Financial Accounting Chapter 1 Subject matter of accounting - Economic

activity or the measurement of economic

Accounting Standards Council
resources and economic obligations.
Accounting is a service activity. Its
function to provide quantitative information, - Only economic activities as
primarily financial in nature, about emphasized and recognized in
economic entities, that is intended to be accounting.
useful in making economic decisions. - Sociological and Psychological
matters are beyond the province of
AICPA accounting.
Accounting is the art of recording, Economic activities of an entity are referred
classifying, and summarizing in a significant to as transactions which may be classified as
manner and in terms of money, transactions External and Internal.
and events which are in part at least of a
financial character and interpreting the External Transactions - Economic events
results thereof. involving one entity and another.

American Accounting Association Example of External Transactions

Accounting is the process of a. Purchase of Goods from a Supplier

identifying, measuring and communicating b. Borrowing Money to the bank
economic decisions to permit informed c. Sales of Goods to a customer
judgment and decision by users of the
information. Internal Transactions Economic events
involving the entity only.
Three Important Key Points
Example of Internal Transactions
1. It is about QUANTITATIVE
INFORMATION Production - the process by which resources
2. The information is likely to be are transformed into products.
FINANCIAL IN NATURE Casualty - is any sudden or unanticipated
3. The information should be USEFUL events termed as Acts of God.
IN DECISION MAKING.
B. MEASURING [technical]
A. IDENTIFYING [analytical component]
- Is the assigning of peso amounts to the
- Is the recognition or non-recognition of accountable economic transactions and
business activities as ACCOUNTABLE events
events.
- Philippine Peso is the unit of measuring
- Not all business activities are accountable accountable economic transactions.
Accountable/quantifiable - Has an effect on - Measurement bases are historical cost,
A=L+OE current cost, realizable value, and present
value.
  HISTORICAL COST – most OBJECTIVE of Accounting
common measure of financial
To provide quantitative financial
transactions.
information about a business that is useful to
statement users particularly owners and
C. COMMUNICATING creditors, in making economic decisions.
- Is the process of preparing and distributing Accountant's objective
accounting reports to potential users of
accounting information, To supply financial information so
that the statement users could make
- Because of communicating process informed judgment and better decisions.
accounting has been called the universal
language of business. REPUBLIC ACT 9298 or PHILIPPINE
ACCOUNTANCY ACT OF 2004 is the law
Recording/Journalizing the process of regulating the practice of accountancy in the
systematically maintaining a record of all Philippines.
economic business transactions after they
have been identified and measured. - Accountancy has developed as a
profession attaining a status
Classifying - the sorting or grouping of
equivalent to that of law and
similar and interrelated economic
medicine.
transactions into their respective classes.
Accountancy Profession = BSA + CPAL
Ledger-group of accounts which are
systematically categorized into ALEInExp BOARD OF ACCOUNTANCY is the body
authorized by law to promulgate rules and
Summarizing - the preparation of
regulations affecting the practice of the
FINANCIAL STATEMENTS. [SFP, IS,
accountancy profession in the Philippines.
SCI, SCE, and SCF]
Limitation of the Practice of Public
Accounting as an Information System
Accountancy
- It is an information system that - Single practitioners and partnerships
measures business activities, for the practice of public
processes information into reports accountancy shall be registered CPA
and communicates the reports to in the Philippines
decision makers.
CERTIFICATE OF ACCREDITATION
Financial statements the documents that
report financial information about an entity - shall be issued to CPAs in public
to decision makers. practice only upon showing in
accordance with rules and
- Financial Reports tell us how well an regulations promulgated by the
entity is performing in terms of profit BOARD OF ACCOUNTANCY and
and loss. approved by the PROFESSIONAL
REGULATION COMISSION that
such registrant has acquired a
 MINIMUM OF 3 YEARS of  PRIVATE ACCOUNTING
meaningful experience in any of the
OBJECTIVE: to assist management in
areas of public practice including
planning and controlling the entity's
taxation.
operation.
- The SEC shall not register any
corporation organized for the Includes maintaining the records,
practice of public accountancy producing the financial reports, preparing
the budgets and controlling and allocating
1. PUBLIC ACCOUNTING the resources of the entity.
Composed of individual practitioners, Has responsibility for the
small accounting firms and large determination of the various taxes the entity
multinational organizations that render is obliged to pay.
independent and expert financial services to
the public. Controller - Highest accounting
officer.
Three Kinds of Service that offers of Public
Accountant  GOVERNMENT ACCOUNTING

 External Auditing / Auditing FOCUS: the study and administration of

- Primary service and attest function of public funds.
independent CPAs Encompasses the process of
Examination of financial statements analyzing, classifying, summarizing and
by independent CPAs for the purpose of communicating ball transaction involving
expressing an opinion as to the fairness with the receipt and disposition of government
which the financial statements are prepared. funds and property and interpreting the
results thereof.
B. Taxation Service
Includes the preparation of annual  CONTINUING PROFESSIONAL
DEVELOPMENT (CPD)
income tax returns and determination of tax
consequences of certain proposed business Refers to the inculcation, assimilation
endeavors, and acquisition of knowledge, skill,
proficiency, and ethical and moral values
C. Management Advisory Services
after the initial registration of the CPA for
Include advice on installation of assimilation into practice and lifelong
computer system, quality control, learning.
installation and modification of accounting
CPD credit units refers to credit
system, budgeting, forecasting, design or
hours required for the renewal of CPA
modification of retirement plans and even
license and accreditation of a CPA
entity mergers and takeovers.
Under BOA all CPAs are required to
comply with 120 credit units for three years.
EXEMPTIONS: ACCOUNTING VS ACCOUNTANCY
ACCOUNTANCY
1. 65 years old
TEMPORARY EXEMPTIONS: - Refers to the profession of accounting
practice
1. The CPA is practicing the profession or
furthering studies abroad. ACCOUNTING
2. The exemption is for the duration of stay - Used in reference only to a particular
abroad. field of accountancy.
3. The CPA has been out of the country for FINANCIAL ACCOUNTING VS
at least 2 years immediately prior to the date MANAGERIAL ACCOUNTING
of renewal of license and accreditation.
FINANCIAL ACCOUNTING
ACCOUNTING VS AUDITING
Primarily concerned with the
ACCOUNTING recording of business transactions and the
Broad sense: Embraces auditing. eventual preparation of financial statements.

Limited Sense: CONSTRUCTIVE - Ceases Focuses on general reports intended

when financial statements are prepared. for EXTERNAL AND INTERNAL USERS.

AUDITING Emphasizes reporting to

CREDITORS AND INVESTORS.
Broad sense: One of the areas of Accounting
specialization. MANAGERIAL ACCOUNTING

Limited Sense: ANALYTICAL - Work The accumulation and preparation of

starts when the work of the accountant ends. financial reports for INTERNAL USERS
ONLY.
AUDITOR - examines the financial
statements to ascertain whether they are in Emphasizes developing accounting
conformity with the GAAP. information for use WITHIN AN ENTITY.

ACCOUNTING VS BOOKKEEPING GENERALLY ACCEPTED

ACCOUNTING PRINCIPLES
ACCOUNTING
Represent the rules, procedures,
CONCEPTUAL - Concerned with reason or practice and standards followed in the
justification or any action adapted. preparation and presentation of financial
ΒΟΟΚΚΕΡING statements.

PROCEDURAL - Concerned with It formulates on the basis of

development and maintenance of accounting experience, reason, custom, usage, and
record. 'HOW' practical necessity.
PURPOSE OF ACCOUNTING PUBLIC PRACTICE 2
STANDARDS COMMERCE AND INDUSTRY 2
To identify proper accounting ACADEME 2
practices for the preparation and GOVERNMENT 2
presentation of financial statements.
AS create a common understanding  3 years term renewable for another
between preparer and users of Financial term
Statements.  Any member of the ASC shall not be
disqualified from being appointed to
FINANCIAL REPORTING STANDARDS the FRSC
COUNCIL now replaces the Accounting PHILIPPINE INTERPRETATIONS
Standard Council COMMITTEE
The accounting standard setting body Formed by the FRSC (AUG 2006)
created by the PROFESSIONAL and replaced the Interpretations Committee
REGULATION COMMISSION upon (formed by the ASC in MAY 2000)
recommendation of the BOA to assist the Role: to prepare interpretations of
BOA in carrying out its powers and PFRS for approval by the FRSC and in the
functions provided under RA act 9298. context of the conceptual framework, to
MAIN FUNCTION - establish and improve provide timely guidance on financial
ACCOUNTING STANDARS that will be reporting issues not specifically addressed in
generally accepted in the Philippines. the PFRS.
It is intended to give authoritative
AS promulgated by the FRSC constitute the
guidance on issues that are likely to receive
HIGHEST HIERARCHY that will be
divergent or unacceptable treatment.
generally accepted in the PH.
PIC in UK is the IFRIC has already
PAS and FRSC - approved statements of the replaced the Standing Interpretations
FRSC. Committee
COMPOSITION OF FRSC – composed of
15 Members  INTERNATIONAL ACCOUNTING
STANDARDS COMMITTEE (June
1. CHAIRMAN had been or is 1973) \ An independent private sector
presently a senior accounting body, with the objective or achieving
practitioner. uniformity in the accounting
BOA 1 principles which are used by
business and other organizations for
SEC 1
financial reporting around the world.
BSP 1 The Headquarters in London, United
BIR 1 Kingdom
COA 1
FINEX 1
(INTERNATIONAL ACCOUNTING Financial Accounting Chapter 2
STANDARDS COMMITTEE)
Conceptual Framework for Financial
OBJECTIVES: Reporting
1. To formulate and publish in the public - a document that is comprehensive
interest accounting standards to be observed and complete that promulgated ng
in the presentation of financial statements IASB
and to promote their worldwide acceptance - Summary ng mga terms and concept
and observance. underlie to the preparation and
2. To work generally for the improvement presentation ng FS for external users.
and harmonization of regulations, - It also concerned with the general
accounting standards, and procedures purpose of FS and kasama din yung
relating to the presentation of financial mga consolidated FS or yung mga
statements. FS nang entire group of companies,
- FS is prepared annually for common
INTERNATIONAL ACCOUNTING needs ng wide range users.
STANDARDS BOARD - However, special purpose financial
reports like prospectuses and
 Replaced the IASC. computations prepared for taxation
 Publishes the standards in a ay outside scope na ng Conceptual
series of pronouncements Framework.
called IFRS. However it
adopted the body of standards Purposes of conceptual framework
by the IASC
a. To assist the FRSC in developing
(INTERNATIONAL FINANCIAL accounting standards that will
REPORTING STANDARDS) represent the Philippines GAAP
b. To assist preparers of financial
 Intended to bring about greater statements in applying accounting
TRANSPARENCY and a higher standards and in dealing with issues
degree of COMPARABILITY in not yet covered by GAAP
financial reporting c. To assist the FRSC in review and
adoption of IFRS
PHILIPPINE FINANCIAL REPORTING
d. To assist auditors in forming an
STANDARDS
opinion as to whether financial
1. IFRS - PFRS statements conform with Philippine
GAAP
2. IAS - PAS
e. To provide information to those
3. IFRIC, SIC, and Interpretations developed interested in the work of the FRSC in
by PIC - PI the formulation of PFRS
Authoritative Status of Conceptual LENDERS and CREDITORS -
Framework need information to determine whether
their loan, interest thereon and other
- When no specific standard or
amounts owing to them will be paid
interpretation applies to a
when due.
transaction, management should use
the Conceptual Framework (CF) to 2. OTHER USERS - Are users of financial
guide their development of an information other than the existing and
accounting policy. This approach potential investors, lenders and other
ensures that the financial information creditors.
they provide remains both relevant
Include the employees, customers,
and reliable.
government and their agencies, and the
- The Conceptual Framework (CF)
public.
does not provide specific rules or
guidelines for measuring or EMPLOYEE - needs information about the
disclosing particular items in stability and profitability of the entity
financial statements. Instead, it offers
general principles and concepts to - To assess the ability of the entity to
guide the development of accounting provide remuneration, retirement
policies and standards. benefits and employment opportunities.
- In case of conflict, the requirements CUSTOMERS need information about the
of PFRS shall prevail over the CF. continuance of an entity especially when
USERS OF FINANCIAL they have a long term involvement with or
INFORMATION are dependent on the entity.

Classification of Two Users: GOVERNMENT AND THEIR

AGENCIES - need information to regulate
- Primary Users the activities of the entity, determine
- Other Users taxation policies and as a basis for national
income and similar statistics.
1. PRIMARY USERS - The parties
to whom general purpose financial - Interested in the allocation of resources
reports are primarily directed. and therefore the activities of entity.
Include the existing and potential PUBLIC - providing information about the
investors, lenders and other creditors. trend and the range of its activities.
INVESTORS - need information to - They make substantial contribution to
help them determine whether they the local economy in many ways
should buy, hold, or sell. including number of people they
employ, and their patronage of local
SHAREHOLDERS - need
suppliers.
information to assess the ability of the
entity to pay dividends.
Scope of Framework:
1. Objective of Financial Reporting: quarter so you can make timely
It aims to provide information that is decisions.
useful for making decisions about
providing resources to an entity, 3. Definition, Recognition, and
focusing on economic performance Measurement of Elements: It
and position. defines key financial elements
2. Qualitative Characteristics: It (assets, liabilities, equity, income,
highlights traits like relevance, expenses), specifies criteria for their
faithful representation, recognition in financial statements,
comparability, verifiability, and outlines methods for measuring
timeliness, and understandability that them.
make financial information useful.
Definition: It explains what things like
1. Relevance: The information should assets (what the company owns), liabilities
help you make decisions or understand (what it owes), equity (owner’s interest),
the company’s future prospects. For income (money earned), and expenses (costs
instance, knowing a company’s incurred) are.
expected profits can help you decide Recognition: It describes when to include
whether to invest. these items in financial reports. For instance,
recognizing revenue when it’s earned, not
2. Faithful Representation: The just when received.
information should accurately show Measurement: It details how to measure
what it claims to. This means the these items, such as valuing assets based on
financial details should be complete and their purchase price or current market value.
correct, without any misleading
information. 4. Capital and Capital Maintenance:
It explores concepts related to
3. Comparability: You should be able to preserving the capital invested in a
compare financial information over time business, ensuring that financial
or between different companies. For performance is reported in a way that
example, if a company’s financial reflects the maintenance of capital.
reports follow the same rules each year,
it’s easier to see if they’re improving or Capital: Refers to the funds invested in the
not. business. The goal is to maintain the value
of this investment.
4. Verifiability: Different people should
be able to check and confirm that the Capital Maintenance: Ensures that the
information is accurate. If auditors can company’s profits reflect how well it has
agree on the numbers, the information is preserved the original investment. It means
verifiable. the company should make sure that its
financial performance shows that the capital
5. Timeliness: The information should hasn’t decreased, except for distribution to
be available when you need it. For owners.
example, quarterly reports should be
released soon after the end of the
FINANCIAL REPORTING Target Users
 Primary users have the most critical
 Purpose: It’s about sharing
information about a company’s and immediate need to FR because
finances with people outside the they’re the one who provide
company, like investors, creditors, resources to the entity.
and regulators. This information  More likely to meet the needs of
helps them make informed decisions primary users, it also addresses the
about the company and evaluate how needs of other users.
well the company’s management is
doing. Economic Decisions
 Main Method: The most common - Existing and Potential Investors need
way to provide this information is general purpose financial reports
through Annual Financial
whether to buy, sell, or hold equity
Statements. These are detailed
investments.
reports that summarize the
company’s financial performance - Creditors and Lenders need general
and position for the year. purpose financial reports whether to
 Additional Information: Besides provide or settle loans and other forms
the main financial statements, of credit.
companies often include other useful
Assessing cash Flow Prospects
details, such as:
o Financial Highlights: Key - Existing and Potential Investors need
figures that show important general purpose financial reports
aspects of the company’s whether to buy, sell, or hold equity
financial health. investments depends on the RETURNS.
o Summary of Important
- Creditors and Lenders need general
Financial Figures: A brief
purpose financial reports whether to
overview of major numbers,
like revenue, profit, and provide or settle loans and other forms
expenses. of credit depends on the PAYMENTS,
PRINCIPALS and INTEREST.
Objective of Financial Reporting Economic Resources and Claims
- It means that financial reports are the Financial Position provides a detailed view
starting point for the concepts and rules of a company’s financial health at a specific
in the framework. The framework uses point in time. Here’s what it involves:
these reports to show how to apply its
ideas, like how to record and measure - Economic Resources and Claims: It shows
financial information, to make sure that what the company owns (assets), what it
the information is useful and clear for owes (liabilities), and the owner’s share
everyone who reads it. (equity).
- Assets, Liabilities, and Equity: Assets are
 The objective of Financial Reporting
things the company owns, like cash or
is the ‘why’ or purpose or goal of
equipment. Liabilities are debts or
accounting.
obligations. Equity is what’s left for the Accrual Accounting
owners after debts are paid.
This means that financial reports track how
- Economic Claims: Knowing the amounts transactions and events impact a company’s
and types of debts can help identify if the assets and liabilities throughout the time
company is financially strong or weak. they occur, regardless of when cash actually
money is exchanged. For example:
- Priorities and Payments: Understanding
how the company plans to pay its debts - Transactions and Events: These are
helps predict future cash flow and how recorded when they happen, not when cash
money will be used. is received or paid.
LIQUIDITY - the availability of cash in the - Income: It’s recorded when it’s earned,
near future to cover currently maturing like when a service is provided, even if the
obligations. [quickly converted assets to payment comes later.
cash]
- Expenses: They’re recorded when they are
SOLVENCY - the availability of cash over a incurred, like when a bill is received, even if
long term to meet financial commitments it’s paid later.
when they fall due. [ensuring the financial
This approach ensures that financial
stability]
statements accurately reflect the company’s
Changes in Economic Resources and Claims financial situation based on when activities
occur, not just when cash transactions
Financial performance - results of operations
happen.
portrayed by IS and SCI.
Accounting Assumptions/Postulates
- FP is an entity comprises revenue,
expenses, and net income or loss for a Core Ideas or Principles:
period of time. It is level of income
- These are basic rules that guide how to
earned by the entity through the
record, report, and understand financial
efficient and effective use of its
information. They help ensure that everyone
resources.
follows the same standards in accounting.
Usefulness of Financial Performance
Foundation of Accounting:
- It helps to understand return that the
- These principles are like the foundation of
entity has produced on the economic
a building. They make sure financial reports
resources.
are clear and consistent, reducing the chance
- Information about PAST FP is helpful
of mistakes or confusion.
in predicting the future returns on the
company. While the PRESENT FP can Going Concern Assumption:
assess the entity’s ability to generate
future cash inflows from operations. - The framework assumes that the company
will keep operating in the future. This means
financial reports are based on the idea that
the company isn't planning to close or sell
off its assets soon.
4 BASIC ASSUMPTIONS Types of Time Periods:
1. GOING CONCERN 1. One-Year Period: Most
businesses report their financial
- This principle means that, unless there’s
results annually because a year is a
clear evidence to suggest otherwise, we
common timeframe for evaluating
assume a company will keep operating
performance.
forever. So, when preparing financial
statements, we assume that the business is
2. Calendar Year: This is a 12-
not going to close down or go bankrupt
month period that ends on December
soon.
31. It aligns with the calendar year
Example: and is often used for financial
reporting.
Imagine a company, ABC Widgets, which
makes and sells products. When preparing 3. Fiscal Year: This is a 12-month
its financial statements, the accountants period that ends on any date chosen
assume that ABC Widgets will continue its by the business, not necessarily
operations in the future. December 31. For example, a fiscal
 Foundation of Cost Principle: year might run from July 1 to June
30.
- This principle states that assets should be
recorded and reported at their original 4. Natural Business Year: This is a
purchase cost, not their current market 12-month period that ends at a time
value. This means you value things based on when the business is least busy or
what you paid for them, rather than what during its slow season. For example,
they might be worth now. a retail store might end its fiscal year
2. ACCOUNTING ENTITY after the holiday season when sales
are lower.
- This principle means treating a business as
its own separate organization, apart from its  ΜΟΝΕΤARY UNIT
owners, managers, and employees. This
separation helps ensure that the financial 1. Quantifiability Aspect:
reports accurately reflect the business’s own - This means that all financial
financial situation. transactions and statements are recorded
3. TIME PERIOD ASSUMPTION in a specific unit of measure, which, in
the Philippines, is the peso.
- This principle means that even though a
business is expected to operate indefinitely, For example, if a company buys equipment
its financial results are reported in specific, for PHP 100,000, this amount is reported in
regular time periods, such as months or pesos.
years. This helps track and review the 2. Stability of the Peso Assumption:
company’s performance and position at
regular intervals. - This assumption treats the value of
the peso as stable over time. It means we
ignore minor changes in its purchasing Financial Accounting Chapter 3
power. For accounting, we assume that
QUALITATIVE CHARACTERISTICS
the peso’s value doesn’t fluctuate
significantly, which simplifies reporting - are the qualities or attributes that make
by assuming its value remains constant. financial accounting information useful
to the users.
3. Stable Peso Postulate:
Fundamental Qualitative Characteristics
- This extends the going concern
assumption by implying that we don’t  Relevance
need to adjust financial statements for  Faithful Presentation
changes in the peso’s value. It means we
treat the peso as stable, so minor Application of Qualitative Characteristics
fluctuations in its value aren’t reflected - First, identify an economic phenomenon
in financial reports. that has the potential to be useful
4. Accounting Function: - Second, identify the type of information
about the phenomenon that would be
- Financial reports use the peso’s most relevant and can be faithfully
current value without adjusting for represented.
changes in purchasing power. This - Third, determine whether the
means reports are based on the value of information is available.
pesos at the time of reporting, not
adjusted for inflation or deflation. 1. Relevance
In today’s world, this assumption may
- The capacity of the information to
not always hold true due to economic
influence a decision.
changes affecting currency stability.
- Information should be related or on-point
to the economic decision.

Ingredients of Relevance
 Financial information has
PREDICTIVE VALUE if it can be
used as an input to processes
employed by users to predict future
outcome.
 Financial information has
CONFIRMATORY VALUE if it
provides feedback about previous
evaluations.
MATERIALITY or Doctrine of - Example: For MegaCorp, an error that
Convenience misstates total revenue by 1% might not be
material, but for LittleShop, an error of the
- This means that in accounting, if a minor
same percentage could be very significant.
detail or item is too small to impact the
overall evaluation, decisions, or fairness of Factors of Materiality:
financial statements, it’s acceptable to
1. Size of the Amount:
deviate slightly from strict adherence to
Generally Accepted Accounting Principles - Example: For a large company like
(GAAP). The focus is on materiality— MegaCorp, an error of PHP 100,000 might
ensuring that only significant items that be minor and not affect the decision-making
affect the financial statements' accuracy and of investors. However, for a small business
usefulness need to follow GAAP strictly. like LittleShop, the same amount could be a
significant portion of their total revenue and
- It is also known subquality of relevance
crucial for assessing financial health.
because it deals with the importance or
significance of information in financial 2. Nature of the Item:
statements.
- Some items are material because of their
Materiality in accounting refers to nature, even if the amount is relatively
how important or significant a financial item small.
or error is to the overall financial statements.
It’s about assessing whether the amount is - Example: If MegaCorp accidentally
big enough to affect decisions made by users omits a major legal settlement from its
of the financial statements. financial statements, even if the amount is
not huge, it could be material due to its
Relativity of Materiality: nature.
- This means that what is considered a 2. Faithful Representation
significant amount (material) can vary
depending on the size of the company. - It means that financial information
accurately reflects the actual effects of
For example, an error of PHP 100,000 might transactions and events.
be a big deal for a small business but
relatively small for a large corporation. A. Completeness

When is an Item Material? - All relevant information must be included

so that users can understand the financial
An item is considered material if it is large statements fully and avoid misleading
enough to influence the decisions of impressions.
someone relying on the financial statements.
Example: If a company, ABC Corp, has
Potential Effect on Financial Statements: a significant lawsuit pending, the
financial statements should disclose this
- If the item’s omission or misstatement
risk in the notes. This ensures that users
could change the user’s view of the financial
are aware of potential liabilities that
health or performance of the company, it’s
material.
 could affect the company's financial  Contingent Loss: If Retail Inc. is
health. facing a possible lawsuit and it is
likely to lose, it should record a
B. Neutrality
provision for the estimated loss.
- The information should be presented  Contingent Gain: If there is a chance
without bias. It should not favour any of receiving a prize or gain, it should
party and should be objective. not be recorded until it is certain.

Example: If XYZ Ltd. has a major client F. Prudence

that is experiencing financial trouble, the
Prudence involves careful judgment to
company should report this fact honestly
avoid overstating assets or income and
in its financial statements without
understating liabilities or expenses.
downplaying or exaggerating the impact.
Example: If Foodies Ltd. is unsure about the
C. Free from Error
collectability of some receivables, it should
- The information should be accurate, be cautious and set aside a provision for bad
with no mistakes or omissions. The debts. This prevents the overstatement of
methods used to prepare the statements assets and ensures that the financial
should be applied consistently. statements are realistic.

Example: If Green Garden Supplies - Expression of Conservatism

records its inventory, it should ensure
“Don’t count your chicks until the eggs is
that the counts and valuations are correct
hatch.”
and that the accounting methods used are
accurate and consistently applied. ENHANCING QUALITATIVE
CHARACTERISTICS
D. Substance over Form
Relate to the presentation and from
Substance over Form means that
of financial statements. Intended to
transactions should be accounted for
increase the usefulness of the financial
based on their real nature, not just their
information that is relevant and faithfully
legal appearance.
represented.
Example: WORTH over LOOKS
Comparability in accounting refers to the
E. Conservatism ability to compare financial information over
time or between different entities. It helps in
Conservatism means recording potential understanding similarities and differences
losses but not potential gains when in
doubt. 1. Comparability within an Entity
(Intracomparability)
- Conservatism and Prudence are
inconsistent with neutrality and Meaning: This involves comparing financial
subjective information for the same entity over
different time periods. It helps track the
Example: If there’s two acceptable asset performance and financial position of the
values, the lower is selected. entity over time.
Example: If Foodies Ltd. wants to assess its c. Verifiability: Financial information
financial performance over the past five should be able to be confirmed by
years, it would look at its financial independent observers, ensuring that it
statements from each of those years. By accurately represents what it claims to.
comparing the revenue, expenses, and
 Direct Verification: Checking
profits year by year, it can see trends and
amounts by directly observing
changes, such as whether its profits have
the transactions or assets.
been growing or if costs have increased.
Example: An auditor counts Foodies Ltd.’s
2. Comparability Between and Across
physical inventory to confirm the reported
Entities (Intercomparability)
stock levels.
Meaning: This involves comparing financial
 Indirect Verification: Checking
information between different entities in the
the accuracy of financial
same industry. It helps in evaluating how
information by reviewing the
one company stacks up against others in the
underlying data or calculations
same sector.
used.
Example: If Foodies Ltd. wants to see how it
Example: An auditor recalculates Foodies
performs compared to other restaurants, it
Ltd.’s depreciation expense using the same
would compare its financial statements with
formula applied by the company to ensure
those of other similar restaurants. This could
the expense is calculated correctly.
include comparing revenue, profitability,
and expense ratios to understand how it fares d. Timeliness
against competitors.
Meaning: Financial information should be
a. Consistency - It should be applied in the available early enough to be useful for
same way from one period to the next. This decision-making.
ensures that financial statements are
comparable over time. Example: Foodies Ltd. releases its quarterly
financial statements soon after the end of
Example: If Foodies Ltd. uses a specific each quarter, allowing investors to make
method for depreciating its equipment, it timely decisions based on the latest financial
should use that same method each year. If it data.
switches methods, it must clearly explain the
change to maintain comparability. Cost Constraint - is met by choosing the
less expensive option that still meets their
b. Understandability - Financial needs.
information should be presented in a clear
and simple manner so that it is easily Example: A high school club considers
comprehensible by users. buying a $200 software for detailed financial
tracking but finds that a free budgeting app
Example: Foodies Ltd. should present its covers their basic needs. The benefits of the
financial statements with straightforward software do not justify its cost, so they
language and clear explanations of its decide to use the free app instead.
number
FINANCIAL ACCOUNTING CHAPTER 4 ASSET RECOGNITION PRINCIPLE
Financial statements are designed to An asset is a valuable resource owned by an
provide a clear and organized view of a entity, acquired through past transactions or
company's financial performance and events, which is anticipated to generate
position by grouping transactions and events future economic benefits.
into broad categories.
To recognize an asset in financial
Broad classes termed as elements of
statements, two conditions must be met:
financial statements
Elements of Financial Statements is 1. Probable Future Benefits:
quantitative information na reported sa SFP
at income statement. For example, a company’s equipment is an
asset because it is expected to generate
The ELEMENTS directly related to the future benefits through its use in production.
measurement of FINANCIAL POSITION in
the statement of financial position are: 2. Reliable Measurement:

1. Asset Equipment: The cost of machinery is

2. Liabilities measurable based on the purchase invoice
3. Equity and installation costs
The ELEMENTS directly related to the FUTURE ECONOMIC BENEFIT
measurement of FINANCIAL
PERFORMANCE in the income statement The potential to contribute directly or
are: indirectly to the flow of cash and noncash
equivalents to the entity.
1. Income
2. Expense Example: 1. A factory purchases a $50,000
machine that will be used in production for
 CF identifies no elements is unique several years. The machine will help
sa Statement of Changes in Equity produce products, contributing to future
kasi nag-a-appear naman sa SFP at revenue and economic benefits.
Income Statement 2. A business holds $8,000 worth of
EQUITY is the residual interest in the assets products. These products can be sold to
of the entity after deducting all of the generate cash when sold to customers.
liabilities. COST PRINCIPLE
RECOGNITION OF ELEMENTS Assets should be recorded at their original
RECOGNITION refers to the process of acquisition cost, reflecting what was paid to
reporting an asset, liability, income, or obtain them. [change because of
expense on the financial statements of an depreciation, amortization, and raw
entity. materials to finished good]
1. Cash Transaction: If a company buys a - established business practice and
laptop for $1,200 in cash, the asset (laptop) commitment to customer service.
is recorded at $1,200, the amount of cash
Ways to settle present obligations
paid.
 payment of cash
2. Noncash or Exchange Transaction: If a
 transfer of non-cash assets
company trades an old machine valued at
 provision of services
$2,000 for a new one worth $2,500, the new
 replacement of the obligation
machine is recorded at $2,500, the fair value
with another obligation
of the asset received. If fair value is unclear,
 conversion of the obligation
the new machine is recorded at the carrying
into equity
amount of the old machine $2,000.
LIABILITY RECOGNITION  Income: A broad term for any
PRINCIPLE increase in equity from inflows or
reduced liabilities, including both
A liability is a present obligation of an entity revenue and gains.
arising from past events, and settling it is  Revenue: Income from regular
expected to result in an outflow of resources business activities, like sales or
that embody economic benefits. services.
 Gain: Income from non-regular
2 Conditions for Recognition of a activities or incidental transactions,
Liability: like selling an asset at a profit.
1. Probable Outflow of Economic Benefits:
INCOME RECOGNITION PRINCIPLE
- Example: A company receives an invoice
- Income shall be recognized when
for $5,000 from a supplier for goods
earned.
received. It is probable that the company
will need to pay this amount to settle the 2 Conditions for Recognition of Income:
obligation, which involves an outflow of
cash. 1. Probable Future Economic Benefits:

2. Reliable Measurement: Example: A company earns $5,000 in

interest from an investment. It is likely the
- Example: The same invoice for $5,000 cash will be received, meeting the condition
can be measured reliably because the of probable future benefits.
amount is specified in the invoice and is
agreed upon by both parties. 2. Reliable Measurement:

Types of Obligations: Example: The company’s $5,000 interest

income can be measured reliably based on
1. Legally Enforceable Obligations: the bank statement, ensuring the amount is
accurate and verifiable.
- Binding legal contract.
2. Constructive Obligations:
POINT OF SALE “Revenue is recognized based on the
percentage of work completed on a long-
Definition: Income is recognized when the
term project.”
sale is made and the goods or services are
delivered to the customer. Example: A construction company is
building a bridge. As the project progresses,
Example: A store sells a laptop to a
the company recognizes revenue based on
customer. The revenue is recorded when the
the completed stage of construction.
laptop is handed over to the customer.
5. Production Method:
5 Exceptions to the Point of Sale:
“Revenue is recognized at the point when
1. Installment Method:
goods are produced.”
“Revenue is recognized as cash payments
Example: A winery recognizes revenue
are received.”
when the wine is bottled, not when sold.
Example: A company sells machinery on an
7 OTHER INCOME RECOGNITION
installment plan. Revenue is recorded as
each installment payment is received, not at 1. Interest Revenue:
the point of sale.
Recognized based on the time elapsed and
2. Cost Recovery Method (Sunk Cost the effective yield of the asset.
Method)
Example: A company earns $200 in interest
“Revenue is recognized only when cash over a year on a $10,000 investment. Interest
received exceeds the cost of the goods revenue is recognized periodically based on
sold.” the effective interest rate and time.
Example: A company sells equipment for 2. Royalties:
$10,000 but has a cost of $8,000. Revenue is
Recognized on an accrual basis, according to
recognized as cash is collected, and initially,
the terms of the agreement.
only the amount received that exceeds
$8,000 is recorded as profit. Example: A company earns royalties from a
patent. If the agreement specifies quarterly
3. Cash Method:
payments, royalties are recognized each
“Revenue is recognized when cash is quarter as they accrue, regardless of when
actually received.” cash is received.
Example: A freelance graphic designer bills 3. Dividends:
$1,000 for a project. Revenue is recorded
Recognized when the right to receive
only when the designer receives the $1,000
payment is established, typically when
payment.
dividends are declared.
Example: A shareholder is entitled to
receive $1,000 in dividends once the board
declares the dividend. Revenue is
4. Percentage of Completion Method:
recognized at the declaration date, not when Example: A company incurs $5,000 in
payment is received. wages for its employees. This expense
reduces equity as it is a cost of doing
4. Installation Fees:
business.
Recognized over the period of installation
Losses: Decrease in economic benefit not
based on the progress of the installation.
related to regular business activities, such as
Example: A company charges $3,000 for those from unforeseen events.
installing software. Revenue is recognized
Example: A company experiences a $20,000
gradually as the installation progresses, not
loss from a fire that destroys its inventory.
all at once.
This loss is not part of regular business
5. Subscription Revenue: activities and reduces equity.

Recognized evenly over the subscription D. EXPENSE RECOGNITION

period. PRINCIPLE

Example: A magazine sells a $120 annual - Expenses are recognized when incurred.
subscription. Revenue is recognized at $10
per month throughout the year. Conceptual framework: record an expense
when you can reasonably expect that either:
6. Admission Fees:
1. The value of something you own (an
Recognized when the event or service
asset) has gone down, or
occurs.
2. You have taken on a new obligation
Example: A concert venue collects $50,000 (a liability).
in admission fees. Revenue is recognized on
the date of the concert when the event takes 2 Conditions for Recognition of Expenses:
place. 1. Probable Decrease in Future Economic
7. Tuition Fees: Benefits:

Recognized over the period during which Example: A company pays $2,000 for office
educational services are provided. rent. The cash payment results in a decrease
in the asset (cash) and indicates that future
Example: A school charges $9,000 for a economic benefits are reduced because the
year of tuition. Revenue is recognized office space is used.
monthly as educational services are provided
throughout the year. 2. Reliable Measurement:

EXPENSE Example: The $2,000 rent expense can be

reliably measured based on the lease
Expenses: Decrease in economic benefit agreement and payment records, ensuring
during the accounting period, leading to a accurate financial reporting of the expense.
decrease in equity, excluding distributions to
owners. They typically arise from regular
business activities.
MATCHING PRINCIPLE - The amount of money originally paid to
acquire an asset.
Expenses should be recorded in the same
time period as the revenue they help to earn. Example: If a company buys a computer for
$2,000, the historical cost of the computer is
Three Ways to Apply It:
$2,000.
1. Cause and Effect:
B. Current Cost (Present Purchase
- Record expenses when you earn the related Exchange Price)
revenue.
- The amount needed to purchase the same
Example: If you spend $1,000 to make a asset at today’s prices.
product and sell it in January, record that
Example: If the same computer now costs
$1,000 expense in January, when the
$2,500, the current cost is $2,500.
revenue is also recorded.
C. Realizable Value (Current Sale
2. Systematic and Rationale Allocation:
Exchange Price)
- Spread out expenses over the time they
- The amount you can get by selling the
help you.
asset right now.
Example: If you buy a $12,000 machine that
Example: If the computer can be sold for
you’ll use for a year, you expense $1,000
$1,500 today, the realizable value is $1,500.
each month instead of all at once.
D. Present Value (Future Exchange Price)
3. Immediate Recognition:
- The current worth of the asset’s future cash
- Some expenses are recorded right away
flows, discounted to account for time value
because it’s hard to link them to future
of money.
revenue.
Example: If the computer is expected to
Example: Advertising costs are usually
generate $3,000 in future cash flows, but the
expensed immediately because it’s tough to
present value of these cash flows, discounted
directly connect them to future sales.
to today’s value, is $2,200, then the present
An expense is recognized immediately value is $2,200.
when:
1. No Future Economic Benefit
Ex. One-time repair
2. Cost Does Not Qualify as an Asset
Ex. Office supplies
MEASUREMENT BASES
A. Historical Cost (Past Purchase
Exchange Price)
FINANCIAL ACCOUNTING CHAPTER 5 FS provide information about the following:
FINANCIAL STATEMENTS a. assets
b. liabilities
- are structured reports that show an
c. equity
entity’s financial position and
d. income and expenses, including gain
performance. They are the main output
and losses
of financial accounting and
e. contributions by and distribution to
communicate key financial information
owners in their capacity as owners
to users.
f. cash flows
GENERAL PURPOSE FINANCIAL
FREQUENCY OF REPORTING
STATEMENTS
- FS shall be presented at least annually
- are reports prepared according to
International Financial Reporting When the company change the time period
Standards (IFRS). They provide a they should be disclose:
comprehensive view of an entity's
a. the period covered by the FS
financial performance and position for a
b. reason for using shorter or longer
wide range of users.
period
COMPONENTS OF FINANCIAL c. the fact amounts that presented is
STATEMENTS not entirely comparable
1. Statement of Financial Position Statement of Financial Position
2. Income Statement
3. Statement of Comprehensive Income - compromise assets, liabilities, and
4. Statement of Changes in Equity equity, helping users assess liquidity,
5. Statement of Cash Flows solvency, and financing needs.
6. Notes, compromising a summary of
ASSET
significant accounting policies and
other explanatory notes. - A resource owned by the entity from
OBJECTIVE OF FINANCIAL which it expects future economic
STATEMENTS benefits.

- To provide information about the Essential characteristics of an Asset are:

financial position, financial 1. The asset is controlled by the entity
performance, and cash flows of an 2. The asset is the result of a past
entity that is useful to a wide range of transaction or event.
users in making economic decisions. 3. The asset provides future economic
- Show the results of the management’s benefits
stewardship of the resources entrusted 4. The cost of the asset can be
to it. measured reliably.
Classifications of Asset
a. current asset
 b. noncurrent asset c. intangible assets
d. deferred tax assets
- Classifying assets as current or non- e. other noncurrent assets
current helps differentiate between those
PROPERTY, PLANT AND
used for short-term operations and those
EQUIPMENT
held for the long term.
- The operating cycle is the period from PAS 16, paragraph 6, as “tangible assets
using assets to generating cash from which are held by an entity for use in
them. If this cycle isn’t clear, a 12- production or supply of goods and services,
month period is used. for rental to others, or for administrative
purposes, and are expected to be used during
CURRENT ASSETS - listed in order of
more than one period.”
liquidity.
Examples of PPE include buildings,
PAS 1, paragraph 66 provides that an entity
equipment, land, and furniture and fixtures.
should classify asset as current asset when:
Most of them are presented at cost less
accumulated depreciation, except for land.
a. Its cash or cash equivalent, not
restricted for 12 months. LONG-TERM INVESTMENTS
b. It’s held for trading.
c. It will be converted to cash within - IASC defines an investment as an asset
twelve months. held to earn income (like interest or
d. It will be used within the operating dividends), gain value, or obtain other
cycle. benefits, including from trading
relationships.
PRESENTATION OF CURRENT
ASSETS
PAS 1 paragraph 54, the line items under INTANGIBLE ASSETS
current assets are: - An identifiable nonmonetary asset
a. cash and cash equivalents without physical substance.
b. financial assets at fair value such as Example of Identifiable Intangible Asset are
trading securities and other
trademark, patent, franchise, copyright.
investments in quoted equity
instruments. Example of Unidentifiable Intangible Asset
c. trade and other receivables is goodwill.
d. inventories
e. prepaid expenses OTHER NONCURRENT ASSETS
NONCURRENT ASSETS - Assets that do not fit in the definition of
noncurrent assets.
PAS 1, paragraph 66 states that “an entity
shall classify all other assets not classified as Example: long-term advances to officers,
current as noncurrent.” directors, shareholder, and abandoned
property.
a. property, plant, and equipment
b. long-term investment LIABILITY
- A liability is a past obligation expected d. Long term obligations to company
to result in an outflow of economic officers
resources. e. Long term deferred revenue.
Essential Characteristics of a Liability are: EQUITY
1. A liability is a current obligation. - Residual interest in the assets of the
2. It arises from past events. entity after deducting all of its
3. Settling it requires an outflow of liabilities.
resources.
Terms in Reporting the Equity of an Entity
CURRENT LIABILITIES depending on the Form of Business
PAS 1, paragraph 69, provides that an entity a. Owner’s Equity in a Proprietorship
should classify a liability as current when: b. Partner’s Equity in a Partnership
c. Shareholder’s Equity in a
1. The liability is expected to be settled
Corporation
within the operating cycle.
2. The liability is held mainly for PAS 1, paragraph 7, “The holders of
trading. instruments classified as equity are
3. The liability is due within 12 OWNERS.”
months.
SHAREHOLDER'S EQUITY
4. The entity cannot postpone
settlement for at least 12 months. - Is the residual interest of owners in the
net assets of a corporation measured by
PRESENTATION OF CURRENT
the excess of assets over liabilities.
LIABILITIES
PHILIPPINE TERM IAS TERM
PAS 1 paragraph 54, the line items under
Capital Stock Share Capital
current liability are:
Subscribed Capital Subscribed Share
a. Trade and other payables Stock capital
b. Current provisions Preferred Stock Preference Share
c. Short term borrowing Capital
d. Current portion of long term debt Common Stock Ordinary Share
e. Current tax liability Capital
Additional Paid Share Premium
Capital
NONCURRENT LIABILITIES Retained Earnings Accumulated
[ deficit] Profits [losses]
PAS 1 paragraph 69 states that an entity Retaining earnings Appropriation
shall classify all liabilities not classified as appropriated Reserve
current are classified as noncurrent Revaluation Surplus Revaluation
Reserve
a. Noncurrent portion of a long term
Treasury Stock Treasury Share
debt
b. Finance lease liability
c. Deferred tax liability
NOTES TO FINANCIAL 14. Provisions
STATEMENTS 15. Financial liabilities
16. Liabilities included in disposal group
- Provide detailed explanations and
classified as held for sale
breakdowns of items in the financial
17. Noncontrolling assets
statements, including information on items
18. Share capital and reserves
not recognized. This helps meet the
disclosure requirements of PFRS. Common practice in accordance with
paragraph 7 of the preface to PAS 1
FORMS OF STATEMENT FINANCIAL
POSITION PAS 1, paragraph 57, “The standard does
not prescribe the order or format in which
A. REPORT FORM
items are to be presented in the statement of
This form sets form the three major sections financial position.
in a downward sequence of assets, liabilities
Illustrated in Appendix to IAS 1 may be
and equity.
practice in other jurisdiction like United
B. ACCOUNT FORM Kingdom.

The assets are shown on the left side and the

liabilities and equity on the right side of the
FINANCIAL ACCOUNTING CHAPTER 6
balance sheet.
INCOME STATEMENT
LINE ITEMS IN STATEMENT OF
FINANCIAL POSITION - Formal statement showing the financial
performance of an entity for a given
PAS 1, paragraph 54, balance sheet line
period of time.
items
FINANCIAL PERFORMANCE
1. Cash and cash equivalents
2. Financial assets - Also known as results of operation.
3. Trade and other receivables - Is useful in predicting future
4. Inventories performance and ability to generate
5. Property, plant and equipment future cash flows.
6. Investment in associates accounted
COMPREHENSIVE INCOME
for by the equity method
7. Intangible assets - The change in equity from transactions
8. Investment property and events, excluding owner-related
9. Biological asset activities. It includes things like
10. Total assets classified as held for sale revenues and losses not related to owner
and assets included in disposal group actions.
classified as held for sale
11. Trade and other payables SCI Includes:
12. Current tax liabilities a. Components of profit or loss
13. Deferred tax asset and deferred tax b. Components of other
liability comprehensive income
PROFIT AND LOSS [Bottom Line] OCI first and are reclassified to profit or loss
when the hedged item impacts profit or loss.
- The total income less expenses,
excluding the components of other B. OCI That Will Not Be Reclassified to
comprehensive income. Profit or Loss
OTHER COMMPREHENSIVE 4. Equity Investment Gains/Losses:
INCOME
- Changes in value of stocks or other equity
- It includes income and expenses not investments stay in OCI and don’t affect
shown in profit or loss, such as certain profit or loss, even when the investment is
reclassification adjustments, as required sold.
or allowed by PFRS (Philippine
5. Revaluation Surplus:
Financial Reporting Standards).
- If an asset (like property) increases in
Presentation of Other Comprehensive
value and is revalued, this surplus stays in
Income
OCI and doesn't affect profit or loss.
- PAS 1 paragraph 82A, provides that the
6. Pension Plan Adjustments:
statement of comprehensive income
shall present line items for amounts of - Changes in the value of pension plan assets
other comprehensive income during the or liabilities go into OCI and stay there.
period classified by nature.
7. Credit Risk Changes:
The line items for amounts of OCI shall be
grouped as follows. - Adjustments related to changes in the
credit risk of financial liabilities go into OCI
A. OCI That Will Be Reclassified to Profit and do not affect profit or loss.
or Loss Later
PRESENTATION OF
1. Debt Investment Gains/Losses: COMPREHENSIVE INCOME
- Changes in value of bonds or other debt 1. TWO STATEMENTS
investments go into OCI first, but will
eventually affect profit or loss when the A. An income statement showing the
investment is sold. components of profit or loss.

2. Foreign Operation Translation: B. A statement of comprehensive income

beginning with profit or loss as shown in the
- When converting the financials of foreign income statement plus or minus the
subsidiaries into the parent company's components of other comprehensive income
currency, the gains or losses go into OCI.
These will move to profit or loss if the 2. SINGLE STATEMENT OF
foreign operation is sold. COMPREHENSIVE INCOME

3. Hedge Derivatives: - This is the combined statement showing

the components of profit or loss and
- Gains or losses from derivatives used to components of other comprehensive income
manage future cash flow changes go into in a single statement
SOURCES OF INCOME LINE ITEMS
a. Sales of merchandise to customers PAS 1, paragraph 82, Income statement
b. Rendering of services and statement of comprehensive income
c. Use of entity resources line items.
d. Disposal of resources other than
products A. Revenue
B. Gain and loss from the derecognition
COMPONENTS OF EXPENSE
of financial asset measured at amortized
a. Cogs or Cost of Goods Sold cost as required by PFRS 9
b. Distribution costs or selling expenses C. Finance Cost
c. Administrative expenses D. Share in income or loss of associate
d. Other expenses and joint ventures accounted for using
e. Income tax expense equity method
E. Income tax expense
F. A single amount comprising
CLASSIFICATION OF EXPENSES discontinued operations
G. Profit or loss for the Period
a. DISTRIBUTION COSTS H. Total Other Comprehensive income
- constitute costs which are directly I. Comprehensive income for the period
related to selling, advertising and being the total of profit or loss and other
delivery of goods to customers. comprehensive income.

b. ADMINISTRATIVE EXPENSES
The following items shall be disclosed on
- constitute cost of administering the the face of the income statement and
business. These ordinarily include all statement of comprehensive income:
operating expenses not related to selling
and cost of goods sold. A. Profit or loss for the period
attributable to noncontrolling interest
c. OTHER EXPENSES and owners of the parent
- are those expenses which are not B. Total comprehensive income for the
directly related to the selling and period attributable to noncontrolling
administrative function. interest and owners of the parent.

NO MORE EXTRAORDINARY ITEMS FORMS OF INCOME STATEMENT

PAS 1 paragraph 87, an entity shall not PAS 1 paragraph 99. An entity shall
present any items of income and present an analysis of expenses
expense as extraordinary items, either recognized in profit or loss using in
on the face of the income statement or classification based on either the
the statement of comprehensive income function of expenses or their nature
or in the notes. within the entity, whichever provides
 information that is more reliable and calculated as revenues minus
more relevant. expenses.
2. Other Comprehensive Income
2 Ways to Present an Income Statement (OCI):
o Unrealized gains and losses
1. Functional Presentation
on certain investments (e.g.,
- Organizes expenses based on their
available-for-sale securities).
function or purpose within the company.
o Foreign currency translation
- Expenses are grouped according adjustments.
to their role in operations, such o Pension plan adjustments.
as "cost of goods sold – raw o Derivative instrument gains
materials, direct labor," and losses.
"administrative expenses – rent,
utilities," or "selling expenses – Comprehensive income provides a broader
advertising expense" view of a company’s financial performance
and is reported in the statement of
Example: A company might list expenses
comprehensive income or as part of the
under categories like "production costs,"
equity section in the balance sheet.
"sales expenses," and "administrative
expenses." FINANCIAL ACCOUNTING CHAPTER 7
2. Natural Presentation FINANCIAL ACCOUNTING CHAPTER 8
- Organizes expenses based on
their nature or type, such as FINANCIAL ACCOUNTING CHAPTER 9
salaries, rent, and utilities. Bank reconciliation is so called two-date
- Expenses are listed according to because it involves two-date
their specific types without
grouping by function. - The procedure followed of the
one-date reconciliation
Example: A company might list individual - It becomes only complicated
expenses like "salaries," "office rent," and when certain data are omitted
"electricity" in a straightforward manner. and needed for computing but if
Statement of Comprehensive Income all the data are available it can
be done simply.
Comprehensive income is a measure of a Omitted Information may be one or
company's total earnings that includes not combination:
only net income but also other gains and
losses that are not typically reported in the a. Book Balance – Beginning and Ending
income statement. It reflects the overall
change in equity for a specific period. b. Bank Balance
c. Deposit in transit
Comprehensive income consists of:
d. Outstanding checks
1. Net Income: The profit or loss from
regular business operations,
 Technically Defective Checks, Bank Service
Charges, and Reduction of Loan)
Computation for Book Balance
Computation for Deposit in Transit
Bal. per book, Beg xx
DiT, Beg xx
Add: Book debits xx
Add: Book Debits / Cash Receipts during
Total xx
the month xx
Less: Book credits xx
Total: Deposits to be acknowledged by the
Total: Bal. per book, End xx bank xx

Bal. per book, End + Book credits = N – Less: Deposits Acknowledged by the bank
Book debits = Bal. per book, Beg during the month xx
DiT, End xx

Book Debits – cash receipts or all debited to

the cash in bank account
Computation for Outstanding Checks
Book Credits – cash disbursement or all
OC, Beg xx
credited to the cash in bank account
Add: Checks drawn by depositor during the
month xx
Computation for Bank Balance
Total: Checks to be paid by the bank
Bal. per bank, Beg xx xx

Add: Bank Credits xx Less: Checks paid by the bank during the
month xx
Total xx
OC, End xx
Less: Bank debits xx
Total: Bal. per bank, End xx
Computation for Deposit in Transit
The January CM of P15,000 is deducted
Bank Credits – all items credited to the from the book debits of P200,000 because
depositor that includes deposits this item is a cash receipt not representing
acknowledged by the bank and credit deposit for the month of February.
memos (N/R collected by the bank in favor
of the depositor, proceed of bank loan, and All items debited to the cash in bank
matured time deposits transferred by the account which do not represent deposits
bank to the current) should be deducted from the book debits
total to arrive at the cash receipts deposited.
Bank Debits – all items debited to the
account of depositor that includes check
paid by bank and debit memos (NSF,
In the absence of any statement to the Proof of Cash – is an expanded
contrary, book debits are assumed to be cash reconciliation in that it includes proof of
receipts deposited. receipts and disbursements.
The February CM of P20,000 for note - Useful to track discrepancies in
collected is deducted from the bank credits handling cash particularly when
because this is not a deposit. cash receipts have been recorded
but have not been deposited.
All items credited to the depositor's account
which do not represent deposits should be Three Form of Proof of Cash
deducted from the bank credits to determine
1. Adjusted Balance Method
the deposits acknowledged by bank.
2. Book to Bank Method
Bank credits are assumed to be deposits
acknowledged by bank in the absence of any 3. Bank to Book Method
statement to the contrary.
- four column WS is necessary in
Computation for Outstanding Checks adjusted balance method is 8
column is required
The January DMs of P6,000 are deducted
from the book credits, because they are cash
disbursements not representing checks.
All items not representing checks credited to
the cash in bank account should be deducted
from the book credits total to arrive at the
checks drawn by the depositor.
But as a rule, all book credits in the absence
of any statement to the contrary are assumed
to be checks issued.
The February DM for NSF of P10,000 is
deducted from the bank debits because this
is not a bank disbursement representing a
check paid.
All items debited to the account of the
depositor not representing checks paid
should be deducted from the bank debits
total to arrive at the checks paid by bank.
But as a rule, all bank debits in the absence
of any statement to the contrary are assumed
to be checks paid by bank.
FINANCIAL ACCOUNTING CHAPTER
10