Accounting 1

SESSION 1

ACCOUNTING CONCEPTS AND ITS CONSIDERATION

Desired Learning Outcomes

• Understand and explain the
definition, purpose, nature,
functions and objectives of
accounting.
• Distinguish the branches of
accounting, users of accounting
information.
• Understand the double entry
bookkeeping concept and how it
differs from single entry
bookkeeping.
• Appreciate the history of
accounting, accounting variations
among countries
• Adopt the basic professional
values and ethics
 Why
Do
We
Need
Accounting?
So why do we need accounting?
Asking that question of an accountant
is like asking a farmer why we need
rain. We need accounting because it’s
the only way for business to grow and
flourish. Accounting is the backbone
of the business financial world.
After all, accounting was created in
response to the development of trade
and commerce during the medieval
times.

Accounting is the conscious of

the business world. When handled with
care and with respect, it performs as
expected. When abuse occurs, and the
system is circumvented or overridden
because of dishonesty and greed, it
doesn’t work correctly. Accounting is
much like all other systems in place,
they are only as good as the people
using them.
ACCOUNTING is a service activity. It’s function is to provide
quantitative information, primarily financial in nature, about economic
entities that is intended to be useful in making economic decisions.
 “Language of business”

Accounting as science and art

Fixed, inflexible,
 Accounting is a social science with a body of knowledge

which has been systematically gathered, classified, and organized and

systematic
organized. It is influenced by, and interacts with, economic,
social and political environments.
 Accounting is a practical art which requires the use of creative skill

and judgment. Opinionated, flexible and subjective

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

Economic Activities and their classification

• Production – the process of converting economic
resources into outputs of goods and services that are
intended to have greater utility than the required inputs.
• Exchange – the process of trading resources or obligations
for other resources or obligation.

• Income distribution - the process of allocating rights to

the use of output among individuals and groups in society.

• Consumption – the process of using the final output of

the production process.

• Investment – the process of using current inputs to

increase the stock of resources available for output as
opposed to immediately consumable output.

• Savings – the process by which individuals and groups set

aside rights to present consumption in exchange for rights
to future consumption.

BASIC PURPOSE OF ACCOUNTING: To provide quantitative information about

economic entities intended to be useful in making economic decisions.

TYPES OF INFORMATION PROVIDED BY ACCOUNTING

1. Quantitative information – expressed in numbers, quantities or units.
 2. Qualitative information – expressed in words or descriptive form
3. Financial information – expressed in terms of money

ECONOMIC ENTITY VS BUSINESS

ENTITY
 Economic entity – 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 no significant characteristics.
o Not-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.
o Business entity is an entity that produces and distributes
goods or services primarily for profit.

FUNCTIONS OF
ACCOUNTING
 Identification. The accounting process of recognition or
nonrecognition of business activities as accountable events or
whether has accounting relevance.

One that is quantifiable and has an effect on assets,

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

Criteria for accountable event

1. It must affect a financial element of accounting
(increasing or decreasing asset, liability or equity)
2. It is a result of a past activity
3. Its cost can be measured reliably.

 Measurement. The accounting process of assigning of peso amounts or

numbers to the economic transactions and 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.
o Recording. the process of systematically committing to writing
business transactions and events after they have been identified
and measured, in books of account in a systematic and
chronological manner according to accounting rules.
o Classifying. The grouping of similar and interrelated
items into their respective classes.
 o Summarizing. Putting together or expressing in condensed or
brief form the recorded and classified statements in financial
statements.

BRANCHES OF ACCOUNTING/AREA OF
SPECIALIZATION
1. Financial Accounting. The recording of transactions, preparation of
financial statements and communication of financial information to
external user groups. Focuses on general purpose reports.
2. Auditing. The examination of financial statements by independent
certified public accountant for the purpose of expressing an
opinion on the fairness of presentation of financial statements.
3. Management Accounting. Incorporates cost accounting data and adapts
them for specific decisions which management may be called upon to
make. A management accounting system incorporates all types of
financial and non-financial information from a wide range of
sources.

4. Financial Management. Relatively new branch of accounting that has

been grown rapidly over the last 35 years. Financial managers are
responsible for setting financial objectives, making plans based on
those objectives, obtaining the finance needed to achieve the
plans, and generally safeguarding all the financial resources of
the entity.

5. Taxation / Tax accounting. Involves the preparation of tax returns

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

6. Government Accounting. Accounting for the national government and

its instrumentalities, focusing attention on the custody of public
funds and the purpose or purposes to which such funds are
committed.
7. Fiduciary Accounting. Handling of accounts managed by a person
entrusted with the custody and management of property for the
benefit of another.

8. Social Responsibility. 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.

9. Environmental Accounting. The area of accounting that focuses on

programs, activities and projects that are focused care for Mother
Earth.

One example of this is carbon accounting such as

“Cap and Scheme”, which is a process of encouraging
reductions in greenhouse gas emissions.
 10. Price-level Accounting. Otherwise known as Accounting for
Hyperinflationary Economies – simply defined, is accounting that
recognizes in the financial statements changes in the purchasing
power of money.

USERS OF ACCOUNTING
INFORMATION
• Internal Users are those who make decisions directly affecting the
internal operations of the business.
o Managers are directly involved in operation of the business.
They need accounting data to improve the efficiency and
effective of the organization.
o Employees use financial data to assess whether they are
receiving the right compensation and to check if they bargain
for higher remuneration, retirement benefits and employment
opportunities.
o Officers, also called as the company executives who are
interested to know if the company is doing well in its operation
so they can plan for possible expansion or branching out to
widen its geographical and demographic market.
the act of making money o Internal Auditors, there role is to protect
and by making people believe safeguard the resources of the company
against something which is not fraud or irregularities. true.

• External users are individuals or enterprises that have financial

interest in the business but they are not involved in the day
activities of the organization. These are:
o Investors (The providers of risk capital) 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 in.
o Lenders are interested in information that enables them to
determine whether their loans, and their interest attaching to
them will be paid when due.
o Suppliers and other trade creditors are interested in information that
enables them to determine whether amount owing to them will be
paid when due.
o Customers are interested in the quality of goods and services that
they are getting from the entity.
o Government and their agencies require information in order to regulate
the activities of the enterprise, determine taxation policies
and as a basis for national income and similar activities,
 o Public are assisted by information through Financial
statements about the trend and recent developments in the
prosperity of the enterprise and the range of its activities.

FUNDAMENTAL CONCEPTS

Entity Concept
The most basic concept in accounting is the entity concept. An
accounting entity is an organization or a section of an organization that
stands apart from other organizations and individuals as a separate
economic unit. Simply put, the transactions of different entities should
not be accounted for together. Each entity should be evaluated
separately.

Periodicity Concept
An entity’s life can be meaningfully subdivided into equal time periods for
reporting purposes.
For the purpose of reporting to outsiders, one year is the usual
accounting period. Luca Pacioli, the first author of an accounting text,
wrote in 1494: “Books should be closed each year, especially in a
partnership, because frequent accounting makes for long friendship.”

Calendar Year – starts in January and ends in December.

Fiscal Year – starts in any month and ends after 12 months.

Stable Monetary Unit Concept

The Philippine Peso is a reasonable unit of
measure and that its purchasing power is relatively a greater increase in the supply
stable. This is the basis for ignoring the effects of of money or credit than in
the production of goods
and
inflation in the accounting records. services, resulting in higher
prices and a fall in the purchasing power of money.
BASIC PRINCIPLES

Accounting practices follow certain guidelines. The set of guidelines and

procedures that constitute acceptable accounting practice at a given time
is GAAP, which stands for generally accepted accounting principles. In
order to generate information that is useful to the users of financial
statements, accountants rely upon the following principles.

Objectivity Principle. Accounting records and statements are based on the

most reliable data available so that they will be as accurate and as
useful as possible. Reliable data are verifiable when they can be
confirmed by independent observers.
the total cost of
Historical Cost. This principle states that acquired asset
producing or buying an
should be recorded at their actual cost and not at what item, which may
management thinks they are worth as at reporting date. include, e.g., its price
plus the cost of
delivery or storage.
Revenue Recognition Principle. Revenue is to be recognized in the accounting
period when goods are delivered or services are rendered or performed.

Expense Recognition Principle. Expenses should be recognized in the

accounting period in which goods and services are used up to produce
revenue and not when the entity pays for those goods and services.

Adequate Disclosure. Requires that all relevant information that would

affect the user’s understanding and assessment of the accounting entity
be disclosed in the financial statements.

Materiality. Financial reporting is only concerned with information that

is significant enough to affect evaluations and decisions. Materiality
depends on the size and nature of the item judged in the particular
circumstances of its omission.

Consistency Principle. The firms should use the same accounting method
from period to period to achieve comparability over time within a single
enterprise. However, changes are permitted if justifiable and disclosed
in the financial statements.

UNDERLYING ASSUMPTIONS

Accrual Basis
Financial Statements are prepared on the accrual on the accrual
basis of accounting and not as cash or its equivalent is received or
paid. Under this assumption, the effects of transactions and other events
are recognized when they occur and they are recorded in the accounting
records and reported in the financial statements of the periods to why
they relate.

In short, transactions are recognized when “ Revenue as they earned, even not yet
received and; Expenses as they incurred, even not yet paid.

In cash basis accounting, however, does not record a transaction until

cash is received or paid. Generally, cash receipts are treated as revenues and
cash payments as expenses.

Going Concern
Financial statements are normally prepared on the assumption that an
enterprise is a going concern and will continue in operation for a
foreseeable future. It is assumed therefore that the enterprise has
neither the intention nor the need to liquidate its operations.

BUSINESS ORGANIZATION

FORMS OF BUSINESS
ORGANIZATIONS
 Sole Proprietorship. This business organization has a single owner
called the proprietor who generally is also manager. It tends to be small
service-type (e.g. physicians, lawyers and accountants) business and
retail establishments. The owner receives all profits, absorbs all losses
and is solely responsible for all debts of the business. From the
accounting viewpoint, the sole proprietorship is distinct from its
proprietor. Thus, the accounting records do not include proprietor’s
personal financial records.

 Partnership. A business owned and operated by two or more persons

who bind themselves to contribute money, property or industry to a common
fund, with the intention of dividing the profits among themselves. Each
partner is personally liable for any debt incurred by the partnership,
except limited partner.
 Corporation. A business owned by its stockholders. It is an
artificial being created by operation of law, having the rights of
succession and the powers, attributes and properties expressly authorized
by law or incident to its existence. The stockholders are not personally
liable for the corporation’s debt.
PURPOSE OF BUSINESS
ORGANIZATIONS
 Service companies perform services for a fee (e.g. law firms,
accounting and law firms, stock brokerage, beauty salons and
recruitment agencies)

 Merchandising companies purchase goods that are ready for sale and
then sell these to customers (e.g. car dealers, clothing stores and
supermarkets)

 Manufacturing companies buy raw materials, convert them into

products and then sell the products to other companies or to final
consumers (e.g. paper mills, steel mills, car manufacturers and
drug manufacturers)
MICRO, SMALL AND MEDIUM ENTERPRISES
(MSME)
 Micro Enterprises are those with assets, before financing of P 3
million or less and employ not more than nine (9) workers.
 Small Enterprises are those with assets, before financing of above
P 3
million to P 15 million and employ 10 to 99 workers.

 Medium Enterprises are those with assets, before financing of above

P15 million to P100 million and employ 100 to 199 workers.
ACTIVITIES IN BUSINESS ORGANIZATIONS

 Operating Activities are the principal activities of the

enterprise. They are the transactions and events that enter into
the determination of profit and loss. E.g.: o Sale of services o
Purchase of supplies
o Payment of various expenses like salaries and other benefits
to employees, utilities, taxes and repairs and maintenance,
insurance, transportation and gasoline expense.
 Investing Activities are the acquisition and disposal of long-term
assets and other investments. E.g.:
o Purchase of equipment, furniture, automobile and land o Cost
of developing and constructing office or building o Sale of
used fixed assets o Loans and advances to other parties o
Investments in equity or debt instruments
 Financing Activities are activities that result in charges in the
size and composition of the contributed equity and borrowings of
the enterprise. E.g.:
o Cash proceeds from issuing shares of stocks by a corporation
o Cash proceeds and repayment of bank loans and other long-
term barrowings.

**End of Session 1**

References:
Ballada, Win and Susan Ballada. (2009). Basic Accounting Made Easy 14th Edition.
Manila: Domdane Publishers and Made Easy Books.
Ledesma, Ester L.(2014).Financial Accounting Theory Review Booklets. Manila: CRC-
Ace The Professional CPA Review School.
Rante, Gloria Aradaniel.(2013). Accounting for Service Entities. Mandaluyong
City: Millenium Books, Inc.
NAME: YR.&SEC.
COURSE: DATE

ACTIVITY NO. 1

Multiple Choice
1. Accounting is a service activity. Its function is to provide
a. Quantitative information
 b. Qualitative information
c. Quantitative and qualitative information
d. None of the above
2. The basic purpose of accounting is
a. To provide the information that the managers of an economic entity
need to control its operations.
b. To provide information that the creditors of an economic entity
can use in deciding whether to make additional loans to the
entity.
c. To measure the periodic income of the economic entity.
d. To provide quantitative financial information about a business
enterprise that is useful in making rational economic decision.
3. Which of the following best describes the attributes of a partnership
a. Limited ability to raise capital; unlimited personal liability of
owners.
b. Limited ability to raise capital; limited personal liability of
owners.
c. Ability to raise large capital; unlimited personal liability of
owners.
d. Ability to raise large amounts of capital; limited personal
liability of owners.
4. Which of the following is true?
a. Stockholders are personally liable for the liabilities of the
corporation if the company us unable to pay.
b. Normally, stockholders can only sell their ownership interests
when the corporation terminates.
c. Partners are personally liable for the liabilities of the
partnership if the partnership is unable to pay.
d. Partners can normally transfer their partnership interests with
ease.
5. Which accounting process is the recognition or non-recognition of
business activities as accountable events?
a. Identifying
b. Communicating
c. Recording
d. Measuring
6. The concept of the accounting entity is applicable
a. Only to the legal aspects of business organizations
b. Only to the economic aspects of business organizations
c. Only to business organizations
d. Whenever accounting is involved
7. The entity concept means that
 a. Because a firm is separate and distinct from its owners, those
owners cannot have access to its assets unless the firm ceases to
trade.
b. Accounts must be prepared for every firm.
c. The financial affairs of a firm and its owner are always kept
separate for the purpose of preparing accounts.
d. None of the above
8. Accountants do not recognize that the value of the peso changes over
the time. This concept is called the
a. Stable money unit concept
b. Going concern concept
c. Cost principle
d. Entity concept
9. The principle of objectivity includes the concept of
a. Summarization
b. Verifiability
c. Classification
d. Conservatism
10. Which of the following is not a user of internal accounting
information?
a. Store Manager
b. Chief executive officer
c. Creditor
d. Chief financial officer
11. An event that affects the financial position of an organization and
requires recording is called:
a. Transaction
b. Account
c. Business documents
d. Operating activities
12. All of the following are external users of accounting information
except:
a. Creditors, lenders and suppliers
b. Present and potential investors
c. Government regulatory bodies
d. Managers and employees
13. It is the simplest of business organization
a. Service Entity
b. Merchandising Entity
c. Partnership
d. Sole Proprietorship
14. The following are examples of service business except:
 a. SM Supermarket
b. Amana Hotel and Resorts
c. Cebu Pacific
d. Manila Water Inc.
15. The following are examples of manufacturing business, except:
a. Toyota Motors, Inc.
b. Sony Philippines
c. Red Ribbon Bakeshop
d. Rolex Watch Repair Shop
16. All of the following are qualitative characteristics of financial
statements except:
a. Understandability
b. Relevance
c. Materiality
d. Going Concern
17. Financial information must possess this characteristic in order for
the users to easily understand the contents of the financial
statements.
a. Reliability
b. Completeness
c. Relevance
d. Understandability
18. The measurement phase of accounting is accomplished by
a. Storing data
b. Reporting to decision makers
c. Recording data
d. Processing data
19. The communication phase of accounting is accomplished by
a. Storing data
b. Reporting to decision makers
c. Recording data
d. Processing data
20. A professional accountant should be straightforward and honest in all
professional and business relationships. This is in consonance with
the fundamental principle of
a. Integrity
b. Objectivity
c. Confidentiality
d. Professional competence and care