THE UNIVERSITY OF MANILA

ACCOUNTING REFRESHER 1

Accounting Definition:
AICPA : The art of recording, classifying and summarizing in a significant manner and in term of
“money, transaction and events” which are in part at least of financial character and interpreting the
result thereof.
AAA: Is the process of identifying, measuring and communicating “economic information” to
permit informed judgment and decision by users of the information

Base on definition 3 important activities:

 Identifying - recognition or non-recognition of accountable events. Accountable or quantifiable
when its affect asset (economic resources), liabilities (economic obligation) and equity. In other
words, the subject matter of accounting is economic activity ( no effect Sociological and
Psychological matters)
Economic activities- transactions which may be classified as external and internal

 External transactions or exchange transactions are those economic event involving

one entity and another entity. Ex. Purchase of merchandise from supplier, borrowing
money from the bank, sale of merchandise or service to customer and payment of
salaries to employees.
 Internal transactions are economic events involving the entity only. Ex. Production
and casualty loss.
 Measuring - process of determining monetary amounts
4 Measurement Bases:
 Historical cost (Acquisition cost) is the amount of cash or cash equivalent paid
or the fair value of the consideration given to acquire an asset at the time of
acquisition.
 Current cost is the amount of cash or cash equivalent that would have to be
paid if the same or equivalent asset was acquired currently.
 Realizable value is the amount of cash or cash equivalent that could currently
be obtained by selling the asset in an ordinary disposal.
 Present value is the discounted value of the future net cash inflows that the
item is expected to generate in the normal course of business.
 Communicating – process of preparing and distributing accounting reports to potential users of
accounting information
Implicit in the communication
 Recording or journalizing is process of systematically maintaining a record of all
economic business transactions after they have been identified and measured.
  Classifying (posting to ledger) is the sorting or grouping of similar and
interrelated economic transactions into their respective class.
 Summarizing is the preparation of financial statements which include the
balance sheet, income statement, cash flow statement, statement of changes in
equity and statement of recognized gains and losses.

Users of Accounting Information

 Internal Users (Management group)-those own and/or manage and control the
business entity.
 External Users (Financing and Public group) other than management. Investors,
Employees, Lenders, Suppliers and other trade creditors, Customers,
Government and its agencies, and Public.

Business is any economic activity conducted primarily for profit. To engage in business is to supply
goods and services to earn profit or income

Common Forms of Business

 Sole or single proprietorship – business entity owned by one person called sole proprietor.
 Partnership – business entity owned by two or more person called partners who agreed to
contribute money, property and industry to common fund with the intention of dividing the
profits among themselves.
 Corporation – business registered as an artificial person under the operation of the law. Its
existence is evidenced by the Article of Incorporation and Corporate By-Laws registered with the
Security and Exchange Commission (SEC)

Primary Activities of Business

 Servicing – primary product of this business is service.
 Merchandising – engage in buying and selling of goods. Its earning are primarily from the
markup (profit) its adds to cost of goods it sells to customers
 Manufacturing – convert raw materials into finished goods that are to be sold at selling price.

Accounting Concepts and Principles

Accounting Convention are accounting practices that practitioners accept because of their long
existence and used. Example; used of “debit” and “credit” or the “dual aspect concept”

Accounting Concepts (Assumption) are the basic notion or fundamental premises on which the
accounting process is based (foundation).
Five Basic Accounting Principles
 Economic Entity Assumption – the business enterprise is separate from the owners, managers
and employees who constitute the firm.
 Going Concern Assumption (Continuity Assumption) – that the business entity will continue
operating indefinitely for a period of time sufficient to carry out its contemplated objectives,
plans, contracts and commitments unless the liquidation of the entity is imminent.
 Monetary Unit Assumption – money is the common denominator in economic activity.
Two Monetary Unit Assumption Aspects
 Quantifiability – that the asset, liability, equity, income and expenses should be
stated in terms of a unit of measurement which is the peso in the Philippines.
 Stability of the peso assumption – that the purchasing power of the peso is
stable or constant and that its instability is insignificant and therefore may be
ignored.
 Time Period Assumption (Periodicity Assumption) – requires that “the indefinite life of an
enterprise is subdivided into time period or accounting period which are usually of equal length
for the purpose of preparing financial reports on financial position, performance and cash flow”
 Accrual Basis Assumption – means that the income is recognized when earned regardless of
when received and expense is recognized when incurred regardless of when paid.

Basic Principles of Accounting it refers to a doctrine, which is the basis of all other rules, procedure, and
method in accounting practice.

Four Basic Principles

 Measurement Principles guide how asset and liabilities are value.
Asset – an asset is recognized in the balance sheet when it is (1)probable and future
economic benefits will flow to the enterprise and (2) the asset has a cost or value that can be
measured reliably.
Liabilities – is recognized in the balance sheet when it is (1) probable that the outflow of
resources embodying economic benefits will be required for the settlement of the present
obligation and (2) the amount of the obligation can be measured reliably.
Two Measurement Principles
 Cost Principle (Historical Cost Principles) – As required by IFRS, business entities
should account for and report many assets and liabilities on the basis of
acquisition price.
 Fair Value Principles – the amount for which an asset could be exchanged, a
liability could be settled, or an equity instrument granted could be exchanged
between knowledge and willing parties in arm’s length transaction.
 Revenue Recognition Principle – income should be recognized when earned. Income considered
as earned in the income statement when it is (1) probable that an increased in the future
economic benefits related to an increased in an asset or a decreased in a liability has arisen and
(2) that the increase in economic benefits can be measured reliably.
  Expense Recognition Principles – expense are recognized in the income statement when it is
probable that a decreased in the income statement when it is (1) probable that decrease in
future economic benefits related to a decreased in an asset or an increased in a liabilities has
occurred and (2) the decrease in economic benefits can be measured reliably.
 Full-Disclosure Principle – it is requires that financial statements should report all relevant
information bearing the economic affairs of a business enterprise, including subsequent events.

Basic Financial Statement -Financial Statements are formal reports prepared by accountants. Objective
of financial statement is to provide information about the financial position, performance and cash flows
of an entity that is useful to a wide range of users in making economic decisions.

 Statement of Financial Position (SFP) also known as the balance sheet shows the financial
condition, comprises asset, liabilities and equity at the particular time. It conveys information
about the business entity’s liquidity, solvency, stability, capital structure, and financial flexibility.
Liquidity – are there available funds to finance the business operations?
Solvency – can the business pay its long-term obligations to others?
Stability – can the business sustain its long-term profitability and cash flow?
Capital Structure – how much borrowed capital and owner’s capital are invested in the
business?
Financial flexibility – Is there excess cash available for investment opportunities and
other uncertainties?
 Statement of Comprehensive Income – also known as Income Statement. This accounting
report shows the operating performance of the business entity for a given period. It provides
information about the business entity’s profitability. Accounting elements of performance are
revenue and expenses
 Statement of Changes in Equity – shows the movements in the various elements of the owner’s
equity or capital for a certain period. Basic components of this statement are Owner’s
investments to the business, Profit or loss for the period, Owner’s personal withdrawals and
Prior period adjustment.
 Cash Flow Statement – explains the changes of cash and cash equivalents during an accounting
period, merely explain the sources (inflow) and uses of cash (outflow)
The components of cash flow statement are classified into following activities:
 Operating – the inflows and outflows of cash from the normal operating
activities of the business.
 Investing – the inflows and outflows of cash from the sale or purchase of assets
other than inventory.
 Financing – the inflows and outflows of cash from the owners and creditors of
the enterprise.
 Notes to Financial Statement – the parenthetical disclosures to the financial statement are
considered part of the basic financial statement to achieve proper understanding of the financial
reports.
Elements of Financial Statements

Statement of Financial Position (“Real Accounts”)

 Asset – resources owned and controlled by entity resulting from past events and from them,
future economic benefits are expected to flow to the entity. May have physical form or no
physical form.
With Debit normal balance (increased at debit side & decreased at credit side)
 Liabilities – existing obligation of the entity arising from past events; their settlements are
expected to result in an outflow of assets from entity or arises for another obligation.
With Credit normal balance (increased at credit side & decreased at debit side)
 Equity – the residual interest in the assets of the entity after deducting all its liabilities. It
comprises the capital contribution and withdrawals by the owner. Increased by capital
contribution of owner and net income of the business, and decreases by the owner’s
withdrawals and net losses of the business.
With Credit normal balance (increased at credit side & decreased at debit side)

Statement of Comprehensive Income (“Nominal Accounts”)

 Revenue – increased in asset (not contribution of owner) or decreases in liabilities arising from
business operation during an accounting period that result to increase owner’s equity.
With Credit normal balance (increased at credit side & decreased at debit side)
 Expenses – decreases in assets (not withdrawal of owner’s or payments of existing liabilities) or
increases in liabilities arising from business operation during an accounting period that result to
decreases in owner’s equity.
With Debit normal balance (increased at debit side & decreased at credit side)

Classification of an Asset
 Current Asset (with the following criteria)
1. It is cash or cash equivalent which is not restricted for current use
2. It is expected to be realized, or is held for the sale or consumption in the normal course
of the enterprise’s operating cycle.
3. It is held primarily for trading purposes or for the short-term, and it is expected to be
realized within twelve months of the SFP date.

“Commonly used current Asset”

 Cash – any items on hand with monetary value that bank will accept for deposit
an all amounts currently on deposit with the bank that are unrestricted (readily
available) in the name of the business.
 Account Receivable - the amounts collectible on open account of the
customers. Debtor’s oral promise to pay certain amount to the business and the
right of the business to collect that certain amount in peso.
  Notes Receivable – a written promise to pay a certain amount on specified or
determinable date. Due within 12 months or with in normal operating cycle.
 Accrued Interest Receivable - interest earned on notes receivable but not yet
received in cash
 Inventories - Asset held for sale in the normal operation of the business, in the
process of production for sale, or in the form of materials or supplies to be
consumed in the production process or in the rendering of services.
 Prepaid supplies – various materials which remain unused at the end of the
account ting period.

 Noncurrent Asset(asset that did not meet the criteria for current asset)
 Land – the site owned by the business on which the business building is
constructed. Not subject to depreciation.
 Building – the structure owned by the business used in the operation of
business
 Furniture and Fixture - long-lived items used by the business including store
furnishing such as showcases, counters, containers, display rack, as well as
furniture used for office purposes such as desk, chairs, and cabinets.
 Equipment - consists of what generally might be called the machinery used in a
business such as computers, delivery equipment or machinery used in
conveying, packing, sorting or altering the commodities handled.
*Contra-Value Accounts (Contra Asset Account)
 Allowance for Doubtful Accounts – refers to an amount estimated uncollectible on
receivable (deductible to Receivable)
 Accumulated Depreciation – the aggregate periodic costs of using a depreciable plant
asset. (deductible to PPE)

Classification of Liabilities
 Current Liabilities (with the following criteria)
1. It is expected to settle in the normal course of the enterprise’s operating cycle.
2. It is due to settled within twelve months of the Statement of Financial Position date.

“Commonly used current Liabilities”

 Accounts Payable – an obligation or debt to creditors for money borrowed or
merchandise and other asset bought on credit.
 Notes Payable – a promissory note issued by the business that are subject to
settle within 12 months or part that are due within 12 months.
 Accrued Interest Payable – the interest incurred in the period but not yet paid.
 SSS Premium Payable – representative of the amount of employee and
employer contribution to SSS which are not yet remitted.
  Withholding Tax Payable – the amount of income tax withheld from the salary
of employee in behalf of BIR that the employer has to remit to BIR on the
specified due date.

 Noncurrent Liability – is one that does not meet the criteria of a current liability.

Basic Accounting Equation

Asset = Liability + Owner’s Equity