FABM REVIEWER

By: Mikaela Shayne E. Aguirre

Foundation of Accounting
- Basic Financial Statements:
o One of the most important documents in starting a business
o Helps fulfill stewardship function
 Businesses should be transparent on the performance and standing of the business
o Reflect the financial standing and economic activities of the business
o Economic activities may relate to transactions that can affect the financial position, financial performance,
and cash flows of the business
o Composed of…
 Statement of Financial Position (SFP)
 Income Statement or Statement of Comprehensive Income (SCI)
 Statement of Changes in Equity (SCE)
 Statement of Cash Flows (SCF)
 Notes (summary of significant accounting policies and explanations)
- Objectives of Financial Statements:
o Provide information about financial position, financial performance, and cash flows of the business
o Provide information about a business’ assets, liabilities, equity, income and expenses, contributions by and
contributions to owners in their capacity as owners and cash flows
- Business Transactions:
o Takes place once a business venture starts operations
o Interactions between business and other stakeholders
 Includes customers, suppliers, investors, government offices, etc.
o Have to be identified, measures and documented through accounting process
- Definitions of Accounting:
o American Accounting Association (AAA)
 Process of identifying, measuring, and communicating economic information to permit informed
judgment and decisions by the users of information
 Identify business transactions
 Any activity done by your company within a period (fiscal or calendar)
 Anything personal is not included
 Measuring price to Philippine Peso equivalent
 Communicate to stakeholders, customers, etc.
o American Institute of Certified Public Accountants (AICPA)
 Art of recording, classifying, and 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
 Art (because it is a skill)
 Recording in ledger and journals
 Classifying into current and non-current assets or liabilities
 Summarizing financial statements
 o Accounting Standards Council (ASC)
 Service activity
 Provide quantitative information that is financial in nature about economic entities in order to be
useful in making economic decisions
 Revenue = Expense  Breakeven
 Revenue > Expense  Profit
 Revenue < Expense  Loss
- Interpretation:
Account 2016 2015 Interpretation
Accounts Payable 100 200 50% of the liabilities was paid
Accounts Receivable 1000 500 Someone owes the business money
- Nature: (APASIF)
o Art
 Refers to the design of how something can be performed
 Behavioral knowledge involving creativity and skill
 Definite techniques and proper application requires a particular skill and expertise
o Process
 Systemic series of action directed towards a particular outcome
 Performs specific actions such as identifying, measuring, and communicating financial information
 Follows logical steps such as recording, classifying, and summarizing financial transactions, and
communicating the results after
o A Means not an End
 Produces an output through financial statements which can still be used in making economic decisions
based on the management assertions in the financial statements
 Paves the way to the end but is not the end
o Service Activity
 Concerned with providing service of ensuring the financial statements are made available to users on
a timely basis
o Information System
 Set of interrelated components that work together to achieve a common purpose
 Repository of collected financial data, proposed financial information, and communicated financial
statements
o Financial in Nature
 ASC Definition – business transactions must be measure in monetary terms
 All transactions that are not monetary are not part of accounting
- Functions:
o To fulfill the stewardship function of the management or owners
o To help interested users come up with informed decisions
o To support daily operations of the business
o Explanation
 Validates accounting as the language of business
 Serves as means of communications between business and users
 Facilitates smooth flow of information in and out of business
  Reports how well the business fares
 Interested users use these information to make informed decisions
 Accounting information can improve the operational effectiveness and efficiency of the company
- Bookkeeping:
o Confined with the recording of monetary of accounting transactions
o Only a part of the accounting process
- History:
o As a witness to history…
 As old as mankind
 Believed that God made use of accounting to ensure that plants, animals, human beings, and other
creatures are fully accounted for
 During the time of Noah, animals got into the ark in pairs and were accounted for
 In the New Testament, 2 famous tax collectors were mentioned
 Matthew – one of the 12 disciples
 Zacchaeus – the one who climbed the sycamore tree to see Jesus
o Cradle of Civilization
 4000 B.C. – income of temples was recorded in Mesopotamia
 2500 B.C.
 Accounting records were found in civilizations like Egypt and China
 Were used and kept by rulers for taxing and spending on public works
 1000 B.C.
 Phoenecians created an alphabet with accounting so that they were not cheated through
trades with Egyptians
 423 B.C.
 Auditing profession was born to double-check storehouses as to what came in and out of the
doors
 Reports were taken by these accountants orally hence the name auditor
 10
 Emperor Wang Mang (45 B.C. to 23 of Xin Dynasty) of China instituted the first known income
tax at a flat rate of 10% of profits
o 14 Century
th

 1300 – accountants were mentioned in historical records for the first time in the Statute of
Westminster indicating their importance
 First requirement for businesses to keep accounting to require for businesses to keep accounting
records spread across many of the Italian Republics in the 13th century
 1327 – early form of bookkeeping in commune of Genoa
 1340 – “Massari (Treasury Officials) Ledgers of Commune of Genoa” (oldest double-entry books ; now
simplified into T-account & expanded in the Ledger)
 Florence – writing debits over credits accounted for its double-entry recording (similar to preparing
journal entries now)
 1400 – Italian trading period saw sophisticated accounting systems developed within banking houses.
Double Entry was discovered
o French Revolution
 Florentine approach – journal entries introduced by Amatino Manucci
  Venetian Approach – ledger posting introduced by Andrea Bargarigo
 Luca Pacioli (November 1494)
 Father of Modern Accounting
 “Summa de Arithmateic, Geometria, Proportioni et Proportionalita” (Everything About
Arithmentic, Geometry, Proportion and Proportionality)
 A study on the common practices of merchants in Venice, Florence and Milan
 Book of debits – “he owes” ; Book of Credits – “he trusts”
 Double-entry accounting system helped merchants maintain records so that they could
improve efficiency of their businesses
 Primitive income and balance sheet statements
 Particular de Computis et Scripturiz (Details of Calculation and Recording) – 24-page treatise
on bookkeeping
o Industrial Revolution
 17th Century – development of invested capital and dividend distribution (East India Company)
 Created a need for change in financial accounting and managerial accounting
 Jacques Savary – Commercial Code of France (1673) – historical cost as basis of valuation
 Accounting was greatly sought in this period so that companies can gain financing and maintain
efficiency through operations
 Several of double entry accounting methods were developed in era
 1887 – first accounting organization was formed in New York
 Napoleon Bonaparte – Commercial Code (1804) & Code of Commerce of France (1807) – assets must
be carried at their market value and not based on historical cost
 Eugen Schmalenbach – price level accounting as basis of the valuation
o 19th to 20th Century
 1913 – first income tax in the Phil. Was enacted
 1920s – accounting was used to reduce the amount of fraud and scandals in businesses (USA)
 1923 – first Accountancy Law (Republic Act No. 1305) in the Phil. – created the Board of Accountancy
 1967 – Accountancy Law was revised
 1973 – International Accounting Standard Committee (IASC) was created to achieve uniformity of
accounting principles. Pronouncements were designated as International Accounting Standards (IAS)
 1975 – Accountancy Law (Phil.) was revised and passed under Presidential Decree No. 692
 1981 – Phil. Institute of Certified Public Accountants (PICPA) created Accounting Standards Council to
establish and improve accounting standards generally accepted in the country
 1996 – most Phil. Accounting standards called Statement of Financial Accounting Standards (SFAS) we
based on the standards in the US
 1997 – Phil. Started transitioning from applying American accounting standards to applying IAS
 2001 – IASC  International Accounting Standards Board (IASB) still adopted issue by IASC but in
moving forward, it was designated as International Financial Reporting Standards (IFRS)
 2002 – European Union (EU) required all EU listed companies to adopt IFRS starting 2005
 2004
 Philippine Regulation Commission (PRC) created Financial Reporting Standard Council (FRSC)
 FRSC  ASC assisted Board of Accountancy (BOA) to carry put its powers and functions
provided under Republic Act No. 9298, the Phil. Accountancy Act of 2004
  IAS and IFRS were complimented by the Philippine Accounting Standards & Philippine
Financial Reporting (PFRS)
o The Present
 Republic Act No. 9298, an act regulating the practice of Accountancy in the Phil. Repealing for the
purpose of the Presidential Decree No. 692, otherwise known as the Revised Accountancy Law, was
also passed and enacted in this year
 2005 – Philippines became fully compliant with IFRS

Branches of Accounting
- Public Accounting:
o Accountant offers or performs any activity that will result to the issuance of an attest report that is in
accordance with professional standards
o Works in a firm offering its services to various clients
o Certified Public Accountants refer to the those who had passed the licensure examination for accountant
o External Auditing
 Public accountants (auditor) examine the financial records and business transactions of a company
with which he is not affiliated with in order to express opinions on whether statements have been
fairly presented or not
 Fairly presented reports means…
 You can omit centavos
 All accounts should have backup (receipts, patent, invoices)
 Auditors should not be affiliated with the business in order to ensure that there would be no bias
 Auditor issues an independent audit report of his or her findings
 Key Person – Auditor
 Output
 Auditor’s Opinion – will be the basis whether or not the financial statements are prepared
truthfully without any material errors (errors that matter depending on the business type)
 Audited Financial Statements – F/S that underwent the process of auditing
 Standards
 Philippine Standards on Auditing
 Deals with independent auditor’s overall responsibilities when conducting an audit
on F/S
o Tax Preparation and Planning Service
 Tax services wherein accountants advice and help clients in tax planning and preparing (income) tax
returns
 Key Person – Accountant as Tax Specialist
 Accountants are expected to be knowledgeable about revenue regulations and tax
laws
 Represents the client in any tax-related case filed by the Bureau of Internal Revenue (BIR)
 Standards – follows the National Internal Revenue Code of the Philippines (NIRC)
 Income Tax
 Individual – 0% to 32%
 Corporate – 30%
  To avoid this corporation establish foundation (ex. ABS CBN – bantay bata,
foundation, etc.)
 Withholding Tax on Compensation
 VAT  Capital Gain Tax
 Percentage Tax  Doc Stamp Tax
 Real Property Tax  Donor’s Tax
 Expanded Withholding Tax  Estate Tax
 Excise Tax  Final Withholding Tax
o Management Advisory Service
 Accountant advises management on matters such as installation of an accounting system,
introduction of new products, business processes and other business activities
 Involves financial planning and control, and the development of accounting and computer systems
 Aka Consultancy
 Key Person – Accountant as Consultant
- Private Accounting:
o Setting up systems of recording business transactions that are aggregated into financial statements
o Includes the development and interpretation of accounting information intended to assist management in
operating the business
o Private Accountant
 Salaried employee who deals with the company’s day-to-day accounting needs
 Trained in the processing of accounting transactions such as billings and account payables
 May be limited to the areas of accounting for which they are responsible for
o Financial Accounting
 Provides economic and financial information for investors, creditors, and other external users
 Uses a system of reporting designed to meet the information needs of external users
 Governed by an established body of standards and principles
 Recording and classifying of business transactions while applying generally accepted accounting
principles (GAAP)
 Ends in the preparation and presentation of financial statement in accordance with GAAP
 Shows the business’ financial position, operating results and cash activities
 Information from this branch helps investors and creditors in deciding where to place their scarce
resources
o Cost Accounting
 Covers the reporting of financial information relevant to manufacturing operations
 Focuses on accumulating manufacturing costs for financial reporting and decision-making purposes
 Provides management with the necessary tools and information for planning and controlling activities
 Role of Cost Accountant – determine the inventory cost for financial reporting purposes
 Manufacturing Cost = Raw Material + Labor + Overhead Expenses (cost of your utilities)
o Budgeting
 Provides a detailed collection and reporting of the expenditures and revenues involved in a business
or company’s operations
 Tracks the financial details or cash flow of the firm ; money taken in and spent by the company
 Assists the management in quantifying goals concerning revenue, cost of sales or services and
operating expenses
  Buy what’s needed only for production
o Accounting Information System
 Collects and processes transaction data
 Disseminates information to interested parties
 Involves signing of both manual and computerized data processing systems
 Spreadsheet – use apps that involve accountings
o Tax Accounting
 Deals with preparation of various tax returns and doing tax planning for the business
 Similar to tax services in public accounting, however, the client is the business and not the public
o Internal Auditing
 Reviews business operations to check if they are complying with management policies
 Also evaluates the efficiency of business operations
 Estimate how much products cost
 Done within the business organization
 Internal auditor is a hired employee of a company
- Government Accounting:
o Statement of Asset, Liabilities and Network (SALN)
o Governed by New Government Accounting System (NGAS)
o Helps identifies bogus business and organization
o System used in government offices to record and report financial transactions
o Systematic process of collecting, recording, classifying, summarizing, and interpreting the financial
transactions relating to the revenues and expenditures of government offices
o Reveals how public funds have been generated and utilized
o Allocate government taxes to infrastructures, health benefits, salary of security force, departments, etc.
o Accounts for local, national and international government
o Government Accountant
 Needed in all levels of government
 Could be provincial accountant, a Commission on Audit (COA) auditor to various government
agencies, a BIR examiner to local and national businesses, a budget officer of the Department of
Budget and Management, or a bank examiner of Bangko Sentral ng Pilipinas
- Accounting Education:
o Responsible for training future accountants
o Engages in teaching accounting, financial management, taxation and other related business course
o Commission on Higher Education (CHED) Memorandum Order (CMO) No. 3, Series 2007
 An accountant needs to pass the CPA board exam before becoming a professor or teacher
 A CPA in accounting education should possess the educational qualifications, professional experience,
classroom teaching ability, computer literacy, scholarly research productivity, and other attributes
that are essential for the successful conduct of a professional accounting program
o Accounting Research
 Encompasses research interests in areas of financial accounting, management accounting, auditing
and assurance, and taxation, etc.
- Specialized Accounting:
o Forensic Accounting
  Provide the detective work needed to investigate and examine evidence of white-collar financial
crimes such as stealing and fraud
 Often act as expert witnesses in legal proceedings and prepare evidence to be presented in court
 Ex. ENRON Scandal, RCBC Scandal (because of this the Sarbanes Act was carried out)
o Information Technology Service
 Design and implement customized software systems
 CPAs can work with e-commerce ventures and consult with others to determine which decisions are
the most financially and technologically sound for a company
 Ex. Mind Your Own Business (MYOB), Quickbooks, Oracle, SAP
o Environmental Accounting
 Determine how companies can be both profitable and environmentally-responsible
 Audit if company is doing their Corporate Social Responsibility (CSR)
 Environmental compliance audits and set up preventative systems to ensure compliance and avoid
future environmental claims or disputes
 Ex. Mining Businesses
o International Accounting
 PICPA regulates standards in the Philippines to make sure that in other countries an accountant can
perform the same process
 Knowledgeable in international trade rules and regulations, international mergers, government
regulations, tax laws, overseas transactions
 Should be able to speak in different languages

Users of Accounting Information

- Internal Users: make decisions on behalf of the company
o Managers
 Top-level Management
 Chief Executive Officer (CEO), Chief Financial Officer (CFO), Chief Operating Officer (COO),
among others
 Use the information to oversee the performance of the whole organization and set its
strategic direction
 Middle-level Management
 Department heads, branch managers, and junior executives, etc.
 Ensure that their units performances aligned with the organization’s objectives
 Lower-level Management
 Supervisors and team-leaders
 Oversee the day-today operations and direct employees in the performance of tasks
o Employees or Labor Unions
 They assess the company’s profitability and stability, and their consequence on future salary and job
security
 Labor Unions – association of employees to protect their welfare (salary, benefits, security)
o Owners
 They provide the capital to the business
 Owners need accounting information to help them decide whether they should withdraw or increase
their investments
  Interested to know the returns on their investment
o Common Information needs of the Internal Users
 Do we have enough cash to pay bills?
 Can the company afford to give salary increase?
 How much is the company’s sales growth for the month?
 How much is the cost of producing each unit of product?
 Which product line is more profitable?
 How much is the tax payable of the government?
- External Users: make decisions based on the company’s financial information
o Potential and Existing Investors
 Need information to help them decide whether they should invest or not in the business
 Want to know potential returns of their investment based on performances and operating results of
business
 Based on historical financial information of business for investors to invest
o Creditors and Potential Creditors
 They asses the credit worthiness and capability of business to pay its obligation including the related
interests on maturity date
o Customers
 Assess the financial position of their suppliers which is necessary for them to maintain a stable source
of supply in the long-term
 Need to know if suggested price is reasonable or fair
 Interested to know whether the business will continue to honor its product warranties
o Suppliers
 Use the financial statements of their customers to determine whether the debts owed to them will
be paid when due or whether the customer has enough funds or resource to pay the goods to be
delivered or the services to be rendered
 Credit Terms (example)
 Net 30 days – 2% discount within 10 days
 Net 60 days – 2% discount within 5 days ; 1% discount within 10 days
 Net 180 days
o Tax Authorities
 Use financial reports to determine the credibility of the tax returns filed on behalf of the company
 Interested to know if the business paid the correct amount of taxes
 Bureau of Internal Revenue
o Regulatory Bodies
 Ensure that company’s disclosure of accounting information is in accordance with the rules and
regulations
 Fully registered not fly-by-night-operation
 Set in order to protect the interest of the stakeholders who rely on such information
 Ex. Securities Exchange Commission (SEC) and Bangko Sentral ng Pilipinas (BSP), BPI, DTI
o Public
 Use the financial information to know how the business affects the economy possible prospects for
employment and/or educational and research purposes

Forms of Business Organization

- According to Ownership:
o Sole Proprietorship
 Business that is owned by only one individual for the practice of trade or profession
 Simplest and least costly form of ownership among other forms of business
 Owner assumes unlimited liability and in most cases even his or her personal assets are on the line if
the business cannot pay the creditors
 Steps Used in Registering Sole Proprietorship
 Register the preferred business name with the Department of Trade and Industry (DTI). The
approved registration should be renewed every five years.
 Secure a barangay permit in the barangay where the business will be located. This permit
should be renewed every year.
 Apply for a business permit in the municipality where the business is situated. The permit is
renewable every year.
 Register the business with Bureau of Internal Revenue (BIR). BIR requires a sole proprietorship
business to pay its registration fee every year.
 Register the business with Social Security System (SSS), Philippine Health Insurance
Corporation (PhilHealth) and Home Development Mutual Fund (HDMF) or Pag-ibig
 Ex. Grocery Store, Repair Shop, Beauty Parlor
Advantages Disadvantages
Unlimited Liability – the owner is legally
obliged to pay all business debts
Full control of operations
 To the extent that your creditors will
go after your assets
Limited Life – the business ceases to
operate if the owner dies, becomes
Easy to start, easy to dissolve
physically or mentally incapacitated, or is
imprisoned
Difficulty in raising capital
All profits go directly to the owner  Shell out personal funds
 May secure bank loans
Less regulations
The government taxes the owner and not
the business
o Partnership
 A business that is owned by two or more individuals pooling their resources together as common fund
 Partners are normally involved in the management and operation of the business
 Profit of the business is divided among the partners as per partners’ agreement
 Written agreement between or among partners is called article of co-partnership
 Name of Partnership  Investments of Each Partner and the
 Name of Partners Corresponding Capital Credit
 Place of Business  Rights, Powers, Duties of the
 Partnership’s Effectivity Date Partners
 Nature of Business  Accounting Period
 Profit and Loss Sharing
  Compensation for Services offered  Dissolution Procedures
by Partners
 Steps in Registering
 Verify business name with the Securities and Exchange Commission (SEC)
 File articles of co-partnership with SEC
 Register the business name with DTI (optional)
 Secure a barangay permit in the place where business is located (renewable every year)
 Apply business permit in the municipality where the business is located (renewable every
year)
 Register the business with the BIR (BIR requires an annual registration fee)
 Register the business with SSS, PhilHealth, and HDMF
 Types of Partnership
 General
 Liable until getting all assets (even personal ones)
 Unlimited liability
 Limited
 Liable only until capital contribution

Advantages Disadvantages
Increased potentials from two or more Unlimited liability of one or all owners
different strengths  Mutual Agency – for every action of a
partner it affects all other partners
Easy to form with proper agreements on its Limited Life – the business ceases to operate
formation if one of the partners dies, becomes
physically or mentally incapacitated, or is
imprisoned
Less regulations compared to corporations High possibility of dispute and conflicts
between partners

o Corporation
 Business required to have five to fifteen incorporators
 Incorporators refer to those who originally formed the corporation
 There is right of succession
 Section 2 of the Corporate Code of the Philippines defines corporation as an entity in its own right
thus it is separate from its owners
 Bound by the law – SEC and BIR
 Owners have limited liability and limited involvement from operations
 Board of Directors – elected by owners themselves to take control of corporation’s activities
 Profit corporation issues to its owners and stockholders shares of stocks which are evidenced by stock
certificates
 Existence is evidenced by articles of incorporation and by-laws approved by SEC
 Articles of Incorporation detail the powers and limitations bestowed by the government
 Name of Corporation  Location of Principal
 Purpose of Corporation Office of Business
  Term of Existence of the  Types of Shares to be
Corporation Issued and value per
 Name, nationalities and share
addresses of  Subscription amount
Incorporators  Subscribers’ names and
 Name of Board directors corresponding
 Authorized share capital subscription
 Total paid subscription of
each subscriber
 By-laws contains provisions for internal administration of the corporation
 Date, place and manner of calling the annual shareholders’ meeting
 Manner of conducting meeting
 Conditions which may warrant special meeting
 Manner of voting and use of proxies
 Manner of electing board of directors and the number of directors
 Term of office of directors
 Manner of appointing officers
 Authority and responsibilities of officers
 Procedures to amend articles of incorporation
 Procedure to amend by-laws
 Steps in Registering
 Verify business name with SEC
 Draft and execute the articles of incorporation and by-laws by incorporators
 Deposit the cash collected from subscription
 File articles of incorporation and by-laws with SEC
 Register the business name with DTI (optional)
 Secure a barangay permit in the municipality where the business is located (renewable every
year)
 Apply business permit in the municipality where the business is located (renewable every
year)
 Register the business with the BIR (requires an annual registration fee)
 Register the business with the SSS, PhilHealth, HDMF

Advantages
More sources of funds
Easy to transfer ownership
Liability of owners is limited
Unlimited commercial life
Disadvantages
More regulations to be followed
Profit is to taxed at a corporate rate
Costly to incorporate
Stockholders taxed again when profits are
distributed to them

o Cooperative
 A business that is owned by a group of individuals who also serve as benefactors to the business
endeavor
 Requires at least 15 members to function
 A non-profit organization that does not issues stocks to its members
  A board of directors and officers are elected to manage the business operation ; one vote – one
member
 Members can become part of the cooperative by purchasing shares
 Can be either incorporate or unincorporated
 Full function will not be accessible or possible if not all members cooperate (ex. Grab / Jeepney Strikes)
 Governed by a set of by-laws and articles of cooperation
 Types of cooperatives
 Credit  Agrarian  Fisherman
 Consumer Reform  Health
 Producers  Cooperative Services
 Marketing Bank  Housing
 Service  Dairy  Insurance
 Multi-  Education  Transport
purpose  Electric  Water
 Service  Financial Service
 Advocacy Service  Workers

 Steps in Registering

 Prepare general statement to help measure the cooperative’s chance of success

 Draft cooperative’s by-laws
 Draft the articles of cooperation
 Secure bond for accountable officer (s)
 Register with Cooperative Development Authority

Advantages Disadvantages
Unlimited life – change of member does not Obtaining capital through investors.
dissolve the business Cooperative has a “one-member-one-vote”
philosophy. Big investors may choose to
invest their money to other firms where
their voting power is equal to their
ownership interest.
Democratic Organization – social equality of Lack of membership and participation.
members is the most important component Cooperative may not fully function if not
of cooperative so it ensures that it serves its members do not involve themselves in the
member’s needs routine business operation.
- According to Activities:
o Service
 Focus on providing intangible products such as offering professional skill, proposals and expertise
 Business to client
 Restaurants are considered a service business because of the convenience it gives
 Ex. Accounting Firms, Law Firms, Schools, Medical Clinic, Banks, Hair Salons and Spas, Repair Shops

Advantages Disadvantages
No need for inventory Services are harder to value
 Skills can be improved an can produce Less demand during economic downturns
better service

o Merchandising
 Buys product then resells which is why mark-up is needed
 Business to client
 Ex. Grocery Stores, Hardware, Department Stores and Drug Stores

Advantages Disadvantages
Good merchandising attracts more Profits are highly dependent on prices set by
customers merchandise supplies
Flexible to changes Merchandise inventory maybe perishable
o Manufacturing
 Acquisition and conversion of raw materials to finished goods through manual labor
 Raw materials are bought to create new products
 Business to business
 Ex. Food factories, garment factories, car manufacturing companies

Advantages Disadvantages
There is continuous demand for Because of the scope activities,
manufactured goods manufacturing firms are often more labor
and capital intensive
Creation of a manufactured product leads Cost of the manufactured products highly
to higher job satisfaction. The manufacturer depends on the price and availability of the
gets satisfaction knowing that their product raw materials
is something that people need and use

Accounting Concepts and Principles

- GAAP Definition:
o Determine what to record, when to record and amount to record
o The rules and procedures necessary to define accepted accounting practice at a particular time
o Widely accepted set of rules, concepts and principles which govern the application of accounting procedures
o Attempts to standardize and regulate accounting definitions, assumptions and methods
o Assume that there is consistency from year to year in the methods used to prepare company’s F/S
- Importance:
o Guide
 Preparers of financial statements in recording and reporting financial information of the business
o Aid
 Effective execution of the accounting procedure and in communicating the financial condition of the
business
- Philippine Accounting Standards and Philippine Financial Reporting Standard:
o New set of GAAP issued by ASC to govern preparation of financial statements
o Patterned after the revised IFRS and IAS issued by the international Accounting Standards Board (IASB)
 o Philippine Financial Reporting Standards (PFRS) – set of accounting standards issued by Financial Reporting
Standards Council (FRSC)
- Assumptions: (GAMET)
o Going Concern
 “existence for N period of time”
 Assume that the company will continue to exist long enough to carry out its objectives and
commitments
 Will not liquidate in the foreseeable future
 Historical cost principle is dependent on this assumption
 Assets are recorded at original acquisition costs and not based on market values
 Ex. Nokia
o Accrual Basis
 Assumes that revenue is record is record in the period it is earned, regardless of the time the cash is
received or collected (REVENUE = EARNED)
Date Debit Credit
07/16/19 Accounts Receivable Service Revenue
08/04/19 Cash Accounts Receivable
 Expenses is recognized and recorded at the time it was incurred, regardless of the time that cash is
paid (EXPENSES = INCURRED (consumed product))

Date Debit Credit

07/16/19 Utilities Expense Utilities Payable
08/04/19 Utilities Payable Cash
 Adheres to revenue recognition, cost and matching principle
 Transactions in the business world is always a debt because companies utilize their capital for other
things
o Monetary Unit
 Assumes that only transactions that can be expressed in terms of money are recorded
 Uses Banko Sentral ng Pilipinas currency rates
 Peso is assumed to remain relatively stable over years in terms of purchasing power
 Disregards any inflation in the economy in which the entity operates
o Economic Entity
 All business transactions are separate from owner’s transactions
 Business is considered distinct entity from owner
 Exception is investment or withdrawal of owner from company
o Time Record
 Requires a business to complete the whole accounting process a specific operating time period
 It can be monthly, quarterly, semi-annually or annually
 Annual
 Fiscal – twelve-month period that starts on any day of the year and ends on the exact same
date next year
 Calendar – twelve-month period than starts on January 1 and ends on December 31
- Principles: (FO MAMA COCO REVERE)
o Full Disclosure
  Accountant should include sufficient information to permit the stakeholders to make an informed
judgment about the financial condition of the enterprise
 An accountant should fully disclose information in Notes
 Cash & Cash Equivalent – Cash on Hand, Cash on Bank, Cash in Foreign Currency
o Objectivity
 Transactions should have some form of impartial supporting evidence or documentation
 Entails that bookkeeping and financial recording be performed with independence that is free of bias
and prejudice
o Matching
 In a given accounting period, the revenue recorded should have an equivalent expense recorded in
order to show the true profit of the business
 Ex. Sales salaries expense should be reported in the period when the sales were made and not
reported in the period when the salaries were made
o Materiality
 Business transactions that may affect the decision of a user of financial information are considered
important or material and thus, must be reported properly
 Allows accountant to violate another accounting principle if an amount is insignificant
 Professional judgment is needed to know if a transactions is insignificant or immaterial
o Cost
 Refers to the amount spent (cash or cash equivalent) when an item was originally obtained, whether
that purchase happened last year or ten years ago
 Amounts are not adjusted upward for inflation
 Amounts in financial statements are referred to as historical costs amounts
 Acquisition Cost is the most objective and verifiable basis upon which to account for assets and
liabilities of a business enterprise
o Revenue Recognition
 Revenues are recognized as soon as goods have been sold (delivered to customers) or a service has
been rendered regardless of when the money is actually received

The Accounting Equation

- Basic Accounting Equation:
o Duality is a fundamental concept in accounting
o For every debit, there is an equal credit
o Basic accounting equation should be balanced all the time
o Assets = Liabilities + Owner’s Equity
o Debit = Credit
o Expanded: Assets = Liabilities + Revenue + Capital – Expenses – Withdrawal
- Account Definition:
o An individual accounting record of movements (increases and decreases) in specific accounts
- Definition and Preparation of Chart of Accounts:
o Listing of all the accounts and is usually tailored to the operations of the business
o Functions as a guide in ensuring uniformity of and consistency in the use of all the accounts in recording
business transactions
- Assets:
o Resources controlled by the business as a result of past transactions and events and from which future
benefits are expected to flow to the business
o Anything of value that is owned by the business
o Current (CRIP)
 Items owned by the business which are expected to flow within a year and be utilized or converted
into money within a specific period (year)
 Cash
 Cash on hand – bills, coins, check  Cash fund – petty cash fund,
 Cash in bank – savings or payroll fund
checking current account
 Accounts Receivable
 Collectibles from customer  Credit terms: n/30, n/60, n/90,
 Debts they have not paid to business n/180
 Notes Receivable
 Same as accounts receivable but has a promissory note (contract between customer and
business)
 “I O U”
 If note is not paid within or on the due date, added interest shall be applied
 Inventories
 Materials or products that are used to give service or product
 Manufacturing – Raw Materials ; Work-in-Process Inventory ; Finished Goods
 Merchandising – Merchandise Inventory
 Service – Unused Supplies at the end of the accounting period
 Prepaid Rent or Advertising
 Advanced payment made by business before occupying commercial space or using a certain
incentive or service
o Non-current (LBMAF)
 Assets that can last more than a year
 Land – physical site of the business which must not idle (ex. Parking space_
 Building – physical structure of business
 Machineries & Equipment – manual or automated machine
 Automobile – transportation
 Furniture & Fixtures
 Tables, chairs, filing cabinets, display racks
 Furniture – movable
 Fixture – immovable (ex. Sink, toilet, light)
o Contra-assets
 Allowance for Doubtful Accounts
 Estimated portion of accounts receivable which no longer can be collected
 Will be declared uncollectable if customer failed to pay during credit terms
 Any receivable that is not allowed to be collected after accounting period
 Applicable to both receivables
Period when customer paid
 Set credit terms No. of days after credit terms
n/30 n/60 n/90 n/180
wherein the customer paid
n/60 / 30
n/30 / 150
n/90 / 90
 Accumulated Depreciation
 Cost of property, plant, equipment that has been charged to depreciation expense
 Land is the only asset that does not depreciate
 Ex. 50𝐾 ÷ 20𝑦𝑟𝑠. = 10𝐾 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 𝑝𝑒𝑟 𝑦𝑒𝑎𝑟
(50 − 10𝐾) ÷ 5 𝑦𝑟𝑠. = 8𝐾 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 𝑝𝑒𝑟 𝑦𝑒𝑎𝑟  Salvage Cost
- Liabilities
o Current (ANSUITUC)
 Debts that should be settled within a year (or accounting period)
 Accounts Payable – what company owes to suppliers
 Notes Payable – what company owes to suppliers with promissory note
 Unearned Revenues – collected cash before performing service or giving product
 Accrued Liabilities
 Salaries Payable  Interest Payable
 Utilities Payable  Taxes Payable (business permits)
 Current Portion of Long Term Debt
 Any amount of debt that can be paid within a period of time
o Non-current
 Debts that can be settled beyond one year (accounting period)
 Loans Payable – owed from 3rd party creditors (ex. Banks)
 Mortage Payable
 Debt from 3rd party creditors with collateral
 Chattel Mortage & Real Mortage (immovable)
 If deal is not followed, there will be an agreement wherein the company will sell their
assets to creditor in exchange
 Bonds Payable
 When you issue bonds, the other company will give you money in return (which you will be
liable for)
 Bonds certificate is given as evidence of indebtness
- Owner’s Equity: (CREW)
o Capital (+)
 Original or start-up or initial investment
 Additional investment
o Revenue (+)
 Service Revenue
 Interest Income – represents interests credited by bank to the account of business arising from bank
deposits
 Sales
 Professional Fees – include lawyers, doctors, CPAs, etc.
o Expense (-)
  Utilities Expense  Cost of Sales
 Salaries Expense  Supplies Expense
 Wages Expense(for contractual workers)  Doubtful Accounts Expense
 Taxes & Licenses Expense  Depreciation Expense
o Withdrawal (-)
 Drawing account
 Getting money from business for personal use of owner

- Normal Balances:
Normal Balance
Debit Credit
Assets (+) Liabilities (+)
Withdrawal (+) Capital (+)
Expense (+) Revenue (+)
Contra-assets (-) Contra-assets (+)
Liabilities (-) Assets (-)
Capital (-) Withdrawal (-)
Revenue (-) Expense (-)
Books of Accounts
- Journal:
o Aka Book of Original Entry
o Simplest form of bookkeeping (or journal)
o Summarizes transactions
o Provides a chronological generalization of the debits and credits resulting from the analysis of business
transactions
o Abbreviations
 Debere = Dr
 Credere = Cr
o Contribution
 Provides chronological record of business transactions
 Reveals in one record the complete effect of business transactions
 Readily facilitates the discovery of errors in the recording process since debit and credit amounts are
immediately shown
o Parts
 Date Column  Posting Reference
 Particular Column (Account Titles &  Debit Column
Explanation)  Credit Column
GWAP Photograph Studio
General Journal Page 1
Date Particulars PR Dr. Cr.
2019
July 2 Cash 100 Php 400,000.00
Arias, Capital 300 Php 400,000.00
To record initial investment
*”To record” is needed in all transactions
 o Advantages
 Provides a systematic and chronological record transactions
 Simplifies the ledger as some details in the journal needs not be written in the ledger
 Provides adequate explanation of entry and present the account debited or credited and related
amounts
 Ensures that the double-entry bookkeeping system is observed when recording transactions
 Helps in solving misunderstandings in business because it serves as proof and evidence of legal
transactions (transparency)
- Ledger:
o Book of Final Entry
o Reference book of the accounting system and is used to classify and summarize transactions, and to prepare
data for basic F/S
o Accumulate values in this book
o Each account has its own record in the ledger. Compared to a journal, a ledger organizes information by
account
o Accumulates all data necessary prior to the preparation of F/S
o 2 General Groups
 Permanent Accounts or Statement of Financial Position Accounts
 Assets, liabilities, owner’s equity
 Passed on from one accounting period to the other
 Permanent = Real  Balance Sheet = ALOE
 Temporary Accounts or Statement of Comprehensive Income Accounts
 Income and Expense
 Serve only for the changes in the owner’s equity account
 Temporary = Nominal  Income Statement = RE
General Ledger
Account Name
Account No.
Date Particular PR Debit Date Particular PR Credit

o Uses
 Serves as a collective record of individual accounts used by business
 Used to sort all entries made in general journal in chronological order and to group all transaction
that affect individual accounts in order to facilitate preparation of F/S
 Provides the last record of financial information before F/S are prepared
o Advantages
 Provides detailed information about revenues and expenses in one place, hence results of business
operations can easily be determine
 Provides detailed information about assets, liabilities and owner’s equity hence financial health or
position of the business can easily be known
 Assists management in monitoring business performance through information in individual ledger
accounts
 Serves as a tool for auditors to track the flow of business transactions for a given period of time
Accounting Cycle (Steps 1 to 3)
- Analyzing business transactions:
o Steps
 Classify whether the transaction is a business or a non-business transaction. If the transaction is non-
business, there is no need to proceed to step 2
 Identify the major account/s and the account title/s affected and the movements with respect to
its/their normal balance/s
 Determine the amount/s to credited or debited
- Journalizing business transactions:
o A simple journal entry is a journal entry that has one debit account and one credit account
Lakeview Montessori Center
General Journal Page 1
Date Particulars PR Dr. Cr.
2019
July 4 Atienza, Drawing 302 Php 400,000.00
Cash 100 Php 400,000.00
To record personal withdrawal of owner
o A compound journal entry is a journal entry with more than one debit account or more than one credit account
Zileigh’s Gym
General Journal Page 1
Date Particulars PR Dr. Cr.
2019
July 10 Furniture and Fixtures 153 Php 20,000.00
Accounts Payable 201 Php 15,000.00
Cash 100 5,000.00
To record bought furniture and fixtures on account with downpayment
o Parts
 Date of transaction
 Particulars (account titles and explanation)
 Reference (for posting reference)
 Debit account title/s and debit amount/s
 Credit account title/s and credit amount/s
 An explanation
- Posting Journal Entries to the Ledger:
o Posting refers to the procedure of transferring information in the journal to the ledger accounts
o Steps
 In the ledger, enter in the appropriate columns of the account/s debited the date, explanation, journal
page, and debit amount shown in the journal
 In the folio (F, Ref., or posting reference) column of the journal, write the account number to which
the debit amount was posted
 In the ledger, enter in the appropriate columns of the account/s credited the date, explanation,
journal page, and credit amount shown in the journal
 In the folio (F, Ref., or posting reference) column of the journal, write the account number to which
the credit amount was posted