Chapter 3
STARTING UP A BUSINESS • The information represent
QUALITATIVE ATTRIBUTES
- These are attributes or
characteristics that financial
information must possess to make
them trustworthy and useful
UNDERSTANDABILITY
‾ Terminologies must be clear
‾ Orderly presentation
‾ Users have reasonable knowledge
of finance, economics and
accounting
RELEVANCE
‾ It prescribes the quality of
information that will make a
difference and influence a
statement user to make meaningful
decision.
‾ The quality or state of being closely
connected or appropriate.
‾ Information must have “predictive
value”. (looking forward)
‾ Information must have “feedback
value” (looking backward)
o Timeliness
 Another quality that will enhance
relevance.
o Materiality
• Information is material
- if its omission or misstatement
can influence the decision
of the user.
• Information is immaterial
-if it does not have a bearing on
user’s judgment.
- Materiality depends on the size
and nature of the item.
RELIABILITY
‾ Degree of confidence users have on
the financial statements.
‾ Free from material errors or
misstatements.
-Faithful representation
faithfully what they claim to be
• The information should not
mislead others to think that it is
when it is not
-Neutrality
• Free from bias or manipulations.
• Information is not neutral if
information selected and presented
influences a particular user toward
a particular decision.
- Substance over form
• Information should reflect the
substance (essence or intention)
rather than its legal form.
-Prudence
• Caution in exercising judgment
especially in making estimates
under a condition of uncertainty.
-Completeness
 All material and relevant
information must be disclosed in
the financial statements.
 If data is omitted, it will cause the
information to be false and
misleading.
COMPARABILITY
‾ Changes taking place are identified
from one period and to another
period.
‾ Level of performance can be
determine.
‾ Can be compared to other
companies to be able to make
meaningful assessment of its
financial performance or financial
position.
-Consistency
• Uniformity of accounting treatment
from one period to another period
or from one company to another
company.
• Same accounting methods or
practices must be used from period
to another period.
 Generally Accepted Accounting
Principles (GAAP)
These are laws or rules that guide the
conduct and practice of the profession.
These are used in identifying, measuring
and reporting financial information.
Man made laws usually a result of:
• long-used accounting practice
• Norm of conduct of a place or
standards promulgated by an
authoritative body.
ACCOUNTING CONCEPTS AND
PRINCIPLES
• BUSINESS ENTITY
‾ This concept assumes that a
business enterprise is separate and
distinct from the owner or investor.
‾ Personal assets & liabilities of the
owner are not included in the
business financial statements.
‾ If the owner has more than one
business, separate set of financial
statements shall be prepared for
each.
• EXCHANGE PRICE OR COST
‾ Assets should be recorded based on
cash which is the amount
exchanged at the time of purchase
or equal to cash basis (cash
equivalent).
• GOING CONCERN
‾ The business will continue in
operational existence for the
foreseeable future.
• ACCRUAL ASSUMPTION
‾ PAS 1 par.27-28 requires that
financial statements be prepared
under accrual basis.
‾ Items are recognized as assets,
liabilities, revenues and expenses
based on the period they relate or
based on the occurrence of the
event rather than on whether cash
is paid or received.
• OBJECTIVITY
‾ Financial data entered in the
records must be verifiable and
substantiated by documents like
official receipts, invoices, vouchers
etc.
• REPORTING PERIOD
‾ PAS1 par 36-37 provides that the
basic accounting period is one year
with interim reports (monthly,
quarterly, semi-annually)
‾ Accounting period – 12 mos. period
 -calendar
year
 -fiscal year
• UNIT OF MEASURE AND
MEASUREMENT IN TERMS OF
MONEY
‾ Business transactions are
measured and recorded using only
one unit of measure.
Financial Structure of Business
• The Financial Position or structure
of a business entity is based on
these three elements:
Assets, Liabilities & Owner’s Equity
• The Financial Performance is based
on:
Revenues and Expenses
ASSETS
 Economic resources owned by the
business
 They are used in operating the
business
 It has three features:
 it is a resource obtained
from a past event
 the business has control
over it
 future economic benefits
will be received from its
use
LIABILITIES
 An obligation to do or pay
  debts of the business owing to THE ACCOUNT
outside parties The account is a device used to
 It also has three features: record the changes (increases or
 There is a present decreases) in the three accounting
obligation elements, assets, liabilities and owner’s
 which arose from a past equity.
event and
 settlement is expected to be - Group of accounts with corresponding
made in the future in the codes are stored in the Chart of Accounts.
form of an outflow of
resources Type Debit Credit
OWNER’S EQUITY Assets Increase Decrease
 residual right or interest of the Liabilities Decrease Increase
owner in the entity’s net assets Equity Decrease Increase
 the net assets claimable by the Revenue Decrease Increase
owner. Assets-Liability Expense Increase Decrease
 determined by deducting the total
liabilities from the total assets ASSET ACCOUNTS
• Cash – currencies, coins, checks,
BUSINESS TRANSACTIONS bank drafts
A transaction is defined as an • Accounts Receivable
1. exchange of values • Notes Receivable
2. between two parties • Supplies
3. expressed in terms of money • Land
• Furniture & Fixtures- tables, chairs,
Non-Financial Transactions desks, cabinets
Business transactions that have not met all • Equipment – typewriters,
the three characteristics should not be computers, adding machines,
recorded in the books of the entity, such as calculators, xerox copier, air
the following: condition, printers
1. Soriano hired tourist guides • Building
for a salary of P10,000 each. • Machinery
2. A lease contract was signed
for the use of an office LIABILITIES
space at a monthly rental of Usually identified by the word
P18,000. Payable such as:
3. An order for office supplies  Accounts Payable
was placed with Goodwill  Notes Payable
Bookstore amounting to  Loans Payable – long term
P5,000.  Utilities Payable
 Mortgage Payable – long
THE ACCOUNTING EQUATION term, collateral

ASSETS = LIABILITIES + OWNER’S OWNER’S EQUITY

EQUITY Two accounts are used to represent
ASSETS – LIABILITIES = OWNER’S owner’s equity:
EQUITY
ASSETS – OWNER’S EQUITY = – Owner’s Capital
– Owner’s Drawing (or
Owner’s withdrawal or
Owner’s Personal)