Chapter

Chapter 22
REVIEW
REVIEW DISCUSSIONS
DISCUSSIONS

1 Explain the Definition of Accounting?

2 Explain the nature, scope, purpose and objectives of
Accounting ?
3 Who are the users of Accounting Profession ?
4 What is Bookkeeping vs. Auditing vs. Accounting?
5 What are the Basics Professional Characteristics / Values of
Accountant?
6 What are the primary activities of Businesses?
 Quiz
Quiz 11
REVIEW
REVIEW DISCUSSIONS
DISCUSSIONS
1. It is a Language of Business?
A. Accounting
B. Auditing
C. Bookkeeping
D. Management Advisory Services

2. Which of the following is not appropriate description of Accounting ?

A. Accounting is an Information System.
B. Accounting is an Exact Science and Art
C. Accounting is to classify, summarize, record transactions
D. Accounting is a process that leads to understanding information.

3. Basic Principle of Bookkeeping?

A. Principle of Balance
B. Principle of Matching
C. Principle of Going Concern
D. Principle of Monetary Value
 Quiz
Quiz 11
REVIEW
REVIEW DISCUSSIONS
DISCUSSIONS
4. Who is the father of Modern Accounting?
A. Luco Pacioli
B. Luca Paciolo
C. Luca Paciole
D. Luca Pacioli
5. Under this economy that Notable accounting practices were developed like internal and external reporting?
A. Global Industrial Economy
B. French Revolution
C. Industrial Revolution
D. International Business Transactions
6. It is best describe as “Is there excess cash available for investment opportunities and other uncertainties?
A. Capital Structure
B. Financial Flexibility
C. Solvency
D. Stability
 Quiz
Quiz 11
REVIEW
REVIEW DISCUSSIONS
DISCUSSIONS
7. This method is known as Journal Entries?
A. Florentino Approach
B. Florentine Approach
C. Venetian Approach
D. Vincentian Approach
8. This method is known as Ledger Postings?
A. Florentino Approach
B. Florentine Approach
C. Venetian Approach
D. Vincentian Approach
9. The statement of Financial Condition reports the following except?
A. profitability
B. financial position
C. liquidity
D. solvency
 Quiz
Quiz 11
REVIEW
REVIEW DISCUSSIONS
DISCUSSIONS
10. Who introduced the Venetian Method?
A. Andrea Bargarigo
B. Andrea Pacioli
C. Luca Pacioli
D. Lebron James
11. Who exemplified that assets must be carried at their Current Market Value?
A. Jacques Savary
B. Napoleon Bonaparte
C. Eugen Schmalenbach
D. Kyrie Irving
12. The following are the external users of General Purpose Financial Statements, except?
A. Creditors
B. Managers
C. Bureau of Internal Revenue
D. Lenders
 Quiz
Quiz 11
REVIEW
REVIEW DISCUSSIONS
DISCUSSIONS
13. This government agency that regulate the operations of all banks and business import and export activities?
A. Bureau of Internal Revenue
B. Security and Exchange Commission
C. Philippine Institute of Certified Public Accountants
D. Bangko Sentral ng Pilipinas
14. Who exemplified that assets must be carried at their Historical Cost Valuation?
A. Jacques Savary
B. Napoleon Bonaparte
C. Eugen Schmalenbach
D. Kevin Love
15.Which of the following accounting processes comes first ahead of the others?
A. Interpreting
B. Measuring
C. Communicating
D. Measuring
 Quiz
Quiz 11
REVIEW
REVIEW DISCUSSIONS
DISCUSSIONS
16. Asset that is the interest earned on Notes Receivable but not yet received in cash?
A. Notes Receivable
B. Accrued Interest Receivable
C. Accounts Receivable
D. Subscription Receivable
17. It is the Financial Statement that depicts the sources and uses of cash for a certain period?
A. Statement of Changes in Equity
B. Statement of Comprehensive Income
C. Statement of Financial Position
D. Cash Flow Statement
18. All of the following are Nominal Accounts, except?
A. Interest Income
B. Loss on Sale of Property
C. Unearned Revenue
D. Revenue
 Quiz
Quiz 11
REVIEW
REVIEW DISCUSSIONS
DISCUSSIONS
19. It is the Residual Amount after deducting liabilities from Assets?
A. Assets
B. Liabilities
C. Owner’s Equity
D. Income
20. It is Expense Recognition Principle that is also called Direct Matching Principle?
A. Associating Cause and Effect
B. Systematic and Rational Allocation
C. Immediate Recognition
D. Full Disclosure Principle
21. It is the concept that assumes that the business entity will continue operating indefinitely for a period
of time sufficient to carry out its contemplated objectives?
A. Monetary Unit C. Going Concern
B. Periodicity D. Economic Entity
 Quiz
Quiz 11
REVIEW
REVIEW DISCUSSIONS
DISCUSSIONS
22. It is a time period composed of twelve months but starts from any month other than January?
A. Calendar Year C. Fiscal Year
B. Interim Period D. Periodicity
23. It is defined as the amount for which as asset could be exchanged, liability could be settled, or an
equity instrument granted could be exchanged between knowledgeable & willing parties in an arm’s
length transaction.” ?
A. Cost Principle
B. Inflation Cost Principle
C. Historical Cost Principle
D. Fair Value Principle
24. It states that all costs that were incurred to generate revenue appearing on a given period’s statement
of comprehensive income should appear as an expense on the same statement?
A. Matching Principle C. Accrual Basis Principle
B. Immediate Recognition D. Economic Entity Principle
 Quiz
Quiz 11
REVIEW
REVIEW DISCUSSIONS
DISCUSSIONS
25. The main objective is to achieve public trust and confidence in the financial statements?
A. Faithful Representation C. Neutrality
B. Completeness D. Relevance
26. Accounting information should be helpful to decision makers who are validating, making
updates, adjustments, or corrections to past predictions
A. Confirmatory Value
B. Predictive Value
C. Free from Error
D. Fair Value Principle
27. Accounting information must be available on time when needed if it is to influence decisions?
A. Timeliness C. Accrual Basis Principle
B. Relevance D. Comparability
 Quiz
Quiz 11
REVIEW
REVIEW DISCUSSIONS
DISCUSSIONS
28. It is also known as Balance Sheet?
A. Statement of Cash Flow C. Statement of Financial Position
B. Statement of Comprehensive Income D. Notes to FS

29. Formal Statements that show the financial effects of transactions and other events that are grouped
into broad classes according to their economic characteristics.
A. Cash Flow Statement
B. Balance Sheet
C. Financial Statement
D. Statement of Comprehensive Income

30. All of the following are Real Accounts, except?

A. Cash C. Loss from Sale of Investment
B. Unearned Revenue D. Goodwill
 CHAPTER
CHAPTER 33
ACCOUNTING
ACCOUNTING CONCEPTS
CONCEPTS &
& PRINCIPLES
PRINCIPLES

After studying this chapter, you should be able to

1 Accounting Concepts, know:
Conventions & Principles
2 GAAP
3 Conceptual Framework of Financial Reporting
4 Basic Assumptions of Accounting
5 Basic Principles of Accounting
6 Accounting Constraints
7 Qualitative Characteristics of Accounting
Information
8 Hierarchy of Accounting Policies
 CHAPTER 22
CHAPTER
THE
THE ACCOUNTING
ACCOUNTING PROFESSION
PROFESSION
After studying this chapter, you should be able to know:
9 Fundamentals Qualities of Accounting
10 Enhance Qualities of Accounting
11 Basic Financial Statements
12 Management Role in FS Preparation
13 Definitions, Classification and Examples of
Account
14 Real Accounts
15 Nominal Accounts
 STUDY OBJECTIVE 1

Explain
Explain the
the Accounting
Accounting Concepts,
Concepts,
Conventions
Conventions & & Principles
Principles
 Accounting
Accounting Concepts,
Concepts,
Conventions
Conventions &
& Principles
Principles

 Users of Financial Reports – UNDERSTAND –

ECONOMIC BUSINESS DECISIONS

 Proper understanding of FS = User has

knowledge of ACCOUNTING CONCEPTS,
CONVENTIONS and PRINCIPLES.


“The basic concepts are the REAL
FOUNDATION in all CPA Board Exam
Subjects” – Darrel Asuncion, CPA MBA
 Accounting
Accounting Concepts,
Concepts,
Conventions
Conventions &
& Principles
Principles


Accounting Concepts – are important ideas
which accountants assume recording business
transactions.
- “Bedrock of Accounting”
- “Postulates”
- “Accounting

Assumptions”
Examples: 1. Separate Entity
2. Going Concern
3. Time Period
4. Accrual
5. Monetary Unit
 Accounting
Accounting Concepts,
Concepts,
Conventions
Conventions &
& Principles
Principles


Accounting Conventions – are accounting
practices that practitioners accept because of
their long existence and use
- Based on the idea that in every business
transactions, a value received has corresponding
value given.

 Examples: 1. Debit and Credit

2. Dual Aspect Concept
 Accounting
Accounting Concepts,
Concepts,
Conventions
Conventions &
& Principles
Principles


Accounting Principles – are those that have
first importance
- Objectives of Accounting
- Doctrine of Accounting, which is the
basis of all other rules, procedures and
methods used in the accounting practice.
- Accordingly, Accounting Principles are
distinguished from Accounting Procedures,
Rules and Methods because the latter
comprise the specifics on how transactions
and other events should be RECORDED,
CLASSIFIED, SUMMARIZED and
PESENTED.
STUDY OBJECTIVE 2

Explain
Explain the
the Generally
Generally Accepted
Accepted
Accounting
Accounting Principle
Principle
 GAAP
GAAP
 The authoritative body of Accountancy formulated
STANDARD PRINCIPLES, ASSUMPTIONS and
PROCUDURES – “Generally Accepted Accounting
Principle (GAAP)”

 GAAP – used uniformly by accountants in measuring,

recording and reporting financial activities.
- These are developed based on experience, research
and careful study
- They become generally accepted by agreement among
accounting practitioners.
 GAAP
GAAP

GAAP – Main objective = expressed in the phrase of the

standard auditor’s report which states “to present the
financial statements…in conformity with Generally
Accepted Accounting Principle.

GAAP used in the Philippines

a. Philippines Accounting Standards (PAS)
b. Philippines Financial Reporting Standards
(PFRS)
 STUDY OBJECTIVE 3

Explain
Explain the
the Conceptual
Conceptual Framework
Framework for
for
Financial
Financial Reporting
Reporting
 Conceptual
Conceptual Framework
Framework
 Financial Reporting
 Coherent System of Concepts that flow from
an accounting objective which identifies the
purpose of Financial Reporting.
 Harmonizes varying Accounting Concepts to
achieve coherent set of Accounting Standards.
STUDY OBJECTIVE 4

Explain
Explain the
the Basic
Basic Assumptions
Assumptions of
of
Accounting
Accounting
 Basic
Basic Assumptions
Assumptions
1. Economic Entity Assumptions
- “Separate Entity Concept,” “Entity Concept,”
“Accounting Entity,” “Business Entity Concept”
- Accountant regard a business enterprise as
separate and distinct entity from the person
or people who own and run it.
- Main purpose; properly account the real
transactions of the business in order to report the
true and fair picture of the business financial
affaitrs.
 Basic
Basic Assumptions
Assumptions
2. Going Concern Assumptions
- Assumes that the business entity will continue
operating indefinitely for a period of time.
- Based on Accounting conventions of
OBJECTIVITY and HISTORICAL COST
- OBJECTIVITY – Accounting measurement
must be both definite and verifiable.
- HISTORICAL COST – helps to attain
objectivity by considering only the purchase price as
well as an asset.
 Basic
Basic Assumptions
Assumptions
3. Monetary Unit Assumptions
- Money is the common denominator in
measuring economic activity.
- Accounting generally pays no attention to
INFLATION and DEFLATION
- Assumes that the Monetary Unit remains
STABLE regardless of fluctuating in money
value.
 Basic
Basic Assumptions
Assumptions
4. Periodicity or Time Period Assumptions
- Time Period assumes that the life of the enterprise is
divided into several periods.
- Thus, when a financial is prepared, it is important to
indicate the date when it was prepared and the time period it
covers.
- A time period is usually called Accounting Period.
a. Calendar Year
b. Fiscal Year
c. Interim period
 Basic
Basic Assumptions
Assumptions
5. Accrual-Basis Assumptions
- FS, except Statement of Cash Flows are prepared on
the Accrual Basis of Accounting.
- Revenue; includes not only those cash receipts
from revenue transactions during financial period, but also
the income earned but not yet received (accrued income)
- Expenses; include not only the cash that business
pays out in the period but also expenses outstanding (accrued
expense)
 STUDY OBJECTIVE 5

Explain
Explain the
the Basic
Basic Principles
Principles of
of Accounting
Accounting
 BASIC
BASIC PRINCIPLES
PRINCIPLES OF
OF
ACCOUNTING
ACCOUNTING
1. Measurement Principles
- It guide accountants how assets & liabilities are valued.
- Accounting uses two measurement principles:
a. Cost Principle (Historical Cost Principle)
- Assets and Liabilities on the basis of acquisition price
- It adheres to the fundamental qualities of faithful representation and
establishes verifiable benchmark for measuring historical trends.
 BASIC
BASIC PRINCIPLES
PRINCIPLES OF
OF
ACCOUNTING
ACCOUNTING
1. Measurement Principles
- It guide accountants how assets & liabilities are valued.
- Accounting uses two measurement principles:
b. Fair Value Principle
- Defined as the “amount for which an asset could be exchanged, liability
could be settled or an equity instrument granted could be exchanged between
knowledgeable & willing parties in an arm’s length transaction.”
 BASIC
BASIC PRINCIPLES
PRINCIPLES OF
OF
ACCOUNTING
ACCOUNTING
2. Revenue Recognition Principle
- Revenue = Income
- Income – “increases in economic benefits during accounting period in the form of inflows or
enhancements of assets or decreases of liabilities that result in increases in equity, other
than those relating to contributions from equity participants.”
- As a rule, income is recognized when earned or has been substantially completed,
generally at the point of sale.
- Revenue is recognized at the point of sale because the point of sale provides uniform,
objective, and reasonable test to verify transfer of title of ownership for consideration.
 BASIC
BASIC PRINCIPLES
PRINCIPLES OF
OF
ACCOUNTING
ACCOUNTING
2. Revenue Recognition Principle
- Revenue are measured at the FAIR VALUE of the consideration received or
receivable.

- Revenue is recognized at the point of sale except:

1. Earlier Recognition – Revenue can be recognized before the time of sale when:
a. At the point of completed production.
b. At a certain percentage of completion
 BASIC
BASIC PRINCIPLES
PRINCIPLES OF
OF
ACCOUNTING
ACCOUNTING
2. Revenue Recognition Principle
- Revenue are measured at the FAIR VALUE of the consideration received or
receivable.

- Revenue is recognized at the point of sale except:

2. Later Recognition – Recognition after the point of sale is applicable when
the collections for the payments of services rendered or goods delivered are
DOUBTFUL even if the goods are already delivered or services have been rendered.
- Later recognition = point of collection / collection basis.
 BASIC
BASIC PRINCIPLES
PRINCIPLES OF
OF
ACCOUNTING
ACCOUNTING
2. Revenue Recognition Principle
- Revenue are measured at the FAIR VALUE of the consideration received or
receivable.

- Revenue is recognized at the point of sale except:

2. Later Recognition – 3 methods of recognizing revenue after the point of sale.
a. Cash or Profit Recovery Method
b. Cost Recovery Method
c. Installment Method or Hybrid Method
 BASIC
BASIC PRINCIPLES
PRINCIPLES OF
OF
ACCOUNTING
ACCOUNTING
3. Expense Recognition Principle
- Expense – “outflows” or other “using-up” of assets or incurring
liabilities (or a combination of both) during a period as a result of delivering or
producing goods and/or services.
- “Matching Principle” – Expense is recognized when income is earned.
- “Matching Principle” – states that all costs that were incurred to
generate the revenue appearing on a given period’s statement of comprehensive
income should appear as an expense on the same statement.
 BASIC
BASIC PRINCIPLES
PRINCIPLES OF
OF
ACCOUNTING
ACCOUNTING
3. Expense Recognition Principle
- It is applied in one of three ways, as follows:
a. Associating Cause and Effect – “Direct Matching Principle
ex. Cost of Sales, Sales Commission
b. Systematic and Rational Allocation
ex. Depreciation Expense, Amortization Expense
c. Expense Recognition
ex. Salaries Expense, Rent Expense, Utilities Expense and Interest Expense
 BASIC
BASIC PRINCIPLES
PRINCIPLES OF
OF
ACCOUNTING
ACCOUNTING
4. Full-Disclosure Principle
- Financial Statement should report ALL RELEVANT
information bearing on the economic affairs of a business enterprise,
including subsequent events:
- Financial information should also be accompanied with NOTES
TO THE FINANCIAL STATEMENTS and SUPPLEMENTARY
SCHEDULES and OTHER INFORMATION.
 STUDY OBJECTIVE 6

Explain
Explain the
the Accounting
Accounting Constraints
Constraints
 Accounting
Accounting Constraints
Constraints
1. Cost Constraints
- Suggest that the benefits of accounting for and reporting
information should outweigh the costs.
- “Cost and Benefit Analysis”

2. Materiality Constraints
- Concerns an item’s impact on an entity’s over-all financial operations.
- It involves a relatively significant amount and importance that would
change a decision if it has been omitted or presented.
 STUDY OBJECTIVE 7

Explain
Explain the
the Qualitative
Qualitative Characteristics
Characteristics of
of
Accounting
Accounting Information
Information and
and Fundamental
Fundamental
Qualities
Qualities of
of Accounting?
Accounting?
 Qualitative
Qualitative Characteristics
Characteristics
Accounting
Accounting
1. Decision-Usefulness – to choose which among the
acceptable accounting methods.
2. Relevant-Disclosure – To determine the amount and types
of accounting information to disclose.
3. Reporting Format – To use the appropriate presentation
and contents of reporting consistent to the financial reporting
objective.
 Fundamental
Fundamental Qualities
Qualities of
of
Accounting
Accounting
1. Relevance:
- to be relevant, accounting information must be capable of
influencing or making a difference in an economic decision.
- Accounting information can move decision-makers when it
contains:
a. Predictive Value
- Accounting information should be helpful to decision makers
when it has inputs to increase their ability to forecast the outcome
of future events.
 Fundamental
Fundamental Qualities
Qualities of
of
Accounting
Accounting
1. Relevance:
- to be relevant, accounting information must be capable of
influencing or making a difference in an economic decision.
- Accounting information can move decision-makers when it
contains:
b. Confirmatory Value
- Accounting information should be helpful to decision-makers
who are validating, making updates, adjustments, or corrections to
past predictions.
 Fundamental
Fundamental Qualities
Qualities of
of
Accounting
Accounting
2. Faithful Representation:
- MAIN PURPOSE: to achieve public trust and confidence in the
financial statements.
- Accounting information must contain FACTUAL TRANSACTIONS
and other events it purports to represent.
- to be faithfully represented, accounting information must be:
1. Completeness
2. Neutrality
3. Free from Error
 Enhancing
Enhancing Qualities
Qualities of
of
Accounting
Accounting
1. Understandability
- To be useful, Accounting Information must be COMPREHENSIBLE.
- Accountants provide understandable financial accounting information
by presenting data that can be understood by users of the information.
2.Verifiability
- It occurs when independent measures, using the same accounting
methods, could arrive with the same results.
- The information as shown in the financial reports should be checked and
corroborated to prove their faithful representation = EXTERNAL AUDITING
 Enhancing
Enhancing Qualities
Qualities of
of
Accounting
Accounting
3. Timeliness
- Accounting information must be available on time when needed if it is to
influence decisions.
- Lack timeliness reduces relevance.
- Information is useless if not available when needed.

4. Comparability
- enables users to identify similarities and differences between two or
more sets of economic circumstances.
 STUDY OBJECTIVE 7

BASIC
BASIC FINANCIAL
FINANCIAL STATEMENTS
STATEMENTS
 What
What is
is Financial
Financial Statements?
Statements?

FINANCIAL STATEMENTS:
1 Formal reports prepared by Accountants.
2 Theses statements show the financial effects
of transactions and other events that are grouped
into broad classes according to their economic
characteristics.
 What
What is
is Financial
Financial Statements?
Statements?

Based on the PAS No. 1, the Basic Financial

Statements are the following:
1.Statement of Financial Position
2.Statement of Comprehensive Income
3.Statements of Changes in Equity
4.Cash Flow Statement
5.Notes to Financial Statements
 What
What is
is Financial
Financial Statements?
Statements?

Based on the PAS No. 1, the Basic Financial

Statements are the following:
1.Statement of Financial Position
a. Assets – Resources owned or controlled by an entity
resulting from past events and from them, future benefits are
expected to flow the entity.
b. Liabilities – Existing obligations of the entity arising from
past events. Outflow of assets from entity.
c. Equity – The residual interest in the assets of the entity after
deducting all its liabilities.
 What
What is
is Financial
Financial Statements?
Statements?

Based on the PAS No. 1, the Basic Financial

Statements are the following:
2. Statement of Comprehensive Income
a. Revenue – Increase in assets or decrease in
liabilities arising from business operation
during an accounting period that result to
increase owner’s equity.
- These increase in assets are not
contributions of owners and creditors.
 What
What is
is Financial
Financial Statements?
Statements?

Based on the PAS No. 1, the Basic Financial

Statements are the following:
2. Statement of Comprehensive Income
b. Expenses – Decrease in assets or increase in
liabilities arising from business operation during an
accounting period that result to decrease owner’s equity.

- These decrease in assets are not withdrawals of owners

or payments of existing liabilities.
 Recognition
Recognition of
of the
the
elements
elements of
of FS?
FS?
Recognition:
- In accounting = The Process of
Recording
- As a rule, an item should be RECOGNIZED
when the following two criteria are met:
a. Probability of Future Benefits
b. Reliability of Measurement
 STUDY OBJECTIVE 8

Explain
Explain the
the Definitions,
Definitions, Classification
Classification and
and
Example
Example ofof Accounts
Accounts
 Management’s Role in FS

Management / Owner of Business

- Primarily responsible & interested for the
information contained in the financial statement.
- Must ensure that FS are for General-
Purpose Reporting
-Must first review & approve any
adjustments are included in the FS.
 Limitations of Financial
Statements
1. Use of Estimates
- Some accounting data contained in the FS are
based on estimates.
2. Use of Historical Costs
- It does not show the current value of Assets,
Liabilities, Owner’s Equity.
- It fails to show time value of money.
3. Non-inclusion of developed intangible assets.
 Definitions, Classification
and Example of Accounts
1 Real Accounts
- Assets, Liabilities and Owners Equity
- They are not closed at the end of the month.
2 Nominal Account
- Revenue and Expense Account
- Temporary because they are closed or put
to zero balance at the end of accounting period.
 Real Accounts
The Asset Accounts
•Assets
1. Resources or things of value owned by an enterprise
2. Some of the resources have physical form
3. But others have no physical form
4. Future economic benefits are expected from
them to flow to the entity.
5. Controlled by the entity.
 Real Accounts

The Asset Accounts

•Assets
6. They recorded in the books of accounts with a
normal DEBIT BALANCE
7. Are classifies into CURRENT &
NONCURRENT ASSETS
 Real Accounts
The Asset Accounts
•Current Assets
1. It is cash & cash equivalent which is not restricted for
current use.
2. It is expected to be realized, or is held for sale or
consumption in the normal course of the enterprise’s operating
cycle.
3. It is help primarily for trading purposes or for the
short-term, and it is expected to be realized within twelve months
of the SFP date.