BASIC FINANCIAL ACCOUNTING and REPORTING (BFAR): PHILIPPINE BASED

(Summary and Class Notes)

I. Introduction to Accounting
II. The Accounting Equation and the Double- Entry System

III. BFAR: The Accounting Cycle

A. Identification of events to be recorded.
B. Journal Entry

C. Posting in the ledger

D. Preparation of Trial Balance
E. Adjusting Journal Entries

F. Preparation of Worksheet
G. Preparation of Financial Statements
H. Closing Journal entries

J. Preparation of Post-Closing Trial Balance

K. Reversing Journal Entries
IV. Types of Business Organization: Application of Accounting

A. Service Business
B. Merchandising Business
1. Perpetual Inventory System
2. Periodic Inventory System
i. Special Journal

ii. Combination Journal

iii. Voucher System
C. Manufacturing Business

D. Comparisons between the three types of business organization

V. Special Topic: Payroll

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 Chapter I
INTRODUCTION TO ACCOUNTING

Definitions of Accounting
A. Accounting Standards Council (ASC)

 Accounting is a service activity.

 The function of accounting is to provide quantitative information primarily
financial in nature about economic entities that is intended to be useful in making
economic decisions.

B. Financial Accounting Standards Board (FASB)

 Accounting is an information system that measures, processes and

communicates financial information about an economic entity.

C. American Institute of Certified Public Accountant (AICPA)

 Accounting is the art of recording, classifying and summarizing in 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.

D. American Accounting Association (AAA)

 Most adapted definition of accounting.

 Accounting is the process of identifying, measuring and communicating
economic information to permit informed judgements and decisions by users of
the information.

Noted points on accounting definition

1. Accounting is about quantitative information.

2. The information is likely to be financial in nature.

3. And, the information should be useful in decision making.

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American Accounting Association (AAA): A comprehensive definition of
accounting

Components of accounting

A. Identifying as analytical component

 Is the recognition or non-recognition of business activities as “accountable”

events.
 Accountable or quantifiable means when an event has effect on assets,
liabilities and equity. Non – accountable means no effect on A, L, & E.
 Only economic activities are recognized in accounting. The measurement of
economic resources (assets) and economic obligation (liabilities).
 Economic activities are referred as transactions.
 Transaction is the exchange between two parties (buyer & seller) whether it
affects assets, liabilities and equity. It can be;
Internal transactions - economic events involving the entity only.
Examples:
 Production - transform resources into products.
 Casualty - act of God (i.e. unanticipated loss
from fire, earthquake and etc.)

External transactions - economic events involving one entity and another

entity.

Examples:

 Purchase of goods from supplier

 Borrowing of money from bank
 Sale of goods to a customer
 Payments of salaries to employees
 Payment of taxes to the government.

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B. Measuring as technical component

 Assigning of peso amounts to the accountable economic transactions.

 Measurement basis; Historical Cost and Current Value
 Historical Cost is the original acquisition cost and the most common measure
of financial transaction. It can be;
 Historical cost of an asset – is the acquisition cost + transaction cost
 Historical cost of a liability - is the consideration received of liability –
transaction cost.
 Current value- it includes;
 Fair value – is an exit price or exit value. It can be observed directly using
market price of an asset or liability in an active market.
- If not measured, the entity can use present value of cash
flows.
- It is not adjusted for transaction cost.
 Fair value of an Asset – price that would receive to sell an asset.
 Fair value of a Liability – price that would paid to transfer
liabilities or claims.
 Value in use for Asset – is the present value of the cash flows that an
entity expects to derive from the use of an asset
and from the ultimate disposal.
- Is an exit price or exit value.
 Fulfilment value for Liability – is the present value of cash that an entity
expect to transfer in paying or settling a
liability.
- Is an exit price or exit value.
 Current cost – based on entry price or entry value that reflects market
conditions on measurement date.
 Current cost of an Asset – cost of an equivalent asset at
measurement date comprising the
consideration paid and transaction
cost.

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  Current cost of Liability - consideration received less any
transaction cost at measurement
date.

C. Communicating as formal component

 The process of preparing and distributing accounting reports to the potential users
of accounting information.
 The reason why “Accounting is the language of business” because accounting as
information system measures the business activities, process it into reports and
communicates the results to the decision makers.
 Note: Accountant are the scorekeepers of the business.

Implicit in Communicating: Aspects of Accounting

Definitions of AICPA

1. Recording or Journalizing

 The process of systematically maintaining a record of all economic business

transactions after they have been identified and measured.
 Accomplished through making journal entry.

2. Classifying or Categorizing

 The sorting or grouping of similar and interrelated economic transactions into their
respective classes.
 Accomplished by posting to the ledger.
 Ledger is a group of accounts which are systematically categorized into:
 Asset - is a present economic resource controlled by entity as a result of
past events.
 Liability - an obligation of the entity to transfer an economic resource
(asset) as a result of past events.
 Equity - is the residual interest in the assets of the enterprise after
deducting all its liabilities.

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  Income - defined as increases in assets or decreases in liabilities, that result
in increases in equity other than those relating contribution from
equity holders.
 Expenses - defined as decreases in assets or increases in liabilities, that result
in decreases in equity.

3. Summarizing

 The preparation of financial statements (i.e. statement of financial position, income

statement, statement of comprehensive income, statement of changes in equity
and statement of cash flows).

Objective of Accounting

To provide quantitative financial information which is relevant and faithfully

represented about a business entity that is useful to statement users; internal users
(owners) and external users (investors and creditors) to permit informed judgements and
economic decisions.

The essence of accounting is for decision- usefulness.

Primary task of Accountant

To supply financial information to the statement users in interim bases; either

monthly, quarterly, semi-annually or annually. But, usually accountants report financial
statements annually.

Evolution of Accounting

Note: Studying the accounting history is important in accounting pedagogy (profession),

policy and practice. It makes it possible to better understand our present and to
forecast our future.
1. Primitive Accounting
 The earliest method used tokens with simple shapes to represent the trade product,
such as herd animals.
 Tokens were often sealed in clay balls called bullae.
 Bullae is an invoice where it was used as first bills of lading in Mesopotamia.

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2. Middle Age
 Quipu (to keep accounting records).
 Merchants began relying on bookkeeping to keep a record of multiple transactions.
This is when double- entry bookkeeping started, which is debit and credit value is
entered for each transactions by accountant.
 Double entry bookkeeping is not a discovery of science; it is the outcome of
continued efforts to meet the changing necessities of trade.

3. The Florentine Approach

 Combination of formalization (form of account books and double-entry
bookkeeping.
 Is the introduction of double- entry bookkeeping system.
 It was in the 14th century when Amatino Manucci, a partner of merchant partnership,
created a recording system where there’s at least one account debited and at least
once account credited and where the total debits amount is equal to credits
smount.
 Amatino Manucci is the inventor of double- entry bookkeeping and was called
Giovanni Farolfe & Comapany in Florence.

4. The Method of Venice or Venetian Approach

 This method was further described as an evolved system, suing several books
which are carefully cross-indexed and coordinated so that the contents are viewed
in a coherent whole. This approach was the so called ledger postings in our time.
 Merchants kept their records in bilateral form (alla veneziana), where the debits
are recorded on the left side and credits on the right side.
 The Venetian Method was introduced by a merchant Andrea Bargarigo’s book in
1418-1449).

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Father of Modern Accounting
Luca Pacioli (1445-1517), was the father of double- entry accounting. He did not
invent it but rather described the use of books of accounts. In 1994, he published the
Venetian Method in his book entitled Summa de Arithmetica. It was described that each
transaction was first noted in the memorandum book then listed the transaction in debit
and credit form in the journal, and finally posted in the entries in the ledger.

Pacioli’s Summa books

1. Memorandum – a book where all transactions are recorded in the currency and time
they are conducted.
2. Journal – Is the merchant’s book.
3. Ledger – alphabetical listing of all business accounts.

Admirable accountants in the Philippines

1. Nicanor Icasiano y Reyes Sr. (est. 1857-during World War 2)

 He was not an accountant because at his time, CPA profession only available to
foreigners but he was a pioneer on his education.
 Graduated Bachelor’s degree at the University of the Philippines Diliman in 1915.
 Migrated to the United States to receive his bachelor’s degree in Commercial
Science at New York and Ph. D in Accountancy at the University of Colombia.
 Because of him, promoting accountancy profession to Filipinos became possible
to him by building a school for Filipino students who want to pursue accountancy
profession.
 He was the founder and first president of Far Eastern University (FEU) in Manila.

2. Vicente F. Fabella (1891-1959)

 The first CPA in the Philippines.
 In 1912, he received his bachelor’s degree in Philosophy at University of the
Philippines (UP).

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  Migrated in the US to earn bachelor’s degree in Philosophy (University of Chicago)
and bachelor’s degree in Commerce (North-western University).
 In 1915, he became a Certified Public Accountant at the state of Wisconsin, USA.
 In 1995, he accepted the offer of President Ramon Magsaysay to be part of the
Central Bank Survey Commission.

3. Jose Diokno (1922-1987)

 He is a CPA, Attorney, Senator and pro-human rights and advocate.
 Jose was only 17 when he graduated as Summa cum laude of Commerce in De
Le Salle University. And later on passed the CPA board exam and Philippine Bar
Examination and became the top notcher.
 Jose Diokno was known for his passion as a nationalist and human-rights
advocate.
 He became famous for pursuing American citizen Harry S. Stonehill for charges of
tax evasion and bribery with government officials and forming the Free Legal
Assistance Group (FLAG) to help the victims of Martial Law.
 As a senator, he passed the pro-Filipino laws such as providing incentives for
Filipino businessmen and investors and a more humane process of taxation.

Types of Business Organization

1. Service Business

 A business provides intangible products (products with no physical form).

 Service type firms offer professional skills, expertise, advice and other similar
products.
 Examples:
 Salons - Banks
 Repair shops - Consulting firms
 Schools

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2. Merchandising Business
 A business that buys products at wholesale price and sells the same and retail
price.
 Known as “buy and sell” business.
 Sells product without changing its forms.
 Examples:
 Grocery stores
 Convenience stores
 Distributors

3. Manufacturing Business
 Buys a product and transforms it into new product.
 Converts raw materials into a product.
 It combines raw materials, labor and overhead costs in its production process.

4. Hybrid business
 Companies that may be classified in more than one type of business.
 Example:
 Restaurant – combines ingredients in making a fine meal (manufacturing),
- Sells a cold bottle of wine (merchandising)
- Fills customer orders (service)
 Bakery

Forms of Business Organization

1. Sole Proprietorship

 Business owned by one person called proprietor.

 Having unlimited liability and retention of all profits.
 Usually adopted by small business entities.

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2. Partnership
 A business operated by two or more persons who contribute resources into the
entity with partnership agreement. The partnership divide their profits and losses
according to their agreement.
 Partner of the organization can be;

 General partner – a partner who is liable to the extent of his separate

property after all the assets of the partnerships are
exhausted.
- a partner who has unlimited liability.

 Limited partner - a partner who is only liable to the extent of his capital
contribution.
- He is not allowed to contribute industry or services only.

 Capitalist partner – a partner who contributes money or property to the

common fund of the partnership.

 Industrial partner – a partner who contributes his knowledge or personal

service to the partnership.

 Managing partner – partner who acts as the manager of the business

 Liquidating partner – a partner who is designated to wind up or settle the

affairs of the partnership after dissolution.

 Dormant partner – a partner who is not an active part in the business of

the partnership and is not known as a partner.
 Silent partner – a partner who is not an active part in the business of the
partnership but known as a partner.

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  Secret partner – a partner who takes active part in the business but is not
known to be a partner by outside parties.

 Nominal partner or partner by estoppel – it is not a partner but represents

himself as one.

3. Corporation
 An artificial being created by law and owned by stockholders.
 The entity must registered in Securities Exchange and Commission.
 One person can owned the corporation called corporation sole.

Three types of Organizational Activities: The OIF

1. Operating Activities
 Involve the use of resources to design, produce and market goods and services.

2. Investing Activities
 Uses capital from financing activities to acquire other resources used in
transformation process. A businessman should be:
 Efficient – provides goods and services at low cost relative to their selling
price.
 Effective – provides goods and services demanded by the customers.

3. Financing Activities
 Organizations require financial resources to obtain other resources used to
produce goods and services.

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Fundamental Concepts of Accounting
1. Entity Concept
 Most basic concept in accounting.
 A business (entity) and the owner are distinct and separate legal entities, their
transactions and when presenting the financial statements should be apart.

2. Periodicity Concept
 Divide the periods of the life of assets or entity’s life.
 Preparing and presenting financial statements to statement users are based on
interim bases; either monthly, quarterly, semi-annually or annually.
 Fiscal year – the reporting period ends within 12 months.
 Calendar year – the reporting period ends every end month (December) of
the year even the business operation started in any month
of the year.
 Natural business year – the reporting period is 12 months which ends in
any month when the business is at lowest or
experiencing slack season.
 Reporting Entity
It is an entity that is required or chooses to prepare financial
statements and it is not necessarily a legal entity.

 Reporting Period
It is the period when financial statements are prepared for general
purpose financial reporting and may be prepared as interim basis.

3. Stable Monetary Unit Concept

 Purchasing power of peso is stable so it means no inflation happens.

4. Going concern
 There is no assumption that a business be closed or not or continue in operation.
 The only underlying assumption in conceptual framework.

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Criteria for Generally Accepted Principle (GAAP)

1. Relevance
The information has the capacity to influence the decision makers.

2. Objectivity
The resulting information is not influenced by the personal bias or judgement.

3. Feasibility
The information implemented is without undue complexity or cost.

Basic Principles of Accounting

1. Objectivity Principle
Accounting records and statements are based on the most reliable data.
 Service business – based on official receipt
 Merchandising - based on sales invoice
 Manufacturing - can be both

2. Historical cost
Acquired assets should be recorded based on actual or original cost. Commonly
applied on fixed assets or tangible assets (with physical substance) like PPE (Property,
Plant and Equipment).
3. Revenue Recognition Principle
Revenue is recognized when rendered or performed regardless cash is received
or paid. Note: Cash is not determinant.
4. Expense Recognition principle
Expenses are recognized when incurred regardless cash is paid or not.
5. Matching Principle
The process of matching of cost with revenue. The expense is recognized when
the revenue is already recognized.

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6. Adequate Disclosure
All significant relevant information and reliable information should be clearly
reported and disclosed. Accounts that needs to be disclosed are put in Notes to FS.

7. Materiality
 If items are not significant enough to affect the evaluation, decision and fairness
of the financial statements.
 Known as “doctrine of convenience”.
 Depends on relative size rather than absolute size. In other words, depends on
the size and nature of the items judged.
 New definition by IASB: Information is material if omitting, misstating or
obscuring of information could reasonably expected to influence or affect the
decision to the primary users. And highlights 3 important points;
 Obscuring information – means that in presenting or communicating of
financial information was not readily understood or not clearly
expressed.
 Could reasonably be expected to influence – material information
shall be limited to the economic decision of primary users
rather than to all users.
 Primary users – includes existing and potential investors; lenders and
other creditors.
 When omission of money is material to others or not like for example like
rounding the amounts to peso rather in decimals is immaterial to big entities
but material to small entities.

8. Consistency Principle
The reporting entity uses the same accounting method.

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Philippine Accountancy Profession

In the Philippines, in order to qualify to practice the accountancy profession, the

person must finished a degree in Bachelor of Science in Accountancy or known as BSA.
Afterwards, he or she must passed the CPALE (Certified Public accountant Licensure
Examination) given by BOA (Board of Accountancy). The examination was offered twice
a year in every May and October month in authorized testing centers around the country.
Note: Board of Accountancy or known as BOA is the body authorized by law to
promulgate rules and regulations affecting the practice of accountancy profession.
They are also the responsible in preparing and grading the CPALE.

Philippine Accountancy Act of 2004 or known as RA No. 9298

A law governing the practice of Accountancy in the Philippines that was signed
by President Gloria Macapagal Arroyo last May 13, 2014 and, was repealed in
Presidential Decree No. 692.

RA No. 9298 Section 4: The areas or scope of practice of accountancy in the

Philippines

1. Practice of Public Accountancy (one who skilled in the knowledge)

2. Practice in Commerce and Industry decision making requiring professional knowledge)
3. Practice in Education or Academe (educational institution)
4. Practice in Government (professional group in government)

Generally, CPA’s practice their profession in three main areas, namely;

1. Public Accounting
Public accountancy is composed of individual practitioners, small accounting
firms and large multinational organizations, small accounting firms and large multinational
organizations that render independent and expert financial services to the public.

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 Offers three kinds of Public Service:

 Auditing – traditionally been the primary service offered by most public

accounting practitioners. It can be internal auditing and
external auditing.

 Taxation – the services includes the preparation of annual income tax

returns and determination of tax consequences.

 Management Advisory Services – it has no precise coverage but is

used generally to refer to services to clients on matter of
accounting, finance, product cost, and other business
operations.

2. Private Accounting
The services includes maintaining the records, producing the financial reports,
preparing the budgets and controlling and allocating the resources of the entity.
Note: Controller is the highest accounting officer.

3. Government Accounting
It encompasses the process of analysing, classifying, summarizing and
communicating all transactions involving the receipt and disposition of government.

RA No. 9298 Section 15: Scope of CPA Examination

Licensure Examination
 Theory of Accounts
 Business Law and Taxation
 Management Services
 Auditing Theory
 Auditing Problems

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  Practical Accounting Problems 1
 Practical Accounting Problems 2

Revised Examination
 Financial Accounting and Reporting (FAR)
 Taxation
 Regulatory Framework for Business Transactions (RFBT)
 Advanced financial Accounting and Reporting (AFAR)
 Management Advisory Services (MAS)
 Auditing

Philippine Institute of Certified Public Accountant (PICPA)

Integrated National professional organization of CPA’s accredited by BOA and
PRC (Professional Regulation Commission).

Limitation of the practice of public accountancy

When the person passed the CPALE, he or she will be given a certificate of
accreditation in accordance with the rules and regulations promulgated by BOA and was
approved by PRC. The BOA will issue certificate of registration to practice the
accountancy profession valid only for three years and renewable every three years upon
payment of required fees.
Under the new BOA Resolution, all Certified Public Accountants regardless of
area or sector of practice shall be required to comply with 120 CPD credit units for
accreditation of CPA to practice the accountancy profession and 15 CPD credit units for
renewal of license after initial registration.

Republic Act No. 10912: Continuing Professional Development (CPD)

It is the law mandating and strengthening the continuing professional

development program for all regulated professions, including the accountancy profession.

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Continuing Professional Development

It is refers to the inculcation and acquisition of advanced knowledge, skill,

proficiency, and ethical and moral values after the initial registration of the CPA for
assimilation into professional practice and lifelong learning.
It also enhances the technical skill and competence of the Certified Public
Accountant. The CPD credit units refer to the CPD credit hours required for the renewal
of CPA license and accreditation of a CPA to practice the accountancy profession every
three years.
A CPA shall be permanently exempted from CPD requirements upon reaching
the age of 65 years. However, he or she only exempted with renewal of licence but not
the purpose of accreditation to practice public accountancy profession.

Qualitative Characteristics
These are the qualities or attributes that make financial accounting information
useful to the users. Classified into:

1. Fundamental Qualitative Characteristics

Which relates to the contents or substance of financial information.

A. Relevance
The capacity of the information to influence the decision.
Note: Information does not bear an economic decision is useless.

Ingredients:
 Predictive value – can be used as an input to processes employed by
users to predict future outcomes.
Example: The previous two years of reporting period
has income of 1M so it was predicted that
it continuously same for the following year.

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  Confirmatory value - it provides feedback or confirmation about previous
evaluations.

B. Faithful Representation
Faithfully represent what it purports to represent.

Ingredients;
 Completeness – relevant information should be presented in a way that
facilitates understanding and avoid erroneous
implication.
 Neutrality – neutral depiction is without bias or free from bias n
preparation and presentation of financial statements.
 Free from Error – means there are no errors or omissions in the
description of phenomenon or transaction.

2. Enhancing Qualitative Characteristics (VCUT)

It is related to the presentation or form of the financial information.

A. Verifiability
It implies consensus and was supported by evidence. it has two types of
verification:
 Direct verification – means verifying an amount or other representation
through direct observation.
Example: Counting of cash
 Indirect verification – checking the input to a model formula and
recalculating the inputs using same methodology.
Ex: Verifying the carrying amount of inventory using
FIFO (manual counting) or through sales invoice.

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B. Comparability
Ability to bring together for the purpose of noting points of likeness and
differences. It can be:
 Comparability within an entity
Known as horizontal comparability or intracomparability and it is the
quality of the information that allows comparisons within a single entity
through time, from one accounting period to the next.

 Comparability between and across entities

It is the quality of the information that allows comparisons between
two or more entities engaged in the same industry.

 Comparability across entities

Also known as dimensional comparability or intercomparabilty. It is
comparisons within the company only like comparing the employees work.

C. Understandability
Presenting the information in clearly and concisely form. It requires information
that must be comprehensible or intelligible to be most useful. Also, information
must express or presented using terminologies that user can understand it.

D. Timeliness
When preparing and presenting information, it must on time or periodically
communicated to users as early enough when a decision is to be made.

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 REFERENCES

Ballada, Win. (2018). BASIC Financial ACCOUNTING and Reporting Made Easy 21st
Edition. Sampaloc Manila Philippines: DomDane Publishers.

Valix, C.T., Peralta, J.F., & Valix, C. M. (2020). Conceptual Framework and Accounting
Standards. Recto Avenue, Sampaloc Mnaila, Philippines: GIC Enterprises &
CO., Inc.

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