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ACCOUNTING

- Accounting is the art of recording, classifying and summarizing in a significant manner and
in terms of money, transactions and events, which are, in part at least, of a financial character,
and interpreting the results thereof. (New York: AICPA, 1953)
CONCEPTUAL FRAMEWORK OF ACCOUNTING (OLD VERSION)
Scope:
C = Concept of capital and capital maintenance
O = Objectives of Financial Statement
Q = Qualitative characteristics of Financial Statement
E = Definition, Recognition, and Measurement of the Element of Financial Statement
QUALITATIVE CHARACTERISTICS OF FINANCIAL STATEMENT
Form/Presentation: C = Comparability
U = Understandability
Content/Substance: R = Relevance
1. Predictive Value
2. Feedback Value
3. Timeliness

Ry = Reliability
1. Faithful Representation
2. Substance over Form
3. Prudence or Conservatism
4. Neutrality
5. Completeness
CONCEPTUAL FRAMEWORK OF FINANCIAL REPORTING (NEW 2010 VERSION)
Scope:
C = Concepts of capital and capital maintenance
O = Objectives of financial reporting
Q = Qualitative characteristics of useful financial information
R = Reporting entity
D = Definition, Recognition of measurement of the elements from which financial statement are
constructed
QUALITATIVE CHARACTERISTICS OF FINANCIAL STATEMENTS (NEW)
Fundamental: R = Relevance – capable of making a difference in the decisions made by users.
1. Confirmatory Value – when it provides feedback about previous
evaluations.
2. Predictive Value – when it can be used as an input to processes
employed by users to predict future outcome.
3. Materiality – information is material “ if omitting it or misstating it
could influence decisions that users make on the basis of financial
information about a specific reporting entity”
FR = Faithful Representation
1. Completeness – all information necessary for a user to understand
the phenomenon being depicted, including all necessary descriptions
and explanations.
2. Neutrality – free from bias or “ unbiased in the selection or
presentation of financial information”
3. Freedom from error – there are no errors or omissions for the
reported information.
Enhancing: V = Verifiability – means that different knowledgeable and independent
observers could reach consensus, although not necessarily complete agreement,
that a particular depiction is a faithful representation.
C = Comparability – enables users to identify and understand similarities in,
and differences among, items.
U = Understandability - “classifying, characterizing and presenting information
clearly and concisely” makes it understandable.
T = Timeliness – means that “ information is available to decision-makers in
time to be capable of influencing their decisions.”

USERS OF FINANCIAL STATEMENT


L = Lender
I = Actual and Potential Investors
E = Employees
S = Suppliers
G = Government Agency
C = Customers
P = Public
ELEMENTS OF FINANCIAL STATEMENTS:
Financial Position
Asset
Liability
Equity
Performance
Income
Expenses
UNDERLYING ASSUMPTIONS:
A = Accrual Basis
G = Going Concern
CONSTRAINTS ON RELEVANT AND RELIABLE INFORMATION
T = Timeliness
CB = Cost Benefit – constraint prescribes that only information with benefits of disclosure
greater than the costs of providing it need be disclosed.
Ba = Balance between relevance and reliability
FUNDAMENTAL CONCEPT OF ACCOUNTING
Periodicity Concept
- An entity’s life can be meaningfully subdivided into equal time periods for reporting purposes.
- Calendar, ending December 31.
- Fiscal, ending in any day throughout the year, eg. April 1 to March 31 of the following year.
Entity Concept
- An accounting entity is an organization or a section of an organization that stands apart from
other organizations and individuals as a separate economic unit.
Stable Monetary Unit Concept
- The Philippine peso is a reasonable unit of measure and that its purchasing power is relatively
stable.
Accrual Basis
- Accrual accounting depicts the effects of transactions and other events and circumstances on a
reporting entity’s economic resources and claims in the periods in which those effects occur,
even if the resulting cash receipts and payments occur in different period.
Going Concern
- Assume that the entity will continue in operation for the foreseeable future.
BASIC PRINCIPLE OF ACCOUNTING
Historical Cost
- Assets should be recorded at their actual cost and not at what management thinks they are worth
as at reporting date.
Objectivity Principle
- Accounting records and statements are based on the most reliable data available so that they
will be as accurate and as useful as possible.
- Without this principle, accounting records would be based on whims and opinions and is
therefore subject to disputes.
Revenue Recognition Principle
- Revenue is to be recognized in the accounting period when goods are delivered or services
are rendered or performed rather than receive.
Expense Recognition Principle
- Expenses should be recognized in the accounting period in which goods and services are used
up to produce revenue and not when the entity pays for those goods and services.
Materiality
- Financial reporting is only concerned with information that is significant enough to affect
evaluations and decisions.
Adequate Disclosure
- Requires that all relevant information that would affect the user’s understanding and
assessment of the accounting entity be disclosed in the financial statements.
Consistency Principle
- The firms should use the same accounting method from period to period to achieve
comparability over time within a single enterprise.
REMEMBER

 The objective of financial statements is to provide information about the financial position,
performance, and changes in financial position of an entity that is useful to a wide range of users
in making economic decisions.
 Information is material if its omission or misstatement could influence economic decisions of users.
It is a threshold or cut-off point rather than primary qualitative characteristic of information.
 The objective of financial reporting is to provide financial information about the reporting entity
that is useful to existing and potential investors, lenders and other creditors in making decisions
about providing resources to the entity.
TYPES OF BUSINESS
SERVICES

- A service type of business provides intangible products (products with no physical form).
Service type firms offer professional skills, expertise, advice, and other similar products.
Examples: salons, repair shops, schools, banks, accounting firms, and law firms.

MERCHANDISING

- This type of business buys products at wholesale price and sells the same at retail price. They
are known as "buy and sell" businesses. They make profit by selling the products at prices
higher than their purchase costs.
- A merchandising business sells a product without changing its form.
Examples: grocery stores, convenience stores, distributors, and other resellers.

MANUFACTURING

- Manufacturing business buys products with the intention of using them as materials in
making a new product. Thus, there is a transformation of the products purchased.
- A manufacturing business combines raw materials, labor, and factory overhead in its
production process. The manufactured goods will then be sold to customers.

FORMS OF BUSINESS ORGANIZATION


Sole Proprietorship
- has a single owner called the proprietor who generally is also the manager. From the accounting
viewpoint, the sole proprietorship is distinct from its proprietor. Thus, the accounting records
of the sole proprietorship do not include the proprietor’s personal financial records.

Partnership
- Two or more persons bind themselves to contributed money, property, or industry to a common
fund, with the intention of dividing the profit among themselves. Two or more persons may
also form a partnership for the exercise of a profession. (Civil Code of the Philippines, Article
1767)
- Each owner is called a partner.
Corporation
- Is an artificial being created by operation of law, having the right of succession and the powers,
attributes and properties expressly authorized by law or incident to its existence.
- A corporation is a business owned by its stockholders.
Cooperatives
- A cooperative is an autonomous and duly registered association of persons, with a common
bond of interest, who have voluntarily joined together to achieve their social, economic, and
cultural needs and aspirations by making equitable contributions to the capital required;
patronizing their products and services and accepting a fair share of the risks and benefits of
the undertaking in accordance with universally accepted cooperative principle. The entity is
registered with the Cooperative Development Authority.

TYPES OF TRANSACTION
1. SOURCE OF ASSET
A = L + OE
↑ = ↑ ↑
2. USE OF ASSET
A = L + OE
↓ = ↓ ↓
3. EXCHANGE OF ASSET
A = L + OE
↑/↓ ↑/↓ = no effect no effect
4. EXCHANGE OF CLAIMS
A = L + OE
no effect = ↑/↓ ↑/↓ ↑/↓ ↑/↓

ACCOUNTING CYCLE
STEP 1: Identification of events to be recorded.
STEP 2: Transaction are recorded in the journal.
STEP 3: Journal Entries are posted to the ledger.
STEP 4: Preparation of a Trial Balance
STEP 5: Preparation of a Worksheet including Adjusting Entries
STEP 6: Preparation of Financial Statement
STEP 7: Adjusting Journal Entries are Journalized and Posted
STEP 8: Closing Journal Entries are Journalized and Posted
STEP 9: Preparation of a Post-Closing Trial Balance
STEP 10: Reversing Entries are Journalized and Posted.