FAR, CFAS, IA through accounting reports, the most common form of which
(FINANCIAL ACCOUNTING & REPORTING, CONCEPTUAL is the financial statements.
FRAMEWORK & ACCOUNTING STANDARDS, INTERMIDIATE i. recording - refers to the process of systematically
ACCOUNTING) committing into writing the identified and measured
REVIEWER accountable events in the journal through journal entries.
ii. classifying - involves the grouping of similar and
interrelated items into their respective classes through posting
ACCOUNTING is a process of identifying, recording, and in the ledger.
communicating economic information that is useful in making iii. summarizing - putting together or expressing in
economic decisions. Accounting Information System of condensed from the recorded and classified transactions and
collecting and processing transaction data and disseminating events.
financial information to interested parties. Accounting
Information System is a subsystem of Management Internal users - managers who plan, organize, and run the
Information System (MIS). Management Information System business
is a set of data gathering, analyzing, and reporting functions External users - are individuals and organizations outside a
designed to provide management with the information it needs company who want financial information about the company.
to carry out its functions. Economic events are also called
accounting transactions. The accounting standards in the Internal events - are events that do not involve an external
Philippines are represented by the Philippine Financial party.
Reporting Standards (PFRSs). These standards are i. production - the process by which resources are
patterned from the International Financial Reporting transformed into finished goods.
Standards (IFRSs). ii. casualty - an unanticipated loss from disasters or other
similar events.
THE ACCOUNTING EQUATION :
ASSETS = LIABILITIES + EQUITY External events - are events that involve an entity and
another external party
THE EXPANDED ACCOUNTING EQUATION : i. exchange - an event wherein there is a reciprocal giving and
ASSETS = LIABILITIES + EQUITY + INCOME - receiving of economic resources
EXPENSES ii. non-reciprocal transfer - is a “one-away” transaction in
that the party giving something does not receive anything in
Assets - are the economic resources you control that have return
resulted from past events and can provide you with economic iii. external event other than transfer - an event that
benefits. involves changes in the economic resources or obligations of
Liabilities - are your present obligations that have resulted an entity
from past events and can require you to give up economic
resources when settling them. General purpose accounting information - is information
Equity - is simply assets minus liabilities. Other terms for designed to meet the common needs of most statement users.
equity are “capital”, “net assets”, and “net worth”. It is provided by financial accounting and is prepared
Income - is increases in economic benefits during the period primarily for external users.
in the form of increases in assets, or decreases in liabilities, Special purpose accounting information - is information
that result in increases in equity, excluding those relating to designed to meet the specific needs of particular statement
investments by the business owner. users. It is provided by management accounting or other
Expenses - are decreases in economic benefits during the branches of accounting and is prepared primarily for internal
period in the form of decreases in assets, or increases in users.
liabilities, that result in decreases in equity, excluding those COMMON BRANCHES OF ACCOUNTING
relating to distributions to the business owner. Financial Accounting - is the branch of accounting that
focuses on general purpose financial statements.
Profit or loss is income less expenses, excluding the Management Accounting - involves the accumulation and
components of other comprehensive income. The excess of communication of information for use by internal users.
income over expenses is profit; while the deficiency is loss. Financial Accounting Management Accounting
· focuses on the · focuses on the
THREE IMPORTANT ACTIVITIES INCLUDED IN information needs of external information needs of internal
THE DEFINITION OF ACCOUNTING users. users.
Identifying - the accountant analyzes each business
transaction and identifies whether the transaction is an Government Accounting - refers to the accounting for the
“accountable event” or “non-accountable event”. government and its instrumentalities, focusing attention on the
Recording - the accountant recognizes (i.e., records) the custody of public funds, the purpose or purposes to which
identified “accountable events”. this process is called those funds are committed, and the responsibility and
“journalizing”. accountability of the individuals entrusted with those funds.
Measuring - involves assigning numbers, normally in Auditing - involves the inspection of an entity’s financial
monetary terms, to the economic transactions and events. statements or business processes to ascertain their
Communicating - at the end of each accounting period, the correspondence with an established criteria.
accountant summarizes the information processed in the Tax Accounting - is the preparation of tax returns and
accounting system in order to produce meaningful reports. rendering of tax advice, such as the determination of tax
Accounting information is communicated to interested users consequences of certain proposed business endeavors.
Cost Accounting - is the systematic recording and analysis of T-accounts - is the simplest type of account. Three parts ;
the costs of materials, labor, and overhead incident to the Account title - describes the specific item of asset, liabilty,
production of goods or rendering of services. equity, income, and expenses.
Accounting Education - refers to teaching accounting and Debit side - the left side of the account
accounting-related subjects in an organized learning Credit side - the right side of the account
environment. It is a process of facilitating the acquisition of
knowledge and skills regarding one or more of the other Current Assets - a type of asset that can be realized for a year
branches of accounting. or for an operating cycle.
Accounting Research - pertains to the careful analysis of Non-current Assets - also known as long-term assets, are
economic events and other variables to understand their resources owned by a business that are not expected to be
impact on decisions. converted into cash or used up within one year.
Fiduciary Accounting - handling of accounts managed by a
person entrusted with the custody and management of STEPS IN THE ACCOUNTING CYCLE
property for the benefit of another. Identifying & Analyzing business documents or transactions.
Estate Accounting - handling accounts for fiduciaries who - the accountant gathers information from source documents
wind up the affairs of a deceased person. and determines the effect of the transactions on the accounts.
Social Accounting - the process of communicating the social Journalizing - the identified accountable events are recorded
and environmental effects of an entity’s economic actions to in the journals.
the society. Posting - information from the journal are transferred to the
Institutional Accounting - the accounting for non-profit ledger.
entities other than the government. Unadjusted Trial Balance - the balances of the general
ledger accounts are proved as to the equality of debits and
BOOKKEEPING & ACCOUNTING credits. The unadjusted trial balance serves as basis for
Bookkeeping - refers to the process of recording the accounts adjusting entries.
or transactions of an entity. Adjusting Entries - the accounts are updated as of the
Accountancy - refers to the profession or practice of reporting date on an accrual basis by recording accruals,
accounting. expiration of deferrals, estimations, and other events often not
signaled by new source documents.
FOUR SECTORS IN THE PRACTICE OF Adjusted Trial Balance (or worksheet preparation) - the
ACCOUNTANCY equality of debits and credits are rechecked after adjustments
Under R.A. 9298 also known as the “Philippine Accountancy are made.
Act of 2004” the practice of accounting is sub-classified into Financial Statements - these are the means by which the
the following: information processed is communicated to users.
i. practice of public accountancy - involves the rendering of Closing the books - this involves journalizing and posting
audit or accounting related services to more than one client on closing entries and ruling the ledger. Temporary accounts (or
a fee basis. nominal accounts) are closed and the resulting profit or loss is
ii. practice in commerce and industry - refers to transferred to an equity account.
employment in the private sector in a position which involves Post-closing Trial Balance - the equality of debits and credits
decision making are again rechecked after the closing process.
iii. practice in education/academe - employment in an Reversing Entries - reversing entries are usually made at the
educational institution which involves teaching accounting, beginning of the next accounting period to simplify the
auditing, etc. recording of certain transactions in that period.
iv. practice in the government - employment or appointment
to a position in an accounting professional group in the NORMAL BALANCES OF :
corporation Expenses = Debit
Assets = Debit
FORMS OF BUSINESS ORGANIZATIONS Owner’s Capital = Credit
Corporation - a business organized as a separate legal entity. Liabilities = Credit
Also enjoys limited liability. Income = Credit
Proprietorship - a business owned by one person. The owner
is also personally liable for all debts of the business. Simple Entry - entries that involve two accounts : one debit
Partnership - a business owned by two or more persons & one credit
associated as partners. Compound Entry - entries that involve more that two
Cooperative - formed in accordance with the cooperative accounts
code.
CHART OF ACCOUNTS
TYPES OF BUSINESS ACCORDING TO ACTIVITIES BALANCE SHEET ACCOUNTS
Service Business - is one that offers services as its main
product rather than physical goods. A service business may Assets (debit):
offer professional skills, expertise, advice, lending service, Cash
and similar services. Accounts receivable
Merchandising (Trading) - is one that buys and sells goods Allowance for bad debts
without changing their physical form. Notes receivable
Manufacturing - is one that buys raw materials and processes Inventory
them into final products. Prepaid supplies
Prepaid rent
Prepaid insurance v. Bureau of Internal Revenue (BIR) - administers the
Land provisions of the National Internal Revenue Code.
Building vi. Bangko Sentral ng Pilipinas (BSP) - influences the
Accumulated depreciation-equipment selection and application of accounting policies by banks and
other entities performing banking functions.
Liabilities (credit) : vii. Cooperative Development Authority (CDA) -
Accounts payable influences the selection and application of accounting policies
Notes payable by cooperatives.
Interest payable
Salaries payable International Accounting Standards Board (IASB) - is the
Utilities payable standard-setting body of the IFRS Foundation with the main
Unearned income objectives of developing and promoting global accounting
standards.
Equity (credit) :
Owner’s capital EXAMPLES OF ACCOUNTING CONCEPTS
Owner’s drawings i. Double-entry system - each accountable event is recorded
in two parts--- debit and credit
INCOME STATEMENTS ii. Going concern assumption - the entity is assumed to carry
on its operations for an indefinite period of time.
Income (credit) : iii. Separate entity - the entity is viewed separately from its
Service fees owners.
Sales iv. Stable monetary unit - assets, liabilities, equity, income,
Interest income and expenses are stated in terms of a common unit of
Gains measure, which is the peso in the Philippines
v. Time Period - the life of the entity is divided into series of
Expenses (debit) : reporting periods.
Cost of sales > calendar year - period starts on Jan. 1 and ends on Dec. 31
Freight-out of the same year.
Salaries expense > fiscal year - period also covers 12 months but starts on a
Rent expense date other than Jan. 1
Utilities expense vi. Materiality concept - information is material if its
Supplies expense omission or misstatement could influence economic decisions.
Bad debt expense vii. Cost-benefit - cost of processing and communicating
Depreciation expense information should not exceed the benefits to be derived from
Advertising expense it.
Insurance expense viii. Accrual Basis of accounting - the effects of transactions
Taxes and licenses and other events are recognized when they occur
Transportation and travel expense ix. Historical cost concept - the value of an asset is
Interest expense determined on basis of acquisition cots
Miscellaneous expense x. Concept of Articulation - all of the components of a
Losses complete set of financial statements are interrelated.
xi. Full disclosure principle - this principle recognizes that
The Conceptual Framework prescribes the concepts for the nature and amount of information included in the financial
general purpose financial reporting. The Conceptual statements reflect a series of judgmental trade-offs.
Framework is not a standard. The objective of general xii. Consistency concept - the financial statements are
purpose financial reporting is to provide financial information prepared on the basis of accounting principles that are applied
about the reporting entity. This objective is the foundation of consistently from one period to the next
the Conceptual Framework. xiii. Matching - costs are recognized as expenses when the
related revenue is recognized
ACCOUNTING STANDARD SETTING BODIES AND xiv. Entity theory - the accounting objective is geared
OTHER RELEVANT ORGANIZATIONS towards proper income determination.
i. Financial Reporting Standards Council (FRSC) - is the xv. Proprietary theory - the accounting objective is geared
official accounting standard setting body in the Philippines towards the proper valuation of assets
created under Philippine Accountancy Act of 2004. xvi. Residual equity theory - this theory is applicable when
ii. Philippine Interpretations Committee (PIC) - is a there are two classes of shares issued
committee formed by the Accounting Standards Council xvii. Fund theory - the accounting objective is neither proper
(ASC) income determination nor proper valuation of assets but the
iii. Board of Accountancy (BOA) - is the professional custody and administration of funds
regulatory board created under R.A. No. 9298 to supervise the xviii. Realization - the process of converting non-cash assets
registration, licensure and practice of accountancy in the into cash or claims for cash
Philippines. xix. Prudence - is the use of caution when making estimates
iv. Securities and Exchange Commission (SEC) - is the under conditions of uncertainty
government agency tasked in regulating corporations and
partnerships, capital investment markets, and the investing Expense recognition principles
public.
xx. Matching concept - costs that are directly related to the
earning of revenue are recognized as expenses in the same
period the related revenue is recognized
xxi. Systematic and rational allocation - costs that are not
directly related to the earning of revenue are initially
recognized as assets and recognized as expenses over the
periods their economic benefits are consumed
xxii. Immediate recognition - costs that do not meet the
definition of an asset, or ceases to meet the definition of an
asset, are expensed immediately.
THE FOUR-STEP MATERIALITY PROCESS
step #1. identify information that has the potential to be
material
step #2. assess whether the information identified in step 1 is,
in fact, material
step #3. organize the information within the draft financial
statements in a way that communicates the information clearly
and concisely to primary users
step #4. review the draft financial statements to determine
whether all material information has been identified
