Overview of Accounting c.

External event other than transfer – an event that involves

changes in the economic resources or obligations of an entity
Learning Objectives caused by an external party or external source but does not
• Define accounting and state its basic purpose. involve transfers of resources or obligations.

• Explain the basic concepts applied in accounting. 2. Internal events – events that do not involve an external party.

• State the branches of accounting and the sectors in the practice of a. Production – the process by which resources are transformed
accountancy. into finished goods.

• Explain the importance of a uniform set of financial reporting standards. b. Casualty – an unanticipated loss from disasters or other similar
events.

Measurement
Accounting
• The several measurement bases used in accounting include, but not
o is “the process of identifying, measuring, and communicating economic limited to, the following:
information to permit informed judgment and decisions by users of
1. historical cost,
information.”
2. fair value,

3. present value,
Three important activities
4. realizable value,
1. Identifying - the process of analyzing events and transactions to
determine whether or not they will be recognized. Only accountable 5. current cost, and
events are recognized.
6. sometimes inflation-adjusted costs.
2. Measuring - involves assigning numbers, normally in monetary terms, to
the economic transactions and events. • The most commonly used is historical cost. This is usually combined with
the other measurement bases. Accordingly, financial statements are said
3. Communicating - the process of transforming economic data into useful to be prepared using a mixture of costs and values.
accounting information, such as financial statements and other
accounting reports, for dissemination to users.

Valuation by fact or opinion

Types of Events o When measurement is affected by estimates, the items measured are
said to be valued by opinion.
1. External events – events that involve an external party.
o When measurement is unaffected by estimates, the items measured are
a. Exchange (reciprocal transfer) – reciprocal giving and receiving said to be valued by fact.
b. Non-reciprocal transfer – “one way” transaction
Basic purpose of accounting
 is to provide information about economic activities intended to be useful
in making economic decisions.
Types of accounting information classified as to users’ needs
• General purpose accounting information - designed to meet the common
needs of most statement users. This information is governed by the
Philippine Financial Reporting Standards (PFRSs).
• Special purpose accounting information - designed to meet the specific
needs of particular statement users. This information is provided by other
types of accounting, e.g., managerial accounting, tax basis accounting,
etc.
Basic Accounting Concepts
o Double-entry system – each accountable event is recorded in two parts –
debit and credit.
o Going concern - the entity is assumed to carry on its operations for an
indefinite period of time.
o Separate entity – the entity is treated separately from its owners.
o Stable monetary unit - amounts in the financial statements are stated in
terms of a common unit of measure; changes in purchasing power are
ignored.
o Time Period – the life of the business is divided into series of reporting
periods.
o Materiality concept – information is material if its omission or
misstatement could influence economic decisions.
o Cost-benefit – the cost of processing and communicating information
should not exceed the benefits to be derived from it.
o Accrual Basis of accounting – 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.
o Historical cost concept – the value of an asset is determined on the basis
of acquisition cost.
o Concept of Articulation – all of the components of a complete set of
financial statements are interrelated.
o Full disclosure principle – 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.
o Consistency concept – financial statements are prepared on the basis of
accounting policies which are applied consistently from one period to the
next.
o Matching – costs are recognized as expenses when the related revenue is
recognized.
o Residual equity theory – this theory is applicable where there are two
classes of shares issued, ordinary and preferred. The equation is “Assets –
Liabilities – Preferred Shareholders’ Equity = Ordinary Shareholders’
Equity.”
o Fund theory – the accounting objective is the custody and administration
of funds.
o Realization – the process of converting non-cash assets into cash or
claims for cash.
o Prudence (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.
Common branches of accounting
o Financial accounting - focuses on general purpose financial statements.
 o Management accounting – focuses on special purpose financial reports
for use by an entity’s management.
o Cost accounting - the systematic recording and analysis of the costs of
materials, labor, and overhead incident to production.
o Philippine Financial Reporting Standards (PFRSs) are Standards and
Interpretations adopted by the Financial Reporting Standards Council
(FRSC). They comprise:
1. Philippine Financial Reporting Standards (PFRSs);

o Auditing - the process of evaluating the correspondence of certain 2. Philippine Accounting Standards (PASs); and
assertions with established criteria and expressing an opinion thereon.
3. Interpretations
o Tax accounting - the preparation of tax returns and rendering of tax
advice, such as the determination of tax consequences of certain
proposed business endeavors. The need for reporting standards
o Government accounting - refers to the accounting for the government o Entities should follow a uniform set of generally acceptable reporting
and its instrumentalities, placing emphasis on the custody of public funds, standards when preparing and presenting financial statements;
the purposes for which those funds are committed, and the responsibility otherwise, financial statements would be misleading.
and accountability of the individuals entrusted with those funds.
o The term “generally acceptable” means that either:
Four sectors in the practice of accountancy
a. the standard has been established by an authoritative
1. Practice of Public Accountancy - involves the rendering of audit or accounting rule-making body; or
accounting related services to more than one client on a fee basis.
b. the principle has gained general acceptance due to practice
2. Practice in Commerce and Industry - refers to employment in the private over time and has been proven to be most useful.
sector in a position which involves decision making requiring professional
knowledge in the science of accounting and such position requires that o The process of establishing financial accounting standards is a democratic
the holder thereof must be a CPA. process in that a majority of practicing accountants must agree with a
standard before it becomes implemented.
3. Practice in Education/Academe – employment in an educational
institution which involves teaching of accounting, auditing, management
advisory services, finance, business law, taxation, and other technically
related subjects. Chapter 2
Accounting Concepts and Principles
Practice in the Government – employment or appointment to a position in an
accounting professional group in the government or in a government–owned Learning Objectives
and/or controlled corporation where decision making requires professional
1. Give examples of accounting concepts and principles.
knowledge in the science of accounting, or where civil service eligibility as a
CPA is a prerequisite 2. Apply the concepts in solving accounting problems.

Basic Accounting Concepts

Accounting standards in the Philippines 1. Separate entity concept
2. Historical cost concept assets or income are not overstated and liabilities or
3. Going concern assumption expenses are not understated.
4. Matching
5. Accrual Basis 19. Reporting Period
6. Prudence (or Conservatism) o The life of the business is divided into series of reporting
7. Time period periods.
8. Stable monetary 20. Stable monetary unit
9. Materiality o Assets, liabilities, equity, income and expenses are stated
10. Cost benefit in terms of a common unit of measure, which is the peso
11. Full disclosure principle in the Philippines. Moreover, the purchasing power of the
12. Consistency concept peso is regarded as stable. Therefore, changes in the
13. Separate entity concept purchasing power of the peso due to inflation are ignored.
o The business is viewed as a separate entity, distinct from
its owner(s). Only the transactions of the business are 21. Materiality concept
recorded in the books of accounts. The personal o An item is considered material if its omission or
transactions of the business owner(s) are not recorded. misstatement could influence economic decisions.
Materiality is a matter of professional judgment and is
14. Historical cost concept (Cost principle) based on the size and nature of an item being judged.
o assets are initially recorded at their acquisition cost.
22. Cost-benefit
15. Going concern assumption o The costs of processing and communicating information
o The business is assumed to continue to exist for an should not exceed the benefits to be derived from the
indefinite period of time. information’s use.

16. Matching 23. Full disclosure principle – Information communicated to users reflect
o Some costs are initially recognized as assets and charged a balance between detail and conciseness, keeping in mind the cost-
as expenses only when the related revenue is recognized. benefit principle.

17. Accrual Basis of accounting 24. Consistency concept – Like transactions are accounted for in like
o income is recorded in the period when it is earned rather manner from period to period.
than when it is collected, while expense is recorded in the
period when it is incurred rather than when it is paid.
Philippine Financial Reporting Standards (PFRSs)
18. Prudence
o The observance of some degree of caution when The PFRSs are Standards and Interpretations adopted by the FRSC. They consist of
exercising judgments under conditions of uncertainty. the following:
Such that, if there is a choice between a potentially
1. Philippine Financial Reporting Standards (PFRSs);
unfavorable outcome and a potentially favorable outcome,
the unfavorable one is chosen. This is necessary so that 2. Philippine Accounting Standards (PASs); and
 3. Interpretations o Faithful representation means the information provides a true, correct
and complete depiction of what it purports to represent.

o Faithfully represented information has the following:

Qualitative Characteristics a. Completeness – all information necessary for users to

understand the phenomenon being depicted is provided.
I. Fundamental Qualitative Characteristics
b. Neutrality – information is selected or presented without bias.
I. Relevance (Predictive Value, Confirmatory Value, Materiality)
II. Faithful Representation (Completeness, Neutrality, Free from error) c. Free from error – there are no errors in the description and in
II. Enhancing Qualitative Characteristics the process by which the information is selected and applied.
I. Comparability
Enhancing Qualitative Characteristics
II. Verifiability
III. Timeliness 1. Comparability – the information helps users in identifying similarities and
IV. Understandability differences between different sets of information.

Fundamental vs. Enhancing 2.
o The fundamental qualitative characteristics are the
characteristics that make information useful to users. 3.
o The enhancing qualitative characteristics are the
characteristics that enhance the usefulness of information. 4.
Verifiability – different users could reach consensus as to what the
information purports to represent.
Timeliness – the information is available to users in time to be able to
influence their decisions.
Understandability – users are expected to have:

a. reasonable knowledge of business activities; and

Relevance b. willingness to analyze the information diligently.
o Information is relevant if it can affect the decisions of users. CHAPTER 3:
o Relevant information has the following:
Conceptual Framework for Financial Reporting
a. Predictive value – the information can be used in making
predictions Learning Objectives

b. Confirmatory value – the information can be used in confirming • State the basic purpose, authoritative status, and scope of the
past predictions Conceptual Framework.

c. Materiality – is an ‘entity-specific’ aspect of relevance. • State the objective of financial reporting.

Faithful representation • Identify the primary users of financial statements.

• Explain briefly the qualitative characteristics of useful information and

how they are applied in financial reporting.
 • Define the elements of financial statements and state their recognition • Primary users – those to whom general purpose financial reports are
criteria. directed:

(a) Existing and potential investors

(b) Lenders and other creditors.

The Conceptual Framework • Only the common needs of primary users are met by the financial
statements.
 sets out the concepts that underlie the preparation and presentation of
financial statements for external users. Qualitative Characteristics

Fundamental qualitative characteristics

Authoritative Status and Applicability
(1) Relevance
• The Conceptual Framework is not a PFRS. When there is a conflict
between the Conceptual Framework and a PFRS, the PFRS will prevail. (a) Predictive value

• In the absence of a standard, management shall consider the Conceptual (b) Feedback value
Framework in making its judgment in developing and applying an  Materiality – entity-specific aspect of relevance
accounting policy that results in information that is relevant and reliable.
(2) Faithful representation
• The Conceptual Framework is concerned with general-purpose financial
statements. (a) Completeness

(b) Neutrality

Objective of general-purpose financial reporting (c) Free from error

• The objective of general-purpose financial reporting is to provide financial II. Enhancing qualitative characteristics
information about the reporting entity that is useful to existing and
potential investors, lenders and other creditors in making decisions about (3) Comparability
providing resources to the entity. A secondary objective of financial (4) Verifiability
statements is to show the results of the stewardship of management.
(5) Timeliness
• The objective of general-purpose financial reporting forms the foundation
of the Conceptual Framework. Other aspects of the Conceptual (6) Understandability
Framework flow logically from the objective.

Elements of Financial Statements

Users and their Needs
Financial Position
 1. Asset - resource controlled by the entity as a result of past events and b. Current cost
from which future economic benefits are expected to flow to the entity
c. Realizable value (Settlement value)
2. Liability - present obligation of the entity arising from past events, the
settlement of which is expected to result in an outflow from the entity of d. Present value
resources embodying economic benefits.

3. Equity – assets less liabilities Concepts of Capital and Capital Maintenance

Performance • Financial concept of capital – capital is regarded as the invested money
1. Income – encompasses both (a) revenues and (b) gains or invested purchasing power. Capital is synonymous with equity or net
assets.
Expense – encompasses both (b) expenses and (losses)
• Physical concept of capital – capital is regarded as the entity’s productive
capacity, e.g., units of output per day.

Recognition

• Recognition –the process of incorporating in the balance sheet or income CHAPTER 4

statement an item that meets the definition of an element and satisfies
the recognition criteria. PAS 1 Presentation of Financial Statements

• An item is recognized if all of the following are satisfied: Learning Objectives

a. The item meets the definition of an element; • Enumerate and describe the general features of financial statement
presentation.
b. It is probable that any future economic benefit associated with
the item will flow to or from the entity; and • Enumerate and describe the components of a complete set of financial
statements.
c. The item has a cost or value that can be measured with
reliability. • State the acceptable methods of presenting items of income and
expenses.
Expense Recognition Principles
• Differentiate between the statement of profit or loss and other
1. Direct association or matching comprehensive income and the statement of changes in equity.

2. Systematic and rational allocation • State the relationship of the notes with the other components of a
complete set of financial statements.
3. Immediate recognition

Measurement bases
Objective of PAS 1
a. Historical cost
PAS 1 prescribes the basis for presentation of general-purpose financial
statements to improve comparability both with the entity's financial statements of
previous periods (intra-comparability) and with the financial statements of other
entities (inter-comparability).
General purpose financial statements
 are those intended to serve users who do not have the authority to
demand financial reports tailored for their own needs. General purpose
financial statements cater to most of the common needs of a wide range
of external users. General purpose financial statements are the subject
matter of the Conceptual Framework and the PFRSs.
a. Intends to liquidate the entity or to cease trading, or
b. Has no realistic alternative but to do so.
• The assessment of going concern is at least 12 months.
3. Accrual Basis of Accounting - An entity shall prepare its financial statements,
except for cash flow information, using the accrual basis of accounting.
4. Materiality & Aggregation - Each material class of similar items must be
presented separately in the financial statements.
5. Offsetting - Assets and liabilities, and income and expenses, shall not be offset
unless required or permitted by a PFRS.

• Measuring assets net of valuation allowances, for example, obsolescence

Complete set of financial statements allowances on inventories, allowances for doubtful accounts on
1. Statement of financial position receivables, and accumulated depreciation on property, plant, and
equipment are not offsetting.
2. Statement of profit or loss and other comprehensive income
6. Frequency of reporting – An entity shall present a complete set of financial
3. Statement of changes in equity statements (including comparative information) at least annually.

4. Statement of cash flows • When an entity changes the end of its reporting period and presents
financial statements for a period longer or shorter than one year, an
5. Notes entity shall disclose the following:
(5a) comparative information in respect of the preceding period; and 1. The period covered by the financial statements,
6. Additional statement of financial position (required only when certain 2. The reason for using a longer or shorter period, and
instances occur)
3. The fact that amounts presented in the financial statements are
not entirely comparable.
General features 7. Comparative Information
1. Fair Presentation and Compliance with PFRSs - The application of PFRSs, with An entity shall present comparative information in respect of the preceding period
additional disclosure when necessary, is presumed to result in financial statements for all amounts reported in the current period’s financial statements, unless other
that achieve a fair presentation. standards permit or require otherwise.
2. Going concern - An entity is not a going concern if, as of the financial reporting 8. Consistency of presentation - An entity shall retain the presentation and
date or prior to the date of authorization of the financial statements for issue, classification of items in the financial statements from one period to the next
management either: unless:
 a. it is apparent that another presentation or classification would 2. it holds the asset primarily for the purpose of trading;
be more appropriate following a significant change in the
nature of the entity’s operations or a review of its financial 3. it expects to realize the asset within twelve months after the
statements; or reporting period; or

b. a PFRS requires a change in presentation. 4. the asset is cash or a cash equivalent unless the asset is
restricted from being exchanged or used to settle a liability for
at least twelve months after the reporting period.

Additional Statement of financial position Current Liabilities

• An additional statement of financial position is presented as at the • An entity shall classify a liability as current when:
beginning of the preceding period when an entity:
1. it expects to settle the liability in its normal operating cycle;
1. Applies an accounting policy retrospectively, or
2. it holds the liability primarily for the purpose of trading;
2. Makes a retrospective restatement of items in its financial
statements, or 3. the liability is due to be settled within twelve months after the
reporting period; or
3. reclassifies items in its financial statements.
4. the entity does not have an unconditional right to defer
….and the effect of the event to the statement of financial position as at the settlement of the liability for at least twelve months after the
beginning of the preceding period is material. reporting period.

Currently maturing long-term liabilities

Statement of financial position • General rule: Currently maturing long term liabilities are presented as
current liabilities.
• A statement of financial position may be presented as either
• Exceptions:
1. Classified – showing distinctions between current and
noncurrent assets and liabilities, or 1. Refinancing agreement is fully completed on or before the
balance sheet date – non-current liability
2. Unclassified (based on liquidity) – showing no distinction
between current and noncurrent items 2. Refinancing agreement after the balance sheet date but before
the financial statements are authorized for issue – noncurrent
Current Assets liability if the entity expects, and has the discretion, to
• An entity shall classify an asset as current when: refinance it on a long-term basis under an existing loan facility.

1. it expects to realize the asset or intends to sell or consume it, in Breach of loan agreement
its normal operating cycle; • General rule: A liability that is payable on demand is a current liability.
 • Exception: It is presented as non-current liability if the lender provides p. Liabilities included in disposal groups classified as held for sale in
the entity, on or before the balance sheet date, a grace period ending at accordance with PFRS 5;
least 12 months after the balance sheet date to rectify a breach of loan
covenant. q. Non-controlling interests, presented within equity; and

Presentation of Deferred taxes r. Issued capital and reserves attributable to owners of the parent

• Deferred tax liabilities (assets) are presented as noncurrent items in a

classified statement of financial position, irrespective of their expected Order/ Format of Presentation
dates of reversal.
• PAS 1 does not prescribe the order or format in which an entity presents
Minimum line items in the statement of financial position items.
a. Property, plant and equipment; Statement of profit or loss and other comprehensive income
b. Investment property; • An entity shall present all items of income and expense recognized in a
c. Intangible assets; period:

d. Financial assets (excluding amounts shown under (e), (h) and (i)); 1. in a single statement of profit or loss and other comprehensive
income; or
e. Investments accounted for using the equity method;
2. in two statements: (1) a statement displaying the profit or loss
f. Biological assets; section only (separate ‘statement of profit or loss’ or ‘income
statement’) and (2) a second statement beginning with profit or
g. Inventories; loss and displaying components of other comprehensive
h. Trade and other receivables; income.

i. Cash and cash equivalents; Extraordinary items

j. Assets (or disposal groups) classified as held for sale in accordance with • PAS 1 prohibits the presentation of any items of income or expense as
PFRS 5; extraordinary items in the statement(s) presenting profit or loss and
other comprehensive income or in the notes.
k. Trade and other payables;
Other comprehensive income for the period
l. Provisions;
a. Changes in revaluation surplus
m. Financial liabilities (excluding amounts shown under (k) and (l));
b. Unrealized gains and losses on investments in FVOCI securities
n. Liabilities and assets for current tax, as defined in PAS 12 Income Taxes;
c. Remeasurements of the net defined benefit liability (asset)
o. Deferred tax liabilities and deferred tax assets, as defined in PAS 12;
d. Gains and losses arising from translating the financial statements of a
foreign operation
 e. Effective portion of gains and losses on hedging instruments in a cash Disclosure of Dividends
flow hedge
• Dividends declared by an entity are disclosed either in the (a) notes or (b)
• OCI may be presented either (a) net of tax or (b) gross of tax. statement of changes in equity.

Reclassification adjustments Order of presentation of disclosures in the Notes

• Reclassification adjustments are amounts reclassified to profit or loss in 1. Statement of compliance with PFRSs;
the current period that were recognized in other comprehensive income
in the current or previous periods. 2. Summary of significant accounting policies applied;

3. Supporting information for items presented in the other financial

statements; and

4. Other disclosures.

Total comprehensive income

• Total comprehensive income comprises all components of

1. Profit or loss; and

2. Other comprehensive income.

Presentation of Expenses

1. Nature of expense method

2. Function of expense method

• If an entity classifies expenses by function, it shall disclose additional

information on the nature of expenses.