BRIEF

HISTORY OF ACCOUNTING

The earliest known writing discovered by archaeologists has, when translated,
been found to be records of tax accounting. Such writings have been found on clay tablets
from Eqypt and Mesopotamia from as early as 2000 to 3300 BC., as humans formed
governments, accounting become a necessity.

th th
The Renaissance period in Italy (14 and 16 century) where many major
developments in accounting practice begins. The replacement of Roman numerals into
Arabic numerals to record business transactions and development of large scale record
keeping were some of the developments. During this time Benedetto Cotrugli wrote Delia
Mercantura et del Mercante Perfetto (Of Trading and the Perfect Trader), which included a
brief chapter which describes many of the features of double entry bookkeeping system.
Other scholars only give credit Cotrugli for writing the first book on the double entry
method and suggest that it had been used for hundreds of years before that, in certain
parts of Italy.

But it was 36 years after when Frater Luca Bartolomes Pacioli, published his fifth
book “Summa de Arithmetica, Geometrica, Proportioni et Proportionalita” (Everything
About Arithmetic, Geometry and Proportion), one of the very first published books of the
time that become the accounting “textbook” for the next 500 years, thus oftentimes he
was credited and called the “Father of Accounting”. It was a digest and guide to existing
mathematical knowledge, and bookkeeping was only one of five topics covered. He
described the use of journals and ledgers which included assets (including receivables and
inventories), liabilities, capital, income, and expense accounts. He demonstrated year-end
closing entries and proposed that a trial balance be used to prove a balanced ledger.


DEFINITION OF ACCOUNTING

The Accounting Standards Council (ASC) defined accounting as follows: “It is 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
decisions.”

The American Accounting Association (AAA) which comprises primarily of
accounting educators defines accounting as follows: “It is the process of identifying,
measuring and communicating economic information to permit informed judgements and
decisions by users of the information.”

 The Committee on Accounting Terminology of the American Institute of Certified
Public Accountants (AICPA) which is the largest organization of practicing accountants
made the definition of accounting as follows:“It is an art of recording, classifying,
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.”

The different governing bodies may give you a different meaning but overall they
are pointing out the same thing that accounting is a service activity that transforms
business transactions, primarily financial in nature, into accounting information that may
be useful for interested parties involved in the business.

Accounting Users
Business Accounting
Information
Transactions Process


Furthermore, the definition above mentioned the four major accounting
processes: recording, classifying, classifying and interpreting.

Recording means putting into writing the transactions and events in the books of accounts.
It is a routine and mechanical process.

Classifying means grouping or sorting the transactions based on their kind and classes in an
orderly manner.

Summarizing is the phase of accounting process in which all the data are gathered together
to heighten their usefulness resulting to the completion of the financial statement.

Interpreting means the analysis of the summarized financial information that may involved
percentage analysis, ratios, comparative computations and the sorts and is communicated
to those interested parties.

Accounting versus Bookkeeping
Accounting includes bookkeeping, which is part of the accounting process of
recording, classifying and summarizing. Bookkeeping is the technical term for the recording
phase of accounting as it is involved with recording of transactions in accounting journals
or books of accounts. The person who does the bookkeeping job is called the bookkeeper.
The bookkeeping tasks include routine, mechanical and clerical work while accounting
extends beyond that, to include judgement on the estimates applied, presentation, and
analysis of financial statements.


PURPOSE OF ACCOUNTING

The main purpose of accounting is to provide quantitative, financial information
about economic entities that is intended to be useful in making economic decisions.

KEY FEATURES OF ACCOUNTING
• It provides a vital service in today’s business environment
• It is primarily concerned with quantitative, financial information in conjunction
with qualitative evaluations in making informed judgment.
• It is used in making decisions about allocation of scarce resources
• It is considered as the language of business.

WHY DO WE STUDY ACCOUNTING AND ITS RELEVANCE TO THE BUSINESS?

There is a saying that “Behind every successful man, there is a woman”, this can
also hold true to every business establishment that every successful business is a great and
smart accountant. The accountants’ main obligation in simplified manner is transforming
numbers into words that can be easily understood and useful by the decision makers.

The main interest of owners and creditors is to generate profit for the company.
Profit does not mean all the sales you generate from selling a product or providing service
to your clients. Profit means the remaining peso sales you earned after deducting all the
expenses you incurred. So just imagine if no one is monitoring the remaining cash you
have; the bills that you haven’t paid for the month; the salaries of your employees; the
amount due to the BIR; how the company performed compared to your competitors or
compared to previous year’s performance.
Questions about can we still pay the next month’s rent based on our sales? Is it
wise to expand our business today? And where do we get money if we are going to
expand? How do we budget our limited money to continue our operations? Is our sales
enough? Is our selling price correct or are we pricing our products too high or low? If we
are going to change the ingredients of our product, what is the effect to the profit? These
and all other questions about the company' welfare that will require decision making will
use accounting.


BRANCHES OF ACCOUNTING

A. Business Accounting (also known as Enterprise or Commercial Accounting)

• Financial Accounting is concerned with general purpose financial statements
including consolidated financial statements. The Financial Accountant will be
 working in a different range of industries, from a private or a nonprofit
organization as a financial analyst, financial accountant, controller or financial
manager. His primary duty includes the preparation of financial report in
accordance to generally accepted accounting principles. He/She may also
involve in advising company leaders on investment practices and strategies,
communicating the status of the company and must be abreast with the
current economic trends, accounting standards both local and international
bodies.

• Managerial Accounting refers to processing or preparation of special purpose
financial reports for management needs, such as, prospectus, management
reports on cost analysis, cost and benefits analysis, investment analysis, and
such other internal management reports. The primary duty of the
management accountant is preparation of report that will help the primarily
the internal users in their decision making. They can be budget analyst,
financial analyst, accounting manager, controller, chief financial officer, may
also be skilled in risk management and strategic planning.

o Cost Accounting is a subset of Managerial Accounting. It concerns
primarily on cost collection, allocation and control of producing
goods and services. Most of the cost accountants are in
manufacturing industry. The work may encompass budgeting, cost
management, performance evaluation and asset management.

• Tax Accounting is based on the enacted tax laws. It includes the preparation
of tax returns and the consideration of the tax consequences (withholding
taxes, value added tax, percentage taxes and other taxes) of business
transactions. Aside from the preparation of tax returns, the tax accountant
also involves in tax planning which is anticipating the tax effects of business
transactions and lowering the tax burden of the company.

B. Not for Profit Accounting

• Government Accounting is the process of analyzing, recording, classifying,
summarizing and communicating all transactions involving state funds and
properties.

• Institutional Accounting is the accounting for non profit entities including non
government organizations (NGOs).


 C. Auditing

• External Auditing is the independent examination intended to support the
expression of an impartial expert opinion on the fairness of the financial
statements.

• Internal Auditing is an independent, objective, assurance and consulting
activity designed to add value and improve an organizations operations. It
helps an organization accomplish its objectives by bringing a systematic,
disciplined approach to evaluate and improve the effectiveness of risk
management, control and governance processes.


D. Fiduciary Accounting

• Estate Accounting is the handling of accounts for fiduciaries who wind up the
affairs of a dead person.

• Trust Accounting is the handling of accounts for fiduciaries who determine
that customer’s money are held for the purpose contracted by the customer
and its management.

• Receivership Accounting is the handling of accounts for a fiduciary appointed
to take charge of a financially unstable business pending its disposition or the
attainment of an imposed objective.

E. Other Branches

• Accounting Education the branch of accounting that deals with developing
future accountants through creating and engaging relevant accounting
curriculum. Educators help in the development of the accountancy program
through teaching, research and publication.

• Accounting Research the branch of accounting that focus on the
advancement of the profession through in depth search for new knowledge
that will affect the field of accountancy.

Financial Accounting versus Financial Auditing
Financial accounting facilitates the management assertions on the financial statements
presentation based on the Philippine Financial Reporting Standards (PFRS). Financial
auditing examines these compliant financial statements with PFRS using the Philippine
Auditing Standards (PSA). In practice, it is observed that when financial accounting stops,
then financial auditing begins.


USERS OF FINANCIAL STATEMENTS
Users of financial statements include internal users (those who make decisions
directly affecting the internal operations of the entity), and external users (those who make
decisions concerning their relationship to the entity); however, under the new Conceptual
Framework, the users are already classified into primary users and other users.

A. Primary Users – are those to whom the general financial reports are primarily
directed.
• Existing and Potential Investors – they need information to help them
determine whether they should buy, hold or sell.
• Lenders and other creditors – they are interested in information that enables
them to determine whether their loans, interest thereon and other amounts
owing to them will be paid on maturity.

B. Other Users – the residual definition of primary users and these are
• Employees – they are interested in information which enables them to assess
the ability of the enterprise to provide remuneration, retirement benefits and
employment opportunities.
• Customers – they have an interest in information about the continuance of an
enterprise especially when they have a long term involvement with or are
dependent on the enterprise.
• Government and their agencies – these users require information to regulate
the activities of the enterprise, determine taxation policies and as a basis for
national income and similar statistics.
• Public – they are interested in information related to trends and recent
developments in the prosperity of the enterprise and the range of its
activities.









FORMS OF BUSINESS ORGANIZATION

Sole Proprietorship
This is the simplest form of business organization where capital is owned and
provided by only one person called the “Proprietor”, who may manage the business by
himself or hire another person to do so.

Advantages Disadvantages
• Formation – very little paper work • Limited Capital – since only one
required in filing your business business owner, the initial capital
name with a minimal fee. will be lesser as compared to
partnership or corporation.
• Ownership – as a sole owner, it • Unlimited Liability – the owner will
possesses all the authority and be personally liable for the debts
control to make decision. and obligations of the company. He
will also be responsible up to the
negative acts committed by his
employees
• Taxation - Income made by the • Responsibility – all the day to day
business is counted as personal business decisions lies on the
income and owners pay taxes owner, thus it requires
according to their individual tax. commitment and taking a holiday
No need to make a separate tax is difficult.
returns
• Distribution of Profits – sole owner • Losses – the same with profits all
owns 100% of the profit. losses will be borne by the sole
owner



Partnership
This is a business owned and operated by two or more persons (called partners) who bind
themselves to contribute money, property, or industry to a common fund, with the
intention of dividing the profits among themselves.

Advantages Disadvantages
• Capital – the more partners there • Disagreements – the danger of
are, the more money they can put disagreement is eminent in
into the business resulting to more partnership resulting from
potential growth and profit. different ideas.
• Flexibility – partnership is much • Agreement – Decisions should be
 easier to form, manage and run. based on the majority of the
Less regulated as compared to partners resulting to less freedom
corporation and far more flexible but more flexible compared to
in terms of management corporations.
• Shared responsibility – partners • Liability – ordinary partnership are
can share the burden of running subject to unlimited liability
the business that will allow them however limited partnership are
to make the most of their abilities. not.
• Decision Making – partners can • Profit Sharing – profits for each
help each other in making partners depend on the
decisions. More partners means agreement.
more brains that will help in
problem solving, strategies and
new ideas .


Corporation
This is an artificial being created by operation of law, having the rights of succession and its
powers, attributes, and properties expressly authorized by law or incident to its existence.
The owner is called a stockholder or shareholder.

Advantages Disadvantages
• The capacity to act as a legal entity • A corporation is subject to
government control
• Continuity of Life • Frequent and numerous reports
are required from the corporation
• Limited Liability – the liability of • The corporation may not engaged
the stockholders is only limited to in another business specified in the
what they contributed to the Articles of Incorporation.
company.
• There is a better management as • Minority owners will be at the
the best service may be extracted mercy of the majority shareholders
from the bigger membership of a
corporation
• There is more unified form of • There is a greater possibility of
control which is reposted in the abuse of power
Board of Directors
• There is a greater source of capital • Credit of Corporation is limited on
account of limited liability of
stockholders.

 Cooperatives
This is a duly registered association of persons, with a common bond of interest, who have
voluntarily joined together to achieve a lawful common social or economic end, making
equitable contributions to the capital required and accepting a fair share of the risks and
benefits of the undertaking in accordance with universally accepted cooperative principles.
The main advantage of cooperative is that it exists for the benefit of the members who at
the same act as owners. Every member is expected to help the company achieve its goals
and it ensure that each member’s voice will be heard and can control the organization
within the limits of majority rule.

Such structure may warrant loyalty to the product or service of the organization by its
members itself to assure high volume of sales by the business. However due to its
democratic in nature, initiative and flexibility in the operations and decision making may
limit the cooperatives. Sometimes also the salary is lesser as compared to commercial
business resulting to hiring not so good and competent managers.

DIFFERENCE BETWEEN PARTNERSHIP AND CORPORATION
PARTNERSHIP CORPORATION
1. Created by voluntary agreement of the Created by law, either special charter or
parties general law.
2. May exist for an indefinite period of time May exist for not more than 50 years
subject to extension
3. Managed by all partners except if they Managed by a Board of Directors or trustees
appoint a managing partner elected by the stockholders or members
4. A general partner’s liability extend beyond A stockholder’s liability is only up to his
his capital investment
5. A partner may bind his co-partner for acts Stockholder’s cannot bind the corporation
within the scope of the business unless authorized by the Corporation code.
6. Death of a general partner may dissolve the Death of a stockholder does not dissolve
partnership the corporation.


TYPES OF BUSINESS

Service Concern
The business derived its income from services rendered to clients. Examples are
professional services of accountants, lawyers, doctors and dentists. Non-professional
services include laundry shop, car repair shop and janitorial servicing.



Merchandising
The business is engaged in buying goods or commodities or any form of finished products
and sells these at a profit.

Manufacturing
The business is engaged in buying of raw materials and supplies to be processed or
manufactured, converting them into finished products for sale at a profit.

Agriculture
The business is engaged in planting of crops and sells its products either in raw or finished
form at a profit.

Hybrid Companies
The type of business that involves in more than one type of activity which are
manufacturing, merchandising and service.




THE ACCOUNTING STANDARD SETTING BODIES

INTERNATIONAL BODY

INTERNATIONAL ACCOUNTING STANDARDS BOARD (IASB)
It is an independent, private sector that helps and approves the International Financial
Reporting Standards. It was formed in 2001 to replace the International Accounting
Standard Council. Normally has 14 board members, of whom one is appointed as Chair and
one as Vice Chair. IASB members has initial term of five years, with renewal option (only
once) of three years or the maximum of five years. The constitution requires four members
from Asia/Ocenia; four from Europe; four from Americas; one from Africa and one
appointed from any area, subject to maintaining overall geographical balance.

IFRS Interpretations Committee
The “Committee” Roles:
• Interpret the applications of IFRS and provide timely guidance on financial
reporting issues not specifically addressed in IFRSs, in the context of IASB’s
Framework, and undertake other tasks at the request of the IASB.
• Publish after clearance by the IASB’s draft interpretations for public comment and
consider comments made within reasonable period before finalising
interpretations.
 • Report to the IASB and obtain the approval of nine members for final
interpretations if there are fewer than sixteen members, or by ten of its members
if there are sixteen members

LOCAL BODY

Financial Reporting Standards Council (FRSC)
The successor of the Accounting Standards Council (ASC) whose main function is
to establish GAAP in the Philippines. FRSC was established by the Board of Accountancy
(BOA) in 2006 under the Implementing Rules and Regulations of the Philippine
Accountancy Act of 2004. Fifteen Members with a Chairman who had been or is presently a
senior accounting practitioner and 14 representatives from: BOA (1); SEC (1); BSP (1); BIR
(1); COA (1); FINEX (1); Public Practice (2); Commerce and Industry(2); Academe (2) and
Government (2).The chairman and the members shall have a three year term renewable
for another term.

Philippine Interpretations Committee (PIC)
Main objectives:
• Principally, to issue implementation guidance on PAS, PFRS and related
interpretations adopted by the FRSC from accounting pronouncements issued by
IASB
• To comment on exposure draft of proposed PFRS and other documents that may
be issued for comment by the FRSC.
• To comment on exposure draft of proposed accounting standards or proposed
regulations with accounting relevance that may be issued by government
agencies, such as the SEC, BSP and Insurance Commmission

Fifteen Representatives: Nine Accounting Firms; FINEX (1); Academe (1); SEC (1); BSP (1);
Insurance Commission (1); BOA (1). Each member shall serve for 3 years and may be re-
appointed subject to the approval of PIC members and FRSC.

GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
Generally Accepted Accounting Principles is a collection of commonly followed
accounting rules, standards and procedures for financial reporting. Its specifications
include definitions of concepts and principles, as well as industry –specific rules. The
purpose of GAAP is to ensure that financial reporting is transparent and consistent from
one company to another. They are used to prepare, present and report financial
statements.



PHILIPPINE FINANCIAL REPORTING STANDARDS
The FRSC has already adopted the entirety of International Financial Reporting
Standards from American Accounting Standard. The Philippines is fully compliant with IFRS
since January 2005. The move from American Standard to International Standards was due
to:
• Support of International Accounting standards by the Phil organizations
• Increasing internalization of business which has heightened interest in a
common language for financial reporting.
• Improvement of international accounting standards or removal o free
choices of accounting treatments.
• Increasing recognition of International accounting standards by the
World Bank, Asian Development Bank and World Trade Organization.

The PFRS collectively include all of the following accounting standards:
1. Philippine Financial Reporting Standards which corresponds to International
Financial Reporting Standards. The PFRS are numbered the same way as the IFRS.
2. Philippine Accounting Standards which corresponds to International Accounting
Standards. The PAS are numbered the same way as the IAS.
3. Philippine Interpretations which correspond to Interpretations of the IFRIC and
the Standing Interpretations Committee (SIC), and Interpretations developed by
the Philippine Interpretations Committee.

STEPS IN THE DEVELOPMENT OF INTERNATIONAL FINANCIAL REPORTING STANDARDS
1. Agenda Consultation
• The IASB is required to undertake public consultation on its work
programme every five years by way of a public Request for Information.
The IASB normally allows a minimum of 120 days to comment on a work
programme (agenda) consultation Request for Information.
• Its primary objective is to seek formal public input on the strategic
direction and balance of the IASB’s work programme, including the
criteria for assessing projects that may be added to the IASB’s standards
level programme. It may also include a review that could seek views on
financial reporting issues that respondents think should be given priority
by the IASB, together with any proposals to withdraw from the IASB’s
work programme any projects that have not proceeded as planned and
for which the prospects for progress is limited.
2. Research Programme
• Main Purpose – is to analyse possible financial reporting problems by
collecting evidence on the nature and extent of the perceived
shortcoming and assessing potential ways to improve financial reporting
or to remedy a deficiency.
 • Main Output – Discussion Paper and Research Paper. It is a
comprehensive review of the issue, possible approaches to addressing
the issue, the preliminary views of its authors or the IASB and an
invitation to comment. The IASB normally allows at least 120 days for
comment on a Discussion Paper, a research paper and a Request for
Information. For other request of information it allows for 60 days for
comment.
3. Standard Setting Programme
• If the Board decides to amend standard or issue a new one, the board will
review the discussion paper and published an exposure draft for public
consultation. The IASB normally allows 120 days to comment on
Exposure Drafts.
• Criteria for New Standards or Major Amendments
o Whether there is a deficiency in the way particular types of
transactions or activities are reported in financial reports.
o The importance of the matter to those who use financial reports
o The types of entities likely to be affected by any proposals,
including whether the matter is more prevalent in some
jurisdictions than others
o How pervasive or acute a particular financial reporting issues is
likely to be for entities.
4. Maintenance Programme
• The process includes consulting on the implementation of a new or
amended Standard to identify any implementation problems that may
need to addressed. If issues arise, the IFRS Interpretations Committee
may decide to create an IFRIC Interpretations of the Standards or
recommend a narrow scope amendment. Post Implementation Review
(PIR) is also part of this step.

 CONCEPTUAL FRAMEWORK SUMMARY


NATURE OF THE FRAMEWORK
The framework sets out the concepts that underlie the preparation and presentation
of financial statements for external users. It is NOT a Philippine Financial Reporting
Standards (PFRSs) and hence does not define standards for any particular measurement or
disclosure issue. In those cases where there is a conflict, the requirements of the PFRS
prevail over those of the framework.
The framework is concerned with general purpose financial statements including
consolidated financial statements. Special purpose financial reports, and computations
prepared for tax purposes, are outside the scope of this framework. It applies to the
financial statements of all commercial, industrial, and business reporting entities, whether
in the public or the private sectors.

PURPOSE OF THE FRAMEWORK
• Assist the Financial Reporting Standards Council (FRSC) in the development of
future FRS and in its review of existing PAS.
• Assist preparers of financial statements in applying PFRS and in dealing with topics
that have yet to form the subjects of a PFRS.
• Assist the Financial Reporting Standards Council (FRSC) in its review and adoption
of International Accounting Standards.
• Assist auditors in forming an opinion as to whether financial statements conform
with PFRS.
• Assist users of financial statements in interpreting the information contained in
financial statements prepared in conformity with PFRS.
• Provide those who are interested in the work of FRSC with information about its
approach to the formulation of PFRS.

SCOPE/COMPONENTS OF FRAMEWORK

OBJECTIVE OF THE FINANCIAL REPORTING
The objective of financial reporting is to provide information about the financial
position, performance and changes in financial position of an entity that is useful to
existing and potential investors, lenders and creditors in making economic decisions. The
management of an entity has the primary responsibility for the preparation and
presentation of its financial statements.
• Financial Position is affected by the economic resources it controls, its financial
structure, its liquidity and solvency, and its capacity to adapt to changes in the
environment in which it operates. Information about financial position is primarily
 provided in the Statement of Financial Position (balance sheet). The financial
position is composed of Assets, Liabilities and Equity Accounts.
• Performance of an entity, in particular its profitability, is required in order to
assess potential changes in the economic resources that it is likely to control in the
future. Information about performance is primarily provided in an income
statement which is useful in predicting the capacity of the entity to generate cash
flows from its existing resource base. It is also useful in forming judgements about
the effectiveness with which the entity might employ additional resources. The
financial performance is composed of Revenue and Expenses.
• Changes in Financial Position of an entity is useful in order to assess its investing,
financing and operating activities during the reporting period. Information about
changes in financial position is provided in the financial statements by means of a
separate statement. This information is useful in providing the user with a basis to
assess the ability of the entity to generate cash and cash equivalents and the
needs of the entity to utilize those cash flows.


Elements of the Financial Statements
Financial statements portray the financial effects of transactions and other events
by grouping them into broad classes according to their economic characteristics. These
broad classes are termed as the elements of financial statements.

I - The elements directly related to measurement of financial position – balance sheet
(permanent accounts)are:

A. Assets are the resources controlled by the entity as a result of past events and
from which future economic benefits are expected to flow to the entity. These
are resources owned by the company. Assets are classified into two, namely
current and noncurrent assets.

Current Assets – refers to assets that are expected to realized, sold or consume
within the enterprise normal operating cycle. Operating cycle is time from the
acquisition of merchandise up to the collection of cash from the sale of the said
merchandise.

Cash -these are money, either in paper or in coins and any other
negotiable instrument, that is payable in money and acceptable by the
bank for deposit and immediate credit.
Cash on hand – includes undeposited cash collections and cash waiting
for deposits such as customer’s or manager’s checks, bank drafts and
money orders.
 Cash in bank – includes demand deposit or checking and savings deposit
which is unrestricted as to withdrawal.
Cash fund – money set aside for specific and current purpose such as
petty cash fund, payroll fund and dividend fund.

Accounts receivable – these are open accounts arising from the sale of
goods and services in the ordinary course of business and not supported
by promissory note. These are amounts collectible from customers.

Notes receivable – these are amounts collectible from customers
supported by formal promises to pay in the form of notes.

Allowance for Uncollectible accounts – a contra asset account. A
provision for any losses of possible uncollected accounts.

Accrued Income – the amount of income earned but not yet collected.

Inventories – assets held for sale in the ordinary course of business, in
the process of production of such sale or in the form of materials or
supplies to be consumed in the production process or in the rendering of
services.

Prepaid expenses -any expenses paid in advance but not yet expired or
received any benefits from it.

Unused Supplies – these are stationery and other supplies that were
purchased but still unused by the company.

Non-current Assets – all other assets not classified as current assets.

Property, Plant and Equipment – are tangible assets which are held by an
enterprises for use in production or supply of goods and services, for
rental to others, or for administrative purposes and are expected to be
used during more than one period.

Land – the site where the building, office or store is constructed.

Building – the account title for a finished construction owned by the
business where operations and transactions took place.

 Furniture and Fixtures – it refers to chairs, tables, counters, display cases
and the like.

Machinery and Equipment - it refers to calculators, typewriters,
computers, trucks, jeeps, vans and automobile.

Accumulated Depreciation – another contra asset account, pertaining to
the estimated degradation of the property, plant and equipment due to
wear and tear or other reasons.


B. Liabilities are the financial obligations of an entity arising from past events, the
settlement of which is expected to result in an outflow from the entity of
resources embodying economic benefits. These are what the company owes to
others. These are classified into to Current and Non-current Liabilities.

Current Liabilities – financial obligations of the enterprise which are expected to
be settled in the normal course of the operating cycle or due to be settled within
one year from the balance sheet date.

Accounts Payable – account title for financial obligation of an enterprise
supported by oral or verbal promise to pay.

Notes Payable – account title for financial obligation of an enterprise
supported by written promise to pay in the form of notes.

Accrued expense - expenses incurred but not yet paid.

Unearned Income – income not yet earned but collected cash in
advance.

Non-current liabilities – financial obligation of the enterprise which are due more
than one year.

Notes Payable (long term) – financial obligation supported by written
promise to pay but payable more than a year.

Mortgage Payable – financial obligation of the enterprise that requires a
fixed and tangible property to be pledged as a collateral to ensure
payment.

 C. Equity or Capital is the residual interest in the assets of an entity after deducting
all its liabilities. In other words, whatever is left, that belongs to the owner of a
business. It is also refers to the amount of money or property put by the owner to
the business.

Owner’s Capital – initial investment of the company and may increase or
decrease due to the result of business operations.

Owner’s Withdrawal – account used when the owner withdraws cash or
other assets from the business for personal use.

Income Summary – a temporary account created at the end of the
accounting period where income and expense are closed.



II - The elements directly related to the measurement of performance – income statement
(temporary accounts) are:

A. Income is increases in economic benefits during the accounting period in the form
of inflows or enhancements of assets or decreases of liabilities that result in
increases in equity, other than those relating to contributions from equity
participants.

Sales - represents revenue from the sale of merchandise

Service Income – represents revenue from rendering service.

Professional income – represents revenue from the practice of
profession.

Rent Income – represents revenue from the building, space or other
open space owned by business and being used by the third party.

Interest Income – represents revenue from money borrowed by third
party and usually covered by a promissory note

Miscellaneous income – any other income derived by the business which
is not the main line of its activity and cannot be properly classified.

B. Expenses are decreases in economic benefits during the accounting period in the
form of outflows or depletion of assets or incurrence of liabilities that result in
decreases in equity, other than those relating to distributions to equity
participants. It comprises all expenditures and disbursements paid for.

Cost of Goods sold – the account used for the cost to produce and sell
the goods.

Freight In - delivery expense from the purchase of merchandise

Freight Out – delivery expense from the sale of merchandise

Rent Expense – expense incurred from use of property, office or open
space.

Repair and Maintenance – expenses incurred in repairing or servicing the
property, plant and equipment.

Utilities Expense – refers to expenses for the monthly telephone, water
and electricity bills.

Salary Expense – expenses incurred for the compensation of the
employees for the month.

Office Supplies – these are office supplies purchased and used already by
the company.

Doubtul Accounts Expense – expense for the anticipated loss due to the
uncollectibility of the receivable.

Depreciation Expense – expense incurred due to the degradation of
property, plant and equipment either from wear and tear or any other
factors.

Miscellaneous Expense – expense incurred which is not significant in
amount to warrant a separate account title.

Taxes and Licenses – expenses incurred for business permits and licenses
and other government dues .
Constraints on Financial Reporting or Modifying Conventions
Materiality – deciding when an amount is material in relation to other amount is a matter
of judgement and professional expertise. An amount may be considered less important
because of its size. This modifying convention relaxes certain GAAP requirements if the
impact is not large enough to influence a decision.
Cost Benefit Relationship – benefits derived from providing information should exceed the
costs of providing that information.
Conservatism – when in doubt, the accountant should choose an alternative, option or
solution that will be least likely to overstate assets and income.
Industry Practices Convention – acceptable industry practices should be followed even if
they differ from GAAP.


BASIC ACCOUNTING ASSUMPTIONS
The Conceptual Framework mentions only one assumption, namely GOING
CONCERN. However implicit in accounting are the basic assumptions of accounting entity,
time period and monetary unit

Going Concern Assumption – in the absence of contrary information, a business entity is
assumed to remain in existence for an indefinite period of time.
Accounting Entity Assumption – assumes that the entity is separate and distinct from its
owners or other business units.
Time Period/Periodicity Assumption – the life of an economic entity can be divided into
time periods for the purpose of providing periodic reports on the economic activities of the
entity.
Monetary Unit Assumption – in the Philippines, economic activities of an entity are
measured and reported in Philippine peso. These peso amounts are assumed to remain
relatively stable over the years in terms of purchasing power. This assumption disregards
any change in the price level in the economy in which the entity operates.