COLLEGE OF ACCOUNTANCY AND BUSINESS ADMINISTRATION
FINANCIAL ACCOUNTING AND
REPORTING
PROF. ADRIAN A. ILAGAN, CPA, MBA
FINANCIAL ACCOUNTING AND REPORTING 1
COLLEGE OF ACCOUNTANCY AND BUSINESS ADMINISTRATION
Lesson 1
ACCOUNTING AND ITS ENVIRONMENT
Learning Objectives:
At the end of the lesson, you should be able to:
Define accounting and explain it role in business.
Explain the fundamental accounting concepts and principles.
Lesson Overview:
As business and society become more complex, accounting develops new
concepts and techniques to meet the ever-increasing needs for financial
information. Without such information, many complex economic development
and social programs may never have been undertaken. Without accounting, a
business could not function optimally (Ballada, 2019).
FINANCIAL ACCOUNTING AND REPORTING 2
COLLEGE OF ACCOUNTANCY AND BUSINESS ADMINISTRATION
Engagement
Did you know?
https://
www.facebook.com/PhilCIPAG/posts/the-richest-person-in-the-philippines-is-a-cpa/
1226959837471025/
Do you know wo this person is? What do you think this person did to become this
rich?
__________________________________________________________________
__________________________________________________________________
__________________________________________________________________
FINANCIAL ACCOUNTING AND REPORTING 3
COLLEGE OF ACCOUNTANCY AND BUSINESS ADMINISTRATION
Explore
A. Definitions of accounting.
Accounting in its broadest sense is the language of business. Several
institutions have defined accounting for us to better understand its essence.
The Accounting Standards Council (ASC)
o 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 decisions.
American Accounting Association (AAA)
o Accounting is the process of identifying, measuring and
communicating economic information to permit informed judgments
and decisions by users of the information.
American Institute of Certified Public Accountants (AICPA)
o 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.
B. Double-entry Bookkeeping
Luca Pacioli is considered the father of double-entry bookkeeping. He
introduced this concept in his book entitled “Summa de Arithmetica,
Geometria, Proportioni et Proportionalita”.
In this concept, he mentioned that for every debet dare (should give)
there exists a debet habere (should have or should receive).
In modern applications, it simply states that for every debit, there exists a
corresponding credit.
Note: We will discuss the application of double-entry bookkeeping in
the next lesson.
FINANCIAL ACCOUNTING AND REPORTING 4
COLLEGE OF ACCOUNTANCY AND BUSINESS ADMINISTRATION
C. Fundamental Concepts and Basic Principles in Accounting
To further understand accounting, we delve deeper into what makes
accounting a useful tool in decision making. There are fundamental concepts
and basic principles which we should all be familiar of.
Fundamental Concepts
o Entity Concept
An accounting entity is an organization or a section of an
organization that stands apart from other organizations and
individuals as a separate economic unit.
Simply put, the owner is separate and distinct from the
business.
o Periodicity Concept
An entity’s life can be meaningfully subdivided into equal
time periods for reporting purposes.
For purposes of reporting to outsiders, one year is the usual
accounting period.
o Stable Monetary Unit
It allows accountants to add and subtract peso amounts as
though each peso has the same purchasing power as any
other peso at any time.
Simply put, we ignore the effects of inflation in the
accounting records.
o Going Concern
Financial statements are normally prepared on the
assumption that the reporting entity will continue in
operation for the foreseeable future.
Basic Principles
o Objectivity
Accounting records and statements are based on the most
reliable data available so that they will be as accurate and as
useful as possible.
o Historical cost
It states that acquired assets should be recorded at their
actual cost and not at what management thinks they are
worth at reporting date.
FINANCIAL ACCOUNTING AND REPORTING 5
COLLEGE OF ACCOUNTANCY AND BUSINESS ADMINISTRATION
o Revenue recognition principle
Revenue is to be recognized in the accounting period when
goods are delivered or services are rendered or performed.
o Expense recognition principle
Expenses is to be recognized in the accounting period in
which goods and services are used up to produce revenue
and not when the entity pay for those goods and services.
o Adequate disclosure
Requires that all relevant information that would affect the
user’s understanding and assessment of the accounting entity
be disclosed in the financial statements.
o Materiality
Financial reporting is only concerned with information that
is significant enough to affect evaluations and decisions.
Materiality depends on the size and nature of the item
judged in the particular circumstances of its omission.
o Consistency principle
Firms should use the same accounting method from period to period to achieve
comparability overtime within a single enterprise.
FINANCIAL ACCOUNTING AND REPORTING 6
COLLEGE OF ACCOUNTANCY AND BUSINESS ADMINISTRATION
Explain and Extend
NAME: _______________________________________________ SCORE: ______________
COURSE: _____________________________________________ DATE: _______________
In your own words and understanding, answer briefly the following questions.
1. Why is accounting the language of business?
_____________________________________________________________
_____________________________________________________________
_____________________________________________________________
___________________________________________________
2. What is going concern?
_____________________________________________________________
_____________________________________________________________
_____________________________________________________________
___________________________________________________
3. What is double entry bookkeeping?
_____________________________________________________________
_____________________________________________________________
_____________________________________________________________
___________________________________________________
FINANCIAL ACCOUNTING AND REPORTING 7
COLLEGE OF ACCOUNTANCY AND BUSINESS ADMINISTRATION
EVALUATE
NAME: _______________________________________________ SCORE: ______________
COURSE: _____________________________________________ DATE: _______________
Answer briefly the following questions.
1. Can we include a purchase of house and lot of Mr. A in the books of his
business? Why?
_____________________________________________________________
_____________________________________________________________
_____________________________________________________________
___________________________________________________
2. Can we have financial statements prepared on a monthly basis?
_____________________________________________________________
_____________________________________________________________
_____________________________________________________________
___________________________________________________
FINANCIAL ACCOUNTING AND REPORTING 8
