SUBJECT: BME 111 – FINANCIAL ACCOUNTING AND REPORTING Module No.

Title: FINANCIAL ACCOUNTING ENVIRONMENT

Scope: This module aims to refresh the knowledge of the students about the
definition, nature, and scope of accounting and accounting practice in the
Philippines.

Overview: Accounting has often called the “language of business”. Terms such as
assets, liabilities, equity, revenue, and expense are a few examples of
technical accounting terms widely used in the business community. Every
businessperson needs a sound understanding of accounting terms, basic
principles, and concepts. Some people think of accounting as a highly
technical field that can only be understood by professional accountants.

Nearly everyone practices account in one way or another. Whether you are
preparing a household budget, balancing your checkbook, preparing your
tax returns, or running a small “sari-sari” store, you are working with
accounting concepts and using accounting information.

Objectives: 1. Define accounting.

2. Describe the nature and purpose of accounting.
3. Describe the role of accounting for the different users of financial
information.
4. Enumerate and discuss the branches of accounting.

Discussion: DEFINITION/NATURE/PURPOSE OF ACCOUNTING

ACCOUNTING is a service activity. Its main purpose is to provide quantitative
information, primarily financial in nature about economic entities, that is
intended to be useful in making economic decisions.

Accounting is the 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.

Accounting is the process of identifying, measuring, and communicating

economic information intended to be useful in making economic decisions.

ACCOUNTING: AN INFORMATION SYSTEM

Accounting identifies and measures economic activities, processes
information into financial reports and communicates these reports to
decision makers.

ACCOUNTING: SCIENCE OR ART?

SOCIAL SCIENCE PRACTICAL ART
 Accounting is a social science  Accounting is practical art
with a body of knowledge which which requires the use of
has been systematically creative skill and judgement.
gathered, classified, and
organized. It is influenced by,
and interacts with, economic,
social, and political
environments.

ECONOMIC ENTITY
It is a separately identifiable combination of persons and property that uses
or controls economic or scarce resources to achieve certain goals or
objectives. Scarce resources have one significant characteristic: because of
their limited nature they command a price.
 BUSINESS ENTITY is an entity that produces and distributes goods and
services primarily for profit.
1|Page
SUBJECT: BME 111 – FINANCIAL ACCOUNTING AND REPORTING Module No. 1

 NON-FOR-PROFIT OR NON-PROFIT ENTITY is one that carries out some

socially desirable needs of the community or its members whose
activities are not directed towards making profit.

ECONOMIC ACTIVITIES
Exchange The process of trading resources or obligations for
other resources or obligation.
Production The process of converting economic resources into
outputs of goods and services that are intended to have
greater utility than the required inputs.
Consumption The process of using the final output of the production
process
Income The process of allocating rights to use of output among
Distribution individuals and group in society.
Savings The process by which individuals and groups set aside
rights to present consumption in exchange for rights to
future consumption.
Investment The process of using current inputs to increase the
stock resources available for output as opposed to
immediately consumable output.

TYPES OF INFORMATION PROVIDED BY ACCOUNTING

Quantitative Information Expressed in numbers, quantities, or units.

Qualitative Information Expressed in words or descriptive form.

Financial Information Express in terms of money.

CHARACTERISTICS AND LIMITATION OF FINANCIAL ACCOUNTING AND

FINANCIAL STATEMENTS
1. Historical in nature.
2. Use of facts and estimates.
3. Use of different measurement bases.
4. General Purpose reports
5. Price Level Change not reflected in the general-purpose reports
6. Centered in quantifiable information
7. Use of Technical terminology.

FUNCTION OF ACCOUNTING
IDENTIFICATION – the process of recognition or non-recognition of business
activities as “Accountable Events” or whether they have accounting
relevance.

ACCOUNTABLE EVENT - one that is quantifiable and has effect on assets,

liabilities, and equity. This is known as economic activity, which is the subject
matter of accounting.

CRITERIA FOR ACCOUNTABLE EVENTS

1. It affects a financial element (Asset, Liability and Equity), either increasing
or decreasing it (PROBABILITY CRITERION)
2. It has already happened (HISTORICAL NATURE)
3. It can be measured reliably (MEASURABILITY CRITERION).

CLASSIFICATION OF ACCOUNTABLE EVENTS

A. EXTERNAL EVENTS
a. Transfers:
2|Page
SUBJECT: BME 111 – FINANCIAL ACCOUNTING AND REPORTING Module No. 1

1. Exchanges – two-way movement, giving and receiving.

2. Non-Reciprocal Transfers – one-way movement; either giving or
receiving

b. Other than Transfer – Increase or Decrease in interest rates, change

in price levels, vandalism.

B. INTERNAL EVENTS
a. Production – process by which resources are transformed into
finished goods.

b. Casualties – sudden, unanticipated occurrences usually known as

fortuitous events.

MEASUREMENT – the accounting process of assigning peso amounts of

numbers to the economic transactions or events. The unit of measure of
accounting is money, expressed in prices.

COMMUNICATION – the accounting process of preparing and distributing

accounting reports to potential users of accounting information and
interpreting the significance of this processed information.

USERS OF ACCOUNTING INFORMATION

INVESTORS are interested in information which enables them to assess the
ability of the enterprise to pay dividends. They need information on whether
they should buy, hold, or sell their shares.

EMPLOYEES are interested in information and the stability and profitability

of the entity so that they could assess the ability of the enterprise to provide
remuneration, retirement benefits and employment opportunities.

LENDERS are interested in information that enables them to determine

whether their loans and their interest attaching to them will be paid.

SUPPLIERS interested in information that enables them to determine whether

amount owing to them will be paid when due.

CUSTOMERS are interested in the quality of goods and services that they are
getting from the entity.

GOVERNMENT require information to regulate the activities of the enterprise,

determine taxation policies and as a basis for national income and similar
activities.

PUBLIC – Financial Statements may assist the public by providing information

about the trends and recent developments in the prosperity of the enterprise
and the range of its activities.

BRANCHES OF ACCOUNTING
 FINANCIAL ACCOUNTING – the recording of transactions, preparation of
financial statements and communication of information about the
economic effects of these accounting transactions and event to external
use group.

 MANAGEMENT ACCOUNTING – the accumulation and communication of

information for use by internal parties of management.

3|Page
SUBJECT: BME 111 – FINANCIAL ACCOUNTING AND REPORTING Module No. 1

 COST ACCOUNTING – systematic recording and analysis of the cost of

materials, labor, and overhead incident to the production of goods and
services.
 GOVERNMENT ACCOUNTING – accounting for the national government
and its instrumentalities, focusing attention on the custody of public
funds and purposes to which such funds are committed.

 FINANCIAL AUDITING – the financial statements by independent CPA for

the purpose of expressing an opinion on the fairness of presentation of
financial statement.

 TAX ACCOUNTING – involves the preparation of tax returns and rendering

of tax advice, such as determination of tax consequences of certain
proposed business endeavors.

 FIDUCIARY ACCOUNTING – handling of accounts managed by a person

entrusted with the custody and management of property for the benefit
of another.

 SOCIAL RESPONSIBILITY ACCOUNTING – reporting of programs and

projects that have to do with the upliftment of the welfare of the people
of a community or of the nation.

 ENVIRONMENTAL ACCOUNTING – involves programs and project aimed

at the preservation and care of mother earth. Some programs and
initiatives undertaken by more advanced countries are “carbon
accounting” or “emission trading”

 ACCOUNTING EDUCATION – teaching of accounting and accounting-

related subjects in an organized learning environment.

 ACCOUNTING RESEARCH – pertains to the careful analysis of economic

events and other variables to understand their impact on decisions.

 ACCOUNTING SYSTEMS – the installation of accounting procedures for

the accumulation of financial data; this includes designing of accounting
forms to be used in date-gathering.

AREAS OF PROFESSIONAL ACCOUNTING PRACTICE

 ACADEMIC ACCOUNTING – Composed of CPAs who are professors of
accounting in various colleges and universities. Their task is to prepare
entrants into the Accounting Profession.

 GOVERNMENT ACCOUNTING – Composed of accountants employed in

the different branches of the government.

 PRIVATE ACCOUNTING – Composed of accounts employed in business

enterprises on salary basis. The major objective of private accounting is
to assist the management in planning and controlling the enterprise’s
operations.

 PUBLIC ACCOUNTING – composed of individuals, practitioners,

accounting firms and large multinational organizations that render
independent expert financial services to the public on a professional fee
basis. Public Accountants usually offer three kinds of services: assurances
and audit, taxation, and management advisory services.

4|Page
SUBJECT: BME 111 – FINANCIAL ACCOUNTING AND REPORTING Module No. 1

Self-Check 1. What is accounting?

Test & 2. “Accounting is the language of business.” Do you agree? Explain.
Evaluation 3. Pick at least five branches of accounting. Compare and contrast.
Activities 4. What are accountable events? Are all events accountable? Explain.
5. Pick at least five users of financial information. Discuss the role that
accounting provides to each user.

References: Ballada, W. (2019). Basic Financial Accounting and Reporting. DomDane

Publishing.

Cabrera, M. A., & Cabrera, G. A. (2018). Financial Accounting and

Reporting. GIC Enterprises & Co., Inc.

Meigs, R., & Meigs, W. (1991). Accounting: The Basis for Business
Decisions (8th ed.). McGraw-Hill Education.

Millan, Z. V. (2018). Financial Accounting and Reporting (Fundamentals).

Bandolin Enterprise.

Ledesma, E. (2010). Lecture Notes - Financial Accounting Theory (No. 1).

CRC-ACE Review School.

Valix, C., Peralta, J., & Valix, C. A. (2015). Financial Accounting, Volume 1.
GIC Enterprises & Co., Inc.

5|Page