ACC102: BASIC FINANCIAL ACCOUNTING & REPORTING

1: Accounting and Its Environment

Forms of business organizations
Definitions of accounting
• Sole Proprietorship – owned and operated by a
• Accounting is a service entity. Its function is to single individual called proprietor.
provide quantitative information, primarily financial • Partnership – owned by 2 or more people called
in nature, about economic entities that are intended partners.
to be useful in making economic decisions • Corporation – equity is divided into shares of stock
(Accounting Standards Council, 1983). and is created by operation of law (owners are
• Accounting is an information system that measures, called shareholders).
processes, and communicates financial information • Cooperative – equity is divided into the interests of
about an economic entity (Financial Accounting the members, created by operation of law to foster
Standards Board, 1978). the welfare of its members, and is exempted from
• Accounting is the process of identifying, measuring, income taxation.
and communicating economic information to permit
Activities in business organizations
informed judgments and decisions by users of the
• Many types of decisions are made in business
information (AICP, 1970).
organizations. Accounting provides important
• Accounting is the art of identifying, classifying, and
information to make these decisions.
summarizing in a significant manner and in terms of • There are three types of organizational activities:
money, transactions, and events which are, in part 1. Financing activities – These are methods an
at least, of a financial character, and interpreting organization uses to obtain financial
the results thereof (AICP, 1953). resources from, and how it manages these
 All transactions are events, but not all resources.
events are transactions. 2. Investing activities – Managers use capital
from financing activities to acquire other
Types of business resources used in the transformation process
– that is, to transform resources from one
Type Activity Structure Examples form to a different form, which is more
Services Selling people’s Hiring skilled staff Software
time and selling their time development,
valuable, to meet the needs of the people.
accounting,  An efficient business is one that provides
legal.
Trader Buying and selling Buying a range of Wholesalers and goods and services at low costs relative
products. raw materials and retailers.
manufactured goods
to their selling prices.
and consolidating  An effective business is one that is
them, making them
available for sale in successful in providing goods and
locations near to
services demanded by the customers.
their customers or
online for delivery. 3. Operating activities – involve the use of
Manufacture Designing Taking raw materials Vehicle
products, and using equipment assembly, resources to design, produce, distribute, and
aggregating and staff to convert construction, market goods and activities.
components, and them into finished engineering,
assembling goods. electricity, food  Includes research and development,
finished products. and water,
drink, chemicals, design and engineering, purchasing,
media, and human resources, production,
pharmaceuticals
. distribution, marketing and selling, and
Raw materials Growing or Buying blocks of land Farming,
extracting raw and using them to mining, oil.
servicing.
materials. provide raw
materials. Double entry bookkeeoing and its evolution
Infrastructure Selling the Buying and operating Transport
utilization of assets (typically large (airport,
• In Fra Luca Pacioli’s book, Summa, there are 36 short
infrastructure. assets); selling operator,
occupancy often in airlines, trains, chapters on bookkeeping. He discusses 3 books in
combination with ferries, buses),
service. hotels, Summa:
telecoms, sports 1. Memorandum – it is prepared in chronological
facilities, and
property order and it is a narrative description of the
management.
Financial Receiving Accepting cash from Bank and business economic events. The memorandum is
deposits, lending, depositors and investment necessary because there are no documents to
and investing paying them interest; house.
money using the money to support transactions.
provide loans to
borrowers.
2. Journal – book of original entry as it is the first
Insurance Pooling premiums Collecting cash from Insurance place where transactions are recorded. It is
of many to meet many customers;
claims a few. investing the money arranged chronologically and in narrative form.
to pay the losses
experienced by a few
3. Ledger – book of final entries, arranged in an
customers. alphabetical order of all the business accounts

along with the running balance of each
particular account.
Fundamental concepts
• Entity Concept – each entity should be evaluated
separately.
• Periodicity Concept – dividing the entity’s life into
meaningful reporting periods. Users obtain timely
information as the basis of decision-making.
 Calendar year – starts on January 1 and ends
on December 31.
 Fiscal year – the first day is any time of the
year but has a complete 12-month period.
 Natural business year – a 12-month period that
ends on any month when the business is at its
lowest or experiencing slack season.
• Stable Monetary Concept – ignoring effects of
inflation in the accounting records.
• Going Concern – financial statements are normally
prepared on the assumption that the reporting entity
is a going concern and will continue in operation for
the foreseeable future.
Criteria for GENERAL ACCEPATNCE OF AN ACCOUNTING
PRINCIPLE
• GAAP, which means Generally Accepted Accounting
Principles, encompasses the conventions, rules, and
procedures necessary to define accepted accounting
practice at a particular time.
• The general acceptance of an accounting principle
usually depends on how well it meets 3 criteria:
1. Relevance – results in information that is
meaningful and useful.
2. Objectivity – the resulting information is not
influenced by personal bias or judgment.
3. Feasibility – to the extent that it can be
implemented without undue complexity or
cost.
Basic Principles
• Objectivity Principle – accounting records and
statements are based on the most reliable data
available so that they will be as accurate and as
useful as possible.
• Historical Cost – states that acquired assets should
be recorded at their actual cost and not what
management thinks they are worth.
• Revenue Recognition Principle – revenue is to be
recorded in the accounting period when goods are
delivered or services are performed or rendered.
• Expense Recognition Principle – expenses should be
recognized in the accounting period in which goods
and services are used up to produce revenue and
not when the entity pays for those goods or services.
• Adequate Disclosure - requires all relevant
information that would affect the users
understanding and assessment of the accounting
ACC102: BASIC FINANCIAL ACCOUNTING & REPORTING
entity should be disclosed in the financial
statements.
• Materiality – financial reporting is only concerned
with information that is significant enough to affect
evaluations and decisions.
ACCOUNTANCY ACT OF 2004
• R.A. no. 9298, known as the Philippine Accountancy
Act of 2004, was signed into law by President Gloria
Macapagal-Arroyo on May 13, 2004.
• This is an act the regulates the practice of
accountancy in the Philippines.
Scope of Practice
• Practice of Public Accountancy
• Practice in Commerce and Industry
• Practice in Education/Academe
• Practice in Government
ACCOUNTING STANDARDS IN THE PHILIPPINES
• On Nov. 18, 1981, the Philippine Institute of Certified
Public Accountants (PICPA) created the Accounting
Standard Council (ASC) to establish and improve
accounting standards that will be generally
accepted in the Philippines.
CORE COMPETENCIES FRAMEWORK FOR ACCOUNTANTS
1. Knowledge
• General knowledge
- Competency in the English language
(the lingua franca of business).
- Adaptability to Western business
practices.
- Level of trainability and good
capabilities in dealing with foreign
partners.
• Organizational and Business Knowledge
- Administrative capability and
efficiency.
- Decision modeling
- Risk analysis
- Measurement
- Industry and sector perspective
• Information Technology Knowledge
- IT concepts for business concepts.
- Sound knowledge of internal control
in computer-based systems.
- Developments standards and
practices for business systems.
- Management of the adoption
- Implementation and use of IT,
evaluation of computer business
systems.
- Managing the security of information
• Accounting Knowledge
 ACC102: BASIC FINANCIAL ACCOUNTING & REPORTING

2. Skills • Education/academe
• Intellectual
BRANCHES OF ACCOUNTING
- Analysis
- Problem-solving • Auditing – external audit is the independent
- Strategic/critical thinking examination to ensure the fairness and reliability of
• Interpersonal the reports that management submits to users
- Being a team player. outside the business entity.
- Persuasion, confidence and • Bookkeeping – is the recording of all financial
diplomacy. transactions undertaken by a business (or an
- Discreteness, open mind, and individual).
patience. • Cost Bookkeeping, Costing and Cost Accounting
- Capability for work and ability to  Cost bookkeeping is the process that involves
respond well to pressure. the recording of cost data in a book of
• Communication accounts.
- Verbally and/or in writing explain  Cost and Cost Accounting deals with the
financial/statistical/administrative collection, allocation, and control of the
matters/policy, etc. cost of producing specific goods and
- Ask clear, concise, and relevant services.
questions to obtain desired • Financial Accounting – is focused on the recording of
information to perform a task. business transactions and the periodic preparation
3. Values of reports on financial position and results of
• Professional Ethics operations.
- Professionalism of being a CPA. • Financial Management – setting financial objectives,
• Moral values making plans based on those objectives, obtaining
- To be able to discern between what is the finance needed to achieve the plans, and
morally right or wrong. generally safeguarding financial resources.
• Management Accounting – incorporates cost
Professional account accounting data and adapts them for specific
• Defined as an individual who holds a valid certificate decisions. A management accounting system
issued by the Board of Accountancy (i.e. CPA), incorporates all types of financial and non-financial
whether he/she be in public practice, industry, information from a wide range of sources.
commerce, the public sector, or education. • Taxation – preparation of tax returns and
consideration of the tax consequences.
Fundamental principles
• Government Accounting – concerned with the
• Integrity – a professional accountant should be identification of the sources and uses of resources
straightforward and honest in all professional and consistent with the provisions of city, municipal,
business relationships. provincial, and national laws.
• Objectivity – a professional accountant should not
allow bias, conflict of interest, or undue influence of 2: the accounting equation and the Double-Entry
others to override professional or business System
judgments.
• Professional Competence and Due Care – a
Information system
professional accountant has a continuing duty to
maintain professional knowledge and skills. • Is a collection of people, procedures, software,
• Confidentiality – a professional accountant should hardware, and data that together provide
respect the confidentiality of information acquired. information essential to running an organization.
• Professional Behavior – a professional accountant • Combination of personnel, records, and procedures
should comply with relevant laws and regulations that a business uses to meet its need for financial
and should avoid any action that discrete the performance.
profession.
Parts of an Information system
Career opportunities
1. People – are competent end users to increase their
• Public practice productivity.
• Commerce and industry 2. Procedures – manuals and guidelines on how to use
• Government service hardware and software.

3. Software - aka programs --- instructions that tell the
computer how to process data.
• System software – background software that
helps a computer manage its internal
resources.
• Application software – performs useful works
on general-purpose problems.
4. Hardware – consists of input devices, the system
unit, secondary storage, output devices, and
communication devices.
• Input devices – translate data and programs
that humans can understand into a form that
computer processes.
• System unit
 CPU – controls and manipulates data
to produce information.
 Memory (primary storage) –
temporarily holds data, program
instructions, and processed data.
• Secondary storage – stores data and
programs.
• Output devices - outputs processed
information from the CPU.
• Communications devices – send and receive
data from one computer to another.
• Data – is the raw material for data
processing.
Types of accounting Information system
1. Manual System – rely on human processing so they
are labor intensive and may be inefficient in todays
complex business environment.
2. Computer-Based Transaction System – maintains
accounting data separately from other operating
data.
3. Database system – a system that captures data,
both financial and non-financial, and store that
information in a data warehouse.
Stages of data processing
• Input – each transaction entered into the accounting
system should be supported by source documents.
• Process – with the use of the accounting software,
process the data.
• Output – financial statements and other financial
reports can be viewed on the screen or printed as
output documents.
, Step 1: transaction analysis
Elements of financial statements
What is asset?
• A present economic resource controlled by the entity
as a result of past events.
• An economic resource is a right that has the
potential to produce economic benefits.
ACC102: BASIC FINANCIAL ACCOUNTING & REPORTING
 Current assets – are items that your
business uses in its day-to-day operations
and has owned for less than 1 year.
 Non-current assets - also known as
fixed assets; these are assets that your
business holds for longer than 1 year and
uses as a source of long-term revenue
generation.
What is Liability?
• A present obligation of the entity to transfer an
economic resource as a result of past events.
• An obligation is a duty of responsibility that the
entity has no practical ability to avoid.
 Current liabilities – debts that are expected
to be paid in less than 1 year.
 Non-current liabilities - debts that are
expected to be paid more than 1 year.
What is an owner’s equity?
• Equity is the residual interest in the assets of the
enterprise after deducting all its liabilities,
What is revenue/income?
• Increases in assets, or decreases in liabilities, that
result in increases in equity, other than those
relating to distributions to holders equity of claims.
The Account
ACCOUNT TITLE
+ DEBIT (DR) + CREDIT (CR)
D= L= LIABILITIES
DRAWINGS/WITHDRAWALS E= EQUITY/OE
E= EXPENSES R= REVENUE
DEA LER
The accounting equation
• ASSET = LIABILITY + OWNER’S EQUITY (ALOE)
3: Recording Business Transactions
1. Identify the transaction from source documents.
2. Indicate the accounts – either assets, liabilities,
equity, income or expenses affected the transaction.
3. Ascertain whether each account is increased or
decreased by the transaction.
 ACC102: BASIC FINANCIAL ACCOUNTING & REPORTING

4. Using the rules of debit and credit, determine

Chart of accounts
whether to debit or credit the account to record its
increase or decrease. • A listing of all the accounts and their account
numbers in the ledger.
Source documents

• Transactions and event are the starting points in the

posting
accounting cycle. • Means transferring the amounts from the journal to
• It identifies and describes transactions and events the appropriate accounts in the ledger.
entering the accounting process.
Trail balance
ACCOUNTING CYCLE • List of all accounts with their respective debit or
STEP 1 Identification of Events to be Recorded. credit balances.
STEP 2 Transactions are Recorded in the Journal. • It is prepared to verify the equality of debits and
STEP 3 Journal Entries are Posted to the Ledger
credits in the ledger at the end of each accounting
STEP 4 Preparation of Trial Balance
period or at any time the postings are updated.
STEP 5 Preparation of the Worksheet including Adjusting
Entries
Locating errors
STEP 6 Preparation of Financial Statements
STEP 7 Adjusting Journal Entries are Journalized and Posted • An inequality in the totals of the debts and credits
STEP 8 Closing Journal Entries are Journalized and Posted would automatically signal the presence of an error.
STEP 9 Preparation of a Post-Closing Trial Balance These errors include:
STEP 10 Reversing Journal Entries are Journalized and Posted
1. Error in posting a transaction to the ledger:
*This cycle is repeated each accounting period
- An erroneous amount was posted to the
account.
JOURNAL
- A debit entry was posted as a credit or
• Chronological record of the entity’s transaction.
vice versa.
• Book of original entry.
- A debit or credit posting was omitted.
• Shows all the effects of a business transaction in
2. Error in determining the account balances:
terms of debits and credits.
- A balance was incorrectly computed.
• The process of recording transaction is journalizing.
- A balance was entered in the wrong

Format of a journal balance column.

3. Error in preparing the trial balance:
1. Date
- One of the columns of the trial balance
2. Account titles and explanation
was incorrectly added.
3. P.R. (posting reference)
- The amount of an account balance was
4. Debit (left)
incorrectly recorded on the trial
5. Credit (right)
balance.
- A debit balance was recorded on the
Simple and compound entry
trial balance as a credit or vice versa, or
• In a simple entry, only 2 accounts are affected – one
a balance was omitted entirely.
account is debited and the other account is credited.
• In a compound entry, 3 or more accounts are
required in a journal entry.

ledger

• A grouping of the entity’s accounts.

• A general ledger is the reference book of the
accounting system and is used to classify and
summarize transaction, and to prepare data for
basic financial statements.
• General ledger is classified into 2 types:
1. Balance sheet or permanent accounts (assets,
liabilities, equity).
2. Income statement or temporary
accounts/nominal accounts (income and
expenses).