Accounting and Its Environment

How do you view Accounting?

How do you view Accounting?
 Definitions
• Art of recording, classifying and
summarizing in a significant manner, and in
terms of money, transactions and in events,
which are in part at least of a financial
character and interpreting the results
thereof.
• Accounting is a service activity.
• It is an information system that measures,
processes and communicates
financial information about an
identifiable economic entity.
 History of Accounting
Can be related to the beginning of
arithmetic in 7000 BC.
Oldest accounting records are in clay
tablets, about 5000 years old found in
Tigris-Euphrates Valley.
In 600 BC, the Greeks introduced the
coined money.
During middle ages, credit instruments
were used. The Italian Merchants
developed the double-entry
bookkeeping.
History of Accounting, continued…
• Luca Pacioli, an Italian, in 1494 wrote the first
book containing the double entry bookkeeping
entitled “Everything About Arithmetic, Geometry
and Proportion”. He has been regarded as the
father of double-entry accounting.
• The Italian accounting practice was adopted by
other trading countries.
 History of Accounting,
continued…
• In the 20th century Americans dominated the
business environment and they developed their
own accounting practice similar to those of the
Italians.
• Nicolas Petri was the first person to group
similar transactions in a separate record.
PACIOLI’S DOUBLE-ENTRY
BOOKKEEPING

§ a recording system
§ it provides an accurate record of
what has happened to a business
over the specified period of time
§ extracted information can help the
manager operate the business
more effectively
 ACCOUNTANCY IN THE
PHILIPPINES
March 17, 1928, RA 3105
“An Act Regulating the Practice of Public
Accounting; Creating the BOA; Providing for
Examination, for the Granting of Certificates,
and the Registration of CPAs; for the
Suspension or Revocation of Certificates;
and for Other Purposes”
 BOARD OF ACCOUNTANCY
RA 9298, Phililppine Accountancy Act of 2004

1 chairman, 6 members
 CPA Licensure Examination
• Financial Accounting and Reporting
• Advanced Financial Accounting and
Reporting
• Management Advisory Services
• Auditing
• Taxation
• Regulatory Framework for
Business Transaction
 CPA Licensure Examination
• General average of 75%, with no grade
lower than 65% in any given subject

• Conditional credit for the subjects passed:

General average of 75% with a grade
lower than 65%

• Failed: General average below

75% and a grade below 65%
 Professional Accountant

An individual who holds a

valid certificate issued by the
Board of Accountancy,
whether he or she be in
public practice, industry,
commerce, public sector or
education.
PROFESSIONAL ORGANIZATION
Philippine Institute of Certified
Public Accountants (PICPA)

“all registered CPAs whose names appear in the

roster of CPAs shall be united and integrated
through their membership in a one and only
registered and accredited national professional
organization of registered and licensed CPAs…”
PROFESSIONAL ORGANIZATION
• To protect and enhance the credibility of the CPA
certificate in the service of the public.
• To maintain high standards in accounting
education.
• To instill ideals of professionalism, ethics and
competence among accountants.
• To foster unity and harmony among members.
 ACCOUNTING STANDARDS IN
THE PHILIPPINES
Financial Reporting Standards Council
(FRSC) – RA9298, to establish generally
accepted accounting principles in the
Philippines.

Philippine Interpretations Committee (PIC) –

formed by FRSC, to issue implementation
guidance on PFRSs.
www.picpa.com.ph
 ACCOUNTING STANDARDS IN
THE PHILIPPINES
Auditing and Assurance Standards Council
(AASC) - the body authorized to establish
and promulgate generally accepted auditing
standards (GAAS) in the Philippines.

www.aasc.org.ph
 ASEAN
Association of Southeast Asian Nations:
Indonesia Brunei Darussalam
Malaysia Viet Nam
Philippines Lao PDR (Laos)
Singapore Myanmar
Thailand Cambodia
 ASEAN
Vision

“a stable, prosperous and highly competitive

ASEAN Economic Region in which there is a
free flow of goods, services, investment and
a freer flow of capital, equitable economic
development and reduced poverty and
socio-economic disparities.”
 SCOPE OF PRACTICE
Public

Commerce and Industry

Education/Academe

Government
 CORE COMPETENCIES
FRAMEWORK
• KNOWLEDGE • SKILLS
– General knowledge – Intellectual
– Organizational and – Interpersonal
business knowledge – Communication
– Information
technology (IT)
• VALUES
knowledge
– Professional ethics
– Accounting
knowledge – Moral values
FUNDAMENTAL BUSINESS MODEL
 TYPES OF BUSINESS
• Service
• Trade/Merchandising
• Manufacturing
• Raw Materials
• Infrastructure
• Financial
• Insurance
 FORMS OF BUSINESS
ORGANIZATIONS
SOLE PROPRIETORSHIP
- Owner: Proprietor
- small service-type businesses and retail
establishments
- owner receives ALL profits, absorbs ALL losses and
is SOLELY responsible for ALL debts of the business
- distinct from its proprietor

REMEMBER: The accounting records of the

sole proprietorship DO NOT INCLUDE
the proprietor’s personal financial records.
 FORMS OF BUSINESS
ORGANIZATIONS

PARTNERSHIP

- Owner: two or more persons

- operated by two or more persons
- they bind themselves together to contribute MONEY,
PROPERTY, or INDUSTRY to a common fund, with the
INTENTION OF DIVIDING PROFITS among themselves
- each partner is personally liable for any
debt incurred by the partnership
- distinct from the personal affairs
of each partner
 FORMS OF BUSINESS
ORGANIZATIONS
CORPORATION
- Owner: Stockholders
- an ARTIFICIAL being
- created by operation of LAW
- having the rights of SUCCESSION
- having the power and attributes expressly authorized by
law or incident to its existence
- stockholders are not personally liable
for the corporation’s debts
- a separate legal entity
 MICRO, SMALL AND MEDIUM
ENTERPRISES (MSMEs)
Classification Assets before financing Employees
Micro P3,000,000 or less 9 or less
Small P3,000,001 - P15,000,000 10-99
Medium P15,000,001 - 100-199
P100,000,000
 ACTIVITIES IN BUSINESS
ORGANIZATIONS
Financing

Investing

Operating
PHASES OF ACCOUNTING
 FUNDAMENTAL CONCEPTS
ENTITY CONCEPT
- An accounting entity is an organization or
a section of an organization that stands
apart from other organizations and
individuals as a separate economic unit.
 FUNDAMENTAL CONCEPTS
PERIODICITY •Allows the users to obtain timely
information to serve as a basis on
CONCEPT making decisions about future
- An entity’s life can activities
be meaningfully •Usual accounting period: 1 year
subdivided into
equal time periods
for reporting
purposes.
 FUNDAMENTAL CONCEPTS
STABLE MONETARY UNIT CONCEPT

- The Philippine peso is a reasonable unit

of measure and that its purchasing power
is relatively stable.

• “Each peso has the same purchasing power as any

other peso at any time.”
• Basis for ignoring the effects of
inflation in the accounting records
 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.”
- “Reliable data are verifiable when they can
be confirmed by independent observers.”
- “Accounting records are based on
information that flows from activities
documented by objective evidence.”
 BASIC PRINCIPLES
HISTORICAL COST
- “Acquired assets should be recorded at their
actual cost and not at what management
thinks they are worth as at reporting date.”
 BASIC PRINCIPLES
REVENUE RECOGNITION EXPENSE RECOGNITION
PRINCIPLE PRINCIPLE
- “Revenue is to be - “Expenses should be
recognized in the recognized in the accounting
accounting period when
period in which goods and
goods are delivered or
services are rendered or services are used up to
performed.” produce revenue and NOT
when the entity pays for those
goods and services.”
 BASIC PRINCIPLES
ADEQUATE DISCLOSURE
- “ALL relevant
information that would
affect the user’s
understanding and
assessment of the
accounting entity be
disclosed in the financial
statements.”
 BASIC PRINCIPLES
MATERIALITY
- “Financial reporting is only concerned with
information that is significant enough to affect
evaluations and decision.”
- “It depends on the size and nature of the item
judged in the particular circumstances of its omission.”

CONSISTENCY PRINCIPLE
- “The firms should use the same accounting method
from period to period to achieve comparability over
time within a single enterprise.”
 FINANCIAL STATEMENTS

Portray the financial effects of transactions

and other events by grouping them into
broad classes according to their economic
characteristics

Elements of financial
statements
OBJECTIVE OF FINANCIAL STATEMENTS
- to provide information about the financial
position, performance, and changes in
financial position of an enterprise that is
useful to a wide range of users in making
economic decisions

REMEMBER: Financial statements DO NOT

PROVIDE ALL the information that users may
need to make economic decisions.
 INFORMATION FINANCIAL STATEMENTS

Balance Sheet
Financial position
(Statement of Financial Position)

Income Statement and

Financial performance
Statement of Changes in Equity

Cash flows Cash Flow Statement

UNDERLYING ASSUMPTIONS
qAccrual Basis
- the effects of transactions and other events
are recognized when they occur and NOT as
cash (or its equivalent) is received or paid
- timing of cash flows is relatively immaterial for
determining when to recognize revenues and
expenses
 Accrual Basis vs. Cash Basis
• Illustration
A client paid the Sea Wind Resort in Boracay Island
Php7,000 on April 8, 2019 for a one-day super deluxe
accommodation on May 13, 2019.

When was Sea Wind Resort paid?

APRIL 8, 2019

When would the service be rendered?

MAY 13, 2019
UNDERLYING ASSUMPTIONS
qGoing Concern
- the financial statements are normally prepared
on the assumption that it will continue in
operation for the foreseeable future
- assumes that the enterprise has neither the
intention nor the need to liquidate or curtail
materially the scale of its operations
 ELEMENTS OF FS

FINANCIAL STATEMENT ELEMENTS

-Assets
Balance Sheet -Liabilities
-Equity
-Income
Income Statement
-Expenses
-Income
-Expenses
Statement of Changes in Equity
-Changes in BS elements
 RECOGNITION OF THE ELEMENTS OF
FINANCIAL STATEMENTS

Recognition – the process of incorporating in the

balance sheet or income statement an item that
meets the definition of an element and satisfies the
criteria for recognition

Criteria for Recognition:

• It is probable that any future economic benefit
associated with the item will flow to or from the
enterprise
• The item has a cost or value that
can be measured with reliability
MEASUREMENT OF THE ELEMENTS OF FS

Measurement
- the process of determining the monetary amounts at
which the elements of the financial statements are to
be recognized and carried in the FS
- involves the selection of the particular basis of
measurement (historical cost, current cost, realizable
or settlement value and present value)

REMEMBER: The measurement basis most commonly

adopted by enterprises in preparing
FS is historical cost.
 Branches of Accounting

Auditing

Bookkeeping

Cost Accounting

ACCOUNTING Financial Accounting

Financial Management

Management Accounting

Taxation

Others
 Code of Ethics for CPAs
FUNDAMENTAL PRINCIPLES
• Integrity
- straightforward and honest
- fair dealing and truthfulness
• Objectivity
- does not allow bias, conflict of
interest or undue influence
• Professional Competence
and Due Care
- continuing duty to maintain
professional knowledge and skill
• Confidentiality
- should not disclose information
without proper and specific
authority unless there is a legal
or professional right or duty to
disclose
• Professional Behavior
- comply with relevant laws and
regulations
- avoid any action that discredits
the profession
 PA1
Look for a business entity and note the ff.:
Name
Address
Type of business
Form of business organization
Size (assets value, no. of employees)
 PA1
Interview a CPA and note the ff.:
Name (Initials will do)
Sector
No. of years in practice
Rank “Knowledge” and “Skills”
according to importance
Piece of advice for passing the board
exam. J
 PA1
Actual financial statements of an existing
business entity.