FAR Lesson 1 65

Concept and
Principles
Bulacan Date Developed:

BACHELOR OF SCIENCE June 2020
Polytechnic Date Revised:
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Document No. Developed by: Revision #
FAR 113 Sarah Joy Dumalay Martin
20-FAR 113 02
MODULE CONTENT
COURSE TITLE: FINANCIAL ACCOUNTING AND REPORTING 1
MODULE TITLE Concept and principles
NOMINAL DURATION: 3 HRS (NO. of Hours per topic)
SPECIFIC LEARNING OBJECTIVES:

At the end of this module you MUST be able to:
1. Rationalize the concepts and principles relating to the preparation and

presentation of financial statements
TOPIC: (SUB TOPIC)

1. Definition and introduction
2. Accounting Principles
3. Accounting Concepts
4. Basic Accounting Terms
REFERENCE/S:
1. https://www.investopedia.com/terms/f/financialinstrument.asp
2. https://www.ifrsbox.com/ifrs-conceptual-framework-2018/
3. https://www.accountingtools.com/articles/2017/5/17/accounts-
receivable-accounting

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Information Sheet
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Basic Principles of Philippine Taxation
Learning Objectives:
After reading this INFORMATION SHEET, YOU MUST be able to:
1. Discuss the Accounting Concepts, Principles and Basic Terms
2. Understand the Accounting Principles.
3. Discuss the Accounting Concepts.
Accounting Concepts, Principles and Basic Terms
Definition and introduction
The worldview of accounting and accountants may certainly involve some

unhelpful characters poring over formidable figures stacked up in
indecipherable columns.
However, a short and sweet description of accounting does exist:
Accounting is the language of business efficiently communicated by well-

organized and honest professionals called accountants.
A more academic definition of accounting is given by the American Accounting

Association:
The process of identifying, measuring and communicating economic

information to permit informed judgments and decisions by users of the
information.
The American Institute of Certified Public Accountants defines accounting as:

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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 financial
character, and interpreting the results thereof.
Accounting not only records financial transactions and conveys the financial
position of a business enterprise; it also analyses and reports the information
in documents called “financial statements.”
Recording every financial transaction is important to a business organization

and its creditors and investors. Accounting uses a formalized and regulated
system that follows standardized principles and procedures.
The job of accounting is done by professionals who have educational degrees

acquired after years of study. While a small business may have an accountant
or a bookkeeper to record money transactions, a large corporation has an
accounts department, which supplies information to:
• Managers who guide the company.

• Investors who want to know how the business is doing.
• Analysts and brokerage firms dealing with the company’s stock.
• The government, which decides how much tax should be collected from the
company.
Accounting Principles
Obviously, if each business organization conveys its information in its own

way, we will have a babel of unusable financial data.
Personal systems of accounting may have worked in the days when most
companies were owned by sole proprietors or partners, but they do not
anymore, in this era of joint stock companies.
These companies have thousands of stakeholders who have invested millions,

and they need a uniform, standardized system of accounting by which
companies can be compared on the basis of their performance and value.
Therefore, accounting principles based on certain concepts, convention, and

tradition have been evolved by accounting authorities and regulators and are
followed internationally.
These principles, which serve as the rules for accounting for financial
transactions and preparing financial statements, are known as the “Generally
Accepted Accounting Principles,” or GAAP.
The application of the principles by accountants ensures that financial
statements are both informative and reliable.
It ensures that common practices and conventions are followed, and that the
common rules and procedures are complied with. This observance of
accounting principles has helped developed a widely understood grammar and
vocabulary for recording financial statements.

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However, it should be said that just as there may be variations in the usage of
a language by two people living in two continents, there may be minor
differences in the application of accounting rules and procedures depending on
the accountant.
For example, two accountants may choose two equally correct methods for
recording a particular transaction based on their own professional judgment
and knowledge.
Accounting principles are accepted as such if they are (1) objective; (2) usable
in practical situations; (3) reliable; (4) feasible (they can be applied without
incurring high costs); and (5) comprehensible to those with a basic knowledge
of finance.
Accounting principles involve both accounting concepts and accounting

conventions. Here are brief explanations.
Accounting Concepts
1. Business entity concept: A business and its owner should be treated

separately as far as their financial transactions are concerned.
2. Money measurement concept: Only business transactions that can be
expressed in terms of money are recorded in accounting, though records of
other types of transactions may be kept separately.
3. Dual aspect concept: For every credit, a corresponding debit is made. The
recording of a transaction is complete only with this dual aspect.
4. Going concern concept: In accounting, a business is expected to
continue for a fairly long time and carry out its commitments and
obligations. This assumes that the business will not be forced to stop
functioning and liquidate its assets at “fire-sale” prices.
5. Cost concept: The fixed assets of a business are recorded on the basis of
their original cost in the first year of accounting. Subsequently, these
assets are recorded minus depreciation. No rise or fall in market price is
taken into account. The concept applies only to fixed assets.
6. Accounting year concept: Each business chooses a specific time period
to complete a cycle of the accounting process—for example, monthly,
quarterly, or annually—as per a fiscal or a calendar year.
7. Matching concept: This principle dictates that for every entry of revenue
recorded in a given accounting period, an equal expense entry has to be
recorded for correctly calculating profit or loss in a given period.
8. Realization concept: According to this concept, profit is recognized only
when it is earned. An advance or fee paid is not considered a profit until
the goods or services have been delivered to the buyer.

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Accounting Convention
There are four main conventions in practice in accounting: conservatism;

consistency; full disclosure; and materiality.
Conservatism is the convention by which, when two values of a transaction

are available, the lower-value transaction is recorded. By this convention, profit
should never be overestimated, and there should always be a provision for
losses.

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Consistency prescribes the use of the same accounting principles from one
period of an accounting cycle to the next, so that the same standards are
applied to calculate profit and loss.
Materiality means that all material facts should be recorded in accounting.
Accountants should record important data and leave out insignificant
information.
Full disclosure entails the revelation of all information, both favorable and
detrimental to a business enterprise, and which are of material value to
creditors and debtors.
Basic Accounting Terms
Here is a quick look at some important accounting terms.
Accounting equation: The accounting equation, the basis for the double-entry
system (see below), is written as follows:
Assets = Liabilities + Stakeholders’ equity
This means that all the assets owned by a company have been financed from
loans from creditors and from equity from investors. “Assets” here stands for
cash, account receivables, inventory, etc., that a company possesses.
Accounting methods: Companies choose between two methods—cash

accounting or accrual accounting. Under cash basis accounting, preferred by
small businesses, all revenues and expenditures at the time when payments
are actually received or sent are recorded. Under accrual basis accounting,
income is recorded when earned and expenses are recorded when incurred.
Account receivable: The sum of money owed by your customers after goods or
services have been delivered and/or used.
Account payable: The amount of money you owe creditors, suppliers, etc., in
return for goods and/or services they have delivered.
Accrual accounting: See “accounting methods.”
Assets (fixed and current): Current assets are assets that will be used within
one year.
For example, cash, inventory, and accounts receivable (see above). Fixed assets
(non-current) may provide benefits to a company for more than one year—for
example, land and machinery.
Balance sheet: A financial report that provides a gist of a company’s assets

and liabilities and owner’s equity at a given time.
Capital: A financial asset and its value, such as cash and goods. Working
capital is current assets minus current liabilities.
Cash accounting: See “accounting methods.”
Cash flow statement: The cash flow statement of a business shows the
balance between the amount of cash earned and the cash expenditure
incurred.
Credit and debit: A credit is an accounting entry that either increases a
liability or equity account, or decreases an asset or expense account. It is
entered on the right in an accounting entry. A debit is an accounting entry that
either increases an asset or expense account, or decreases a liability or equity
account. It is entered on the left in an accounting entry.
Double-entry bookkeeping: Under double-entry bookkeeping, every
transaction is recorded in at least two accounts—as a credit in one account
and as a debit in another.

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For example, an automobile repair shop that collects Rs. 10,000 in cash from a
customer enters this amount in the revenue credit side and also in the cash
debit side. If the customer had been given credit, “account receivable” (see
above) would have been used instead of “cash.” (Also see “single-entry
bookkeeping,” below.)
Financial statement: A financial statement is a document that reveals the

financial transactions of a business or a person. The three most important
financial statements for businesses are the balance sheet, cash flow statement,
and profit and loss statement (all three listed here alphabetically).
General ledger: A complete record of financial transactions over the life of a
company.
Journal entry: An entry in the journal that records financial transactions in
the chronological order.
Profit and loss statement (income statement): A financial statement that
summarizes a company’s performance by reviewing revenues, costs and
expenses during a specific period.
Single-entry bookkeeping: Under the single-entry bookkeeping, mainly used
by small or businesses, incomes and expenses are recorded through daily and
monthly summaries of cash receipts and disbursements. (Also see “double-
entry bookkeeping,” above.)
Types of accounting: Financial accounting reports information about a
company’s performance to investors and credits. Management accounting
provides financial data to managers for business development.

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Financial Reporting Standards
Council and Conceptual
Framework for the preparation
and Presentation of Financial
Statement

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MODULE CONTENT
MODULE TITLE Financial Reporting Standards Council and

Conceptual Framework for the preparation and
Presentation of Financial Statement

1. Rationalize the concepts and principles relating to the preparation

and presentation of financial statements
TOPIC: (SUB TOPIC)

1. The nature, principles and scope meaning of accounting
2. Nature principles and objectives of financial and related records of an
organization
3. Nature role and significance of accounting theories and principle
4. Principles of conceptual framework of accounting
5. Philippine financial reporting standard Philippine accounting
standard
6. The concept and role of the true and fair presentation of financial
statement
REFERENCE/S:

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Information Sheet
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Financial Reporting Standards Council and Conceptual
Framework for the preparation and Presentation of Financial
Statement
1. Discuss the objective of general purpose financial reporting
2. Understand the qualitative characteristics of useful financial
information
3. Discuss Financial Statements and the Reporting Entity
4. Discuss Recognition and DE recognition
5. Discuss Presentation and disclosure
6. Discuss Concepts of capital and capital maintenance
The Conceptual Framework for the Financial Reporting (let’s title it just
“Framework”) is a basic document that sets objectives and the concepts for
general purpose financial reporting.
Its predecessor, Framework for the preparation and presentation of the

financial statements was issued back in 1989.
Then in 2010, IASB published the new document, Conceptual Framework for
the Financial Reporting, however it was a bit unfinished as a few concepts
and chapters were missing.
The newest and completed Framework published in 2018 comprises 8 chapters

and in this article, I would like to sum it up.

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The objective of general purpose
financial reporting
The main objective of general purpose financial reports is to provide the
financial information about the reporting entity that is useful to existing and
potential:
• Investors,
• Lenders, and
• Other creditors
To help them make various decisions (e.g. about trading with debt or equity
instruments of a reporting entity).
Chapter 1 is NOT about the financial statements itself – these are described in
Chapter 3.
Instead, Chapter 1 describes more general purpose reports that should contain
the following information about the reporting entity:
• Economic resources and claims (this refers to the financial position);

• The changes in economic resources and claims resulting from entity’s
financial performance and from other events.
Chapter 1 puts an emphasis on accrual accounting to reflect the financial

performance of an entity. It means that the events should be reflected in the
reports in the periods when the effects of transactions occur, regardless the
related cash flows.
However, the information about past cash flows is very important to assess
management’s ability to generate future cash flows.
Qualitative characteristics of useful

financial information
In this Chapter, the Framework describes 2 types of characteristics for
financial information to be useful:
1. Fundamental, and
2. Enhancing.
Fundamental qualitative characteristics

• Relevance: capable of making a difference in the users’ decisions. The
financial information is relevant when it has predictive value,

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confirmatory value, or both.
Materiality is closely related to relevance.
• Faithful representation: The information is faithfully represented when
it is complete, neutral and free from error.
Enhancing qualitative characteristics

• Comparability: Information should be comparable between different
entities or time periods;
• Verifiability: Independent and knowledgeable observers are able to
verify the information;
• Timeliness: Information is available in time to influence the decisions of
users;
• Understandability: Information shall be classified, presented clearly
and concisely.
Financial Statements and the

Reporting Entity
Financial Statements
The financial statements should provide the useful information about the
reporting entity:
1. In the statement of financial position, by recognizing

o Assets,
o Liabilities,
o Equity
2. In the statements of financial performance, by recognizing
o Income, and
o Expenses
3. In other statements, by presenting and disclosing information about
o recognized and unrecognized assets, liabilities, equity, income and
expenses, their nature and associated risks;
o Cash flows;
o Contributions from and distributions to equity holders, and
o Methods, assumptions, judgements used, and their changes.

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Financial statements are always prepared for a specified period of time, or
the reporting period.
Normally, the financial statements are prepared on the going

concern assumption.
It means that an entity will continue to operate for the foreseeable future
(usually 12 months after the reporting date).
By the way – what if an entity cannot present as going concern? For example,
when the liquidation is assumed within 12 months? Learn what to do here.
Reporting Entity
This is a new concept introduced in 2018.
Although the term “reporting entity” has been used throughout IFRS for some
time, the Framework introduced it and “made it official” only in 2018.
Reporting entity is an entity who must or chooses to prepare the financial

statements. It can be:
• A single entity – for example, one company;

• A portion of an entity – for example, a division of one company;
• More than one entities – for example, a parent and its subsidiaries
reporting as a group.
As a result, we have a few types of financial statements:
• Consolidated: a parent and subsidiaries report as a single reporting

entity;
• Unconsolidated: e.g. a parent alone provides reports, or
• Combined: e.g. reporting entity comprises two or more entities not linked
by parent-subsidiary relationship.
Elements of the financial statements

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This chapter extensively deals with the definitions of individual elements of the
financial statements.
There are five basic elements:
1. Asset = a present economic resource controlled by the entity as a result

of past events;
2. Liability = a present obligation of the entity to transfer an economic
resource as a result of past events;
3. Equity = the residual interest in the assets of the entity after deducting
all its liabilities;
4. Income = increases in assets or decreases in liabilities resulting in
increases in equity, other than contributions from equity holders;
5. Expenses = decreases in assets or increases in liabilities resulting in
decreases in equity, other than distributions to equity holders;
The Framework then discusses each aspect of these definitions and provides
wide guidance on how to decide what element you are dealing with.
Recognition and DE recognition

This chapter discusses the recognition and DE recognition process.
Recognition
Simply speaking, recognition means including an element of financial
statements in the financial statements.

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In other words, if you decide on recognition, you decide on WHETHER to show
this item in the financial statements.
Recognition process links the elements in the financial statements according to

the following formula:
Please let me stress here that not all items that meet the definition of one of the
elements listed above are recognized in the financial statements.
The Framework requires recognizing the elements only when the recognition
provides useful information – relevant with faithful representation.
Then, the Framework discusses the relevance, faithful representation, cost

constraints and other aspects in a detail.
DE recognition
DE recognition means removal of an asset or liability from the statement of
financial position and normally it happens when the item no longer meets the
definition of an asset or a liability.
Again, the Framework discusses the DE recognition in a greater detail.
Measurement
Measurement means IN WHAT AMOUNT to recognize asset, liability, piece of
equity, income or expense in your financial statements.
Thus, you need to select the measurement basis, or the method of

quantifying monetary amount for elements in the financial statements.
The Framework discusses two basic measurement basis:
1. Historical cost – this measurement is based on the transaction price at

the time of recognition of the element;
2. Current value – it measures the element updated to reflect the
conditions at the measurement date. Here, several methods are included:
o Fair value;
o Value in use;
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o Current cost.
Each of these measurement base is discussed in a greater detail.
The Framework then gives guidance on how to select the appropriate

measurement basis and what factors to consider (especially relevance and
faithful representation).
What I personally find really useful is the guidance on measurement of

equity.
The issue here is that the equity is defined as “residual after deducting
liabilities from assets” and therefore total carrying amount of equity is not
measured directly.
Instead, it is measured exactly by the formula:
• Total carrying amount of all assets, less

• Total carrying amount of all liabilities.
The Framework points out that it can be appropriate to measure some

components of equity directly (e.g. share capital), but it is not possible to
measure total equity directly.
Presentation and disclosure

The main aim of presentation and disclosures is to provide an effective
communication tool in the financial statements.
Effective communication of information in the financial statements requires:
• Focus on objectives and principles of presentation and disclosure, not on

the rules;
• Group similar items and separate dissimilar items;
• Aggregate information, but do not provide unnecessary detail or the
opposite – excessive aggregation to obscure the information.
The Framework discusses classification of assets, liabilities, equity, income and

expenses in a greater detail with describing offsetting,
aggregation, distinguishing between profit or loss and other comprehensive
income and other related areas.
Concepts of capital and capital

maintenance
This chapter is carried forward from previous versions of Framework, so there’s
nothing new here.
Let me recap shortly.

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The Framework explains two concepts of capital:
1. Financial capital – this is synonymous with the net assets or equity of

the entity.
Under the financial maintenance concept, the profit is earned only when
the amount of net assets at the end of the period is greater than the
amount of net assets in the beginning, after excluding contributions from
and distributions to equity holders.
The financial capital maintenance can be measured either in
o Nominal monetary units, or

o Units of constant purchasing power.
2. Physical capital – this is the productive capacity of the entity based on,
for example, units of output per day.
Here the profit is earned if physical productive capacity increases during
the period, after excluding the movements with equity holders.
The main difference between these concepts is how the entity treats the effects
of changes in prices in assets and liabilities.
You can watch a video with the summary of the Conceptual Framework here:

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Introduction to
Financial
Instruments

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MODULE CONTENT
MODULE TITLE Introduction to financial instruments


TOPIC: (SUB TOPIC)

organization
standard
statement
REFERENCE/S:

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Information Sheet
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Introduction to financial instruments
1. Discuss the Financial Instrument.
2. Understand the Cash Instruments.
3. Understand Derivative Instruments
What Is a Financial Instrument?

Financial instruments are assets that can be traded, or they can also be seen
as packages of capital that may be traded. Most types of financial instruments
provide efficient flow and transfer of capital all throughout the world's
investors. These assets can be cash, a contractual right to deliver or receive
cash or another type of financial instrument, or evidence of one's ownership of
an entity.
KEY TAKEAWAYS
• A financial instrument is a real or virtual document representing a legal

agreement involving any kind of monetary value.
• Financial instruments may be divided into two types: cash instruments
and derivative instruments.
• Financial instruments may also be divided according to an asset class,
which depends on whether they are debt-based or equity-based.
• Foreign exchange instruments comprise a third, unique type of financial
instrument.
•
Understanding Financial Instruments
Financial instruments can be real or virtual documents representing a legal
agreement involving any kind of monetary value. Equity-based financial
instruments represent ownership of an asset. Debt-based financial instruments
represent a loan made by an investor to the owner of the asset.
Foreign exchange instruments comprise a third, unique type of financial

instrument. Different subcategories of each instrument type exist, such as
preferred share equity and common share equity.
International Accounting Standards (IAS) defines financial instruments as "any

contract that gives rise to a financial asset of one entity and a financial liability
or equity instrument of another entity."
Types of Financial Instruments

Financial instruments may be divided into two types: cash instruments and
derivative instruments.

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Cash Instruments
• The values of cash instruments are directly influenced and determined

by the markets. These can be securities that are easily transferable.
• Cash instruments may also be deposits and loans agreed upon by
borrowers and lenders.
Derivative Instruments
• The value and characteristics of derivative instruments are based on the

vehicle’s underlying components, such as assets, interest rates, or
indices.
• An equity options contract, for example, is a derivative because it derives
its value from the underlying stock. The option gives the right, but not
the obligation, to buy or sell the stock at a specified price and by a
certain date. As the price of the stock rises and falls, so too does the
value of the option although not necessarily by the same percentage.
• There can be over-the-counter (OTC) derivatives or exchange-traded
derivatives. OTC is a market or process whereby securities–that are not
listed on formal exchanges–are priced and traded.
Types of Asset Classes of Financial Instruments

Financial instruments may also be divided according to an asset class, which
depends on whether they are debt-based or equity-based.
Debt-Based Financial Instruments

Short-term debt-based financial instruments last for one year or less.
Securities of this kind come in the form of T-bills and commercial paper. Cash
of this kind can be deposits and certificates of deposit (CDs).
Exchange-traded derivatives under short-term, debt-based financial

instruments can be short-term interest rate futures. OTC derivatives are
forward rate agreements.
Long-term debt-based financial instruments last for more than a year. Under
securities, these are bonds. Cash equivalents are loans. Exchange-traded
derivatives are bond futures and options on bond futures. OTC derivatives are
interest rate swaps, interest rate caps and floors, interest rate options, and
exotic derivatives.
Equity-Based Financial Instruments

Securities under equity-based financial instruments are stocks. Exchange-
traded derivatives in this category include stock options and equity futures. The
OTC derivatives are stock options and exotic derivatives.

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Special Considerations
There are no securities under foreign exchange. Cash equivalents come in spot
foreign exchange, which is the current prevailing rate. Exchange-traded
derivatives under foreign exchange are currency futures. OTC derivatives come
in foreign exchange options, outright forwards, and foreign exchange swaps.
Related Terms
The Money You Can't See: Financial Assets

A financial asset is a non-physical, liquid asset that represents—and
derives its value from—a claim of ownership of an entity or contractual rights
to future payments. Stocks, bonds, cash, and bank deposits are examples of
financial assets.
Money Market Fund Definition

A money market fund is a type of mutual fund that invests in high-
quality, short-term debt instruments and cash equivalents.
Portfolio Definition
A portfolio is a collection of financial investments like stocks, bonds,
commodities, cash, and cash equivalents, including mutual funds and ETFs.
Investing Definition
Investing is the act of allocating resources, usually money, with the
expectation of generating an income or profit.
Money Market
The money market refers to trading in very short-term debt investments. These
investments are characterized by a high degree of safety and relatively low rates
of return.
Derivative
A derivative is a securitized contract between two or more parties whose value
is dependent upon or derived from one or more underlying assets. Its price is
determined by fluctuations in that asset, which can be stocks, bonds,
currencies, commodities, or market indexes

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Accounting for
Cash

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MODULE CONTENT
MODULE TITLE Accounting for cash


TOPIC: (SUB TOPIC)

organization
standard
statement
REFERENCE/S:

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Information Sheet
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Accounting for cash
1. Discuss the Cash Accounting.
2. Understand the Limitations of Cash Accounting.
3. Discuss the three important things to keep in mind when
determining whether cash accounting is the right method for your
business.
Cash Accounting
What is Cash Accounting?
Cash accounting is an accounting method where payment receipts are
recorded during the period in which they are received, and expenses are
recorded in the period in which they are actually paid. In other words,
revenues and expenses are recorded when cash is received and paid,
respectively.
Cash accounting is also called cash-basis accounting; and may be

contrasted with accrual accounting, which recognizes income at the time
the revenue is earned and records expenses when liabilities are incurred
regardless of when cash is actually received or paid.
KEY TAKEAWAYS
• Cash accounting is simple and straightforward. Transactions are

recorded only when money goes in or out of an account.
• Cash accounting doesn't work as well for larger companies or
companies with a large inventory because it can obscure the true
financial position.
• The alternative to cash accounting is accrual accounting where
transactions are recorded when an order is made rather than paid.
Understanding Cash Accounting
Cash accounting is one of two forms of accounting. The other is accrual
accounting, where revenue and expenses are recorded when they are
incurred. Small businesses often use cash accounting because it is
simpler and more straightforward and it provides a clear picture of how
much money the business actually has on hand. Corporations, however,
are required to use accrual accounting under Generally Accepted
Accounting Principles (GAAP).
When transactions are recorded on a cash basis, they affect a company's

books with a delay from when a transaction is consummated. As a
result, cash accounting is often less accurate than accrual accounting in
the short term.

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Most small businesses are permitted to choose between either the cash
and accrual method of accounting, but the IRS requires businesses with
over $25 million in annual gross receipts to use the accrual method. 1 In
addition, the Tax Reform Act of 1986 prohibits the cash accounting
method from being used for C corporations, tax shelters, certain types of
trusts, and partnerships that have C Corporation partners. 2 Note that
companies must use the same accounting method for tax reporting as
they do for their own internal bookkeeping.
Example of Cash Accounting

Under the cash accounting method, say Company A receives $10,000
from the sale of 10 computers sold to Company B on November 2, and
records the sale as having occurred on November 2. The fact that
Company B in fact placed the order for the computers back on October 5
is deemed irrelevant, because it did not pay for them until they were
physically delivered on November 2.
Under accrual accounting, by contrast, Company A would have recorded

the $10,000 sale on October 5, even though no cash had yet changed
hands.
Similarly, under cash accounting companies record expenses when they

actually pay them, not when they incur them. If Company C hires
Company D for pest control on January 15, but does not pay
the invoice for the service completed until February 15, the expense
would not be recognized until February 15 under cash accounting. Under
accrual accounting, however, the expense would be recorded in the
books on January 15 when it was initiated.
Limitations of Cash Accounting

A main drawback of cash accounting is that it may not provide an
accurate picture of the liabilities that have been incurred (i.e. accrued)
but not yet paid for, so that the business might appear to be better off
than it really is. On the other hand, cash accounting also means that a
business that has just completed a large job for which it is awaiting
payment may appear to be less successful than it really is because it has
expended the materials and labor for the job but not yet collected
payment. Therefore, cash accounting can both overstate and understate
the condition of the business if collections or payments happen to be
particularly high or low in one period versus another.
There are also some potentially negative tax consequences for businesses
that adopt the cash accounting method. In general, businesses can only
deduct expenses that are recognized within the current tax year. If a
company incurs expenses in December 2019, but does not make
payments against the expenses until January 2020, it would not be able
to claim a deduction for the fiscal year ended 2019, which could
significantly affect the business' bottom line. Likewise, a company that

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receives payment from a client in 2020 for services rendered in 2019 will
only be allowed to include the revenue in its
There are three important things to keep in mind when determining

whether cash accounting is the right method for your business:
• First, even when a company is paid through some type of barter

arrangement, these transactions must be recorded at the fair
market cash value of what was sold or received.
• Second, when using cash accounting, a company cannot delay
recognition of income. Income must be recognized when it is
constructively received. Income is constructively received
when money is made available to the seller (whether by being
posted to their account or received by their agent).
For example: if a check is received on the 29th of the month, but not
cashed or deposited at the bank until the 2nd of the following month, it
still must be recognized as income in the first month.
• Finally, the cash accounting method has implications for tax.

Under this method, it’s only possible to deduct the expenses that
are incurred during the accounting year, so it may have an impact
on a company’s net income.
Under cash accounting, revenues and expenses are recorded at the time
that cash is exchanged. When cash is received from a sale, it is recorded
in the accounts as a sale, and when payment is made on an expense, it’s
recorded as an expense.

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Cash accounting is one of the two main accounting methods, accrual
accounting being the other. In the accrual accounting method, revenue
and expenses are recorded when they are incurred - regardless of when
cash actually changes hands.
Cash accounting in practice

The cash method of accounting is easy to apply. When a company
receives money from a customer or pays one of their suppliers, these
transactions are recorded and recognized for tax purposes.
The benefits of cash accounting

Because it is such a straightforward way of recording a company’s
income and expenses, it is often a choice for small businesses and sole
traders who make under £83,000 a year.
Using cash accounting gives you an immediate and up-to-date picture of

your cash flow and balances. This can be useful for a small business that
might not want to get caught up in too much credit and loans.
Cash accounting and debtor

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With Debtor, you can register your expenses and income as they happen.
Use automatic bank reconciliation on one of our larger plans to make
balancing your accounts fast and easy.

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Accounting for
Inventories

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MODULE CONTENT
MODULE TITLE Concept and principles

1. Rationalize the concepts and principles relating to the preparation and

presentation of financial statements
TOPIC: (SUB TOPIC)

A. The nature, principles and scope meaning of accounting
B. Nature principles and objectives of financial and related records of an
organization
C. Nature role and significance of accounting theories and principle
D. Principles of conceptual framework of accounting
E. Philippine financial reporting standard Philippine accounting standard
The concept and role of the true and fair presentation of financial statement
REFERENCE/S:

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Information Sheet
FAR 113
Basic Principles of Philippine Taxation
1. Discuss the Accounting for inventory.
2. Understand the meaning of taxation.
3. Discuss the Philippine Taxes and understand whose the people
exempted to tax.
Accounting for inventory

Inventory accounting is the body of accounting that deals with valuing
and accounting for changes in inventoried assets. A company's inventory
typically involves goods in three stages of production: raw goods, in-progress
goods, and finished goods that are ready for sale. Inventory accounting will
assign values to the items in each of these three processes and record them as
company assets. Assets are goods that will likely be of future value to the
company, so they need to be accurately valued in order for the company to
have a precise valuation.
The accounting for inventory involves determining the correct unit
counts comprising ending inventory, and then assigning a value to those
units. The resulting costs are then used to record an ending inventory
value, as well as to calculate the cost of goods sold for the reporting period.
These basic inventory accounting activities are expanded upon in the

following bullet points:
• Determine ending unit counts. A company may use either a periodic or

perpetual inventory system to maintain its inventory records. A periodic
system relies upon a physical count to determine the ending inventory
balance, while a perpetual system uses constant updates of the inventory
records to arrive at the same goal.
• Improve record accuracy. If a company uses the perpetual inventory system

to arrive at ending inventory balances, the accuracy of the transactions is
paramount.
• Conduct physical counts. If a company uses the periodic inventory system to

create ending inventory balances, the physical count must be conducted
correctly. This involves the completion of a specific series of activities to
improve the odds of counting all inventory items.

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• Estimate ending inventory. There may be situations where it is not possible
to conduct a physical count to arrive at the ending inventory balance. If so,
the gross profit method or the retail inventory method can be used to derive
an approximate ending balance.
• Assign costs to inventory. The main role of the accountant on a monthly

basis is assigning costs to ending inventory unit counts. The basic concept of
cost layering, which involves tracking tranches of inventory costs, involv es the
first in, first out (FIFO) layering system and the last in, first out (LIFO)
system. A different approach is the assignment of a standard cost to each
inventory item, rather than a historical cost.
• Allocate inventory to overhead. The typical production facility has a large

amount of overhead costs, which must be allocated to the units produced in a
reporting period.
The preceding bullet points cover the essential accounting for the valuation
of inventory. In addition, it may be necessary to write down the inventory
values for obsolete inventory, or for spoilage or scrap, or because the
market value of some goods have declined below their cost. There may also
be issues with assigning costs to joint and by-product inventory items. We
expand upon these additional accounting activities in the following bullet
points:
• Write down obsolete inventory. There must be a system in place for

identifying obsolete inventory and writing down its associated cost.
• Review lower of cost or market. The accounting standards mandate that the
carrying amount of inventory items be written down to their market values
(subject to various limitations) if those market values decline below cost.
• Account for spoilage, rework, and scrap. In any manufacturing operation,

there will inevitably be certain amounts of inventory spoilage, as well as items
that must be scrapped or reworked. There is different accounting for normal
and abnormal spoilage, the sale of spoiled goods, rework, scrap, and related
topics.
• Account for joint products and by-products. Some production processes

have split-off points at which multiple products are created. The accountant
must decide upon a standard method for assigning product costs in these
situations.

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• Disclosures. There are a small number of disclosures about inventory that
the accountant must include in the financial statements.
KEY TAKEAWAYS
Inventory accounting determines the specific value of assets at certain

stages in their development and production.
This accounting method ensures an accurate representation of the value of all
assets, company-wide.
Careful examination by a company of these values could lead to increased
profit margins at each stage of the product.
Inventory items at any of the three production stages can change in value.
Changes in value can occur for a number of reasons including depreciation,
deterioration, obsolescence, change in customer taste, increased demand, and
decreased market supply, and so on. An accurate inventory accounting system
will keep track of these changes to inventory goods at all three production
stages and adjust company asset values and the costs associated with the
inventory accordingly.
How Inventory Accounting Works
GAAP requires inventory to be properly accounted for according to a very

particular set of standards, to limit the potential of overstating profit by
understating inventory value. Profit is revenue minus costs. Revenue is
generated by selling inventory. If the inventory value (or cost) is understated,
then the profit associated with the sale of the inventory may be overstated.
That can potentially inflate the company's valuation.
The other item the GAAP rules guard against is the potential for a
company to overstate its value by overstating the value of inventory. Since
inventory is an asset, it affects the overall value of the company. A company
which is manufacturing or selling an outdated item might see a decrease in the
value of its inventory. Unless this is accurately captured in the company
financials, the value of the company's assets and thus the company itself might
be inflated.
Advantages of Inventory Accounting
The main advantage of inventory accounting is to have an accurate

representation of the company's financial health. However, there are some
additional advantages to keeping track of the value of items through their
respective production stages. Namely, inventory accounting allows businesses

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to assess where they may be able to increase profit margins on a product at a
particular place in that product's cycle.
This can be seen most prominently in products that require exceptional

time or expense in secondary stages of production. Items such as
pharmaceuticals, machinery, and technology are three products that require
large amounts of expense after their initial designing. By evaluating the value
of the product at a certain stage⁠—such as clinical trials or transportation of the
product⁠—a company can adjust the variables at that stage to keep the product
value the same while increasing their profit margins by decreasing expenses.

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Concept and

Bulacan Date Developed:

COURSE TITLE: FINANCIAL ACCOUNTING AND REPORTING 1

MODULE TITLE Concept and principles

NOMINAL DURATION: 3 HRS (NO. of Hours per topic)

SPECIFIC LEARNING OBJECTIVES:

1. Rationalize the concepts and principles relating to the preparation and

TOPIC: (SUB TOPIC)

Bulacan Date Developed:

Accounting Concepts, Principles and Basic Terms

Definition and introduction

The worldview of accounting and accountants may certainly involve some

However, a short and sweet description of accounting does exist:

Accounting is the language of business efficiently communicated by well-

A more academic definition of accounting is given by the American Accounting

The process of identifying, measuring and communicating economic

Bulacan Date Developed:

Recording every financial transaction is important to a business organization

The job of accounting is done by professionals who have educational degrees

• Managers who guide the company.

Obviously, if each business organization conveys its information in its own

These companies have thousands of stakeholders who have invested millions,

Therefore, accounting principles based on certain concepts, convention, and

Bulacan Date Developed:

Accounting principles involve both accounting concepts and accounting

1. Business entity concept: A business and its owner should be treated

Bulacan Date Developed:

There are four main conventions in practice in accounting: conservatism;

Conservatism is the convention by which, when two values of a transaction

Bulacan Date Developed:

Accounting methods: Companies choose between two methods—cash

Balance sheet: A financial report that provides a gist of a company’s assets

Bulacan Date Developed:

Financial statement: A financial statement is a document that reveals the

Bulacan Date Developed:

Bulacan Date Developed:

COURSE TITLE: FINANCIAL ACCOUNTING AND REPORTING 1

MODULE TITLE Financial Reporting Standards Council and

NOMINAL DURATION: 3 HRS (NO. of Hours per topic)

SPECIFIC LEARNING OBJECTIVES:

1. Rationalize the concepts and principles relating to the preparation

TOPIC: (SUB TOPIC)

Bulacan Date Developed:

Its predecessor, Framework for the preparation and presentation of the

The newest and completed Framework published in 2018 comprises 8 chapters

Bulacan Date Developed:

• Economic resources and claims (this refers to the financial position);

Chapter 1 puts an emphasis on accrual accounting to reflect the financial

Qualitative characteristics of useful

Fundamental qualitative characteristics

Bulacan Date Developed:

Enhancing qualitative characteristics

Financial Statements and the

1. In the statement of financial position, by recognizing

Bulacan Date Developed:

Normally, the financial statements are prepared on the going

Reporting entity is an entity who must or chooses to prepare the financial

• A single entity – for example, one company;

As a result, we have a few types of financial statements:

• Consolidated: a parent and subsidiaries report as a single reporting

Elements of the financial statements

There are five basic elements: