UNIT 1

Definitions of Accounting:
1. ASC - Accounting Standard Council
a. SERVICE ACTIVITY, Its function is to provide quantitative information, primarily
financial in nature, about economic entities, that is intended to be useful in
making economic decision.
b. Money is the unit of measure
c. Primary information so decision makers make sound, rational, business
decisions
2. AICPA - American Institute Certified Public Accountants
a. ART (critical thinking analysis) of recording, classifying, and summarizing in a
significant manner and in terms of money, transactions and events which are, in
part at least of financial character, and interpreting the results thereof. ~decisions
3. AAA - American Accounting Association
a. process of identifying, measuring and communicating economic information to
permit informed judgment and decision by users of the information.
~ relaying and communicating the information = sound & rational decisions.

1. IDENTIFY
a. Select economic events (transactions)
b. Identify economic events, accountable transactions (not everything in the
business is needed in accounting)
c. Identify activities relevant to an organization or entity (then we can proceed)
d. Failure to identify = incorrect output
2. RECORD - means to an end, the bulk part of the work
a. Record, classify, and summarize
b. Once identified, events are recorded
c. In a systematic (there are rules) and chronological diary of events
d. “Measurement”
e. Assigning peso value or monetary amounts to economic events
f. Also involved in classifying and summarizing
g. DATE is a basis of measurement/recording; “chronological”
h. Can be expressed in terms of money
i. If it can’t be expressed in terms of money, it isn’t measurable, thus it can’t be
recorded
3. COMMUNICATE - most important!
a. Prepare accounting reports
b. Analyze and interpret
c. Involves relaying share accounting information to intended users through
accounting reports (different information to different people)
d. Financial Statements
1. most common form of accounting report
2. Heart of accounting communication
e. Involves analysis and interpretation of aggregate accounting information
 f. Analysis is crucial because not everyone can analyze and interpret
g. NUMBERS are there to tell us the VALUE OF ACCOUNTING

NATURE OF ACCOUNTING
1. SERVICE ACTIVITY - aid decision makers by providing financial reports relevant to
financial activities of business
2. PROCESS - series of steps, achieve desired end
3. LANGUAGE OF BUSINESS - medium of communication between business firms and
interested parties in its financial activities
~ Language of business facilitates understanding though accounting, interested parties in its
financial activities will us it as a reference for decision making

FINANCIAL STATEMENTS
1. Statement of Financial Position
2. Income statement/Statement of Comprehensive income
3. Statement of changes in owner’s equity
4. Statement of Cash Flows
5. Notes to Financial statements - integral and essential in the understanding of financial
statements

BRANCHES OF ACCOUNTING (according to PICPA - Philippine Institute of Certified Public

Accountants)
1. Public Accounting
a. Accountants who offer professional services for a fee
b. Provides services in the form of:
i. External auditing
ii. Tax services
iii. Managerial advisory services
c. Why PUBLIC? You work for an accounting firm which provides services to the
GENERAL PUBLIC - clients
d. MUST BE A CPA
e. E.g. Sycip, Gorres, Velayo & Co., SGV & Co.
2. Private Accounting
a. Accountants employed by a private enterprise or a nonprofit organization
b. DIFFERENT FROM PUBLIC? Working for a specific company, the company
itself receives your services, no other client, only exclusive to company
c. Provides services in the form of:
i. Financial accounting and reporting
ii. Internal auditing
iii. Tax accounting
iv. Cost accounting
3. Government accounting
a. Focus on preparing & keeping financial records for various national and local
government agencies
 b. Work FOR government, thus public will benefit, but public is NOT client, because
MAIN SERVICES direct to government
4. Accounting Education
a. Accountants involved in teaching accounting, taxation and some business
subjects
b. Involved in preparing the curriculum for accounting education
c. Work FOR schools, students will benefit
d. MUST BE A CPA

BRIEF HISTORY
1. Present already by 3600 BC “mechanism”
2. Double-entry accounting system ~ Italian influence
3. Florentine approach - influence how we write/record in Journal
4. Venetian approach - ledger postings, bilateral
5. Luca Pacioli - Father of Accounting
a. Kept records of merchants in Venice
b. Early accounting activities
c. NOT INVENTOR OF ACCOUNTING
6. Industrial Revolution
a. Increase Pricing, Competition, and Mass Production
7. Eugene Schmalenbach - chart of accounts
8. Government, income tax
9. Globalization

Bookkeeping Accounting

1. Only RECORDING of economic 1. ENTIRE process of identifying,

events recording and communicating
2. Only ONE PART of accounting economic events
3. Keeping of the books 2. Can be divided into
4. Update records a. Financial
b. Managerial

Financial Accounting Managerial Accounting

1. EXTERNAL users 1. Caters to needs of INTERNAL users

2. Produce Financial Statements 2. Specific to the need of the user
(general purpose) 3. NOT covered by GAAP
3. Provide information for a wide group 4. Within the organization
of users
4. GAAP

External Users Internal Users

 ● NOT Directly involved in the
business/organization
1. Investors (current & potential) -
maximize resources, invest in
business with good returns
2. Suppliers - assess the credit-
worthiness, how long to pay
3. Creditors - liabilities , e.g. BANK -
ability to pay for a loan
4. Regulatory Bodies (BIR, SEC, BSP)
- compliance, business compliance
with rules, regulation purposes
5. Customers - concerned to continue
producing goods that we need, if not,
we must adjust
● Directly involved in the
business/organization
● Day-to-day
1. Owners - assess how the business is
doing, decisions to continue/shut
down, what happened with investment
2. Managers - specific decisions,
marketing: pricing, finance: enough
cash, human resources: enough
resources
3. Employees - part of the business,
his/her employment at stake, able to
pay for benefits/salary

FORMS OF BUSINESS ORGANIZATION according to:

1. Ownership
a. Sole proprietorship
b. Partnership
c. Corporation
2. Activity
a. Service
b. Merchandise
c. Manufacture

OWNERSHIP:
1. Sole proprietorship - MOST COMMON
a. Only one person makes investment = owns the business
b. Owner is the proprietor or the sole proprietor
c. Advantage: ease of formation, lesser rules and regulations
d. Disadvantages: limited resources, continuity/life, skills and managerial expertise
are limited to what the owner knows, dies with the proprietor
2. Partnership
a. 2 or more persons make the investmenr and agrees to operate under certain
conditions, being PARTNERS
b. No maximum no. of partners
c. E.g. SGV PARTNERSHIP
d. Contractual
e. Expand under client base
f. Adv: better pull of resources,funds, more people with skills and expertise, every
partnership is mutual, unlimited liability- personal assets, ONLY liable to extent of
contribution
 g. Dis: sharing of profits, make agreement, disagreement of partners =
discontinuation, add new partner = everyone must be consulted
3. Corporation
a. An artificial being created by operation of law for a specific purpose
b. Owners are called stockholders of shareholders
c. owners need to acquire 1 share of stock
d. Unit of Ownership: SHARE
e. Need a degree of law, submit a list of documents before formed
f. Dividends - Shareholders

ACTIVITY
1. Service
a. Engaged in rendering services for a fee
b. Intangibility of output
c. Value added to the output
d. E.g. Salon, laundry shop, Restaurant (PREPARE food for you), Law firm, acctg
firm
2. Merchandising / Retail / Trading
a. Businesses engaged in buying and selling of goods
b. Earn by selling, buying/purchase goods, “RESELLING”
c. There’s a margin, mark-up
d. E.g. department store, groceries, bookstore
3. Manufacturing
a. Engaged in processing of products or the conversion of raw materials into
finished goods that are then sold
b. E.g. Unilever, Nestle, Apple
c.
ACCOUNTING PROFESSION in:
1. Republic act 9298 (Philippine Accountancy Act of 2004)
a. Regulates the practice of Accountancy in the Philippines
2. CPA -Certified Public Accountant
a. Must be a Filipino citizen
b. Professional accountant who earns title through a combination of education,
qualifying experience and an acceptance score in this written national
examination given by BoA - Board of Accountancy
3. Board of Accountancy
a. Also regulates accountancy profession
b. Prepares, grades & gives the results of the examination to the
c. Agency in charge of grading exam
d. Says IF QUALIFIED
4. PRC - Professional Regulation Commission
a. Licensing body
b. GIVES the license
5. FRSC - Financial Reporting Standards Council
 a. main function is to establish generally accepted accounting principles in the
Philippines

BASIC PROFESSIONAL VALUES AND BUSINESS ETHICS

1. Ethical Values
a. Integrity & due care - people rely on our work
b. Competence - equipped, seminars, info-change
c. Objectivity - evidence
2. Treadway Commission (1987)
a. formed to identify factors contributing to fraudulent financial reporting and to
develop recommendations to reduce its future occurrence

UNIT 2: GAAP
Generally Accepted Accounting Principles
- Ground rules that govern how accountants measure, process and communicate financial
information
- Encompasses the conventions, rules and procedures necessary to define what is
accepted accounting practice (Valix, Peralta & Valix, 2011)
Reasons why:
 ● Limited/boundaries
● Expectation in output
● Which is acceptable, defined correct/incorrect
● Rules = correct output
● Uniformity
● Users rely on the information
○ Ensures financial statements are useful and meaningful
○ Allows fs to be compared (different companies/period to period)
○ More sense when information compared

FASB - Financial Accounting Standards Board

- establish and improve generally accepted accounting principles within the United States
in the public's interest

I. UNDERLYING ASSUMPTIONS
A. Entity/economic entity/separate economic entity
B. Going Concern/ continuity assumption (*liquidity concern)
C. Monetary Unit
D. Time Period/Periodicity
II. GENERAL PRINCIPLES
A. Historical Cost/Cost
B. Revenue Recognition
C. Matching Principle
D. Full Disclosure
III. MODIFYING CONSTRAINTS
A. Materiality
B. Cost Benefit
C. Conservatism/Prudence
D. Industry Practice
IV. QUALITATIVE CHARACTERISTICS
A. Usefulness
B. Understandability
C. Relevance
D. Reliability
E. Neutrality
F. Comparability

I. UNDERLYING ASSUMPTIONS
A. Entity/economic entity/separate economic entity
■ Entity: organizational unit for which accounting records
■ Assumes that the business is separate from its owners
■ Activities of the entity must be kept separate and distinct from activities of
the owner and all other economic entities
■ NO personal transactions
 ■ Business transaction: economic event that can be measured in terms of
money and affects the enterprise
B. Going Concern/ continuity assumption
■ In the absence of information to the contrary, this concept assumes that
the business is to continue its operations for an indefinite period of time
■ Indefinite- there’s an end but do not know when, unless there are
evidences that tells us that business will close, otherwise business as
usual
■ Assessment every 12 months
■ On the basis, basis for Assets and Liabilities are classified as Current and
Non-current
■ Current: within 1 operating cycle/year; short term
■ Non-current: means that the business will continue to exist
■ Permits business to record ASSETS at their HISTORICAL COST (price
paid to acquire an asset)
■ Historical cost, otherwise FAIR MARKET VALUE
■ If going concern not applicable:
● there is no current/noncurrent, only current
● If theres evidence that business will not continue to operate in the
indefinite future
■ Liquidity Concern
● Convert non-cash to cash
● Appropriate assumption when business will not continue to
operate and instead liquidate
C. Monetary Unit
■ Money is used as unit of measure in preparing various financial reports of
the entity
■ Enables accounting to quantify and measure economic events
■ Assumes that money is a constant and stable unit of measure over time
(IGNORES INFLATION)
● QUANTIFIABILITY
○ If event not capable to express monetary, not recorded
● STABILITY OF MONEY
○ Does not change over time
○ Ignore inflation
If values of 2 entities are same, you can add value in 1997&2017
D. Time Period/Periodicity
■ Assumes that indefinite life of a business can be divided into separate
artificial time periods
■ Allows for a timely measurement of accounting information; knows the
progress of business
■ At the end of each time period, accounting reports, financial statements
are prepared (at least once a year)
■ Accounting Periods:
 ● Calendar year
○ January 1 to Dec 31 (most common)
○ FISCAL PERIOD: 12 MONTHS, will not start/end at Jan
1/dec 31
● Natural business year (Fiscal year)
○ Length of fiscal period is determined by nature of business
& frequency of need for data/reporting
● Interim period
○ Shorter than 1 year (quarter, month, semi-annually)
II. GENERAL PRINCIPLES
A. Historical Cost/Cost
■ Principle that requires assets to be recorded at their acquisition cost
■ Once recorded, assets will continue to be carried at their cost, adjusted
for depreciation if there would be any, even if their fair market value
differs
■ If value increased=appreciation
■ Old asset acquired before, record at its fair market value, not acquisition
cost, if only invest it in the business now
B. Revenue Recognition
■ Revenue: represents inflows of new assets resulting from sale of goods
or services rendered to an outsider
■ Revenue should only be recorded in the period when it was EARNED or
REALIZED regardless whether CASH was received or not
■ Revenue is considered earned/realized when service has been fully-
rendered/goods has been fully delivered
C. Matching Principle
■ Expense: represents outflows of resources incurred to generating
revenues
■ Cost or expenses incurred in earning revenues must be recorded in the
same period in which the related revenue was earned
■ Implies a cause-effect relationship, cost-revenue
ACCRUAL BASIS OF ACCOUNTING
1. Income is recorded when earned regardless whether cash has been received or not
2. Expense is recorded when incurred whether or not payment has been made
3. NOT A PRINCIPLE but a MANNER of recording
CASH BASIS
- For small businesses
D. Full Disclosure
■ reveal/share/make something known
■ Requires that all information that might affect the user’s interpretation and
understanding of the financial statements be disclosed
■ Disclosures may come in the form of:
● Parenthetical comments on the face of financial statements
○ If something will help understand, disclose it
 ● Disclosure notes/notes to financial statements
○ Essential to understand financial statements
III. MODIFYING CONSTRAINTS
- Practical considerations which will relax compliance
- Exemptions to general rules
A. Materiality
■ Refers to relative importance or significance of an item in relation to a
particular situation or set of facts
■ Considered as material if knowledge of it, it’s inclusion or exclusion in the
financial statements will affect the decision of a prudent decision maker
■ Material is relative, what is important to you may not be important to
others
■ BASIS:
● AMOUNT
● NATURE OF SITUATION INVOLVED
B. Cost Benefit
■ Would go hand-in-hand with MATERIALITY
■ Cost of gathering information to comply with an accounting principle or
rule should be justified by the benefit that would be provided if the
preferred treatment is followed
■ COST OF COMPLIANCE < BENEFIT SHOULD BE GREATER ~asset,
material
■ IF COST > BENEFIT ~losing end, immaterial
C. Conservatism/Prudence
■ When uncertainties exist, accountants lean toward/favor the accounting
method that would produce the lower net income or lower asset valuation
■ In the presence of uncertainties, the accounting method with the least
impact on equity is preferred
D. Industry Practice
■ Some industries have unusual tax laws or regulatory requirements and
have developed special accounting principles and procedures for their
industry
■ E.g. public utility companies
■ Businesses may have different accounting methods, doesn’t necessarily
mean wrong
■ Different industries ~ different regulations/practices
IV. QUALITATIVE CHARACTERISTICS
- If the following are present, will enhance financial statements
A. Usefulness
■ Information must be useful for decision makers
B. Understandability
■ Before decision making, must be understood
■ Information should be presented in a clear and understandable manner,
assuming users have some basic knowledge of business and economics
 C. Relevance
■ Information should be appropriate or and have a bearing on decisions to
be made by users
■ Timeliness- information should be reported promptly so that it can be
useful in current decision making
■ Relevant information should have both: predictive value and feedback
value
D. Reliability
■ Information should be dependable, free from error or free from bias
■ Broader than neutrality
■ VERIFIABILITY
● Supporting documents support the amounts reported in the fs and
they’re available for examination
■ REPRESENTATION FAITHFULNESS
● Data shown in the financial reports reflect what really happened
● Not reporting fictations, only actual and things affect the business
E. Neutrality
■ Information should not favor 1 group of users over another
■ Information should be useful and helpful to ALL groups of users
■ Free from bias, objectivity
■ To be reliable, must be neutral
F. Comparability
■ Information should be presented so that it can be meaningfully compared
with financial statements of other businesses as well as previous financial
statements of the business itself
■ Requires CONSISTENCY- means that an entity uses the same
accounting treatment for similar events and data from period to period
■ Consistency permits Comparability

UNIT 3: STATEMENT OF FINANCIAL POSITION

SFP
- Balance Sheet
- Financial statement, informing users the financial condition/position of an organization at
a given date
- Shows the WORTH of a business in terms of ASSETS it owns, OBLIGATIONS it owes,
and INVESTMENTS of its owners
- Computational notes are different from Disclosure

NATURE FORMS OF SFP:

1. Account form - left and right
2. Report form - top and bottom
MAJOR ELEMENTS:
1. ASSETS
a. Resources controlled by an entity as a result of past transactions or events and
from which future economic benefits are expected to flow from the entity
b. Used in carrying out activities of an entity
2. LIABILITIES
3. OWNER’S EQUITY