LESSON 1

Overview of Accounting

 Definition

 “Accounting is the process of identifying, measuring and communicating economic information to permit
informed judgements and decisions by users of information.”- American Accounting Association

 “Accounting is a service activity. Its function is to provide information, primarily financial in nature about
economic entities that is intended to be useful in making economic decisions.”- Accounting Standards
Council

 “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.”- American Institute of Certified Public Accountants

 Three Important Activities Included in the Definition of Accounting

1. Identifying
- The process of analyzing events and transactions to determine whether or not they will be recognized.

 Recognition is the process of including the effects of an accountable event in the statement of financial
position or the statement of comprehensive income through a journal entry.

NOTE: Only accountable events are recognized (journalized). Non-accountable events are not recognized but disclosed only in the notes if
they have accounting relevance.

 2 Types of Events/ Transactions

a. External events are events that involve an entity and another external party.
 Exchange (reciprocal transfer)
 Non-reciprocal transfer
 External event other than transfer

b. Internal events are events that do not involve an external party.

 Production
 Casualty

2. Measuring
- Involves assigning of numbers, normally in monetary terms, to the economic transactions and events.
NOTE: The use of estimates is essential in providing relevant information. Thus, financial statements are said to be a mixture of fact and opinion.

3. Communicating
- The process of transforming economic data into useful accounting information, such as financial
statements and other accounting reports, for dissemination to users.

 3 Aspects of Communicating
a. Recording- refers to the process of systematically committing into writing the identified and
measured accountable events in the journal through journal entries.
b. Classifying- involves the grouping of similar and interrelated items into their respective classes
through posting in the ledger.
c. Summarizing- putting together or expressing in condensed form the recorded and classified
transactions and events. This includes the preparation of financial statements and other accounting
reports.

 Basic Purpose of Accounting

- To provide quantitative financial information about a business that is useful to statement users
particularly owners and creditors in making economic decisions.
  Types of information provided by accounting
1. Quantitative Information- information expressed in numbers, quantities or units
2. Qualitative Information- information expressed in words or in descriptive form. Qualitative
information is found in the notes to financial statements as well as on the face of the other financial
statements.
3. Financial Information- information expressed in money. Financial information is also quantitative
information because monetary amounts are normally expressed in numbers.

 Types of accounting information classified as to users’ needs

1. General purpose accounting information
 Designed to meet the common needs of most statement users
 This information is provided under financial accounting
 Governed by GAAP.
2. Special purpose accounting information
 Designed to meet the specific needs of particular statement users.
 This information is provided under managerial accounting and tax basis accounting.

 Accounting as a science and art

 As a science, accounting is a body of knowledge which has been systematically gathered, classified
and organized.
 As a practical art, an accounting requires the use of creative skills and judgment.

 Accounting as an information system

 Accounting defines and measures economic activities, processes information into financial reports,
and communicates these reports to decision makers.

 Accounting as a language of business

 Accounting is often referred to as “language of business” because it is fundamental to the
communication of financial information.

 Accounting Concepts
- Refer to the principles upon which the process of accounting is based. Accounting concepts is used
interchangeably with the following terms:
a. Accounting Assumptions/ Accounting Postulates- these are fundamental concepts or
principles and basic notions that provide the foundation of the accounting process.
b. Accounting theory- the logical reasoning in the form of a set of broad principles that:
i. Provide a general frame of reference by which accounting practice can be evaluated
ii. Guide the development of new practices and procedures.

 Examples of accounting concepts

1. Double Entry System- each accountable event is recorded as two-parts: the debits and credits.
2. Going Concern Assumption- the entity is assumed to carry on its operations for an indefinite period
of time.
3. Separate Entity (Accounting Entity/ Business Entity Concept/ Entity Concept) - the entity
is viewed separately from its owners. Personal transactions of the owners are not recorded in the
entity’s accounting records.
4. Stable Monetary Unit (Monetary Unit Assumption) - Assets, liabilities, equity, income and
expenses are stated in common unit of measure (peso) and the purchasing power of the peso is
regarded as stable or constant and the instability is insignificant.
5. Time Period (Periodicity/Accounting Period)- the life of the entity is divided into series of
reporting periods.
6. Materiality Concept- information is material if its omission or misstatement could influence
economic decisions. It is a matter of professional judgment.
7. Cost-benefit (Cost Constraint/ Reasonable Assurance)- the cost of processing and
communicating information should not exceed the benefits to be derived from it.
8. Accrual Basis of Accounting- the effects of transactions and other events are recognized when
they occur and not as cash is received or paid and they are recorded in the accounting records and
reported in the financial statements of the periods to which they relate.
9. Historical Concept- the value of an asset is determined on the basis of acquisition cost.
10. Concept of Articulation- all of the components of a complete set of financial statements are
interrelated.
11. Full disclosure principle- this principle recognizes that the nature and amount of information
included in the financial statements reflect a series of judgemental trade-offs.
12. Consistency Concept- the financial statements are prepared on the basis of accounting principles
that are applied consistently from one period to the next.
13. Matching (Association of cause and effect)- cost are recognized as expenses when the related
revenue is recognized.
14. Entity Theory- “Assets= Liabilities + Owners’ Equity
15. Proprietary Theory- “Assets- Liabilities= Capital”
16. Residual Equity Theory- “Assets- Liabilities- Preferred Shareholders’ Equity= Ordinary
Shareholders’ Equity”
17. Fund Theory- “Cash inflows- Cash outflows= Fund”
18. Realization- the process of converting non-cash assets into cash or claims for cash.
19. Prudence- is the use of caution when making estimates under conditions of uncertainty, such that
assets or income are not overstated and liabilities or expenses are not understated.

 Common Branches of Accounting

1. Financial Accounting
 The branch of accounting that focuses on general purpose financial statements.
 It is governed by PFRS.
2. Management Accounting
 Refers to the accumulation and communication of information for use by internal users or
management.
3. Cost Accounting
 The systematic recording and analysis of the cost of materials, labor and overhead incident to
production.
4. Auditing
 The process of evaluating the correspondence of certain assertions with established criteria and
expressing an opinion thereon.
5. Tax Accounting
 The preparation of tax returns and rendering of tax advice, such as the determination of the tax
consequences of certain proposed business endeavours.
6. Government Accounting
 Refers to the accounting for the government and its instrumentalities, placing emphasis on the
custody of public funds.
7. Fiduciary Accounting
 Refers to the handling of accounts managed by a person entrusted with the custody and
management of property for the benefit of another.
8. Estate Accounting
 Refers to the handling of accounts for fiduciaries who wind up the affairs of a deceased person.
9. Social Accounting
 The process of communicating the social and environmental effects of an entity’s economic actions
to the society.
10. Institutional Accounting
 The accounting for non-profit entities other than the government.
11. Accounting Systems
 The installation of accounting procedures for the accumulation of financial data and designing of
accounting forms to be used in data gathering.
12. Accounting Research
 Pertains to the careful analysis of economic events and other variables to understand their impact
on decisions.

 The Accountancy Profession

 At present, Republic Act No. 9298 (Philippine Accountancy Act of 2004) is the law regulating the
practice of accountancy in the Philippines.
  The Board of Accountancy is the body authorized by law to promulgate rules and regulations
affecting the practice of the accountancy profession in the Philippines. They are the one responsible
for preparing and grading the Philippine CPA examination.

 Four Sectors in the Practice of Accountancy

1. Practice of Public Accountancy
 Involves the rendering of audit or accounting related services to more than one client on
a fee basis.
2. Practice in Commerce and Industry
 Refers to employment in the private sector in a position which involves decision making
requiring professional knowledge in the science of accounting and such position requires
that the holder thereof must be a CPA.
3. Practice in Education/Academe
 Employment in an education institution which involves teaching of accounting,
management advisory services, auditing, finance, business law, taxation and other
technically related field.
4. Practice in the Government
 Employment or appointment to a position in an accounting professional group in the
government, where decision making requires professional knowledge in the science of
accounting, or where civil service eligibility as certified public accountant is a prerequisite.

 Accounting Standards
- The Philippine Financial Reporting Standards (PFRSs) represent the generally accepted accounting
principles in the Philippines.
- The PFRSs are standards and interpretations adopted by the Financial Reporting Standards Council.
They comprise:
a. Philippine Financial Reporting Standards (PFRSs)
b. Philippine Accounting Standards (PASs)
c. Interpretations

 Hierarchy of Reporting Standards

1. Philippine Financial Reporting Standards (PFRSs)
2. In the absence of PFRs that specifically applies to a transaction or event, management shall use
its judgement in developing and applying an accounting policy that results in information that is
relevant and reliable.

In making judgement,
a. Management shall refer to, and consider the applicability of the following sources in descending
order:
i. The requirements in PFRSs dealing with similar and related issues
ii. The Conceptual Framework
b. Management may also consider the following:
i. Pronouncements of other standard-setting bodies
ii. Accounting literature and accepted industry practices

 Accounting Standard Setting Bodies

1. Financial Reporting Standards Council (FRSC)
 The official accounting standard setting body in the Philippines created under RA 9298.
 Composed of fifteen individuals- a chairperson who had been or presently a senior accounting
practitioner in any of the scope of accounting practice and 14 representative members.
 The FRSC replaces the Accounting Standards Council (ASC)
 The main function is to establish and improve accounting standards that will be generally accepted
in the Philippines.
 The approved statements of the FRSC are known as PAS and PFRS
2. Philippine Interpretations Committee (PIC)
  PIC was formed by FRSC and has replaced the Interpretations Committee (IC) formed by the ASC.
 The role of PIC is to prepare interpretations of PFRS for approval of FRSC and to provide timely
guidance on financial reporting issues not specifically addressed in current PFRS.
 The counterpart of PIC in the United Kingdom is the International Financial Reporting
Interpretations Committee (IFRIC) which has already replaced the Standing Interpretations
Committee (SIC).
3. International Accounting Standards Board
 The IASB is the standard setting body of the IFRS Foundation with the main objectives of
developing and promoting global accounting standards.
 It was established as part of the IASC Foundation (renamed to IFRS Foundation).

 Move Toward IFRS

 FRSC has adopted in their entirety all International Accounting Standards and International
Financial Reporting Standards.
 The move toward IFRS is essential to achieve the goal of one uniform and globally accepted
financial reporting standards.
 The following factors are considered in deciding to move totally to international accounting
standards:
a. Support of international accounting standards by Philippine organizations, such as SEC, BOA
and PICPA.
b. Increasing internationalization of business which has heightened interest in a common
language for financial reporting.
c. Improvement of international accounting standards or removal of free choices of accounting
treatments.
d. Increasing recognition of international accounting standards by the World Bank, Asian
Development Bank and World Trade Organization.