BA 99.

1 HANDOUT: CONCEPTUAL FRAMEWORK AND ACCOUNTING PRINCIPLES

Module I Intro video link: https://youtu.be/6BeiaWCIZic

WHAT IS ACCOUNTING?

Video links: https://youtu.be/Yj24JwZVd54 and https://youtu.be/kLudcM-ov-8

Accounting is the I_______________, R_____________ and C________________ of economic

events of an entity.

BOOKKEEPING VS ACCOUNTING

WHY IS IT IMPORTANT?

1.

2.

To be useful, information must be:

Fundamental Qualitative Characteristics

1.
2.

Enhancing Qualitative Characteristics

1.
2.
3.
4.

USERS AND USES OF ACCOUNTING

1. Internal
2. External

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BA 99.1 HANDOUT: CONCEPTUAL FRAMEWORK AND ACCOUNTING PRINCIPLES

BUILDING BLOCKS OF ACCOUNTING

Video link: https://youtu.be/m9CK_fyzT4I

1. Ethics

Code of Ethics for Professional Accountants: http://picpa.com.ph/attachment/21720171215650.pdf

2. Generally Accepted Accounting Principles (GAAP)

Securities and Exchange Commission allows the use of: a)________________________,

b)____________________, c)_____________________________, and d)_________________.

SEC Memo Circular 5-2018: https://tinyurl.com/2n6cd2pd

Standards Setting Bodies

International

a) International Accounting Standards Boards (IASB)

b) International Financial Reporting Interpretations Committee (IFRIC)

Local

a) Financial Standards Reporting Council (FRSC)

c) Philippine Interpretation Committee (PIC)

3. Measurement Principles

Historical Cost Principles – historical cost

Fair Value Principle – the price received to sell an asset or settle a liability; basis is generally market
value information

Measurement Bases

a. Historical Cost
b. Current Cost
c. Realizable Value
d. Present Value

Conceptual Framework on Financial Reporting: https://tinyurl.com/3eh4r4vm

4. Assumptions

Going concern assumption –

Monetary unit assumption – only transaction data that can be expressed in terms of money be
included in the accounting records

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BA 99.1 HANDOUT: CONCEPTUAL FRAMEWORK AND ACCOUNTING PRINCIPLES

BUILDING BLOCKS OF ACCOUNTING (cont.)

Economic entity assumption – activities of the entity be kept separate and distinct from the activities
of its owners and all other economic entities.

Some differences between Sole Proprietorship, Partnership and Corporation

Sole Proprietorship Partnership Corporation

# of Owners One Two or more One or At least five

Capital Limited Limited to # of partners Limited to available

shares

Liability Unlimited personal Unlimited personal Limited to investment

liability liability

Life Limited to life of owner Limited to life of Unlimited (SEC:

partners perpetual existence

Regulation LGU, DTI, BIR LGU, SEC, BIR LGU, SEC, BIR

Management Simple Complex Separation of Ownership

(Stockholders) and
Management

THE ACCOUNTING EQUATION

Video link: https://youtu.be/panzFcBllnU

ASSETS = LIABILITIES + EQUITY

ASSET - a resource controlled by the entity as a result of past events and from which future
economic benefits are expected to flow to the entity.

LIABILITY - a present obligation of the entity arising from past events, the settlement of which is
expected to result in an outflow from the entity of resources embodying economic benefits.

EQUITY - the residual interest in the assets of the entity after deducting all its liabilities.

Investment by Owners

Drawings by Owners

Revenue

Expenses

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BA 99.1 HANDOUT: CONCEPTUAL FRAMEWORK AND ACCOUNTING PRINCIPLES

THE ACCOUNTING EQUATION (cont.)

If Revenue ___ Expenses, then the business has made a profit, since Revenue increases Equity,
Equity ___________.

If Expenses > Revenue, then the business has made a loss, since Expenses _______ Equity, Equity
decreases.

REVENUE or INCOME - increases in economic benefits during the accounting period in the form of
inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other
than those relating to contributions from equity participants.

EXPENSE - decreases in economic benefits during the accounting period in the form of outflows or
depletions of assets or incurrences of liabilities that result in decreases in equity, other than those
relating to distributions to equity participants.

TRANSACTION ANALYSIS

Video link: https://youtu.be/92UwKrpjq6Q

Transactions – economic events of an entity that recorded; may be external or internal.

Transaction Analysis – the process of analyzing the transaction in terms of the basic accounting
equation

SUMMARY OF TRANSACTIONS

1. Each transaction must be analyzed in terms of its effect on:

a. The 3 components/elements of the basic accounting equation;

b. Specific item within each component.

2. Two sides of the equation must always be equal.

Example: P1.4 modified (Weygant, et al., 2019)

Maisie Taft started her own consulting firm, Maisie Consulting, on May 1, 2020. The following
transactions occurred during the month of May.
May 1 Maisie invested € 7,000 cash in the business
2 Paid € 900 for office rent for the month
3 Purchased € 800 of supplies on account
5 Paid € 125 to advertise in the Country News
9 Received € 4,000 cash for services performed
12 Withdrew € 1,000 cash for personal use
15 Performed € 6,400 of services on account
17 Paid € 2,500 for employee salaries
18 Bought shoes using cash withdrawn on May 12
20 Paid € 600 for supplies purchased on May 3
23 Received € 4,000 for May 15 services on account
26 Borrow € 5,000 from the bank on a notes payable
29 Purchased equipment for € 4,200 on account
30 Paid € 275 for utilities

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 BA 99.1 HANDOUT: CONCEPTUAL FRAMEWORK AND ACCOUNTING PRINCIPLES

TRANSACTION ANALYSIS (cont.)

Requirements
a. Identify the effect of each transaction on the accounting equation (INCREASE, DECREASE, NO
EFFECT)
MAY ASSETS LIABILITIES EQUITY
1
2
3
5
9
12
15
17
18
20
23
26
29
30

b. Prepare a tabular analysis of the transaction using the format below.

ASSETS LIABILITIES EQUITY

MAY Accounts Accounts Notes M. Taft, M. Taft,
Cash Supplies Equipment Revenue Expenses
Receivable Payable Payable Capital Drawings
1
2
3
5
9
12
15
17
18
20
23
26
29
30

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BA 99.1 HANDOUT: CONCEPTUAL FRAMEWORK AND ACCOUNTING PRINCIPLES

FINANCIAL STATEMENTS

Video link: https://youtu.be/q5_YYP5CkuA

1. Statement of Comprehensive Income/Income Statement/Profit or Loss Statement – shows

income/revenues and expenses and the resulting net income/profit or net loss/loss for a specific
period of time

2. Statement of Changes in Equity – shows changes in owner’s equity for a specific period of time.

3. Statement of Financial Position/Balance Sheet – shows that assets, liabilities and owner’s equity
at a specific date

4. Statement of Cash Flows – show cash inflows (receipts) and cash outflows (payments) for a
specific period of time

5. Notes to the financial statements – summary of significant accounting policies used to prepare
the financial statements, and other explanatory notes and supporting schedules

Example: P1.4 modified (Weygant, et al., 2019)

c. Prepare an income statement for the period ended May 31, 2020 using the following
accounts: Service Revenue, Advertising Expense, Rent Expense, Salaries Expense, and
Utilities Expense.
d. Prepare a statement of changes in equity for the period ended May 31, 2020.
e. Prepare a statement of financial position as of May 30, 2020.

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