savings that will occur when the old equipment
Qualitative
Characteristics of
Financial Reporting
Qualitative characteristics are the attributes
that make financial information useful to users.
For Analytical purposes, Qualitative
characteristics can be differentiated into
Fundamental and Enhancing qualitative
characteristics.
FUNDAMENTAL QUALITATIVE
CHARACTERISTICS
Fundamental Characteristics distinguish useful
financial reporting information from that is not
useful or misleading.
The two fundamental Qualitative characteristics
are:
1. Relevance
2. Faithful Representation
Relevance: In accounting, the term relevance
means it will make a difference to a decision-
maker. Relevant information is capable of
making a difference in the decisions made by
users. It is capable of making a difference in
decisions if it has predictive value, confirmatory
value, or both.
Predictive value helps users in predicting or
anticipating future outcomes. Confirmatory
value enables users to check and confirm earlier
predictions or evaluations.
For example, in the decision to replace a piece
of equipment that has been used for the past
six years, the original cost of the equipment
does not have relevance. In other words, the
original cost is irrelevant or is not relevant in
the decision to replace the equipment. What
will have relevance are the future amounts,
such as the cost of the new equipment, and the
is replaced.
Here's another expression of relevance: Costs
that will differ among alternatives. Costs that
will not differ among alternatives do not have
relevance.
In order to have relevance, accounting
information must be timely. Financial
statements issued three weeks after the
accounting period ends will have more
relevance than financial statements issued
several months after the period ends. Having
timeliness and relevance may mean sacrificing
some precision or reliability.
The Relevance of information is affected by its
nature and its materiality.
Materiality: Information is material if omitting
it, or misstating it could influence decisions that
users make on the basis of financial information
about a specific reporting entity.
Materiality is an aspect of relevance that is
entity-specific. It means that what is material to
one entity may not be material to another. It is
relative. Information is material if it is significant
enough to influence the decisions of users.
Materiality is affected by the nature and
magnitude (or size) of the item.
Faithful Representation is the second
Fundamental Qualitative Characteristic.
Faithful Representation
The Financial reports represent economic
phenomena in words and numbers. The
financial information in the financial reports
should represent what it purports to represent.
Meaning, that it should show what really is
present (Example: The position of Assets and
Liabilities) and what really happened (Example:
The position of Income and expenditure), as the
case may be.
There are three characteristics of faithful
representation:
1. Completeness: Depiction of all necessary
information for a user to understand the
phenomenon being depicted. It includes all
necessary descriptions and explanations
(adequate or full disclosure of all necessary
information),
2. Neutrality: Depiction is without bias in the
selection or presentation of financial
information must not be manipulated in any
way in order to influence the decision of users.
(Fairness and freedom from bias), we often
refer to a term called True and Fair View in
Accounting.
3. Free from error: means there are no errors
and inaccuracies in the description of the
phenomenon and no errors made in the process
by which the financial information was
produced. (No inaccuracies and omissions). That
does not mean no inaccuracies can arise,
particularly in the case of making estimates. The
standards expect that the estimates are made
on a realistic basis and not arbitrarily.
ENHANCING QUALITATIVE CHARACTERISTICS
Enhancing Qualitative Characteristics
distinguish more useful information from less
useful information.
The Enhancing Qualitative Characteristics are
divided into 4 attributes.
Comparability
Verifiability
Timeliness
Understandability
COMPARABILITY
Comparability is the Qualitative characteristic
that enables users to identify and understand
similarities and differences among items.
Information about a reporting entity is more
useful if it can be compared with similar
information about other entities with similar
information about other entities and with
similar information about the same entity for
another period or date.
Comparable information enables comparisons
within the entity and across entities. When
comparisons are made within the entity,
information is compared from one accounting
period to another. For example: income is
compared for the years 2014, 2015, and 2016.
Comparability of information across entities
enables analysis of similarities and differences
between different companies. Corresponding
information for preceding periods should be
shown to enable comparison over time.
Consistency vs. Comparability
Consistency is not the same as Comparability.
Consistency refers to the use of the same
methods for the same items (Consistency of
Treatment) either from period to period within
a reporting entity or in a single period across
entities. Users must be able to distinguish
between different accounting policies in order
to be able to make a valid comparison of similar
items in the accounts of different entities.
VERIFIABILITY
A company's accounting results are verifiable
when they're reproducible, so that, given the
same data and assumptions, an independent
accountant can produce the same result the
company did.
Verifiability helps ensure that Information
faithfully represents the economic phenomena
it purports to represent. It means that different Classifying and characterizing presenting
knowledgeable and observers could reach a information clearly and concisely makes it
consensus that a particular depiction is a Understandable.
Faithful Representation. Verifiability isn't about
A principle that states that a company's
determining whether the assumptions a
financial information should be presented in
company makes are correct. Rather, it's about
such a way that a person with a reasonable
determining whether the accounting result the
knowledge of business and finance, and the
company reaches is appropriate for the data,
willingness to study the information, should be
given the assumptions that have been made.
able to comprehend it. This principle is included
The Financial Accounting Standards Board, in the Accounting Standards Board's Statement
which writes the rules for the U.S. accounting of Principles.
profession, says that verifiability provides
by Shyam Sunder Kasturi
assurance that "accounting measures represent
what they purport to represent." It's not Source: ACCA Study Material
enough for a company to say the answer is "2."
It also has to show you the "1 + 1" on the other
side of the equation. Verifiability.

Verifiability has its own limitations too.

Verifiability doesn't have to do with
determining the truthfulness of the data a
company provides, but rather with making sure
its results logically flow from the data.
Verifiability also doesn't pass judgment on
whether the assumptions made are correct or
even appropriate, just whether the result
matches the assumptions.
PS: Simply put, fair presentation is the end
result that is expected to be achieved by
maintaining principle qualitative characteristics
and the application of accounting standards.
Faithful presentation is one of the qualitative
factor that enhances one of the four principle
qualitative characteristics i.e. reliability.

Finally, verifiability is silent on the

interpretation of accounting results.

TIMELINESS

The timeliness of accounting information refers

to the provision of information to users quickly
enough for them to take action. Information
becomes obsolete and useless if it is not
reported within time. Usually, the Statute
specifies the time for preparation and
presentation of financial reports.

UNDERSTANDABILITY
 MODULE 1 - ACCOUNTING: AN OVERVIEW

Lesson 1: Accounting

A. What is Accounting?

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. (AICPA)

Accounting is the process of identifying, measuring and communicating economic information to permit informed
judgements and decisions by users of information. (AAA)

Accounting is a service activity. Its function is to provide quantitative information, primarily financial in nature, about
economic entities, that is to be useful in making economic decisions. (FRSC)

B. Bookkeeping as a Field of Accounting

Bookkeeping involves those mechanical and repetitive recording and classifying procedures related to the business
activities of a natural or artificial person, until the voluminous financial information is summarized and reported in the form
of financial statements.

Bookkeeping is only a part of the wider field of accounting.

C. Accounting as a Tool for Business Decisions

 Primary Responsibilities of Management:

 Planning and organizing the activities of the business enterprise
 Investing and financing activities
 Controlling and assessing the performance of the business enterprise
 These managers would depend on the useful financial information provided by the accounting system.

D. Role of Accounting in Business

 It helps the owner/s or managers in making plans and decisions.

 It reports and analyzes business transactions thru the financial statements.
 It communicates financial information to all interested parties.

Lesson 2: Business

A. What Is a Business Enterprise?

Business Enterprise exists when a person or group of persons makes an investment or contributes its resources in order to
sell products or render services to others, for the ultimate purpose of making profit.

B. Objectives of a Business Enterprise

Businesses are generally formed to make profit

Profit-oriented Organizations

o “Business Enterprise”
o the main activities of a business enterprise is to make profit

Non-profit Organizations

o established not for profit but to render services and meet the needs of the members of the community

C. Business’ Liquidity and Solvency

 Liquidity is the ability of a business enterprise to pay its currently maturing financial obligations.
 Solvency is the ability of a business enterprise to meet its long-term financial obligations.
  In contrast, a business enterprise that cannot meet its obligations as they fall due is said to be insolvent.

D. Other Objectives of a Business

 To provide jobs to the community

 To protect the environment
 To create new and better products for the consumers
 To render useful services at competitive prices

4.1. Types and Forms of Business

A. Types of Business

 Service Enterprise — This type of business provides various forms of services, not tangible products, to its
customers or clients.
 Merchandising Enterprise — This type of business entity is in the “buy and sell” business. A trading or
merchandising enterprise buys ready-to-use products then sells these products at higher prices.
 Manufacturing Enterprise — this involves the conversion of raw materials into finished product, which
will be sold at a higher price than the production cost.

B. Forms of Business Ownership

 Single Proprietorship — a business owned by one person, called entrepreneur or proprietor.

 Partnership - has two or more owners called partners.
 Corporation — is a business that has its ownership capitalization divided into hundreds or thousands of
transferable shares of stock. The corporation must have at least five owners or investors called
stockholders or shareholders.

C. Characteristics of the Different Forms of Business Enterprises

Unlimited liability — lf the business has unpaid debts which it can no longer pay, the creditors can run after the owner and
attach his properties to satisfy their claim.

Limited liability — the liability of the partner, shareholders or members is limited only up to the extent of their paid up
capital.

Lesson 3: Accounting as a Profession

A. Accounting as a Profession

In terms of career opportunities, the field of accounting may be divided into two broad disciplines: public accounting and
private accounting:

1. Public Accounting
A certified public accountant (CPA) is a professional who is licensed to perform an independent audit of business
enterprises or to render other forms of special accounting services to his clients.

Certified Public Accountants (CPA) may offer the following services:

 Auditing — it is the careful study of the client’s accounting information and gathering of evidences both
from within the business enterprise and from other sources

Based on these gathered evidences, the CPA expresses a professional opinion regarding the fairness and reliability of the
financial statements.

 Tax Services — the CPA may be hired by his client to perform the latter’s tax requirements such as
settlement of tax case, tax planning, tax consulting, etc.
 Management Advisory Services — the CPA may be consulted of a certain business problem and
recommends new policies and procedures that are needed as a solution.

Other Services

 preparation of financial forecasts or feasibility studies

 assessment of the present cost accounting system
 computation of the confidential payrolls and compensations
 installation of the accounting information system
 in-house trainings and personal development
 keeping the client’s stock and transfer records

2. Private Accounting

An accountant who is in a private accounting when he is employed by one particular enterprise to perform accounting-
related tasks.

 Controller — the chief accounting officer of a business enterprise

Among the more important areas of private accounting are: Financial Accounting, Management Accounting, and Internal
Auditing.

 Financial Accounting — the branch of accounting that is primarily concerned with the preparation and
presentation of general-purpose financial statements of a business enterprise
 Management Accounting — provides specific information needs of the internal data-users, principally the
management
 Internal Auditing — Internal Auditors have the responsibilities of evaluating the efficiency of operations
and determining whether the business’ policies are being followed in all organizational levels of
operations in order to achieve the organization’s objectives.
 MODULE 2 - ACCOUNTING CONCEPTS AND PRINCIPLES

Lesson 1: Generally Accepted Accounting Principles

Generally Accepted Accounting Principles (GAAP)

Philippine Financial Reporting Standards (PFRS) and PFRS for Small and Medium-sized Entities
the accounting principles and processes, standards of recognition, measurement methods, and basic assumptions that
have gained international acceptance in the business world and the accountancy profession that are used in the
preparation and presentation of basic financial statements.
Sources:

 Financial Reporting Standards Council (FRSC) – the authoritative body that establishes and promulgates GAAP and
standards in the Philippines
 International Accounting Standards Board (IASB) – Its main objective is to create a semblance of uniformity in the
accounting practices among the different nations of the world.
 International Financial Reporting Standards – reporting standards carried out by the IASB.

Lesson 2: Basic Accounting Concepts

Basic Accounting Concepts

 Accrual Basis - the amount of profit or loss is determined by deducting the total expenses incurred (whether they
are already paid for or not) during the period from the total income earned (whether they are collected or not) for
the same time frame.
 Going Concern Assumption - under this assumption, also known as continuity assumption, the primary financial
statements of a business enterprise are prepared on the assumption that the normal operations of the enterprise
will continue indefinitely.
 Business Entity Principle – assumes that the business and its owner are separate and distinct entities.
 Periodicity Concept – the assumption that the operating life of the business may be divided into time-periods.
 Concept of Equality of the Value Received and Value Given Up – for every value received, there is an equal value
given up.
 Monetary Concept – the assumption that the business transactions can be objectively measured or quantified in
terms of “peso”
 Matching Concept – the assumption that the results of business operations could be measured if there is a proper
matching of income and expenses within a reporting period.
 MODULE 3 - ACCOUNTING ELEMENTS AND ACCOUNT TITLES

Lesson 1: Financial Statements

A. OBJECTIVES OF FINANCIAL STATEMENTS

Reporting Periods:
 Calendar Year – 12-month reporting period that begins on January 1 and ends on December 31
 Fiscal Year – 12-month reporting period that ends on a date other than December 31
 Natural Business Year –12-month period which ends in the month business activities are at their lowest

B. USERS OF THE FINANCIAL STATEMENTS

 Management – All these financial statements and internal reports serve as management’s feedback tools, and
at the same time aid the managers in making decisions as to what future actions to take.
 Investors – The financial information made available to the investors could help them decide whether they
should buy, hold or sell their investment in the business enterprise.
 Trade Creditors – A trade creditor wants to know whether his present or prospective customer is capable of
settling his financial obligations within a short period of time
 Banks and Other Lenders – A lender needs information that will help in assessing the safety of his investment, or
the risk involved in his lending exposure.
 Government and Its Agencies – The government wants to know how the business enterprise is contributing to
the needs of the community and to the economy as a whole.
 Employees and Labor Unions – This group needs to know how stable and profitable its employer is.
 Customers and Clients – The customers of the enterprise are interested to know whether their supplier is
capable of continuously supplying their needs for raw materials, spare parts, services, and even technological
information.
 General Public – The other external data-users need financial data related to the operations of a business for
varied reasons.

C. COMPLETE SET OF FINANCIAL STATEMENTS

1. Balance Sheet
2. Income Statement
3. Statement of Changes in the Owners’ Equity
4. Statement of Cash Flows
5. Notes, comprising of the summary of significant accounting policies and other explanatory notes

3.1. Balance Sheet

BALANCE SHEET (Statement of Financial Position)
- This shows the financial condition of a business enterprise, which is assumed to be a going concern, as of a
particular date
- This statement will show the assets, liabilities, and owner’s equity of the business as of a given date.
- All accounts appearing in this statement are called real accounts in the sense that they are more or less permanent
in nature and their balances are carried forward from period to period.
A.1. Accounting Elements in the Balance Sheet
A.2 EXAMPLE

CLASSIFICATIONS OF ASSETS
 Current Assets – cash and other assets that are expected to be converted to cash or consumed within one year
from the accounting period or the normal operating cycle of the business whichever is longer
 Noncurrent Assets – other assets of the business that are not classifiable as current such as fixed assets.
CLASSIFICATIONS OF LIABILITIES
 Current Liabilities – financial obligations of the business which are payable within one year from the end of an
accounting period.
 Noncurrent Liabilities - financial obligations of the business which are payable for more than one year from the
end of an accounting period.
3.2. Income Statement
A. INCOME STATEMENT
- This shows the results of the operations of a business enterprise for a certain period of time or reporting period
- This statement summarizes the different revenues and expenses of the business to arrive at the net income.
- All accounts appearing in this statement are called nominal accounts in the sense that they are merely temporary
accounts and are not carried forward from period to period.

B.1 Accounting Elements of Income Statement

B.2 EXAMPLE
 MODULE 4 -ACCOUNTING EQUATION AND RULES OF DEBIT AND CREDIT

Lesson 1: The Accounting Equation

A. FUNDAMENTAL ACCOUNTING EQUATION

BALANCE SHEET ELEMENTS:

 Assets – represent those economic resources and/or controlled by the enterprise, and which are
expected to have future usefulness to the business.
 Liabilities – include those economic obligations of the enterprise, and which require future settlements
that are expected to result in outflows of economic resources.
 Equity – the residual interest of the owner or owners over the assets of the enterprise, after deducting
its total liabilities.
B. RESULTS OF OPERATIONS

The income statement is an expanded and detailed expression of the income and expenses in order to arrive at the profit earned or loss incurred
during a given reporting period.

INCOME STATEMENT ELEMENTS:

 Income – used in connection with the inflow of assets and/or outflow of liabilities that is related to the
activities of the business.
 Expenses – used in connection with the outflow of assets and/or inflow of liabilities that is directly or indirectly
related to the activities of the business enterprise.

C. ENDING BALANCE OF THE PROPRIETOR’S EQUITY

The equity of the proprietor may be computed independently from the asset and liability elements, if information about profit and
withdrawals for personal use is available.
Lesson 2: The Accounting Cycle

Phase 1: Recording and Classifying

Step 1- Compile and arrange the source documents that support the business transactions.
Step 2- Analyze the business transactions and determine their two-fold effects on the accounting
elements.
Step 3- Journalize the business transactions in the books of original entry called journals.
Step 4- Post the journal entries to the books of final entry called ledgers.
Step 5- Prepare the unadjusted trial balance.

Phase 2: Summarizing and Reporting

Step 6- gather the data needed to adjust the accounts.
Step 7- Prepare the worksheet.
Step 8- Journalize and post the adjusting entries.
Step 9- Prepare the financial statements and supplementary schedules.

Phase 3: Closing Process

Step 10- Journalize and post the journal entries.
Step 11- Rule and balance the ledger accounts.
Step 12- Prepare the post-closing trial balance.
Step 13- Journalize and post the reversing entries.

Lesson 3: Classification of Business Transactions

 Business Transactions – activities or events that occur during a period of time, if they affect
the business’ financial condition and are capable of being assigned monetary values.
 Internal business transactions – activities or events that occurred within the business
enterprise with no separate entity involved.
 External business transactions – exchanges of economic consideration with another separate
entity, whether a natural or an artificial entity.
 Reciprocal transactions – every business transaction has two-fold effects. There is reciprocity
of value received and value parted with in every business transaction.
 Non-reciprocal transactions – value is received yet no value is parted with.
 Monetary Transaction – it is assumed that objective and reliable monetary values can be
assigned to the business transactions.
 Non-monetary transactions – are assigned equal-to-cash peso values or fair market peso
values that are agreed upon between parties involved.
 Source Documents – It is necessary that the reported information can be easily traced back to
the supporting evidences.