INTRODUCTION TO

ACCOUNTING
DEFINITION OF ACCOUNTING
 The Accounting Standards Council in its Old Statement
of Financial Standards No.1 mentions the following:

 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
 The Committee on Accounting Technology of the
American Institute of Certified Public Accountants
defines accounting as follows:

 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
 The American Accounting Association in its Statement
of Basic Accounting Theory defines accounting as
follows:

 Accounting is the process of identifying, measuring and

communicating economic information to permit informed
judgment and decision by users of the information.
DEFINITION OF ACCOUNTING
 The American Accounting Association in its Statement
of Basic Accounting Theory defines accounting as
follows:

 Accounting is the process of identifying, measuring and

communicating economic information to permit informed
judgment and decision by users of the information.
DEFINITION OF ACCOUNTING
 Identifying – recognition or non-recognition of
business activities as “accountable” events
 Measuring – assigning of peso amounts to the
accountable economic transactions and events (historical
cost, current replacement cost, discounted or present
value or net realizable value)
 Communicating – process of preparing and
distributing accounting reports to potential users of
accounting information
DEFINITION OF ACCOUNTING
 Recording (journalizing) – process of systematically
maintaining a record of all economic transactions after
they have been identified or measured
 Classifying – sorting or grouping of similar and
interrelated economic transactions into their respective
classes
 Summarizing – preparation of financial statements
(statement of financial position, income statement,
statement of comprehensive income, statement of
changes in equity, statement of cash flows and notes to
financial statements)
NATURE OF ACCOUNTING
 1. Accounting is a process
 2. Accounting is an art

 3. Accounting is a means and not an end

 4. Accounting deals with financial information and

transactions
 5. Accounting is an information system
BASIC OBJECTIVE/FUNCTION OF
ACCOUNTING
 The basic objective of accounting is to “provide
quantitative financial information about a business that is
useful to statement users particularly owners and
creditors, in making economic decisions. ”
BASIC OBJECTIVES/FUNCTIONS OF
ACCOUNTING
 Specifically, the objectives of accounting are the
following:
 To ascertain the result of the business operations;
 To ascertain the financial position of the business; and
 To assist the financial users in predicting the enterprise’s
financial capacity regarding future cash flows, financial
conditions and results of operation.
HISTORY OF ACCOUNTING
 Accounting is as old as civilization and has evolved in
response to economic and social needs of men.
 Primitive accounting
 The origin of keeping accounts has been traced as far back as
8500 B.C., the date archaeologists have established for certain
clay tokens found in Mesopotamia.
 These tokens represented such commodities such as sheep, jugs of

oil, bread or clothing and were used in Middle East to keep

records.
 The tokens were often sealed in clay balls, called bollae, which

were broken on delivery so the shipment could be checked against

the invoice.
Bollae and tokens c. 3300 BC
HISTORY OF ACCOUNTING
 Primitive accounting
 Account records date back to the ancient civilizations of China,
Babylonia, Greece and Egypt. People in these civilizations
maintained various types of records of business activities. At
around 3600 B.C in Babylonia, clay tablets recorded payments of
wages.
 Middle ages
 Development of more formal account-keeping methods is
attributed to the merchants and bankers of Florence, Venice and
Genoa during the 13th to 15th centuries.
 The earliest methods consisted of accounts kept by a Florentine

banker in 1211 A.D. The system was primitive; accounts were not
related in any special way (in terms of equality for entries) and
balancing of the accounts was lacking.
HISTORY OF ACCOUNTING
 Middle ages
 Systematic bookkeeping evolved from these methods. Double-
entry records first appeared in Genoa in 1340 A.D.
 The first treatise on the art of systematic bookkeeping appeared in

1494, in Venice. “Everything about Arithmetic, Geometry,

Proportions and Proportionality” (Summa de Arithmetica,
Geometria, Proportioni et Proportionalita) was written by the
Franciscan monk, Fra Luca Pacioli.
HISTORY OF ACCOUNTING
 Industrial Revolution and Corporate Reorganization
 Occurred in England from the mid-18th to the mid-19th century.
 Changed the method of producing commercial goods from the

handicraft method to the factory system.

 The expanded business operations initiated by the Industrial

Revolution required increasingly large amount of funds to build

factories and purchase machinery. This need resulted to the
development of the corporate form of organization. The growths
of corporation spurred the development of accounting.
HISTORY OF ACCOUNTING
 Information Age
 Tremendous advances in information technology have
revolutionized accounting in recent years.
 The advent of Internet, along with its promising prospects of

doing business online or E-commerce will surely bring about

another metamorphosis in the field of accounting.
BRANCHES OF ACCOUNTING
 As a result of economic, industrial, and technological developments,
different specialized fields in accounting have emerged.
The famous branches or types of accounting include:
1. Financial Accounting
2. Managerial Accounting
3. Cost Accounting
4. Auditing
5. Tax Accounting
6. Accounting Systems
7. Fiduciary Accounting
8. Forensic Accounting
9. Fund Accounting
USERS OF ACCOUNTING INFORMATION
Accounting information helps users to make better financial decisions. Users
of financial information may be both internal and external to the organization.

INTERNAL USERS (PRIMARY USERS)

 Parties to whom general purpose financial reports are primarily directed

 Have the most critical and immediate need for information in financial
reports
 Parties that provide resources to the entity
USERS OF ACCOUNTING INFORMATION

Internal users (Primary Users) of accounting information include the

following:
 Management
 Employees
 Owners
 Accounting information is presented to internal users usually in the form of
management accounts, budgets, forecasts and financial statements.
USERS OF ACCOUNTING INFORMATION

EXTERNAL USERS (SECONDARY USERS)

 Residual definition
 Users of financial information other than the
management, the owners, the employees and others
USERS OF ACCOUNTING INFORMATION
 External users (Secondary Users) of accounting information include the
following:

 Creditors
 Tax Authorities
 Investors
 Customers
 Regulatory Authorities
FORMS OF BUSINESS ORGANIZATION
 Business is any economic activity conducted primarily
for profit. To engage in business is to supply goods and
services to earn profit or income. Below are the most
common forms of business:
 Single or sole proprietorship
 Partnership
 Corporation
SOLE PROPRIETORSHIPS
Advantages Disadvantages
Easiest to start and set up; only few legal Unlimited liability – Owner is legally
requirements. liable for all business debts.
Only one owner decides for the business. Limited resources (capital, managerial
skills, etc.

All profits are for the owner. All losses are borne by owner.
Limited life – Business is automatically
terminated due to owner’s death, insanity
The owner, not the business is taxed. or imprisonment.

Easy to dissolve.
PARTNERSHIPS
 By the contract of partnership, two or more persons bind
themselves to contribute money, property or industry to a
common fund with the intention of dividing profit
among themselves. Two or more persons may also form
a partnership for the exercise of a profession. (Article
1767, Civil Code of the Philippines)
CHARACTERISTICS OF A PARTNERSHIP
 Mutual Contribution
 Division of Profits or Losses

 Co-Ownership of Contributed Assets

 Mutual Agency

 Limited Life

 Unlimited Liability

 Income Taxes

 Partners’ Equity Accounts

PARTNERSHIPS

Advantages Disadvantages
Easy to form – Mere agreement organizes Unlimited liability – A general partner is
a partnership. legally liable for the unpaid debts of the
partnership.
Joint management of resources (capital, All partners maybe held liable for the
skills, etc.) action of one partner.

Lesser government supervision Consensual and restricted transfer of

ownership.
PARTNERSHIPS

Advantages
Tax-exempt if general professional
partnership, but subject to corporate tax if
commercial partnership.
Disadvantages
Limited life – Disagreement or change of
partner may dissolve the partnership.
Incapacity, insanity or death of a partner
terminates the partnership.
CORPORATIONS
 A corporation is an artificial being created by operation
of law, having the right of succession and the powers,
attributes and properties, expressly authorized by law or
incident to its existence. (The Corporation Code of the
Philippines, Sec. 2)
CORPORATIONS
Advantages Disadvantages
Limited liability – Shareholders are
not legally liable for the corporate Most costly and difficult to organize,
unpaid liabilities.
Power of succession – It can continue
to exist in spite of death, withdrawal
or changes of officers and
shareholders.
Only the Board of Directors and other
Unrestricted transfer of ownership. authorized officers can bind the
corporation in contracts.
Shareholders have limited access and
Greater source of resources control over management and
(capitalization, skills, etc.) operations.
CORPORATIONS
Advantages
Renewable and perpetual life – A
corporation may renew its registered
life every 50 years.
Disadvantages
More stringent government
supervision and restrictions.
Corporations are taxed at a flat 30%
income tax rate (effective 2009). If a
corporation incurred loss in its 4th year
of operation, it should still be taxed
2% based on its gross income
OTHER FORMS OF BUSINESS
ORGANIZATIONS
 In addition to those basic forms of business ownership, these are
some other types of organizations that are common today:
 Limited Liability Company
 Limited liability companies (LLCs) in the USA, are hybrid forms of
business that have characteristics of both a corporation and a
partnership. An LLC is not incorporated; hence, it is not considered
a corporation.
 Nonetheless, the owners enjoy limited liability like in a corporation.
An LLC may elect to be taxed as a sole proprietorship, a
partnership, or a corporation.
OTHER FORMS OF BUSINESS
ORGANIZATIONS
 Cooperative
 A cooperative is a business organization owned by a
group of individuals and is operated for their mutual
benefit. The persons making up the group are called
members. Cooperatives may be incorporated or
unincorporated.
 Some examples of cooperatives are: water and electricity
(utility) cooperatives, cooperative banking, credit unions,
and housing cooperatives.
TYPES OF BUSINESSES
 A business maybe classified based on its primary
activities. The most common types of businesses as to
their nature or main activities are as follows:
 Service
 Merchandising
 Manufacturing
SERVICE COMPANIES
 Do not deal with tangible products but rather provide
services as its major operations
MERCHANDISING COMPANIES
 Involved in selling of finished goods by other
businesses.
MANUFACTURING COMPANIES
 Involved in the conversion of raw materials into some
tangible, physical product.
IDENTIFICATION
1. A business owned by only one individual.
2. Type of business involved in selling of finished goods
by other businesses.
3. A contract whereby two or more persons bind
themselves to contribute money, property or industry
to a common fund with the intention of dividing profits
among themselves.
4. Any economic activity conducted primarily for profit.
5. The main objective of a business.
ENUMERATION
6 – 8. Types of Business according to
Primary Activities Performed
9 – 12 Factors of Production
13 – 15 Legal Forms of Business
Organizations
MATCHING TYPE
16. Architectural firms
17. Meralco
18. Robinson Department Store
19. Universal Robina Corporation
20. Internet café
21. Cebu Pacific
22. Hyundai
23. National Book Store
24. J8 Travel Services, Inc.
25. Hyatt Regency Hotels
26. Monde Nissin Corporation
MATCHING TYPE
27. Accounting firms
28. PLDT
29. SM Hypermarket
30. Canon
 Keep the world in good balance and there will be peace.
The accountants believe this is true.

 For every value received, there is equivalent value that is

parted with.

 You get what you give.

THE FRAMEWORK AND THE
ACCOUNTING STANDARDS

GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

(GAAP)

 Represent the rules, procedures, practice and standards

followed in the preparation and presentation of financial
statements
 Like laws that must be followed in financial reporting
MOVE TOWARD IFRS
 In the past years, most of the Philippine standards issued
are based on American accounting standards.
 Starting in 1996, Philippine accounting standards are
based on IASC accounting standards. In 1997, a decision
was made to move totally to IAS.
 In 2000, sweeping revisions of Philippine accounting
standards are made in conformity with their counterparts
in the IAS.
 The Philippines is fully compliant with IFRS effective
January 2005.
BASIC ACCOUNTING PRINCIPLES AND
CONCEPTS
GAAP is the framework, rules and guidelines of the
financial accounting profession with a purpose of
standardizing the accounting concepts, principles and
procedures.
Here are the basic accounting principles and concepts
under this framework:
1. Business Entity
A business is considered a separate entity from the owner(s) and should be
treated separately. Any personal transactions of its owner should not be
recorded in the business accounting book, vice versa. Unless the owner’s
personal transaction involves adding and/or withdrawing resources from the
business.
2. Going Concern
It assumes that an entity will continue to operate indefinitely. In this basis, assets are
recorded based on their original cost and not on market value. Assets are assumed to
be used for an indefinite period of time and not intended to be sold immediately.
3. Monetary Unit
The business financial transactions recorded and reported should be in monetary
unit, such as Philippine Peso, US Dollar, Canadian Dollar, Euro, etc. Thus, any non-
financial or non-monetary information that cannot be measured in a monetary unit
are not recorded in the accounting books, but instead, a memorandum will be used.
4. Historical Cost
All business resources acquired should be valued and recorded based on the actual
cash equivalent or original cost of acquisition, not the prevailing market value or
future value.
5. Matching
This principle requires that revenue recorded, in a given accounting period,
should have an equivalent expense recorded, in order to show the true profit
of the business.
6. Accounting Period
This principle entails a business to complete the whole accounting process
of a business over a specific operating time period. It may be monthly,
quarterly or annually. For annual accounting period, it may follow a
Calendar or Fiscal Year.
7. Conservatism
This principle states that given two options in the valuation of business
transactions, the amount recorded should be the lower rather than the higher
value.
8. Consistency
This principle ensures consistency in the accounting procedures used by the
business entity from one accounting period to the next. It allows fair
comparison of financial information between two accounting periods.
9. Materiality
Ideally, business transactions that may affect the decision of a user of
financial information are considered important or material, thus, must be
reported properly. This principle allows errors or violations of accounting
valuation involving immaterial and small amount of recorded business
transaction.
10. Objectivity
This principle requires recorded business transactions should have some form
of impartial supporting evidence or documentation. Also, it entails that
bookkeeping and financial recording should be performed with
independence, that’s free of bias and prejudice.
11. Accrual
This principle requires that revenue should be recorded in the period it is
earned, regardless of the time the cash is received. The same is true for
expense. Expense should be recognized and recorded at the time it is
incurred, regardless of the time that cash is paid.
QUALITATIVE CHARACTERISTICS
 Qualities or attributes that make financial accounting
information useful to the users
 Fundamental qualitative characteristics
 Relevance
 Faithful representation

 Enhancing qualitative characteristics

 Comparability
 Understandability

 Verifiability

 Timeliness
RELEVANCE
 Capacity of information to make a difference in a
decision by helping users form predictions about the
outcome of a past, present or future events, or confirm
and correct prior expectations
 Capacity of the information to influence a decision
MATERIALITY
 Also known as the doctrine of convenience
 A practical rule in accounting which dictates that strict
adherence to GAAP is not required when the items are
not significant enough to affect the evaluation, decision
and fairness of the financial statements.
 The relevance of information is affected by its nature and
materiality.
 Materiality is a relativity.

 Materiality of an item depends on its relative size rather

than absolute size.
WHEN IS AN ITEM MATERIAL?
 “An item is material if knowledge of it would affect or
influence the decision of the informed users of the
financial statements.”
 Information is material if its omission or misstatement
could influence the decision that the users make on the
basis of the financial information about the entity.
FAITHFUL REPRESENTATION
 Also called as representational faithfulness
 To be reliable, the information must represent faithfully
the transactions and other events it purports to represent
or could be expected to reasonably represent.
 The actual effects of the transactions should be properly
accounted and reported in the financial statements.
 The descriptions and figures must match what really
existed or happened
INGREDIENTS OF FAITHFUL
REPRESENTATION:
 Completeness
 Neutrality

 Free from error

COMPLETENESS
 Requires that relevant information should be presented
in a way that facilitates understanding and avoids
erroneous implication
 Completeness is the result of the application of the
adequate disclosure standard or the principle of full
disclosure
NEUTRALITY
 Free from bias
 The financial information should not favor one party to
the detriment of another party
 The information is directed to the common needs of
many users, and not to the particular needs of specific
users
 To be neutral is to be fair
FREE FROM ERROR
 The are no errors or omissions in the description of the
phenomenon or transaction, and the process used to
produce the reported information has been selected and
applied with no errors in the process.
SUBSTANCE OVER FORM
 The economic substance of transactions and events are
usually emphasized when economic substance differs
from legal form.
 Not considered as a separate component of faithful
representation because it would be redundant.
CONSERVATISM
 There is no discussion of conservatism or prudence in
the new Conceptual Framework for Financial Reporting
because to do so would be inconsistent with neutrality.
 A conservative or prudent approach is subjective and
may contain an element of bias.
CONSERVATISM
 Under conservatism, when alternatives exist, the
alternative which has the least effect on equity should be
chosen.
 Stated differently, possible errors in measurement be in
the direction of understatement rather than an
overstatement of net income and net assets
 Synonymous with prudence
CONSERVATISM
 Prudence – desire to exercise care and caution in dealing
with the uncertainties in the measurement process such
that assets or income are not overstated and liabilities or
expenses are not understated.
CONSERVATISM
 “Anticipate no profit and provide for probable and
estimable loss.”
 “In the matter of income recognition, the accountant
takes the position that no matter how sure the
businessman might be in capturing bird in the bush, he,
the accountant, must see it in the hand.”
 “Don’t count your chicks until the eggs hatch.”
COMPARABILITY
 Ability to bring together for the purpose of noting points
of likeness and difference
 Horizontal comparability/Intracomparability – allows
comparison within a single enterprise through time or
from one accounting period to the next
 Dimensional comparability/Intercomparability – quality
of information that allows comparison between two or
more enterprises engaged in the same industry
CONSISTENCY
 Accounting methods and practices should be applied on
a uniform basis from period to period.
 Consistency does not mean that no change in accounting
method can be made. If the change will result to more
useful and meaningful information, then such change
should be made. But there should be full disclosure of
the change and the peso effect thereof.
UNDERSTANDABILITY
 Financial information must be comprehensible or
intelligible if it is to be useful.
 Users are assumed to have a reasonable knowledge of
the economic activities and accounting and a willingness
to study the information with reasonable diligence
VERIFIABILITY
 Verifiability implies consensus.
 Different knowledgeable and independent observers
could reach consensus, although not necessarily
complete argument, that a particular depiction is a
faithful representation.
TIMELINESS
 Timeliness means that financial information must be
available or communicated early enough when a
decision is to be made.
 Relevant and faithfully represented financial information
furnished after a decision is made is useless or of no
value.