CHAPTER 1

ACCOUNTING
Accounting is a service activity that functions to provide quantitative information about economic entities that is
intended to be useful in making economic decisions (Accounting Standards Council - ASC)
Accounting is the art of recording, classifying, and summarizing in a significant manner (AICPA)
 Accounting is about quantitative information
 The information is likely to be financial in nature
 The information should be useful in decision-making
 Accounting is the process of identifying (analytical), measuring (technical) and communicating (formal) economic
information (American Accounting Association - AAA)
Identifying Measuring Communicating
~ recognition or nonrecognition of ~ assigning of peso amounts to ~process of preparing and distributing
business activities as accountable accountable events reports to users of information
events ~ expressed in terms of common ~ the reason why accounting has been
*accountable events - has an effect financial denominator called the “universal language of
on assets, liabilities and equity business”
*economic activity - measurement  Measurements bases:
of economic resources and A. Historical cost  Recording
economic obligations; - most common measure - systematically maintaining a
transactions B. Current value record of all transactions
A. External transactions - involving - fair value, value in use  Classifying
one entity and another entity - grouping of similar and
Ex. Purchase of goods from supplier, borrowing interrelated transactions
money from bank, sales of good to customer Ledger - group of accounts which are
B. Internal transactions - take place categorized to assets, liabilities, equity,
within the entity revenue and expenses

Ex. Production - process by which resources  Summarizing

become products - preparation of financial
Casualty loss - any sudden or unanticipated loss
statements (SFP, SCI, SCE, SCF)
from acts of God

ACCOUNTING AS AN INFORMATION SYSTEM

 An information system that measures business activities, processes information into reports and
communicates the reports to decision makers
*Key product - set of financial statements (tells us how an entity is performing in terms or profit and loss and where it
stands)

OVERALL OBJECTIVE OF ACCOUNTING

 Provide quantitative financial information about a business that is useful to statement users particularly owners
and creditors in making economic decisions
 An accountant’s primary task - supply financial information so users can make better decisions
 The essence of accounting - decision-usefulness

THE ACCOUNTANCY PROFESSION

 Republic Act No. 9298: Philippine Accountancy Act of 2004
 Regulates the practice of accountancy in the Philippines
  The Board of Accountancy
 Body authorized by law to promulgate rules and regulations affecting the practice of the accounting
profession in the Philippines
 Responsible for preparing and grading the Philippine CPA Examination
 Limitation to the practice
 Certification of accreditation is issued to CPAs after acquiring minimum of 3 years as public accountants
 Different practices of accountancy

Public Accounting Private accounting Government accounting

~ individual practitioners rendering
financial services to the public
 3 kinds of services:
a. Auditing (primary) examination
of financial statements by
independent CPAs to express
opinion on fairness
*external auditing - attest function of
independent CPAs
b. Taxation
preparation of annual income
tax returns
c. Management advisory services
services to clients on matters
of finance and business
~ CPAs employed in business entities
*highest accounting officer = controller
 Major objective:
- assist management in planning
and controlling entity’s operations
- maintaining records
- producing financial reports
- preparing the budget
- controlling and allocating
resources of entity
~ process of accounting all
transactions involving government
funds and property
 Focus:
custody and administration of
public funds
 Employment:
a. Bureau of Internal Revenue (BIR)
b. Commission on Audit (COA)
c. Department of Budget and
Management (DBM)
d. Securities and Exchange
Commission (SEC)
e. Bangko Sentral ng Pilipinas (BSP)

conduct and operations

*services:
- advice on installation of computer system
- quality control
- installation and modification of acctg system
- budgeting
- forecasting
- design on retirement plans
- advice on mergers and consolidation

Academe

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

 inculcation and acquisition of advanced knowledge, skill and proficiency
 raises and enhances skill of CPA
*CPD units: 120 (3 years)

ACCOUNTING VS.
AUDITING
 Accounting embraces
auditing.
 Accounting is constructive
while auditing is analytical
“the work of an auditor starts
when the work of the accountant
BOOKKEEPING
 Bookeeping is procedural
and concerned with
development and
maintenance of accounting
records
 The “how” of accounting
ACCOUNTANCY
 Accountancy is the
profession of accounting
practice
 Accounting is used in
reference to a particular filed
of accountancy
FIN VS. MA
 Financial accounting is
concerned with recording of
business transactions and
preparation of financial
statements.
 general purpose reports
for internal and external
users
 ends.”
ACCOUNTING STANDARDS
Purpose: to identify proper accounting practices for the preparation & presentation of financial statements
GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES
(GAAP)
~ accounting rules,
procedures and practices
~ developed on the basis of
experience, reason, custom,
usage and practical
necessity
~ like laws that must be
followed
Accounting is conceptual,
concerned with the “why”
FINANCIAL REPORTING
STANDARDS COUNCIL
(FRSC)
~ GAAP is formalized
initially by ASC which is
replaced by FRSC
~ adopted in entirety all IAS
& IFRS
~ created by the
Professional Regulations
Commission to assist Board
of Accountancy in carrying
out its power & function
 Main function:
establish and improve
accounting standards
that will be generally
accepted in the
Philippines
 Approved statements
PAS and PFRS
*accounting standards
promulgated constitute
the “highest hierarchy”
*creditors & investors
 Managerial Accounting is
the preparation of financial
reports for internal users
only
PHILIPPINE INTERNATIONAL
INTERPRETATIONS ACCOUNTING STANDARDS
COMMITTEE (PIC) BOARD (IASB)
~ Formed by FRSC in 2006 ~ replaces IASC
~ publishes standards in a
 Role series of pronouncements
Prepare interpretations of called IFRS
PFRS for approval by FRSC ~ standard-setting process
and to provide authoritative includes research,
guidance discussion paper, exposure
draft and accounting
standard
 Composition (15 members)
1 Board of Accountancy
1 Securities and Exchange
Commission
1 Bangko Sentral ng Pilipinas
1 Bureau of Internal Revenue
1 Commission on Audit
1 FINEX (Financial Executives
Institute of the Phils.)
2 Public Accountants
2 Private Accountants
2 Academe Accountants
2 Government Accountants
1 Chairman (3 years term)
 Accounting Standards Council Philippine Accounting Standards
(ASC) > Financial Reporting (PAS) & Philippine Financial
Standards Council (FRSC) Reporting Standards (PFRS)

Int’l Accounting Standards Int’l Accounting Standards

Committee (IASC) & Int’l (IAS) & Int’l Financial
Accounting Standards Reporting Standards (IFRS)
Board (IASB)

Generally Accepted Conceptual Framework

Accounting
Principles (GAAP)

CHAPTER 2
CONCEPTUAL FRAMEWORK
 Complete and comprehensive single document promulgated by IASC (Int’l Acctng Standards Board)
 Summary of terms and concepts of financial statements for external users
 Describes concepts for general purpose financial reporting
 Theoretical foundation for development of accounting standards and revision of previous standards
 Arises when there is lack of standards in PFRS/PAS

 Provides foundation for a. To assist IASB to develop - PFRS overrides Conceptual

standards that IFRS standards Framework
A. Contribute to transparency b. To assist preparers of - considered if standard or
B. Strengthen accountability financial statements interpretation is absent
C. Contribute to economic (accountants, - Conceptual framework is
efficiency management) NOT an IFRS
c. To assist all parties to - requirements of IFRS
understand and interpret prevails over Conceptual
IFRS Standards Framework
Authoritative status:
Purposes

USERS OF FINANCIAL INFORMATION

Primary Users Other users
~ parties by whom general purpose financial reports are ~users others than existing and potential investors, lenders
directed and other creditors
~ cannot require reporting entities to provide information ~ may find the general purpose reports useful but are not
directly to them
a. Existing and Potential Investors
 concerned with the risk provided by their
investments
 read info to determine whether they should buy,
hold or sell
 assess the ability of the entity to pay dividends
b. Lenders and other creditors
 determine whether their loans and interest will be
paid when due
FINANCIAL REPORTING AND PERFORMANCE
FINANCIAL REPORTING
 Objectives
OVERALL: Provide information that is useful to
existing and potential investors and lenders and other
creditors in making decisions about providing
resources to the entity,
Specifics:
a. To provide info useful in making decision about
providing resources to the entity
b. To provide info useful in assessing the cash flow
of the entity
c. To provide info about entity resources, claims and
changes thereof - statement of financial position
(A,L,C,I,E)
1. Liquidity - availability of cash in the near future to
cover currently maturing obligations
2. Solvency - availability of cash over long term to
meet financial commitments when due
 Limitations
directed to them primarily
a. Employees
 stability and profitability of the entity
 assess the ability of the entity to provide
remuneration, retirement benefits and employment
opportunities
b. Customers
 interested in the continuance of the entity
especially when they are dependent on the entity
c. Government
 interested in the allocation of resources
 to regulate activities of the entity to determine tax
and use as basis for national income statistics
d. Public
 providing information about the trend and the
range of its activities
FINANCIAL PERFORMANCE
~ results of operations and is portrayed by income and
expense statement
 Usefulness:
a. Helps users understand the return that the entity
has produced on economic resources
b. Helps users see how well the management has
discharged its responsibilities over resources
c. Past financial performance helps prediction on
future returns
d. Helps assess entity’s ability to generate future
cash inflows form operations
 Accrual accounting
 recognizing income when it is earned
 recognizing expenses when it is incurred
…regardless of when it is paid
 1. General purpose financial statements do not provide
all information that primary users need
2. Not designed to show the value of the entity but only
helps users estimate, based on estimate and judgement
3. Cannot accommodate every request for information

MANAGEMENT STEWARDSHIP
 how efficiently and effectively management has discharged its responsibilities on resources
 useful in predicting how management will use the resources in the future

CHAPTER 3
QUALITATIVE CHARACTERISTICS
 Qualities or attributes that make financial accounting information useful to others

Fundamental characteristics - relate to the content or substance of financial information

 Most effective process for applying fundamental characteristics:

 2 characteristics:
Relevance FAITHFUL REPRESENTATION
 the capacity of the information to influence a decision ~monetized and accurate depiction
 for an information to be relevant, the info must be ~financial reports represents economic phenomena in
capable of making a difference in decisions words and numbers
 information that does not bear on an economic ~descriptions and figures must match what really
decision is useless happened
~actual effects of the transactions are properly accounted
 Ingredients: for
1. Predictive value  Ingredients: (completeness, neutrality, free from
 can be used as an input to predict future error)
outcome 1. Completeness
 can help users increase the likelihood of  information should be understandable and
forecasting outcome of events avoids erroneous implication
Example: SFP -> dividend and wage payments, ability to meet  result of adequate disclosure standard /
maturing commitments
principle of full disclosure
2. Confirmatory value
*Standard of adequate disclosure - all significant
 provides feedback about previous
information leading to statements should be
evaluations clearly reported
 enables users to confirm or correct earlier disclosure of any financial facts significant enough
to influence the judgement of informed users
 expectations *Notes to financial statements - accompanies
Example: Net income -> help shareholders revise their financial statements
expectation about earning Purpose: provide disclosures required by PFRS

2. Neutrality
 depiction without bias in the preparation and
presentation of financial information
 information must be free from bias
 information is directed towards the common
needs of many users and not particular needs
of specific users
 principle of fairness: to be neutral is to be fair

3. Free from error

 there are no errors or omissions
 amounts are described clearly and accurately
as an estimate

Materiality
 practical rule in accounting which dictates that strict adherence to GAAP is not required when items are not
significant enough (Accdg to SEC)
 also known as “doctrine of convenience” *big companies/publicly listed and traded = 5% of net income
 based on the nature or magnitude of item *small companies/not publicly listed and traded = 10% of net income
 depends on relative size rather than absolute size
 WHEN IS AN ITEM MATERIAL?
 based on good judgement, professional expertise and common sense
 “an item is material if it would affect of influence the decision of the informed users of the statements”
 “information is material if its omission or misstatement could affect decision of users”

 Factors of materiality:
a) Size of the item - in relation to the total of the group it belongs to
b) Nature of the item - by its very nature affects economic decisions

Prudence
 exercise of care and caution when dealing with uncertainties
 assets or income: not overstated
 liabilities or expenses: not understated

Conservatism
 when alternatives exist, the alternative which has the least effect on equity should be chosen
 in case of doubt, record any loss and do not record any gain
 choice between two asset values, the lower figure is selected
 not a license to deliberately understate net income and assets
Expressions:“anticipate no profit and provide for probable and measurable loss”
“don’t count your chicks until the eggs hatch”
Measurement Uncertainty
 arises when monetary amounts cannot be observed directly and must be estimated
 the use of reasonable estimate: as long as the estimate is clearly and accurately described and explained, even a
high level of uncertainty will not affect usefulness of info

Substance over form

 quality of info and not how it looks
 content > presentation
 representing legal form that differs from economic substance =/ faithful representation

ENHANCING CHARACTERISTICS
(def) presentation or form of the financial information
- intended to increase the usefulness of the financial statements
Comparability
~the ability to bring together
for the purpose of noting
points of likeness and
difference
~enables users to identify
and understand similarities
and dissimilarities among
items
~uniform application of
accounting method
between and across entities
a) Intracomparability
(within an entity)
allows comparisons
within a single entity
through one accounting
period to the next
(Horizontal and vertical)
Understandability
~financial information must
be comprehensible (simple)
~presented in a form and
expressed in terms
understood by the user
~classifying, characterizing
and presenting information
clearly and concisely
~financial reports are
prepared for users who
have a reasonable
knowledge of business and
economic activities
Verifiability
~different knowledgeable
and independent observers
could reach consensus
~implies consensus
~financial information is
supported by evidence
~results can be duplicated
by measurers using the
same method
 Types:
a. Direct - verifying
through direct
observation
(management), counting
cash
b. Indirect - checking the
inputs, formulas and
techniques, recalculation
of inputs
Timeliness
~financial information must
be available or
communicated early enough
when a decision is to be
made
~the older the information,
the less useful
~without knowledge of the
past, the basis for prediction
will be lacking
~without interest in the
future, knowledge of the
past is sterile
~knowledge of the past
would becomes the basis of
what will happen in the
future

b) Intercompatibility  Principle of consistency

(between and across -use of the same method for
entities) the same item
between two or more - uniform application of
entities engaged in the accounting method from
same industry period to period
- helps achieve
*for things to be comparable, like things
must look alike and different things must comparability
look different - if the change will result to
more useful and meaningful
information then changes
can be made
 - it is inappropriate for an
entity to leave accounting
polices unchanged when
better and acceptable
alternatives exist

Cost constraint
 consideration of the cost incurred in generating financial information against the benefit to be obtained from having
the information
 the benefit derived from the information should exceed the cost incurred in obtaining the information

CHAPTER 4
TYPES OF OWNERSHIP
A. 0 to <20%: marketable securities; no control no significant influence
B. 20% to 50%: investment; no control but with significant influence on decisions; ability to suggest
C. >50%: control; control exists (parent-subsidiary relationship)

FINANCIAL STATEMENTS
 provides financial information about an entity’s assets, liabilities, equity, income and expenses useful to users in:
a) Assessing future cash flows to the entity
b) Assessing management stewardship
 General objective: to provide information about economic resources of the reporting entity, claims against
and the changes in these
 Types:
1. Consolidated financial statements
 prepared when the reporting entity comprises both the parent and its subsidiaries
 information about A,L,C,I,E of parent and subsidiary as a single entity
 existing and potential investors
2. Unconsolidated financial statements
 prepared when the entity is the parent alone
 about parent’s own A,L,C,I,E
 not sufficient to meet the needs of primary users
 cannot be a substitute for consolidated
3. Combined
 statements comprise two or more entities not linked by a parent-subsidiary relationship

REPORTING ENTITY
 entity required to or chooses to prepare financial statements
a. Individual corporation, partnership or proprietorship
b. The parent alone
c. The parent and its subsidiaries as single entity
d. Two or more entities w/o parent-subsidiary relationship as single entity
 e. A reportable business segment of entity
 Reporting Period
 period when financial statements are prepared for general purpose financial reporting
 may be prepared on interim basis (optional)

UNDERLYING ASSUMPTIONS
 basic notions on which accounting process Is based; Postulates
 foundation/bedrock of accounting in order to avoid misunderstanding
Going Concern
 in the absence of
evidence contrary to
continuity, the accounting
entity will continue
indefinitely
 - financial statements are
prepared assuming that
the entity will continue
operations til future
 - foundation of cost
principle: assets are
normally recorded at cost
(historical cost)
Accounting entity
 the specific business
organization (sole,
partnership, corporation)
 the entity is separate from
the owners, managers
and employees in the
entity
 for fair presentation of
financial statements
 each business is an
independent accounting
entity
 consolidation does not
eliminate legal boundary
between parent and
subsidiaries
Time Period Monetary Unit
 a completely accurate a) Quantifiability
report on the financial A,L,C,I,E should be
position and performance stated in a unit of
cannot be obtained until measure (peso)
the entity is finally
dissolved and liquidated b) Stability of the peso
 periodic reports on purchasing power of the
financial position, peso is stable or constant
performance and cash and its instability is
flows insignificant = ignored
 the indefinite life of an
entity is divided into *stable peso postulate
accounting periods of adjustments are
equal length unnecessary to reflect any
 accounting period/fiscal changes in purchasing
period - 1 year/12 months power

*calendar year - ends on

december 31
*natural business year - 12
month period that ends on
any month when the
business is at the
lowest/slack season