ACCOUNTING

BASIC CONCEPTS
LEARNING OBJECTIVE
After the discussions, students will
be able to recall:
the nature and some concepts of
ACCOUNTING
as well as the steps of the
accounting process.
DEFINITION OF ACCOUNTING
o Accounting Standards Council (ASC)

Accounting is a service activity. Its function is to

provide quantitative information, primarily financial
in nature, about economic entities, that is intended to
be useful in making economic decision.
DEFINITION OF ACCOUNTING
o Committee on Accounting Terminology of the
American Institute of CPA (AICPA)
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.
DEFINITION OF ACCOUNTING
o American Accounting Association (AAA)
Accounting is the process of identifying, measuring and
communicating economic information to permit
informed judgment and decision by users of the
information.
-----------------------------
Stood the test of time
PHASES OF ACCOUNTING
1) Recording routine and mechanical
process of writing down the
transactions and events on the
2) Classifying books of accounts in
chronological manner
3) Summarizing (journalizing)
before business transactions
and events can be recorded,
4) Interpreting they should be:
identified
analyzed
measured
PHASES OF ACCOUNTING
1) Recording
Sorting or grouping of similar
2) Classifying transactions and events into
their respective classes
(posting)
3) Summarizing
Transferring the entries from
the Journal to the Ledger
4) Interpreting
PHASES OF ACCOUNTING
1) Recording
Completion of the financial
statements and the accounting
2) Classifying requirements as well from
trial balance
3) Summarizing adjusting entries
worksheet
financial statements
4) Interpreting closing entries
post-closing trial balance
reversing entries
PHASES OF ACCOUNTING
1) Recording

2) Classifying

3) Summarizing
analytical and interpretative
4) Interpreting works
ACCOUNTING INFORMATION
SYSTEM

KEY PRODUCT set of

FINANCIAL STATEMENTS :
 Statement of Financial Position
 Statement of Comprehensive Income
 Statement of Cash Flows
 Statement of Changes in Equity
 Notes to FS
ELEMENTS OF FINANCIAL
STATEMENTS
1) ASSETS

2) LIABILITIES

3) OWNER’S EQUITY

4) INCOME or REVENUE

5) EXPENSES
ELEMENTS OF FINANCIAL
STATEMENTS
1) ASSETS Resources controlled by the
enterprise as a result of past
transactions and events and
2) LIABILITIES from which future economic
benefits are expected to flow to
3) OWNER’S EQUITY the enterprise

4) INCOME or REVENUE

5) EXPENSES
ELEMENTS OF FINANCIAL
STATEMENTS
1) ASSETS
Present obligations of an
2) LIABILITIES enterprise arising from past
transactions and events, the
settlement of which is expected
3) OWNER’S EQUITY to result in an outflow from the
enterprise
4) INCOME or REVENUE

5) EXPENSES
ELEMENTS OF FINANCIAL
STATEMENTS
1) ASSETS

2) LIABILITIES
The residual interest in
the assets of the
3) OWNER’S EQUITY enterprise after
deducting all its
liabilities
4) INCOME or REVENUE

5) EXPENSES
ELEMENTS OF FINANCIAL
STATEMENTS
1) ASSETS Gross inflow of
economic benefits
during the period
2) LIABILITIES arising in the course of
ordinary activities of
3) OWNER’S EQUITY an enterprise when
those inflows result in
increase in equity,
4) INCOME or REVENUE other than those
relating to
5) EXPENSES contributions from
owners
ELEMENTS OF FINANCIAL
STATEMENTS
1) ASSETS

2) LIABILITIES
Gross outflow of economic
3) OWNER’S EQUITY benefits during the period
arising in the course of ordinary
activities of an enterprise when
4) INCOME or REVENUE
those outflows result in
decrease in equity, other than
those relating to distributions to
5) EXPENSES owners
THE BASIC ACCOUNTING EQUATION

A = L + OE
 NORMAL BALANCE
DEBIT CREDIT

Assets Liabilities
Expenses Owner’s
Drawing Equity
Account Revenues
USERS OF ACCOUNTING
INFO
1. Primary (Target) Users
• Existing and Potential Investors
• Existing and Potential Lenders and Other
Creditors
2. Other Users
• Employees
• Customers
• Government and its agencies
• Public
FORMS OF BUSINESS
ORGANIZATION
1. Sole Proprietorship
• Single owner: “proprietor” who generally is also the manager
• Owner receives all profits, absorbs all losses and is solely responsible for all
debts of the business
2. Partnership
• Owned and operated by 2 or more persons who bind themselves to contribute
money, property or industry to a common fund
• With the intention of dividing the profits among themselves
• Each partner is personally liable for any debt incurred by the partnership
• Separate organization, distinct from the personal affairs of each partner
3. Corporation
• Owned by its stockholders; 5 to 15 incorporators
• An artificial being created by operation of law, having the rights of succession
and the powers, attributes and properties expressly authorized by law or
incident to its existence
• Stockholders are not personally liable for the corporation’s debts
• Separate legal entity
PURPOSE OF BUSINESS
ORGANIZATIONS
1. Service Companies
• Performs services for a fee (e,g, law firms, accounting
and auditing firms, stock brokerage, beauty salons and
recruitment agencies)
2. Merchandising Companies
• BUY and SELL (e.g. car dealers, clothing stores and
supermarkets)
3. Manufacturing Companies
• Buy raw materials, convert them into products and
then sell the products to other companies or to final
consumers (e.g. paper mills, steel mills, car
manufacturers and drug manufacturers)
MSMES
Micro Enterprises
• Assets before financing of P3M or less
• Employs not more than 9 workers
Small Enterprises
• Assets before financing above P3M to P15M
• Employs not more than 10 to 99 workers
Medium Enterprises
• Assets before financing above P15M to P100M
• Employs not more than 100 to 199 workers
----------------
 May be the country’s top taxpayers and highest paying employers
 Provide for 69.1% of the country’s labor force
 According to NSO, in 2001 accounted for 99.6% of the total business enterprises
ACTIVITIES IN BUSINESS
ORGANIZATIONS
Financing Activities
• Methods used by the organization to obtain financial resources and how
it manages these resources
• Involves Non-current Liabilities and Equity
Investing Activities
• Using capital from financing activities to acquire other resources used in
the transformation process
• Involves Non-current Assets
Operating Activities
• Involves the use of resources to design, produce, distribute and market
goods and services
• Includes Trading Securities, Dividend Income, Interest Income and
Interest Expense
---------------------------------
Interest Income O/I Interest Expense O/F
Dividend Income O/I Dividend Paid F/O
GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (GAAP)

uniform set of accounting rules,

procedures, practices and
standards that are followed in
preparing the financial statements
 CRITERIA FOR A PRINCIPLE TO BECOME
GENERALLY ACCEPTABLE
• Principle of Relevance
– resulting information is meaningful and useful

• Principle of Objectivity
– resulting information is not influence by the personal bias or
judgment of those who furnish it

• Principle of Feasibility
– can be implemented without undue complexity or cost
 GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES
• Cost Principle
– assets should be recorded at original or acquisition cost.
• Objectivity Principle
– requires accounting principle that accounting records should be
based on reliable and verifiable data as evidence of transactions.
• Materiality
– dictates practicability to rule over theory in determining the
valuation of an item.
• Matching
– revenue recognized when earned; expense recognized when
incurred.
 GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES
• Consistency
– requires that accounting methods and procedures should be
applied on a uniform basis from period to period to achieve
comparability in the financial statements.

• Adequate Disclosure
– requires that financial statements should be free from any
material misstatement; that if there is any, proper disclosure
should be made.
UNDERLYING ASSUMPTIONS
The Conceptual Framework for Financial Reporting
mentions only one assumption, namely:

Going Concern
• In the absence of evidence to the contrary, the
accounting entity is viewed as continuing in
operation indefinitely
UNDERLYING ASSUMPTIONS
However, implicit in accounting are these basic
assumptions:
Accounting Entity
• The entity is separate from the owners, managers and
employees who constitute the entity.
Time Period
• The indefinite life of an entity is subdivided into time
periods or accounting periods which are usually of equal
length for the purpose of preparing financial reports on
financial position, performance and cash flows.
• Calendar Year / Fiscal Year
• Natural business year – twelve-month period
UNDERLYING ASSUMPTIONS
Monetary Unit
• Has two aspects:

Quantifiability – A, L, E, income and expenses should be

stated in terms of a unit of measure which is peso in the
Philippines
Stability of the peso – the purchasing power of the peso is
stable or constant and that its instability is insignificant
and therefore may be ignored
Accrual
COST CONSTRAINT
Cost is a pervasive constraint on the information that
can be provided by general purpose financial
reporting.

The costs of providing useful information should not

exceed the benefits derived from it.