accounting relevance. A
non-accountable event that has accounting relevance may be recorded through a memorandum entry.
TYPES OF EVENTS OR TRANSACTIONS
a. External events- events that involve an entity and another external party.
Types of External Events
 Exchange (reciprocal transfer)- an event wherein there is a reciprocal giving and receiving of economic resources
or discharging of economic obligations between an entity and external party. Examples: sale, purchase, payment
of liabilities, receipt of notes receivable, etc.
 Non-reciprocal transfer- a “one way” transaction in which the party giving something does not receive anything
in return, the party receiving does not give anything in exchange. Examples: donations, gifts or charitable
contributions, payment of taxes, imposition of fines, etc.
 External events other than transfer- an event that involves changes in economic resources or obligations of an
entity caused by an external party or source but does not involve transfers of resources or obligations. Examples:
changes in fair values and price levels, obsolescence, technological changes, vandalism, etc.
b. Internal events- events that do not involve an external party. These events happen inside the company.
Types of Internal Events
 Production- resources are transformed into finished goods. Examples: production of farm products, conversion
of raw materials into finished products
 Casualty- unanticipated loss from disasters or other similar events. Examples: loss from fire, flood, and other
catastrophe
II. MEASURING-