INTRODUCTION TO

FINANCIAL
ACCOUNTING
Subtitle
LEARNING OBJECTIVES

• After studying this chapter, you should be able to:

• Understand the basics of financial accounting, and the theories involved in the
field.
• Understand the basics of the generally accepted accounting principles as
stated by Financial Reporting Standards Council, in particular scenarios
• Differentiate and distinguish the different components of a complete set of
financial statements
• Learn the components of complete set financial statements
• Know the elements of financial statements that made up each components
• Understand the use and purpose of each financial statements
Title and Content Layout with List
• Definition, Nature, and Scope of Accounting
• Brief History of Accounting
• Users of accounting information
• Relationship of accounting to other fields of Discipline
• Forms of Business Organization
• According to ownership
• According to activity
• Accounting Principles/Concepts as Applied to Sole Proprietorship
Definition and
Nature of Systematic process of
Accounting measuring and reporting
relevant financial information
about the activities of an
economic organization or
unit.

The art of recording, classifying and

summarizing in a significant manner
under the terms of money,
transactions and events, which are in
part at least of financial character,
and interpreting results thereof.
Purpose of Accounting

Provide financial information

(quantitative) about economic
activities, that is intended to be
useful in making economic
decisions.

This Photo by Unknown Author is licensed under CC BY-NC-ND

C1 Importance of Accounting
is a
Accounting Identifies
system that

Records

information
Relevant Communicates
that is

Reliable
about an
organization’s
Comparable business activities.
1-6
C1 Accounting Activities

 Identifying  Recording
Business Business
Activities Activities

Communicating
Business
Activities

1-7
C2
Users of Accounting
Information
External Users Internal Users
(Primary users) (Other users)

•Lenders •Consumer Groups •Managers •Sales Staff

•Shareholders •External Auditors •Officers •Budget Officers
•Governments •Customers •Internal Auditors •Controllers
1-8
C2
Users of Accounting
Information

External Users Internal Users

Financial accounting provides Managerial accounting provides

external users with financial information needs for internal
statements (shareholders, decision makers (officers,
lenders, etc.). managers, etc.).
1-9
C2
Users of Accounting
Information

External Users Internal Users

For investment and lending Help them decide on the particular

purposes transactions and directions to be
undertaken by the entity

1-10
Users of Accounting Information
INVESTORS/ OWNERS/
STOCKHOLDERS

These people provide financial

resources to keep the business
going.

This Photo by Unknown Author is licensed under CC BY

Users of Accounting Information
GOVERNMENT

Financial information is important

for tax purposes and in
compliances with other Regulatory
Bodies

This Photo by Unknown Author is licensed under CC BY

Users of Accounting Information
FINANCIAL
INSTITUTION/CREDITORS
Before extending credit, financial
institutions use financial
information to determine the
capacity of business organization
to pay its obligation and their
interest at the appropriate time.
Did you know?
Users of Accounting Information
MANAGEMENT

Organizational managers use

financial information to set goals
for their Companies
Users of Accounting Information
EMPLOYEES

Provide information on Company

stability which is important for
employees to determine if they
have future in the Company.

This Photo by Unknown Author is licensed under CC BY

Users of Accounting Information
CUSTOMER

A customer is a person or
company that receives, consumes
or buys a product or service and
can choose between different
goods

This Photo by Unknown Author is licensed under CC BY-SA

This Photo by Unknown Author is licensed under CC BY
Users of Accounting Information
SUPPLIER

a person or organization that

provides something needed such
as a product or service.

This Photo by Unknown Author is licensed under CC BY-SA

This Photo by Unknown Author is licensed under CC BY

This Photo by Unknown Author is licensed under CC BY-SA

Financial Accounting and Reporting Standards
The Conceptual Framework
PFRS

• In the Philippines, the framework

used is the Philippine Financial
Reporting Standards (PFRS).
• Comprised of different standards
and interpretations that lay out the
guidelines and principles to be
followed in the presentation of the
items shown in the general
purpose financial statements, as
well as their disclosures.
Conceptual Framework
Full disclosure
• The financial statements, as a rule,
should be enough to help the users
understand the performance and
condition of the entity, and draw
conclusions from such.
• These conclusions would then direct
them to a course of actions involving
the entity.
• The standards require the entities to
provide information to these users
that entities would otherwise not
furnish if the standards do not exist.
Conceptual Framework
Comparability
• The standards aim to minimize
such situation from happening by
setting guidelines and principles
that are uniform across entities.
• The PFRS therefore allows these
entities to speak the same
language in their financial reports.
Conceptual Framework
Various purposes

• Developed so that the

financial reporting standards
are applicable to a wide range
of accounting models
including the concepts of
capital and capital
maintenance.
• Lays out the guidelines for the
preparation of financial
statements of entities.
 Useful financial information must have these two general
characteristics

Fundamental characteristics Enhancing characteristics

Relevance - A piece of information
is relevant if it is capable of making a • Comparability
difference in the decisions made by • Verifiability
the user.
• Timeliness
Information is relevant if it is being
used in the decision-making process • Understandability

Faithful representation. - requires a

piece of information to be complete,
neutral, and free from material error.
Enhancing characteristics
Comparability
• Qualitative characteristic that
enables users to identify and
understand similarities in, and
differences among, items.
• Information becomes more useful
if it can be compared with similar
information about other entities
and with similar information
about the entity for another period
or another date.
Enhancing characteristics
Consistency
• refersto the use of the
same methods for the
same items, either from
period to period within
a reporting entity or in a
single period across
entities.
Enhancing characteristics
Verifiability
• assures users that information
faithfully represents the economic
phenomena it seeks to represent.
• It means that different
knowledgeable and independent
observers could reach a
consensus, although not
necessarily complete agreement,
that a particular information is a
faithful representation.
Enhancing characteristics
Timeliness
• Having information available to
decision makers in time to be
capable of influencing their
decisions.
• This is the reason why companies
not only produce financial statements
once a year but also produce regular
partial, or interim, financial
statements, throughout a year to
supplement their general-purpose
financial statements.
Enhancing characteristics
Understandability
• Financial information is understandable
if it is classified, characterized, and
presented clearly and concisely.
• This is one of the reasons why the face of
the financial statements is presented
separately from their disclosures.
• For financial information to be
understandable, the users should have
adequate background of the financial
statements, the financial information, and
of course, financial accounting.
UNDERLYING ASSUMPTION

Going Concern - business will continue in

operation for the foreseeable future.

• The financial statements are prepared with the

assumption that the entity is not going to
liquidate, or will be forced to do so, in the
foreseeable future.

Accrual basis - requires that the effects of

transactions and other events are recognized when
they occur, and not as cash is received or paid.
BASIC SET OF FINANCIAL STATEMENTS

BALANCE SHEET (STATEMENT OF FINANCIAL POSITION)

INCOME STATEMENT (STATEMENT OF OPERATIONS)

STATEMENT OF CHANGES IN EQUITY

STATEMENT OF CASH FLOWS

NOTES TO FINANCIAL STATEMENTS

STATEMENT OF FINANCIAL POSITION
(BALANCE SHEET)
• The balance sheet presents a
company's financial position at
the end of a specified date.
• Financial statement that reports
a company's assets, liabilities and
shareholders' equity at a specific
point in time
• It is a financial statement that
provides a snapshot of what a
company owns and owes, as well
as the amount invested by
shareholders.
Basic Components of Balance Sheet

ASSETS LIABILITIES EQUITY

STATEMENT OF FINANCIAL POSITION
(BALANCE SHEET)
• Formula Used for a Balance Sheet
Assets=Liabilities+Shareholders’
Equity
• A company has to pay for all the
things it owns (assets) by either
borrowing money (taking on
liabilities) or taking it from
investors (issuing shareholders'
equity).
ASSETS

• These are things that the

company owns.
• They are the resources of
the company that have
been acquired through
transactions, and have
future economic value
that can be measured and
expressed in dollars
ASSETS

Assets also include costs paid in

advance that have not
yet expired, such as prepaid
advertising, prepaid insurance,
prepaid legal fees, and prepaid rent.
EXAMPLE OF ASSETS

Account Short term

Cash Inventory
Receivable Investment

Supplies Prepayments Land Building

Equipment Goodwill
LIABILITIES
• These are obligations of the
company.
• They are amounts owed to
creditors for a past transaction
and they usually have the word
"payable" in their account title.
LIABILITIES
• Along with owner's equity,
liabilities can be thought of as
a source of the company's assets.
• They can also be thought of as a
claim against a company's assets.
• Liabilities also include amounts
received in advance for future
services
Examples of liability accounts reported on a
company's balance sheet include:

ACCOUNTS NOTES LOANS SALARIES

PAYABLE PAYABLE PAYABLE PAYABLE
Examples of liability accounts reported on a
company's balance sheet include:

Tax payable

Customer deposit

Bonds payable

Accrued payable
EQUITY

along with liabilities—can be thought of as a source of the

company's assets

Owner's equity is sometimes referred to as the book value of

the company, because owner's equity is equal to the reported
asset amounts minus the reported liability amounts.
EQUITY
• "Owner's Equity" are the words
used on the balance sheet when
the company is a sole
proprietorship.
• If the company is a corporation,
the words Stockholders' Equity
are used instead of Owner's
Equity.
EQUITY
• An example of an owner's equity
account is Mary Smith,
Capital (where Mary Smith is the
owner of the sole
proprietorship).
• Example of partnership:
• A partner, Capital
• B partner, Capital
EQUITY
Components Stockholders Equity
• Common Stock
• Preferred Stock
• Additional paid in Capital
• Retained Earnings
Balance sheet Formula
Balance Sheet Format
Forms of Balance Sheet

REPORT FORM ACCOUNT FORM

Account Form

The balance sheet is divided into left and right sides like a T
account.

The assets are listed on the left hand side whereas both liabilities
and owners’ equity are listed on the right hand side of the balance
sheet.

If all the elements of the balance sheet are correctly listed, the
total of asset side (i.e., left side) must be equal to the total of
liabilities and owners’ equity side (i.e., right side).
Account Form
Report Form
• The balance sheet elements are
presented vertically i.e., assets
section is presented at the top
and liabilities and owners equity
sections are presented below the
assets section.
Report Form
Income Statement (Statement of Operations)
• Used for reporting a
company's financial
performance over a specific
accounting period.
• Also known as the profit and loss
statement or the statement of
revenue and expense, the income
statement primarily focuses on
the company’s revenues and
expenses during a particular
period.
Income Statement (Statement of Operations)
• The income statement reports
income through a particular time
period and its heading indicates
the duration, which may read as
“For the (fiscal) year/quarter
ended
Income Statement (Statement of Operations)
• Four Key Items of Income
Statement:
A. Revenue
B. Costs/Expenses
C. Gains/Losses
D. Net Income/Net Loss
• it gives an account of how the net
revenue realized by the company
gets transformed into net profit
or loss
Income Statement (Statement of Operations)
Revenue
• is the income generated from
normal business operations and
other business activities that
includes discounts and
deductions for returned
merchandise.
• It is the top line or gross income
figure from which costs and
expenses are subtracted to
determine net income.
Income Statement (Statement of Operations)
Revenue:
• is also known as sales on the
income statement.
Formula:
Income Statement (Statement of Operations)
Revenue:
A. Operating income - is income
derived from normal business
operations, such as sales of good or
services.
B. Non-operating income - is
infrequent or nonrecurring income
derived from secondary sources
(e.g., lawsuit proceeds).
Examples of Revenue
Government
Money received from taxation, fees,
fines, inter-governmental grants or
transfers, securities sales, mineral
or resource rights
Non Profits Companies
Include donations from
individuals, foundations, and
companies; grants from
government entities; investments;
fundraising activities; and
membership fees
Examples of Revenue
Real estate Companies Telecommunication Companies

Revenue refers to the income Sale of Cell phone Credit Card

generated by a property, such as loads, sale of load plans, and etc.
rent, parking fees, and sale of units
Income Statement (Statement of Operations)
Cost VS Expenses
Costs
• Tied to the production of a company's
goods and services.
• Represents the business expenses that
are directly incurred because a
transaction has taken place.
• When the coffee shop sells a coffee, the
cost account captures the price of the
cup, the coffee sleeve, the water, the
processed beans, etc.
Expenses
• Expenditures that are not directly tied
to the production of goods or services.
• 3 Classifications
a. Selling
b. General and Administrative
c. Other expenses
When the coffee shop sells a coffee, the
expense account captures the rentals,
office supplies and marketing expense.
Income Statement (Statement of Operations)
Cost VS Expenses
Costs Expenses
Examples of Costs
• Labor directly tied to production Example of Expenses

• Depreciation of the manufacturing plant • Rent

• Utilities of the facilities tied to • Utilities

production • Office supplies
• Direct materials needed for the • Legal costs
production of goods and services
• Taxes on the production facilities • Sales and marketing

• In the retail industry, cost of goods sold • Payroll

could be the inventory and merchandise • Insurance costs
purchased from the supplier or
manufacturer.
Income Statement (Statement of Operations)
Gains VS Losses
GAINS
• Also called other income, gains
indicate the net money made from
other activities, like the sale of long-
term assets.
• These include the net income
realized from one-time non-business
activities, like a company selling its
old transportation van, unused
land, or a subsidiary company.
LOSSES
• All expenses that go towards a loss-
making sale of long-term assets,
one-time or any other unusual costs.
• a loss is realized whenever a
company loses money through
secondary activity
• A loss will also be recorded if a
company is ordered by a judge to
pay to settle a lawsuit, or if it loses
money on the financial investment.
•
Income Statement (Statement of Operations)
Net Income
• Also called net earnings, is
calculated as sales minus cost of
goods sold, selling, general and
administrative expenses, operating
expenses, depreciation, interest,
taxes, and other expenses.
• It is a useful number for investors to
assess how much revenue exceeds
the expenses of an organization.
• This number appears on a
company's income statement and is
also an indicator of a company's
profitability.
Nature and Forms
of Income
Statement
A. Natural Form
B. Functional Form

This Photo by Unknown Author is licensed under CC BY-SA-NC

Nature and Forms of Income Statement
Natural Form
• Expenses are disclosed according to what
categories they are spent on, such as raw
materials, transport costs, staffing costs,
depreciation, employee benefit etc.
• This method of disclosure of expenses is
used in single step income statement,
usually employed by small businesses as it
is simple and relatively easier to be
implemented.
• However, the drawback of this method is
that it cannot be used to calculate gross
profit within the income statement.
Nature and Forms of Income Statement
Functional Form

• Expenses are disclosed according to

the different functions they are
spent on (cost of goods sold, selling,
administrative, etc.)
• This method allows us to calculate
gross profit and operating profit
within the income statement, and
therefore is usually used in the
multi-step format of income
statement.
• Most large and medium sized
businesses use this method.
Statement of Changes in Equity
• Reconciliation of the beginning
and ending balances in a
company’s equity during
a reporting period.
• The statement of changes in
equity is most commonly
presented as a separate
statement, but can also be added
to another financial statement.
Statement of Changes in Equity
The transactions most likely to appear on
this statement are as follows:
• Net profit or loss
• Dividend payments
• Proceeds from the sale of stock
• Treasury stock purchases
• Gains and losses recognized directly in
equity
• Effects of changes due to errors in prior
periods
• Effects of changes in fair value for certain
assets
Nature of Statement of Equity

Sole Proprietorship

Partnership

Corporation
Nature of Statement of Equity
• Sole Proprietorship
Nature of Statement of Equity
Partnership
Nature of Statement of Equity
Corporation
Pick for your Stars
GRADED RECITATION
 Mechanics

• You must choose a star from 1 to 14

• You must choose either one (1) or two (2) answers within 60 seconds
• If you prefer to choose two (2) answers, you must choose one as your best answer
 Mechanics

• The following are the scenarios with appropriate scores

• One answer is given, and it is correct – 2 stars
• Two answers is given - Final answer is correct – 1 star
• Two answers is given- Final answer is incorrect and 2nd answer is correct – .5 star

2 stars = plus 1 quiz scores

 Choose your star
1
1 2 3 4 5 6 7 8 9
0

1 1 1` 1 1 1 1 1 1 2
1 2 3 4 5 6 7 8 9 0

2 2 2 2 2 2 2 2 2 3
1 2 3 4 5 6 7 8 9 0

3 3 3 3 3 3 3 3 3 4
1 2 3 4 5 6 7 8 9 0
 THE CORRECT
ANSWER IS.. B
1.A fundamental characteristic of financial information which enables it to
influence the decision of financial statement users.
a. Material
b. Relevance
c. Consistency

TIME IS UP!
d. Neutral
 THE CORRECT
ANSWER IS.. D
2.Without partiality in the selection or presentation of financial information

TIME IS UP!
.
a. Material
b. Relevance
c. Consistency
d. Neutral
 THE CORRECT
ANSWER IS.. A
3. Having available information to decision makers just in time to allow

TIME IS UP!
them to make their decisions.
a. Timeliness
b. Verifiability
c. Going Concern
d. Consistency
 THE CORRECT
ANSWER IS.. B
4. A present obligation of the entity to transfer an economic resources as a
result of past events.
a. Assets
b. Liability
c. Capital

TIME IS UP!
d. Expenses
 THE CORRECT
ANSWER IS.. C
5. Residual interest in the assets of the entity after deducting all

TIME IS UP!
its liabilities
a. Assets
b. Liability
c. Equity
d. Expenses
 THE CORRECT
ANSWER IS.. D
6.Amount of cash and cash equivalents that would have to be paid if the
same or an equivalent assets is acquired currently.
a. Current Assets
b. Current liabilities
c. Historical Cost

TIME IS UP!
d. Current Cost
 THE CORRECT
ANSWER IS.. A

TIME IS UP!
7.Standards and interpretations issued by the international Accounting
Standards Board.
a. International Financial Reporting Standards
b. Generally Accepted Accounting Principles
c. Philippine Auditing Standards
d. Philippine Accounting standards
 THE CORRECT
ANSWER IS.. A
8.Total of income less expenses excluding the components of other

a.
b.
c.
TIME IS UP!
comprehensive income
Profit or Loss
Revenue
Gains/Losses
d. Cost/Expenses
 THE CORRECT
ANSWER IS.. D
9.Inflows and outflows of cash equivalents .
a. Cash Receipts
b. Cash Income
c. Cash Disbursements
d. Cash Flows

TIME IS UP!
 THE CORRECT
ANSWER IS.. B
10. The financial statements that shows an entity’s assets, liabilities, and

b.
TIME IS UP!
equity as of particular date. .
a. Cash Flows
Balance Sheet
c. Income Statement
d. Statement of Assets, Liabilities and Net worth (SALN)
 THE CORRECT
ANSWER IS.. B
11. I. The definition of income encompasses both revenue and gains

TIME IS UP!
II. The definition of income also includes rent collected in advance.
Which statement/s is/are TRUE
a. I and II
b. I only
c. II only
d. Neither of the statements are true
 THE CORRECT
ANSWER IS.. C
12. I. Physical form is essential to the existence of an assets.
II. Faithful representation does not mean accurate in all respects

TIME IS UP!
Which statement/s is/are TRUE
a. I and II
b. I only
c. II only
d. Neither of the statements are true
 THE CORRECT
ANSWER IS.. D
13. I. Financial statements show the value of a reporting entity
II. The fundamental qualitative characteristics of useful financial information are relevance and

TIME IS UP!
timeliness
Which statement/s is/are TRUE
a. I and II
b. I only
c. II only
d. Neither of the statements are true
 THE CORRECT
ANSWER IS.. D
14. I. A decision by the management of an entity to acquire assets in the future gives rise to a liability

TIME IS UP!
II. If financial information is to be useful, it must be relevant and faithfully represent what it intends
to represent
Which statement/s is/are TRUE
a. I and II
b. I only
c. II only
d. Neither of the statements are true
TIME IS UP!