Chapter 1 BOOKKEEPING AND ACCOUNTING

Definition of Accounting - Accounting is the process of

Bookkeeping - refers to the process of recording the
identifying, measuring and communicating economics
accounts or transactions of an entity. Bookkeeping
information to permit
normally ends with the preparation of the trial
informed judgement and decisions by users of the
balance.
Information.
FUNCTIONS OF ACCOUNTING
Three important activities included in the definition
In BUSINESS
1.Identifying - analycal component
2 broad functions in business
2.Measuring - technical component
1. To provide external users with information that is
3.Communicating - formal component
useful in making economic decisions.
RECORDING - The Accountant recognizes (i.e. Records) i.e. investment / credit decision
the identified “accountable” events. This process is
2. To provide internal users with information that is
called “Journalizing”
useful in managing the business
after journalizing the accountant then classifies the
USERS
effects of the events on the “accounts”. This process is
1. INTERNAL - those directly involved in managing the
called “posting”.
business
ACCOUNT - Account is the basic STORAGE of a. Business owners - directly involved
INFORMATION in accounting. b. Board of Directors
Examples : CASH; LAND; SALES; ACCOUNTS PAYABLE, c. Managerial Personnel
ECT.
USERS
Types of events or transaction. 2. EXTERNAL - those are NOT directly involved in
managing the business
1.External Transactions - are events that involves the a. Existing and Potential Investors
entity and another external entity or party. b. Lenders
Types of External events c. Government Agencies
A.Exchange (reciprocal transfers) d. Customers
B.Non-reciprocal transfer (one way) e. Public
C.External events other than transfer f. Non-Managerial Employees(Rank and File)

2.Internal Events - are events happen within the Types of accounting information classified as to users’
entity. needs
Types of internal events
A.Production 1. General Purpose
B.Casualty - Is information designed to meet the COMMON
NEEDS of the most statement users. It is provided by
INFORMATIONS provided by accounting financial accounting & primarily for external users.

1. QUANTITATIVE - express in Numbers 2. Special Purpose

2. QUALITATIVE INFORMAT - expressed in words or - Is information designed to meet the SPECIFIC NEEDS
descriptive form. of a particular statement users. It is provided by
3. Financial Infomation - express in money. Financial Management accounting or branches of accounting
Information is Quantitative Information. and primarily prepared for internal users.

Accounting as an information system Brief history of accounting

a system is one consist of an
• Accounting can be traced as far back as the
INPUT - identified accountable events
prehistoric times, perhaps more than 10,000
PROCESS - recording, classifying & summarizing
years ago.
OUTPUT - Accounting Reports that is communicated
to the users • The concept of “double entry recording” is
being used to this day. Thus,Fra Luca Pacioli is
 considered as the father of modern
accounting.
professional skills, expertise, advices, lending services,
Financial Reporting - is the provision of financial massage services and similar services
information about an entity that is useful to external
Merchandising (Trading) A Merchandising business (or
users, primarily the investors (existing or potential),
trading business) is one that buys and sell goods
lenders and other creditors, in making investment and
without changing their physical form.
credit decision.
A. General Merchandise Resellers
Primary objective - To provide information about an
entity’s economic resources, claims to those resources B. Distribution and Dealers
and changes in those resources.
Secondary objective - assess the entity’s management Manufacturing
in stewardship of the business entity. A Manufacturing business is one that buys raw
2. Management Accounting - involves and materials and processes them into final products.
communicating of information for internal users Examples
(prepare financial reports that may not follow
STANDARDS) 1. Car Manufacturers

3. Government Accounting - refers to the accounting 2. Technologies Companies

for the government and its instrumentalities, GOCC’s 3. Food Processing Companies
and GIF’s.
4. Factories
4. Auditing - involves the inspection of an entity’s
HYBRID BUSINESS
financial statements or business process to ascertain
their correspondence VS the established criteria. It is engage in more that one type of activity. Example,
a restaurant uses ingredients to cook (manufacturing),
5. Tax Accounting - preparation of tax returns
sell soft drinks (merchandising) and serves food to
rendering of tax advice.
customers (servicing).

6. Cost Accounting - is the systematic recording and However restaurant is a service type business since it
analysis of cost of MATERIALS, LABOR and OVERHEAD. is the majority operation of the business.

7. Accounting Education - teaching accounting and

accounting related subjects in an organized learning
environment.

8. Accounting Research - pertains to the careful

analysis of economic events and other variables to
understand their impact on decisions.

Types of Business According to Activities

Service business A Service business is one that offers

services as its main product rather than physical
goods.
Chapter 2

ACCOUNTING CONCEPTS AND PRINCIPLES 11. FULL DISCLOSURE PRINCIPLE

Also called assumptions or postulates Information communicated to users reflect a series of

1. SEPARATE ENTITY CONCEPT
• The business is viewed as separate person,
distinct from its owners.
2. HISTORICAL COST CONCEPT
• Also called the Cost Principle
• Assets are initially recorded at their
acquisition cost.
3. GOING CONCERN ASSUMPTION
• The business is assumed to continue to exist
for an indefinite period of time.
4. MATCHING
• Association of Cost and Effect
5. ACCRUAL BASIS OF ACCOUNTING
• Economic events are recorded in the period in
which they occur rather than at point in time
when time affect in cash.
6. PRUDENCE
• Also called as Conservatism
• The accountant observes some degree of
caution when exercising judgments needed in
making accounting estimates under conditions
of uncertainty.
7. TIME PERIOD
• Also called as Periodicity or Accounting Period
Concept.
• A reporting period is usually 12 months.
8. STABLE MONETARY UNIT
 Assets, liabilities, equity, income and
expenses are stated in terms of a common
unit of measure which is the Philippine
Peso.
9. MATERIALITY CONCEPT
judgmental trade – offs
12. CONSISTENCY CONCEPT
• A business shall apply accounting policies
consistently, and present information
consistently, from one period to another.
ACCOUNTING STANDARDS
• Accounting concepts and principles are either
explicit or implicit.
Explicit concepts and principles are those that are
specifically mentioned in the Conceptual Framework
for Financial Reporting and in Philippine Financial
Reporting Standards.
Implicit are those that are not specifically mentioned
in the foregoing but are customarily used because of
their general and long time acceptance within the
accountancy profession.
PHILIPPINE FINANCIAL REPORTING STANDARDS
• Just like the basic accounting concepts, THE
STANDARDS serve as guide when RECORDING
and COMMUNICATING Accounting
information
• They also prescribed which principles is most
appropriate for specific economic
transactions.
CONSIST of the FOLLOWING:
• 1. Philippine Financial Reporting Standards
(PFRS)
• 2. Philippines Accounting Standards (PASs)
• 3. Interpretation (Philippine Interpretation
Committee - PIC
PFRS are issued by the Financial Reporting Standards
Council (FRSC), which is the Standard Setting Body in
the Philippines.

• An item is considered material if its omission

or misstatement could influence the economic
decisions.

10. COST BENEFIT

• Also called the Cost Constraint.

GENERALLY ACCEPTABLE - means
1. The standard has been established by an
authoritative accounting standard-setting body or
2. The principle has gained general acceptance due to
practice over time and has been proven to be most
useful.
RELEVANT REGULATORY BODIES
OTHER REGULATORY BODIES
Other than the FRSC the following also affectthe
accounting policies used by teh businesses and their
financial reporting here in the Philippines.
Securities and Exchange Commission (SEC)-For all
Corporation and Partnership
Bureau of Internal Revenue (BIR)- For All businesses
Bangko Sentral ng Pilipinas (BSP)- For All Bank and
Quasi Bank
Cooperative Development Authority (CDA) -For All
Cooperatives
CONCEPTUAL FRAMEWORK
FOR FINANCIAL REPORTING
• Just like the standards, the Conceptual
Framework for Financial Reporting also
prescribes accounting concepts meant to
guide the accountant in preparing and
presenting financial statements.
QUALITATIVE CHARACTERISTICS OF USEFUL FINANCIAL
INFORMATION
• Qualitative Characteristics are the traits that
make information useful to users. Without
these, information may be deemed useless.
CLASSIFICATION OF QUALITATIVE CHARACTERISTICS
1. Fundamental Qualitative Characteristics – refer to
the essential characteristics that information must
have before it can be included in the financial
statements.
• Relevance
• Faithful Representation
2. Enhancing Qualitative Characteristics – these
characteristics support the fundamental
characteristics. They enhance the usefulness of
information.
• Comparability
• Verifiability
• Timeliness
• Understandability
FUNDAMENTAL QUALITATIVE CHARACTERISTICS
RELEVANCE
• Information is considered relevant if it has the
ability to affect the decision making of the
users. Without this ability, information is
deemed irrelevant and useless.
1. PREDICTIVE VALUE
• Information has a predictive value if users can
use it as an input in making predictions or
forecasts of outcomes or events.
2. CONFIRMATORY VALUE
• This concept is related to predictive value.
Information has a confirmatory value if users
can use it to confirm their past predictions.
3. MATERIALITY
• It is an ‘entity-specific’ aspect of relevance
meaning it depends on the facts and
circumstances surrounding a specific entity.
ELEMENTS OF FAITHFUL REPRESENTATION
FAITHFUL REPRESENTATION
• Information if faithfully represented if it is
factual, meaning it represents the actual
effects of events that have taken place.
1. COMPLETENESS
• Information must be presented with sufficient
detail necessary for users to understand them.
Important information must not be omitted.
2. NEUTRALITY
• Information are selected or presented without
bias. Information must not be manipulated to
increase the probability that it will be received
favorably or unfavorably by the users.
3. FREE FROM ERROR
• Free from error means information presented
in the financial statements must not be
materially misstated. This does not mean,
however, that accounting information must be
 perfectly accurate in all respects, because
some accounting information necessarily
needs to be estimated.
ENHANCING QUALITATIVE CHARACTERISTICS
1. COMPARABILITY
• Information has this characteristic if it enables
users to make comparisons to identity and
understand the similarities in, and the
differences among, items. Unlike the other
qualitative characteristic, comparability does
not relate to a single item. A comparison
requires at least two items.
2. TIMELINESS
• Information must be provided to users on
time to be capable of influencing their
decisions.
3. UNDERSTANDABILITY
• Information must be presented clearly and
concisely in order for users to understand
them. On the other hand, users are expected
to have a reasonable knowledge of business
and economic activities and to review and
analyze the information diligently, sufficient
for them to understand the information
contained in the financial statements.
4. VERIFIABILITY
• Information is verifiable if it enables different
and independent users to reach a general
agreement about what the information
intends to depict.
Chapter 3
The Accounting Equation
The Accounting Equation
All the process in an accounting system must observe
the equality of the accounting equation.
Assets = Liabilities + Equity
ASSET
are economic resources you CONTROL that have
RESULTED FROM PAST EVENT and provide you with
ECONOMIC BENEFITS.
Essential elements of an Asset
CONTROL
> you dont necessarily need to own the economic
resources for it to be considered your asset.
PAST EVENTS
> the control over the asset resulted from PAST
EVENTS or TRANSACTIONS.
ECONOMIC BENEFITS
> to be an asset, the economic resources must have
the POTENTIAL TO PROVIDE YOU WITH ECONOMIC
BENEFITS in at least one circumstance.
Essential elements of an Asset
Example:
1. Sold, Leased, Transferred or exchange for other
assets.
SOLD - Revenue/Sales
LEASED - Rent Income
TRANSFERED or EXCHANGED - Gain from transferred
and exchanged transactions
2. Used singly or in combination with other assets to
produce goods or provide services
Manufacturing Equipment to produce finish goods of
which will be sold to earned revenue
3. Used to enhance the value of other assets.
> additional expenditures to enhance an asset so we
could sell it on a higher amount. (so more economic
benefits will flow to the entity once it is sold)
4. Used to promote efficiency and cost savings.
which elimanate or lessen outflow of economic • EXPENSES – are decreases in economic
benefits benefits during the period in the form of
decreases in assets, or increases in liabilities,
5. Used to settle a liability
that result in decreases in equity, excluding
when you settle the liability, no more additional those relating to distributions to the business
outflow of economic benefit (example payment of owner
additional interest expense)
• The difference between income and expenses
LIABILITY represents PROFIT or LOSS.

are your PRESENT OBLIGATIONS that have resulted
from past events and can require you to give up
economic resources when settling it
Essential elements of a Liability
Obligation
means a duty or responsibility. An obligation is either:
a. Legal Obligation - an obligation that results from a
contract, legislation or other operation of law; or
b. Constructive Obligation - an obligation results from
your past actions (e.g. past practices or published
policies) that have created a valid expectation on
others that you will accept and discharge certain
responsibilities. (Examples Warranties, Premiums,
Ect.)
Present obligation as a result of past events
A PRESENT OBLIGATION EXIST AS A RESULT OF PAST
EVENTS IF:
A. you have already obtained economic benefits or
talen an action, and
• The profit or loss are closed to equity at the
end of each accounting period.
Asset = Liabilities + Equity + Profit / - Loss
Types and effects of transactions
1. Source of Assets (SA) - an asset account
increases and a corresponding claims (liabilities or
owner’s equity) account increases, e.g., purchase of
supplies on account; sold goods on cash on delivery
basis.
2. Exchange of Assets (EA) - one asset account
increases and another asset account decreases,
e.g., acquired equipment for cash.
3. Use of Assets (UA) - an asset account
decreases and a corresponding claim (liabilities or
equity) account decreases, e.g., settled accounts
payable; paid salaries of employees
4. Exchange of Claims (EC) - one claims (liabilities or
owner’s equity) account increases and another
claims (liabilities or owner’s equity)account
decreases, e.g., received utilities bill but did not pay.

B. as a consequence, you are required to transfer an

economic resources.

EQUITY – is simply assets minus liabilities. Other terms

for equity are “capital”, “net assets”, and “net worth”.

Types and effects of transactions

The Expanded Accounting Equation

Assets = Liabilities + Equity + Income - Expenses

notice that income is added while expenses are

dedcucted in the equation. These are because income
INCREASES equity, while expenses DECREASES equity.

• INCOME – is increase in economic benefits

during the period in the form of increase in
assets, or decrease in liabilities, that result in
increases in equity, excluding those relating to
investments by the business owner.