Module 1 History of Accounting<------click the link for more

information
1.0 -- Introduction to Accounting
3600 (approx.)
Definition of Accounting <------click the link for  Record keeping already common from
more information Mesopotamia, China, India to Central &
South America.
The following authorities on the field of accounting  The oldest evidence of this practice was
defined accounting as; the “clay tablet”

 Accounting Standards Council (ASC) 13th to 15 century (approx.)

– A Service Activity.
 American Institute of Certified Public
Accountant (AICPA) – An Art  339 is the earliest recorded history of
 American Accounting Association (AAA) the “double-entry
- A Process  bookkeeping” (DEB) accounting system
o “Massari Ledgers of Commune of Genoa” –
Accounting as the “Language of Business"<------ The oldest DEB because of separate pages
click the link for more information were used for debit and credit (T-Account
or Ledger or Venetian Method)
o In Florence Italy – DEB records wherein
1. Accounting is the medium of
communication through which financial debits were written over credits (Florentine
reports are furnished to intended users for Method or Journal Entries)
decision making. o 1494 – an Italian monk and mathematician,
2. Accounting helps business answer the wrote “Summa de Arithmetica Geometria,
following business questions: Proportioni et Proportionalita” the first
book that was published containing a
o Profitability – “How much is the increase detailed chapter of In this book, Pacioli
in capital as a result of business introduced three (3) important record
operations?” books;
o Liquidity – “Are there available funds to
 Memorandum Book – for all information on
finance the business operations?
a transaction
o Solvency – “Can the business pay its long-
 Journal Book – Book of Original Entry
term obligations to others?”  Ledger Book – Book of Final Entry
o Stability – “Can the business sustain its
long-term profitability and cash flow?”
o Capital Structure – “How much https://www.youtube.com/watch?v=qbI2GtxhvXs
investments are from Capital or borrowed https://www.youtube.com/watch?v=qGEOHCXLJrI
from Creditors?
o Financial Flexibility – “Is there excess 1700s – French Revolution
cash available for opportunities and  The thorough study of accounting and
uncertainties? development of accounting theory began
 1760 – 1830 – Industrial Revolution
Accounting as the “Eyes of the Business”  Mass production and great importance of
Fixed Asset
Accounting helps owners the following business 1900s – Global Industrial Economy
activities:  Developing changes in accounting practice
such as mergers, acquisitions and reporting
o Check on their financial progress systems
o Prepare plans to the future 2000s – Technological Advancements & Global
o Avoid material mistakes Trade
o Analyze causes of changes  Computer-assisted accounting practice and
o Choose the best amongst economic reporting were developed rapidly
alternatives  Globalization of business and diverse
accounting practice has been standardized
 Accounting are economic detectives using in an international accounting setting
the audit function by verifying the
truthfulness of financial reports 1.1-- Sectors of the Accounting Practice
Four (4) SECTORS of the Accounting Practice  Accounting Systems Design – includes the
evaluation of the company’s control system
1. Public Accounting – This practice is when to find out any area of improvement
accountant offer their professional services for a fee
and who engages NOT as an employee of the 3. Government Accounting – focuses on the proper
company. custody of government funds and their purposes. The
following are several agencies that many accountants
 External Auditing – primarily centers on
are employed:
the critical examination of financial
statements by an independent CPA to
express an opinion regarding the fairness  Bureau of Internal Revenue (BIR)
of the contents of the financial statements  Commission on Audit (COA)
 Tax Services – deals with the accountant’s  Department of Finance (DOF)
preparation of the client’s income tax  Department of Budget and
returns, business and transfer taxes. Management (DBM)
 Managerial Advisory Services – provide  Banko Sentral ng Pilipinas (BSP)
assistance and advice to the
management to their clients regarding 4.  Accounting Education – involves teaching and
finance, budgeting, business policies, and preparation of curriculums in high schools, colleges,
organization procedures, systems, product universities or review centers of the following
costs, distribution and other business subjects:
activities.

2. Private Accounting – Accountants that engages as  Financial Accounting

an employee of a private enterprise or non-profit  Management Accounting
organization  Taxation
 Other business-related subjects
 Financial Accounting – Primarily
concerned with the recording and 1.2-- Business Forms and Activities
classifying of business transactions
culminating in the preparation of general- Business – is any economic activity conducted
purpose financial statements or reports primarily for profit. Below are the most common
regarding the business’ financial position, forms of business
operating results and cash activities in
accordance with the GAAP. 1. Sole or Single Proprietorship – A business entity
 Internal Auditing – deals with determining owned by one person called a sole proprietor
the operational efficiency of the company
2. Partnership – A business entity owned by two
regarding protection of the company’s
(2) or more persons called partners who have
assets, accuracy and reliability of the
agreed to contribute money, property and industry to
accounting data.
a common fund with the intention of dividing the
 Tax Accounting – embraces the profits among themselves (further discussion will be
preparation of various tax returns and tax undertaken on MODULE 3 and 4)
planning necessary to minimize the impact
of taxes on the entity. 3. Corporation – A business registered as an
 Cost Accounting – The determination of artificial person under the operation of law. Its
inventory costs and/or product costs of the existence is evidenced by its Articles of
manufactured goods. Data produced from Incorporation and Corporate By-Laws registered
cost accounting are used by the with the Securities and Exchange
management for planning, budgeting and Commission (SEC) (further discussion will be
controlling purposes. undertaken on MODULE 5 and 6.
 Not-for Profit Accounting – Special
accounting for charitable organizations, A business may be classified based on its primary
philanthropic foundations, religious groups, activities. The common types of businesses as to their
governmental agencies, schools and nature or main activities are as follows:
cooperatives.
 Socio-economic Accounting – concerns 1. Servicing – This Activity earns through rendering
the measurement of the impact of business a service in exchange for a fee
or governmental agency’s decision on the
public sector. 2. Merchandising – The business engages in
the buying and selling of goods. It ears primarily by
marking up the cost from purchased goods that it sells considered if it is either a) Accountable or b) Un-
to customers. Accountable.

3. Manufacturing – This business converts raw

materials into finished goods that are to be sold at
selling price.

1.3.0 The Accounting Process

The Accounting Process

 Accountable events are monetary
transaction that are recorded in the
This is also called the "accounting cycle", which
Accounting Books
refers to a series of repetitive activities of recording,
 Un-accountable events are non-monetary
summarizing and reporting economic transaction
events that are not recorded in the
from the beginning to the end of the accounting
Accounting Books
period.

Aspects of the Accounting Process Accountable Events

The following are the aspects of the accounting
process: Accountable events can be further classified into two
1) Identifying - This includes recognizing business (2) namely:
transaction or events that are reportable
2) Measuring - This assigns peso amounts to the 1) Business Transactions -
accountable economic transactions and events. These involve the ordinary business activities of an
3) Communicating - This constitute the preparation entity depending on the industry.
and distribution of accounting reports to potential
users of accounting information There are two (2) types of business transactions
namely:
Steps in the Accounting Cycle 1) External Business Transaction
There are nine (9) basic steps in the accounting o These are arm's length transactions with
cycle, which includes phases on recording, an outside party in exchange of resources
classifying, and summarizing.  Selling of Service or Merchandise
 Collection & Payment
RECORDING PHASE 2) Internal Business Transaction
1. Analyzing the transaction (business document) o These are transactions that takes place
2. Journalizing within the enterprise such as:
 Conversion of Raw Materials to
CLASSIFYING PHASE Finished Goods
3. Posting  Supplies Withdrawn or transfer of
supplies to another department
SUMMARIZING PHASE
4. Preparing the unadjusted trial balance 2) Accounting Events -
5.Preparing adjusting entries These involve the occasional or non-ordinary 
6. Preparing the financial statements  business activities of an entity such as:
7. Preparing the closing entries o Losses due to Fortuitous Events(these are
unforeseeable events or acts of God), ex. theft, earthquake, etc)
8. Preparing the post-closing trial balance
9. Preparing reversing entries o Decline in Market Value

1.3.1 AP| Analyzing Business Transaction Source Documents

Analyzing Business Transaction It is important for accounting events to

have documentation of the transaction.
This is where the accountant gathers information from
source documents and determines the impact of the Source Documents enhances the verifiability of a
transaction on the financial position as represented by transaction because they are forms, evidence, legal or
the equation “assets equals liabilities plus equity”. official paper that supports the economic transactions

Impact of the transaction The following are examples of Source Documents

In order to determine if a transaction has an impact to

the financial position of an entity, it must be
 o Purchase journal – Used to record all
purchases on account (merchandise,
equipment and supplies).
o Cash disbursement journal – All
payments of cash for any purpose are
recorded.

Type of journal entries according to form:

 Simple journal entry – One which
contains a single debit and a single credit
 Compound journal entry – One which has
two or more elements and often
representing two or more

Accounts are the storage units of accounting

https://www.youtube.com/watch?v=vDCXIzvn4c information and used to summarize changes in assets,
liabilities and equity including income and expenses.
Exercise: Determining the Source Documents The following are a broad classification of kinds of
accounts:
Decrease in Cash in bank for issuing this business
paper -> Check  Real account – Statement of financial
position or so-called permanent accounts.
Increase in supplies expense for supplies purchased ->
These accounts are not closed and carryover
Invoice
to the next accounting period. (ex. Cash,
Increase in cash in bank and decrease in cash on hand, AR and PPE)
when this business paper will be recorded -> Bank  Nominal account – Income statement or
Deposit Slip temporary capital accounts. These
accounts are closed at the end of the
Increase in cash, increase in liabilities for receiving accounting period. (ex. Sales and expenses)
cash in exchange for this business paper -> Cash  Mixed account – A combination of real
Voucher and nominal accounts. (ex. Prepaid
expenses)
Increase in expense when this business paper received  Clearing account – Holds temporarily
from utility business for utility services consumed is certain information pending transfer to
recorded -> Statement of Account other ledger accounts.
 Controlling account – The general ledger
Increase in accounts receivable for merchandise sold account that summarizes the detailed
to customer -> Sales Invoice information in a subsidiary
 Suspense account – Is an account that
Decrease in cash on hand when this business paper holds temporarily certain information
indicating proof of payment of an account is recorded pending for disposition.
-> Official Receipt  Reciprocal account – Has a counterpart in
another book with in the entity or in another
1.3.2 AP| Journalizing ledger or another
 Principal account – An account that is
Journalizing
independent or can stand alone.
This is the process of recording the transactions in the  Auxiliary account – An account that
appropriate journals. A journal is a chronological cannot stand alone and are technically
record of transactions also known as the book of neither assets, liabilities nor income
original entry. Although all transactions could be
Sample Journal Entry
recorded in the general journal, it is more efficient
to use special journals in recording a large number of
like transactions.

Special journals that enterprises usually use are:

o Sales Journal – Only sales of merchandise
on account are
o Cash receipts journal – All types of cash
receipts are
 A list of general ledger accounts with their respective
debit or credit balance.

The purpose of the unadjusted trial balance is

to provide evidence that the total debits in the
general ledger equal the total credits and prepares the
accounts for adjustments.

Before a trial balance is made, amounts on each side

of the accounts from the General Ledger are totaled
or FOOTED.

 A closed or zero-balance account is when

the ending balance of the account’s debit is
EQUAL to its Credit,
 An Open accounts is when either debit or
credit is higher than the other;
o Debit balance = Debit > Credit
o Credit balance = Debit < Credit 

https://www.youtube.com/watch?v=VBj33nCz1w0 Sample Trial Balance

https://www.youtube.com/watch?
v=shJ2K5xaqZc&t=1s

1.3.3 AP| Posting

Posting

This is the third process of the accounting process

wherein, It is the process of transferring data from the
journal to the appropriate accounts in the general
ledger and subsidiary ledger. This process classifies
Limitation of an unadjusted Trial Balance
all accounts that were recorded in the journals
It Does NOT Guarantee the correctness of the
Kinds of ledgers
bookkeeping records.
 General ledger – Includes all the accounts
appearing on the financial Why?
 Subsidiary ledgers – Affords additional
detail in support of certain general ledge Answer: It is possible to have a balanced unadjusted
trial balance, but may contain errors
Chart of Accounts
What are the Types of Errors?
It is a listing of the names of the accounts that a  Incorrect usage of accounts
company has identified and made available for  Double Entry or Posting
recording transactions in its general ledger  Omission of a journal entry
Within the chart of accounts you will find that the
What are the causes when Debit and Credits is
accounts are typically listed in the following order:
NOT EQUAL?
 Posting an Item to the wrong side of the
account
 Erroneous copying of transferring a balance
 Omission of posting of a journal entry
either debit or credit
 Posting the same account twice
 Wrong calculation of account balances
https://www.youtube.com/watch?v=3QwZ-LvnW-g
How to Locate Errors?
1.3.4 AP| Unadjusted trial balance
Step 1: Calculate the Difference between Debits
Preparing the unadjusted trial balance
and Credits
If the difference is;  Accrued Income – Income earned but not
 ₱ .01, ₱ .10, ₱ 1.00, ₱ 10.00,.. Etc yet received. A receivable is always debited
= Addition / Subtraction Error and income is recognized (credited)
 ₱ 9.00, or Multiple of  9,= Transposition  Accrued expenses – Expenses incurred but
Error not yet an expense is recognized (debited)
o Example: ₱ 52.00 is Written as ₱ 25.00 and a liability is always credited.
 ₱ 2.00 divisible by two = Error of
Commission 3. Estimates – Adjusting entries that do not involve
o Example: Posting in the wrong column of cash
the Trial Balance  Doubtful accounts – The expense to be
 Divisible by 9 or 99 = Misplacement or matched against credit
Slide  Depreciation - Allocation of the cost of
o Example : Misplacement of Decimal Point, fixed assets as expense over its useful life
₱2.00 instead of ₱20.00
4. Ending inventory - An adjustment to set up the
Step 2: Workback from Trial balance to year-end physical count of the inventory. This only
Journals applies if the PERIODIC INVENTORY SYSTEM IS
1 . Check the Trial Balance USED
1.1 Verify Totals
1.2 Check each accounts in the Trial
https://www.youtube.com/watch?v=xuXZTsKFjjM
balance back to the Ledger
2 . Check the Ledger
2.1 Verify Footings https://www.youtube.com/watch?v=JJcaxvLWRow
2.2 Check Posting from Journals
1.3.6 AP| Financial statements
https://www.youtube.com/watch?v=F3lmDC64874

1.3.5 AP| Adjusting entries Preparing the financial statements

Preparing the adjusting entries The most important part of the summarizing phase,
this is where the processed information is
To take up accruals, expiration of prepayments and communicated to external users
deferrals, estimations and other events often not
signaled by new source documents. Adjusting entries It can also be called the REPORTING Phase
are made at the end of each accounting period. The wherein intended users can make an informed
concepts involved behind adjusting entries are judgement and sound decision
ACCRUAL, MATCHING OF COSTS AGAINST
REVENUE and ACCOUNTING Basic financial statements
1. Statement of financial position
Typical Adjusting Entries classified according to 2. Income statement or a statement of
timing of cash flow. comprehensive income
3. Statement of changes in equity
1.Prepayments and Deferrals – The cash 4. Statement of cash flows
flow precedes the revenue or the expense 5. Notes and disclosures
recognition.
Preparing the Financial Statements

STEP 1: Single-Step Income Statement

https://www.youtube.com/watch?v=fmtd7NHdylc
2. Accruals – Income or expense recognition
precedes the cash STEP 2: Statement of Owner's Equity
https://www.youtube.com/watch? Complete the worksheet (Optional Step)
v=3DLAHFHXuWE Journalize / Post Adjustments
Prepare Financial Statements
STEP 3: Statement of Financial Position Journalize / Post Closing Entries
Prepare a post-closing trial balance
https://www.youtube.com/watch?v=LBLvKGZKwBc Preparation of Reversing Entries (Optional Step)
STEP 4: Statement of Cash Flow MODULE 2
https://www.youtube.com/watch?v=l6Fb-q3wXGU
4.0 -- The Conceptual Framework Overview
1.3.7 AP| Closing entries
CONCEPTUAL FRAMEWORK for Financial
Preparing the closing entries Reporting 

Recorded and posted for the purpose of closing all The IASB Framework for the Preparation and
nominal or temporary accounts to the income Presentation of Financial Statements describes
summary account and the resulting net income or the basic concepts by which financial statements
loss is afterwards closed to the capital or retained are prepared as an attempt to provide an
earnings account. overall theoretical foundation for accounting.
The Framework serves as a guide to the FRSC in
 The OPEN ACCOUNTS  of the revenue and developing accounting standards and as a guide to
expense accounts is closed to the CAPITAL resolving accounting issues that are not addressed
ACCOUNT directly in Philippine Accounting Standards or
Philippine Financial Reporting Standards or
What is the income summary account? Interpretations.
Income summary is used as another temporary The PURPOSE of the framework as outlined is to:
account to determine whether the business  To assist the Board in the development of
operations results to income or loss future IFRSs and in its review of existing
Difference between Permanent and Temporary IFRSs
Accounts  To assist the Board in promoting
harmonisation of regulations, accounting
standards and procedures relating to the
presentation of financial statements by
providing a basis for reducing the
number of alternative accounting
treatments permitted by IFRSs
 To assist national standard-setting bodies
in developing national standards;
https://www.youtube.com/watch?v=Tyi0fMgstCE
 To assist preparers of financial statements
1.3.8 AP| Post-closing trial balance in applying IFRSs and in dealing with
topics that have yet to form the subject of
Preparing the post-closing trial balance an IFRS
 To assist auditors in forming an
A listing of general ledger accounts and their balances opinion on whether financial statements
after closing entries have been made. The post- comply with IFRSs
closing trial balance is the same with the year-end  To assist users of financial statements
statement of financial position, the only difference is in interpreting the information contained
that valuation accounts like allowances for assets are in financial statements prepared in
found in the credit side instead of being deducted compliance with IFRSs
from the related asset  To provide those who are interested in the
work of the IASB with information about
https://www.youtube.com/watch?v=AUg2qwdGdFg its approach to the formulation of IFRSs.
Exercise: Steps of accounting Process This Conceptual Framework is not an IFRS or
PFRS, and hence, does not define standards for any
Collect / verify source documents particular measurement or disclosure issue.
Analyze business transactions
The SCOPE of the Framework:
Journalize Business Transactions
 The Objective of general purpose financial
Post Journal Entries
reporting;
Prepare Trial Balance
  Qualitative characteristics of financial REPORTING such as but not limited to financial
information highlights, supplementary schedules, management
 Underlying assumption forecast, CSR reports, and government mandated
 The definition, recognition and reports.
measurement of the elements of the
financial statements Despite the fact that entities can provide additional
 Concepts of capital and capital data through other means, there are
maintenance. still LIMITATIONS to financial reporting, these are;

4.1 | CF: Financial Reporting -  Financial Reporting is not designed to show exact
value of a reporting entity because of estimates on
Objective of General Purpose Financial Reporting the values of some elements.

-  To provide financial information about the -  Financial Reporting cannot give all the details of
reporting entity that is useful to INTENDED each and every users because they have different
USERS in making decisions about providing needs.
resources to the entity. 
4.2 | CF: Underlying Assumptions
-  To provide information about the effects of
transactions and other events that change reporting UNDERLYING ASSUMPTION (POSTULATES)
entity’s economic resources and claims.
Going concern means financial statements presume
Users of Financial Information <--- clink the link that an enterprise will continue in operation
for more information indefinitely or if that presumption is not valid,
disclosure and a different basis of reporting are
required.  Its foundation is the  COST
PRINCIPLE (assets are recorded at COST).

NOTE: If there is evidence that the entity would

experience large losses or subject for
termination, GOING CONCERN IS ABANDONED.
GENERAL PURPOSES FINANCIAL REPORTS
The new FRSC conceptual framework mentions
To provide information about the financial position of
going concern as the only underlying assumption
a reporting entity, which is information about the
(previously accrual was included).
entity’s economic resources and the claims against the
reporting entity. Accrual accounting depicts the effects of
transactions and other events and circumstances on a
FINANCIAL REPORTING
reporting entity’s economic resources and claims in
The provision of financial information about an entity the periods in which those effects occur, even if the
to external users that is useful to them in resulting cash receipts and payments occur in a
making economic decisions and for assessing the different period.
effectiveness of the entity’s management
The illustration below shows changes in economic
Question:  What is the principal way of providing resources and claims as reflected by accrual basis and
financial information to external users? compared with cash basis of accounting:

Answer: ANNUAL FINANCIAL STATEMENTS

Financial Statements have five (5) major reports or

components that should be prepared at least
ANNUALLY.  These are:

1.  Statement of financial position,

2. Statement of comprehensive income
3.  Statement of cash flows
4.  Statement of changes in equity. Inherent Assumptions of Financial Statements
5.  Notes to Financial Statements
Accounting Entity or Separate Entity Concept
Financial Statements however cannot cover all the
information needed by external users which is why This assumption means that the entity is separate
there are OTHER MEANS OF FINANCIAL from the owners, managers and employees who
constitute the entity.  Personal transactions of owners “Building Blocks” from which FS are constructed
shall not be allowed to distort the financial statements
of the entity With the use of the Elements of FS financial effects
can be grouped into classes according to
Q: What is a "Single Economic Entity"? characteristics

A:  This is where a Parent and

Subsidiary (PS) Relationship exists.

 PS Relationship consolidates there

Financial Statements
 Consolidation, however, does not eliminate
the legal boundary segregating the affiliated RECOGNITION OF THE ELEMENTS of the FS
entities
 Accounting will continue to be done The Reporting of an asset, liability, income or
separately for each entity expense on the face of the financial statements of an
entity
Time Period Recognition Principles
This assumption requires that the indefinite life of an
Recognition is the process of incorporating in the
entity is subdivided into accounting periods, usually
financial statements an item that meets the
of equal length or time period, for the purpose of
definition of an element and satisfies the following
preparing financial statements.  The “one-year”
criteria for recognition:
period is traditionally the accounting period.
 It is probable that any future economic
The accounting period may be; benefit associated with the item will flow to
o Calendar year - A twelve (12) – month or from the enterprise; and
 The item's cost or value can
period that ends on December 31
be measured with reliability.
o Natural business year - A twelve (12) –
month period that ends on any month when Asset Recognition Principle
the business at its lowest or slack season
o Fiscal Year - A Twelve (12) - month An asset is recognized in the statement of financial
period that starts from any other month than position when it is probable that the future economic
January benefits will flow to the enterprise and the asset has a
o Interim Period - business period within an cost or value that can be measured reliably.
accounting period. These are financial
reports prepared at any date even if the 12 ASSET - A resource controlled by the enterprise as a
month period is not yet due. ( weekly, result of past events and from which future economic
monthly, quarterly or semi-annual) benefits are expected to flow to the enterprise.

Three (3) aspects on the Definition of Assets

Monetary Unit

This assumption pertains to (1) quantifiability of the  Rights -

peso and (2) stability of the peso.  Quantifiability of
the peso means that the elements of the financial
statements should be stated under one unit of measure
which is the Philippine Peso.  Stability of the
peso means that the purchasing power of the peso is
stable or constant and that instability is insignificant
and therefore ignored.  Stability is also an
amplification of the going concern assumption, that NOTE:
adjustments are unnecessary to account for nominal
pesos only and not for constant pesos Not all of an entity’s rights are assets of that entity—

5.1 CF| Elements of Financial Statements To be assets of the entity, the rights must also have
the potential to produce for the entity economic
Elements of Financial Statements (FS) benefits

Refers to the quantitative information reported in the

statement of financial position and income statement
  Future Economic Benefit - It 6. Conversion of Obligation to Equity
is probable that future economic benefits
will flow to the entity  Result of Past Event –

*Probable = Change is MORE LIKELY than less A present obligation exists as a result of past events
likely only if;
 The entity has already obtained economic
**Future economic benefit does not need to be
benefits and
certain but only necessary that the right already
 As a consequence, the entity will transfer
exists even if probability is low.
economic resource

 Control Income Recognition Principle

There is control when; Income is recognized in the when an increase in

o Ability for DIRECT USE future economic benefits related to an increase in an
asset or a decrease of a liability has arisen that can be
o Ability to enforce LEGAL RIGHTS
measured reliably. This means, in effect, that
o Future Economic Benefits will flow directly
recognition of income occurs simultaneously with the
or indirectly to the entity recognition of increases in assets or decreases in
liabilities
Liability Recognition Principle
Income- Increases in economic benefits during the
A liability is recognized in the statement of financial
accounting period in the form of inflows or
position when it is probable that an outflow of
enhancements of assets or decreases of liabilities that
resources embodying economic benefits will result
result in increases in equity, other than those relating
from the settlement of a present obligation and the
to contributions from equity participants.
amount at which the settlement will take place can be
measured reliably.

Liability- A present obligation of the enterprise

arising from past events, the settlement of which is
expected to result in an outflow from the enterprise of
resources embodying economic benefits.

Three (3) aspects on the Definition of Assets

POINT OF SALE
 Present Obligation - a duty or o Legal title to the goods passes to the buyer
responsibility that an entity has no practical “the risk & rewards” of ownership at point
ability to avoid. of sale
o Legal Obligation  o It is usually the point of delivery.
 Obligations may be legally enforceable as a
consequence of a binding contract or EXCEPTIONS to the POINT OF SALE
statutory requirements
o Constructive Obligation 1. Installment Method 
 Arise from normal business practice, o Revenue is recognized at the point of
custom and a desire to maintain good collection
business relations or act in an equitable o Revenue = Gross Profit Rate x
manner Collections
2. Cost Recovery Method
o Revenue is recognized at the point of
 Transfer an economic resource - Another collection
term for Settlement of Liability o Collections are applied first to cost of
merchandise sold
EXAMPLES OF WAYS  TO SETTLE 3. Percentage of Completion Method
1. LIABILITY o Contract Revenue and Contract Cost
2. Payment of Cash associated with construction contract shall
3. Transfer of Non-Cash Assets be recognized as revenue and expenses,
4. Provision of Services respectively
5. Replacement of the obligation with another 4. Production Method
obligation
 o Revenue is recognized at the point of  Cost of Merchandise Inventory
production  Doubtful Accounts
o Applicable to Agricultural, forest and  Warranty Expense
mineral products  Sales Commission

Other Income Recognition o Systematic and Rational Allocation

 Interest Revenue -Expensed by Allocating over the
 Revenue is Recognized on PERIODS benefited
a TIME Proportion basis that takes
into account the EFFECTIVE Examples
YIELD on the asset  Depreciation
 Royalties  Amortization
 Accrual = Based on AGREEMENT  Allocation of Prepayments
 Dividends
 Upon Declaration o Immediate Recognition - Cost Incurred is
 Installation Fees Expense outright because;
 Stage of Completion
 Subscription Revenue 1. NO future economic Benefit
 Straight Line Basis over the 2. Cease to qualify as an asset
Subscription Period
 Admission Examples
 When the Event Takes Place  Administrative & Selling Expenses
 Tuition Fees  Loss from Disposal of Assets
 The Period in Which Tuition is
Provided 5.1.1 CF| Measurement of the Elements

Expense Recognition Principle Measurement of the Elements of the FS

Expenses are recognized when a decrease in future Measurement involves assigning monetary amounts at
economic benefits related to a decrease in an asset or which the elements of the financial statements are to
an increase of a liability has arisen that can be be recognized and reported.
measured reliably. This means, in effect, that
recognition of expenses occurs simultaneously with The Framework acknowledges that a variety of
the recognition of an increase in liabilities or a measurement bases are used today to different
decrease in assets. degrees and in varying combinations in financial
statements, including:
Expense- Decreases in economic benefits during the
accounting period in the form of outflows or 1. Historical Cost - Also known as “Past Purchase
depletions of assets or incurrence of liabilities that Exchange Price” & it is the Most Commonly
result in decreases in equity, other than those relating Adopted
to distributions to equity participants.
o The Amount of:

A) Cash or Cash Equivalent PAID or RECEIVED

Matching Principle
 It requires that cost and expenses incurred
in earning a revenue shall be reported in the
same period *Transaction Cost
 There must be a Cost in earning a Revenue
" NO PAIN,,, NO GAIN " Costs that is directly attributable to the acquisition,
issue or disposal of an asset or liability
Application of Matching Principle
Examples: Legal Fees, Finders Fee, *Transportation
o Cause and Effect Association - Expense Cost
is recognized when Revenue is Recognized
B) Fair Value (FV) of the consideration given to
Examples acquire the asset “at the time of acquisition”
What is Fair Value? NOTE:

The price that would be received in an orderly The Framework does not include  concepts or
transaction between market participants at the principles for selecting which measurement basis
measurement date. should be used for particular elements of financial
statements or in particular circumstances.
 
Exercise: Categorize the Elements
Hierarchy or best evidence of fair value
Statement of Financial Position Accounts
 Level 1 -INPUTS
o Quoted Price in an active Current Assets:
market for Identical Assets Office Supplies
Cash
Non - Current Assets
* Active Market – transactions take place with Inventory
sufficient regularity and volume Interest Receivable
Prepaid Insurance
 Level 2 -OBSERVABLE INPUTS Accounts Receivable
o Quoted Price in an active Current Liabilities:
market for Similar Assets or Non - Current Liabilities
o Quoted Price in an inactive Salaries Payable
market for  Similar Assets or Identical Accounts Payable
Utilities Payable
 Level 3 - UN-OBSERVABLE INPUTS Interest Payable
o Assets Developed by the entity using BEST Notes Payable due within 1 year
AVAILABLE INFORMATION from VAT Payable
entity’s own data Non - Current Liabilities:
Notes Payable due for more than 1 year
Bonds Payable
NOTE: Owner's Equity:
Ordinary Shares
Historical Cost Does not change in value EXCEPT,
Preferred Shares
Changes related to;
Retained Earnings
 Impairment of assets
No Category
 Onerous Liabilities
Share Premium
2. Current Cost - Treasury Shares
Non - Current Assets
Building
 Also known as "Current Purchase Equipment
Exchange Price" Franchise
 The Amount of Cash or Cash equivalent Copyright
WOULD HAVE paid If the same or Land
equivalent asset was “acquired currently” Goodwill
Uncategorized answers:
3. Realizable Value- Purchases
Interest Expense
 Also known as "Current Sale Exchange Sales
Price"
 The amount of Cash or Cash Income Statement Accounts
Equivalent COULD CURRENTLY BE Revenue:
OBTAINED by "Selling the asset" in a n Interest Income
orderly disposal Sales
Service Income
Rent Income
4. Present Value - Professional Fees
Gain on sale of Other Assets
 Also known as "Future Exchange Price" Expenses:
 The DISCOUNTED VALUE of the future Cost of Sales
net cash inflows that the item is expected to Depreciation Expense
generate in the normal course of business Insurance Expense
 Supplies Expense An entity must normally present a classified statement
Bad Debts Expense of financial position, separating current and
Uncategorized answers: noncurrent assets and liabilities. Only if a
Accumulated Depreciation presentation based on liquidity provides information
Interest Receivable that is reliable and more relevant may the
Interest Payable current/noncurrent split be omitted.

6.0 -- CF | Presentation & Disclosure and Concepts of Current assets

Capital
An entity shall classify an asset as current when:
Financial Statements
(a) It expects to realize the asset, or intends to sell or
Purpose of Financial Statements consume it, in its normal operating cycle
(b) It holds the asset primarily for the purpose of
The objective of general purpose financial statements trading
is to provide information about the financial position, (c) It expects to realize the asset within twelve months
financial performance, and cash flows of an entity after the reporting period
that is useful to a wide range of users in making (d) The asset is cash or a cash equivalent (as defined
economic decisions. in IAS 7) unless the asset is restricted from being
exchanged or used to settle a liability for at least
To meet that objective, financial statements provide twelve months after the reporting period.
information about an entity's:
 Assets. An entity shall classify all other assets as non-
 Liabilities. current.
 Equity.
 Income and expenses, including gains and Normal Operating Cycle – The time between the
losses. acquisition of assets for processing and their
 Other changes in equity. realization cash or cash equivalents. When the
 Cash flows. entity’s normal operating cycle is not clearly
identifiable, its duration is assumed to be twelve
That information, along with other information in the months.
notes, assists users of financial statements in
predicting the entity's future cash flows and, in
particular, their timing and certainty.

https://www.youtube.com/watch?v=6GVVTfj7ndc

Components of Financial Statements

A complete set of financial statements comprises:

1) A statement of financial position as at the end of

the period
2) A statement of comprehensive income for the
period
3) A statement of changes in equity for the period Current liabilities
4) A statement of cash flows for the period
5) Notes, comprising a summary of significant An entity shall classify a liability as current when:
accounting policies and other explanatory information
6) A statement of financial position as at the (a) It expects to settle the liability in its normal
beginning of the earliest comparative period when an operating cycle
entity applies an accounting policy retrospectively or (b) It holds the liability primarily for the purpose of
makes a retrospective restatement of items in its trading
financial statements, or when it reclassifies items in (c) The liability is due to be settled within twelve
its financial statements. months after the reporting period
(d) The entity does not have an unconditional right to
Statement of Financial Position defer settlement of the liability for at least twelve
months after the reporting period
Shows the financial condition of an entity of a
particular date An entity shall classify all other liabilities as non-
current.
Current/Noncurrent Distinction
 SHAREHOLDERS’ EQUITY

I. CONTRIBUTED (PAID-IN / INVESTED

CAPITAL) CAPITAL
Represent the amount invested or contributed by
owners.

This is divided into:

1. Capital Share – the contributions equal to the par

or stated value of the share purchased by owners; or
the total contribution by owners in case of no-par
share.
2. Share Premium – contribution in excess of the par
or stated value, gains from share transactions and
“other” equity items that are not included in earnings
or other comprehensive income.

II. RETAINED EARNINGS 

2.Account Form
Accumulated profits and losses that have not been
declared as dividends. Assets are shown in the Left side and the liabilities
and equity on the Right
Classified into retained earnings that are prohibited
from being declared as dividends due to legal and SAMPLE
contractual requirements or upon the decision of the
Board of Directors, “appropriated” and retained
earnings available as dividends to shareholders,
“unappropriated”.

1. Increases – Effect of changes in accounting policy

and correction of prior period errors, Net Income and
Quasi re-organization.
2. Decreases - Effect of changes in accounting policy
and correction of prior period errors, Dividends,
Losses on share transactions like retirement and
reissuance of treasury shares, conversion of NOTE: In the Philippines, the common practice is to
preference shares and recapitalization of par value present current assets/liabilities before non-current
other than share splits. assets/liabilities
Forms of  Statement of Financial Position Income Statement /  Statement of Comprehensive
Income
1.Report Form -
An entity shall present all items of income and
This form set forth the three (3) major sections in
expense recognized in a period:
Downward sequence of Assets, Liabilities and Equity
(a) In a single statement of comprehensive income, or
SAMPLE
(b) In two statements: a statement displaying
components of profit or loss (separate income
statement) and a second statement beginning with
profit or loss and displaying components of other
comprehensive income (statement of comprehensive
income).

Components of Comprehensive Income

1. Profit and Loss - Income minus Expenses

including Tax expense and any Income or Loss from
Discontinued Operations.
2. Other Comprehensive income – –Items of
income and expenses including reclassification
adjustments (RA) that are not included in Profit and
Loss as required by a standard or interpretation. There
are two types of OCI items, those that are reclassified
to profit or loss (RA) and those that are reclassified to
Retained Earnings (RE). OCI includes the following;
Presentation and Disclosure

 Unrealized gain or loss on equity Going Concern

investments measured at FVOCI (RE) An entity preparing PFRS financial statements is
 Unrealized gain or loss on debt presumed to be a going concern.
investments measured at FVOCI (RA)
 Unrealized gain or loss from derivative If management has significant concerns about the
contracts designated as cash flow hedge entity's ability to continue as a going concern, the
(RA) uncertainties must be disclosed. If management
 Revaluation Surplus (RE) concludes that the entity is not a going concern, the
 Remeasurement Gains and losses for financial statements should not be prepared on a
defined benefit plans (RE) going concern basis, in which case PAS 1 requires a
 Change in fair value arising from credit series of disclosures.
risk for financial liabilities measured at
FVPL (RE) Accrual Basis of Accounting
PAS 1 requires that an entity prepare its financial
 Translation gains and losses of foreign
statements, except for cash flow information, using
operations
the accrual basis of accounting.

An entity shall present either an analysis of expenses Consistency of Presentation

using a classification based on either; The presentation and classification of items in the
financial statements shall be retained from one
 the nature of expenses or period to the next unless a change is justified either
 their function within the entity, by a change in circumstances or a requirement of a
new PFRS.
whichever provides information that is reliable and Materiality and Aggregation
more relevant. Each material class of similar items must be presented
separately in the financial statements. Dissimilar
Nature of expense method – Expenses are items may be aggregated only if they are individually
aggregated in the income statement immaterial.
according to their nature and are not reallocated
among various functions within the Offsetting
entity. Assets and liabilities, and income and expenses, may
not be offset unless required or permitted by a
SAMPLE Standard or an Interpretation.

Comparative Information
PAS 1 requires that comparative information shall be
disclosed in respect of the previous period for all
amounts reported in the financial statements, both
face of financial statements and notes, unless another
Standard requires otherwise. If comparative amounts
Function of expense or cost of sales method – are changed or reclassified, various disclosures are
Classifies expenses according to their required.
function as part of cost of sales or, for example, the
cost of distribution or administrative Concepts of Capital & Capital Maintenance
activities.

SAMPLE Concepts of Capital

Financial concept of capital - capital is synonymous

with net assets of the enterprise. This is the concept
of capital adopted by most enterprises. A financial
concept of capital, e.g. invested money or invested
purchasing power, means capital is the net assets or
equity of the entity.

Physical concept of capital – capital is regarded as

the productive capacity of the enterprise based on,
for example, units of output per day.

Concepts of Capital Maintenance

Financial capital maintenance – Under this concept,

a profit is earned only if the financial (or money)
amount of the net assets at the end of the of the period
exceeds the financial (or money) amount of the net
assets at the beginning of the period, after excluding
any distributions to, and contributions from, owners
during the period.

NET ASSET END  > NET
ASSET BEGINNING =  PROFIT

Physical capital maintenance – Under this concept,

a profit is earned only if the physical productive
capacity (or operating capability) of the enterprise (or
the resources need to achieve that capacity) at the end
of the period exceeds the physical productive capacity
at the beginning of the period, after excluding any
distributions to, and contributions from, owners
during the period.

https://www.youtube.com/watch?v=zjsOG5PrHDQ