ACCOUNTING
financial reports.
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.
Service- intends to supply financial reports to be
used be economic decision makers.
Economic decision making- the main reason why
accounting records and reports are prepared.
American Institute of Certified Public
Accountants
-the art of recording , classifying, and summarizing in
a significant manner in the terms of money
transactions and events in which are in part at least
of financial character and interpreting the results
thereof.
American Accounting Association
-the process of identifying, measuring, and
communicating economic information to permit
informed judgments and decisions by users of the
information.
Process- through accounting cycle to summarize the
voluminous and repetitive business transactions into
organized and understandable financial reports.
Information system- financial reports then turned
over to decision makers.
Nature of Accounting
1. A service activity
-provides assistance through financial
reports.
-helps users to understand financial reports
from which to draw sound economic
decisions.
Economic Entities- they need financial
report to evaluate r not to see if they are
performing well or not.
2. A Process, an Art, and a Discipline
-involves identifying, measuring, and
communicating economic information to
effect informed economic judgment.
Process- to follow certain guidelines.
Art- expressing of ideas, knowledge,
information, and critical thinking.
3. The Language of Business
-the medium of communication is through
-it interprets and communicate the true
status of the business in terms of its operating
results and financial condition.
Profitability- is the increase in capital as a
result of business operations.
Liquidity- the available funds to finance the
business operation.
Solvency- the ability of the business to pay its
long-term obligations to others.
Stability- the ability of the business to sustain
its long-term profitability and cash flow.
Capital Structure- the amount of borrowed
capital and owner’s capital are invested in the
business.
Financial Flexibility- the ability of the
business to have excess cash for investment
opportunities and other uncertainties.
4. The Eyes of the Business
Bookkeeping records- initial part of
accounting activities. It enables the owner of
a business to check his financial progress.
Accountants- economic detectives.
Auditing- verifies the truthfulness of the
financial reports concerning the business
results of operation and financial condition.
Functions of Accounting
Primary Function- prepare financial reports and
provide them to economic decision makers.
Basic Function- the process of identifying,
measuring, and communicating economic
information to permit informed judgments and
decisions by users of the information.
Advanced or critical Function- (audit function) to
test the reliability of the financial reports.
Purpose of Accounting
-to help financial users see the true picture of the
business.
Objectives of Accounting
-to provide useful information for economic decision
making.
a. to ascertain the results of the business operations
b. to ascertain the financial position of the business
c. to assist financial users in predicting the
enterprise’s financial capacity regarding future cash
flows, financial conditions and results of operation.
- to asses if the business earned profit or suffered loss
during the accounting period.
Income Statement- contains all the revenues and
expenditures of the business for a certain period.
Statement of Financial Position (Balanced Sheet)
Assets – Liabilities= Owner’s Equity
-know the financial condition.
History of Accounting
Cradle Civilization
-started in Mesopotamia around 3600 BC
-they used clay tablets.
Double-Entry System
-it has Italian influence in the 13th to 15th century
Genoa- has the oldest double-entry books (Massari
Treasury Officials) Ledgers of Commune of Genoa)
1340.
Florentine Method- Journal Entries
Venetian Method- Ledger Postings
Luca Pacioli (1447-1517)
-Father of Accounting
-wrote the Summa de Arithmetica the bible of
accounting.(1494)
3 Important Books of Record
1. Memorandum Book- for all information and
transactions
2. Journal Book- for original entry
3. Ledger Book- for final entry(posting)
CHED Memo Order No. 3 s.2007
-indicates the 4 fields of accounting
Branches of Accounting
Public Accounting
-perform service for a fee
-intended for public
-employee of your own company
Branches of Accounting under Public
a. External Auditing
-inspect or determine financial statements
 Rectify errors
 Verifying the financial statements
 Correcting errors
 Issues that have problems will be
bringing to the Auditor.
b. Tax Services
-prepares the clients income tax return, business, and
tax transfers.
Income tax- earnings of individuals/employee
Transfer tax- the tax of the original owner will be
transferred to the buyer.
Tax- is the life blood of the government.
c. Managerial Advisory Services
-gives financial advice to different companies
-operations and finance clients
-consulting services
Private Accounting
-internal part of accounting.
-they are part of a certain company.
a. Financial Accounting
-record/ classify business transactions that performs
to the preparation of the financial statement.
i. Balance Sheet
ii. Income Statement (operating results)
iii. Cashflow Statement
b. Internal Auditing
-working in a specific company
-deals with determining the operational efficiency of
the company.
c. Tax Accounting
-preparations of tax returns (company tax)
-to minimize the impact of tax in the firm.
d. Cost Accounting
-inventory records of all the supply expenses
incurred by the company.
-used for planning and controlling purposes.
e. Budgeting
-management of cash
-predicting monetary objectives in the future period
-allocating=dividing
f. Accounting System Design
- evaluation of the company’s control system
-designs the accounting forms
-accumulation of accounting data
g. International Accounting
-specialize on international transaction of a business.
h. Not-for-Profit Accounting
- their ultimate purpose is to help the community
i. Socio-Economic Accounting
- concerns the measurement of the impact of the
business in helping the society.
Government Accounting
-custody of government funds
Accounting Education
-involves teaching accounting, taxation, and some
business subjects.
Chapter III: Users of Accounting Information
-can be classified based on the extent of their
participation in the affairs of the business.
Internal Users
-direct access to the financial statement
-internal financial reports are usually prepared
External Users
-do not own the business
-no direct access to the management of the business.
- uses the financial statements to satisfy some of their
different needs.

The Financing Group and Public Group
a. Investors
-to assess the risk investments portfolio
-to help them determine whether they should
buy, hold, or sell their investments
-to assess their return on investment
b. Employees
-to determine the employer’s stability and
profitability
c. Lenders
-to determine whether the borrowers can pay
their loans and interest attached to them
when due.
d. Suppliers and other trade creditors
-suppliers use the financial statements of
their customer to determine the continuity of
the latter’s business.
-debts owed to them will be pad when due.
e. Customers
-to assess the latter’s continuity in business
because some customers are dependent on
the existence of their suppliers to insure the
availability of supplies that will sustain their
business operation.
f. Government and its agencies
-financial statements of an enterprise for
statistics, income taxes, and other regulatory
policies.
g. Public
-providing information for the trends and
recent developments in the prosperity of the
enterprise and the range of its activities.
Forms of Business Operations
Business
-any economic activity conducted primarily for profit.
-to supply goods and services to earn profit or
income.
1. Sole Proprietorship
-business entity owned by one person
-called as a sole proprietor
-ownership can’t be transferred.
-ownership is different from property.
Advantages
-easiest to start and set up
-needs few legal requirements.
-only one owner decides for the business.
-all profits are for the owner.
-the owner is the one being taxed.
-easy to dissolve.
Disadvantage
-unlimited liability, the owner is liable for the
businesses’ debts
-limited resources (capital, managerial skills and etc.)
-all losses are borne by owner
-limited life, automatically terminated due to owner’s
death, insanity, or imprisonment.
2. Partnership
-founded through trust and confidence which is
called fiduciary relationship
-owned by two or more persons that are called
partners.
-agreed to contribute money, property, and industry
to a common fund.
-dividing the profits among themselves.
-register it to Securities and Exchange
Commission.
Advantages
-easy to form, by mere agreement
-joint resources
-lesser government supervision
-tax-exempt if professional, but subject to tax
corporate tax if commercial partnership.
Disadvantages
-unlimited liability
General partnership- invest money and
personal property. Can be liable for the
business debt.
Limited Partnership- invest money only.
-all partners may be held liable for the action of one
partner.
-consensual and restricted transfer of ownership.
-limited life, disagreement or change of partner may
dissolve the partnership. Incapacity, insanity, or
death of the partner terminates it.
3. Corporation
-registered as an artificial person under the
operation of the law.
-has the right of succession
-it has power, attributes, and properties expressly
authorized by the law or incident to its existence.
-powered by the legislative department
-special or general incorporation law
-Board of Directors are the elected group of
individual that represent shareholders.
-income received by the shareholders are called
dividends.
- Juridical persons- the personality given by the law
to corporations
Profit corporation- issues shares equity to
shareholders.
Nonprofit-does not issue shares equity.
-incorporators, are founders, composed of
stockholders.
Advantages
-limited liability, shareholders are not legally liable
for the corporate unpaid liabilities.
-power of succession, it can continue to exist inspite
of death, withdrawal, or changes of officers and
shareholders.
-unrestricted power of ownership
-renewable and perpetual life, a corporation may
renew its life every 50 years.
Disadvantages
-only the BOD and other authorized officers can bind
contracts.
-shareholders have limited access and control over
management and operations.
-more stringent government supervision and
restrictions.
-regular tax is 30% of the income rate.
-if incurred loss in its 4th year of operation it will have
a tax of 2% in its gross income.
Primary Activities of Business
Servicing
-renders service to earn revenue
Merchandising
-engages in the buying and selling of goods.
-earnings are primarily derived from the markup
(profit) it adds to the cost of goods it sells to the
customers.
Wholesale- large
Retail- small
Manufacturing
-raw materials to finish goods that are sold at selling
price.
Hybrid
-the combination of servicing, merchandising, and
manufacturing.
Accounting Concepts, Conventions and Principles
Job: prepare financial reports
- to draw sound, consistent and profitable economic
decisions.
- a user must have a basic knowledge of concepts,
convections and principles which serve as guidelines
in the practice accountancy.
- use over the years
Accounting Concepts
- important assumptions or ideas which accountants
observe in recording business transactions in the
books of accounts.
- refer to an assumption, or an abstract idea that
governs accounting practice.
- Bedrock of Accounting/ Postulates
-separate entity -accrual
- going concern - monetary unit
- time period
Accounting Conventions
-accounting practices that practitioners accept
because of their long existence and use.
-example is debit and credit or dual aspect concept.
-a value received has a corresponding value given.
Accounting Principles
-actions that will best accomplish the objectives of
accounting.
-a doctrine, a basis of all other rules, procedures and
methods used in accounting practice.
-continually evolving and developing to meet the
changing needs and conditions.
The Generally Accepted Accounting Principles
-governing body of accountancy formulated standard
principles, assumptions, and procedures.
-guide in measuring, recording, and reporting
financial activities of the enterprise.
-developed based on experience, research, and
careful study.
Objectve: to fairly present financial statements in
conformity with GAAP.
Basic Accounting Concepts Assumptions
-foundation for the rational and systematic
formulation of principles and the development of
procedures for the application of such principles.
Underlying Assumptions
a. Accrual Basis
-financial statements except statement of
cash flow.
 -net profit of the business is the difference of
the revenue and expense for an accounting
period.
b. Going Concern
-accountants assume that the business entity
will continue operating indefinitely.
Objectivity- must be both definite and
verifiable
Historical cost- helps attain objectivity. Only
purchased price as the value of an asset.
Accounting Entity
-business transaction
-personal and business transaction must not
combine. It can create confusion and
unorganized report of an accountant.
-also called as separate entity concept or
business entity concept.
Inherent Assumptions
a. Monetary Unit
-assumptions on quantifiability and peso
stability.
Quantifiability- common unit of
measurement. (money) Currency used in
a country they’re working for.
Peso stability- accountants assume that
the monetary unit retains its purchasing
power regardless of fluctuation in money
value.
b. Time Periods
-accountants divide economic life of the
business into relatively short period of
time.
Importance: users of financial
information need to make decisions at
many points in the life of business.
-also called as accounting period.
i. Calendar year
-12 month period. Starts in January 1 to
December 31.
ii. Fiscal Year
-also composed of 12 months but starts
any month of the year other than January.
iii. Interim Period
-business period within an accounting
period.
Basic Financial Statements and their Elements
Financial statements
-formal reports prepared by accountants.
-it shows the financial effects of transactions and
other events by grouping them into broad classes
according to their economic characteristics. Also
called as elements of financial statements.
1. Statements of Financial Position
-formerly known as Balance Sheet.
-shows the financial position of the business.
-the elements are assets, liabilities, and owner’s
equity.
2. Income Statement
-shows the operating performance of the business.
-the elements are revenue and expenses.
3. Statement of Change in Equity
-shows the movements in the various elements of the
owner’s capital
Basic components of this statement.
a. Owner’s investments to the business
b. Profit or loss for the period
c. Owner’s personal withdrawals
d. Prior period adjustments
4. Cash flow statements
-changes of cash and cash equivalents.
Cash Equivalent –short-term, easy to convert in cash
Components of cash flow statement
a. Operating- the inflows and outflows of cash
from the normal operating activities of the
business.
b. Investing- the inflows and outflows of cash
from the sale or purchase of assets other than
inventory.
c. Financing- the inflows and outflows of cash
from the owners and creditors of the
enterprise.
5. Notes to the financial statements
-to achieve proper understanding of the financial
reports.
Definition, Classification and Examples of
Accounts
Real Accounts
-assets, liabilities, and owner’s equity.
-reported in the SFP.
The Assets Accounts
Assets
-owned and controlled by the enterprise.
Physical form- cash and inventory
No physical form- patents and copyrights.
-short term in nature.
Current Assets are:
1. It is a cash or cash equivalent which is not
restricted for current use.
2. It is expected to be realized, is held for sale or
consumption in the normal course of the
enterprise’s operating cycle.
3. It is held primarily for trading purposes or for
short-term and expected to be realized within
12 months of the SFP date.
Operating cycle of an enterprise
-time between the acquisition of materials
entering into a process and its realization in cash
or an instrument that is readily convertible into
cash.
Cash-on hand monetary value
Accounts Receivable- oral promise to the
business.
Notes Receivable- written promise to the
business
Accrued Interest Receivable- interest earned
on note receivable.
Inventories- process of production sale.
Prepaid Supplies- materials used in the office thet
are unused.
Noncurrent Assets
-long-term in nature
Land- site owned by the business
Building- used in the operation of the business
Furniture and Fixture- long-lived items used in
the business
Equipment- machinery used in a business.
The Liability Accounts
Liabilities
-present obligations to pay cash or cash
equivalents by an entity.
Current Liability
1. It is expected to be settled in the normal
course of the enterprise’s operating cycle.
2. It is due to be settled within the 12 months of
the Statement of Financial Position date.
Accounts Payable- oral promise of the business
to the creditor
Notes payable- written promise of the business
to the creditor
Accrued Interest payable- interest incurred to
the notes payable
SSS Premium Payable- representative amount
of employee and employer contribution to SSS
which are not yet remitted.
Withholding Tax Payable- unpaid tax to the BIR
The Owner’s Equity Accounts
Owner’s Equity- residual amount after deducting
liabilities from assets.
-capital contribution and withdrawals by the
owner.
Owner’s Capital= Sole Proprietorship
Partners’ Capital= Partnership
Shareholders’ Equity= corporation
Drawing- amount taken by the owner from the
business
Nominal Accounts- comprise the element of the
Income Statement
-closed or put to zero balance at the end of the
accounting period
Nominal Accounts- earning portion of the firm
Sales- sale of goods of a trade or a merchandising
business.
Service Income- earnings from service
Professional Fees- earning from service by a
professional servicing firm to its client.
Interest Income- earning from time value of
money derived from promissory notes.
Gain on Sale of other Assets- earning from
selling assets of the business.
The Expense Accounts
Expenses- cost incurred in conducting the
business activities.
Cost of Sales- value of merchandise sold
Supplies Expense- supplies consumed
Insurance Expense- amount of insurance policy
incurred during the current period
Taxes and License Expense- cost of paying the
tax and renewing or registering the business.
Accrued income- income which has been earned but
not yet received.
Accrued expense- expense which has been incurred
but not yet paid.
Accrued revenue- a sale that has been recognized by
the seller, but which has not yet been billed to the
customer.