COLLEGE OF BUSINESS AND ACCOUNTANCY

Topic: Overview of Accounting

Learning Outcomes

At the end of this module, the student should be able to:

 Define accounting and state its importance.

 Enumerate the branches of accounting and sectors in the practice of accountancy.
 Demonstrate the importance of uniform set of financial reporting standards.

Introduction (with Core Values Integration):

'I bet being an accountant is boring.' If you are an accountant or studying to be one am sure you have heard
that before. Well the short answer to that is no, unless you want it to be boring. The truth is accounting has a
lot more to offer than just a career. And we can use some of its principles to better our lives.

Let’s talk about accountability. An accountant is always accountable for an organization's spending habits;

they will analyze the spending habits of an organization and make recommendations on how to improve
these habits. Being exposed to accounting will make you be accountable for your own spending habits. You
will look for areas to reduce your spending habits after a few months of tracked spending and to rework your
budget. You will find areas you can reduce the amount of money you spend, and maybe it will be in the brand
of notebook you buy, the pens you use, or the place you do your shopping.

Learning Activities and Resources:

When we you heard the word accounting what comes in your mind? Do you think it's all about numbers?
People usually have this impression that if you are good in Mathematics you will easier grasp the concepts of
this course. But allow me to spill the truth. Accounting involves basic math operations such as addition,
subtraction, multiplication and division. It is seldom that you will have to use complex mathematical
equations/formula. In studying this course, your good analytical skills will help you to understand and
integrate the concepts underlying accounting.
 
In Accounting, your why’s and how’s are very essential to better comprehend the topics specially the
accounting standards.
 
Accounting doesn't require you to memorize as much information as other subjects do. It does however
require you to understand "WHY." Accounting is all about "WHY." As you read your textbook discover the
"WHY" in what you're reading. Try to understand the logic behind what is being taught.
 
Once you understand the "why", it's important to discover the "how". It's not enough to understand why an
accounting principle or concept works, if you can't apply it. You must understand how accounting concepts
work and be able to apply them.

Let us learn together, shall we?

Body:

Accounting is "the process of identifying, measuring, and communicating economic information to permit
informed judgments and decisions by users of the information," – American Association of Accountants
There are three important activities included in the definition of accounting, these are the following:
I. Identifying
II. Measuring
III. Communicating

I. Identifying

 Recognition refers to the process of incorporating the effects of an accountable events in the financial
statements through journal entries.

- Accountable event (Economic Activity) is an economic occurrence that causes changes in

an enterprise’s assets, liabilities, and/or equity. It is a transaction that is recognized in
the financial statements of an accounting entity. 
- Non-accountable event – if it has accounting relevance, it should be disclosed not
recognized. Note the disclosure in the notes is not an application of recognition.
Types of events/transactions:
1. External Events
a. Exchange (Reciprocal Transfer)
b. Non-reciprocal Transfer
c. External Event other than transfer
2. Internal Events
a. Production
b. Casualty

II. Measuring
It involves assigning numbers, normally in monetary terms, to the economic transaction or
events. Bear in mind that financial statements are prepared using a mixture of cost and values.
Measurement bases:
 Historical Cost
 Fair Value
 Present Value
 Realizable Value
 Current Cost
 Inflation-adjusted cost
 Valuation by fact or opinion
- When measurement is not affected by estimates, it said to be valued by fact.
Examples: Cash measured at its face amount
Land stated at its acquisition cost
- When measurement is affected by estimates, it said to be valued by opinion.
Examples: Depreciation Expenses
Uncollectible Account Expense

III. Communicating

It is the process of transforming economic data into useful accounting information, such as
financial statements and other accounting reports for dissemination to users.

The communicating process involves 3 aspects:

- Recording. In this phase, all financial transactions are recorded in a systematical and
chronological manner in the appropriate books. These are the documents and books
involved in preparing financial statements.
- Classifying involves sorting and grouping similar items under the designated name,
category or account. This phase uses systematic analysis of recorded data in which all
transactions are grouped in one place. For example, "travel expenses" might be a category
that accountants use to classify expenses relating to company travel. The term “ledger”
refers to the book in which classifications are recorded.
- Summarizing phase of accounting involves summarizing the data after each accounting
period, such as a month, quarter or year. The data must be presented in a manner which is
easy to understand and use by both external and internal users of the accounting
statements. 

Interpreting is process in concerned with interpreting financial data, and is a critical tool for decision-
making. This final function interprets the recorded data in a manner which allows end-users to make
meaningful judgments regarding the financial conditions of a business or personal account, as well as the
profitability of business operations. This data is then used to prepare future plans and frame policies to
execute financial plans.
PURPOSE OF ACCOUNTING

Accounting enables transparency in the business and demonstrates investors / shareholders how the
business operates, its assets, liabilities, equity, revenues, cash flow, and lawsuits.

Its purpose is to provide the information that is needed for making sound judgements and business decisions.

Systematic Recording

Communicate Financial
Status

Helps in decision making

Purpose of
Accounting Ensure control of assets

Aids in planning future

activities

Comply with laws and

regulations

Types of Information provided by Accounting

1. Quantitative Information-information expressed in numbers, quantities, and units.

- Financial Information
2. Qualitative Information-information expressed in words or in any descriptive form.

Types of Accounting Information classified to users

1. General purpose accounting information

- Designed to meet common needs of most statement users.
- This type of information is provided under financial accounting and governed by generally
accepted accounting principles (GAAP) represented by the Philippine Financial Reporting
Standards (PFRS)
 2. Special Purpose accounting information
- Designed to meet specific needs of particular statement users.
- This type of information is provided by the other types of accounting e.g., managerial
accounting, tax basis accounting.

Accounting may be defined as a service activity, as an information system, as a process and as an art.

 As a service activity. It aims to provide quantitative information, primarily financial in nature, about
economic entities (businesses) that is intended to useful in making economic decisions.
 

 As an information System. It measures, processes and communicates financial information about

economic entity.

 As a process of identifying, measuring and communicating economic information to permit informed

judgements decisions by the users of information.

 As an 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 a financial character, and interpreting the results
thereof.

Moreover, it also considered as a social science and language of business. Social science because it is a body of
knowledge which has been systematically gathered, classified and organized. Language of business because it
is fundamental to the communication of financial information.
Accounting concepts refers to the principles upon which the process of accounting is based. The term
“accounting concepts” is often used interchangeably with the following terms:

a. Accounting assumptions (Accounting postulates) – are the fundamental concepts or principles and
basic notions that provide the foundation of the accounting process.
b. Accounting theory – logical reasoning in the form of a set of broad principles that (i) provide a
general frame of reference by which accounting practice can be evaluated and (ii) guide the
development of new practices and procedures.

 It noteworthy to mention that accounting theories comprises the Conceptual

Framework and PFRSs.

Examples of Accounting Concepts:

1. Double-entry system
2. Going concern assumption/
3. Separate entity (Accounting entity/Business Entity Concept)/
4. Stable monetary Unit (Monetary unit assumption)/
5. Time Period (Periodicity/Accounting Period Assumption)/
6. Materiality Concept/
7. Cost-benefit (Cost constraint/Reasonable Assurance)/
8. Accrual Basis of Accounting/
9. Historical Cost Concept (Cost Principle)/
10. Concept of Articulation
11. Full Disclosure Principle/
12. Consistency Concept/
13. Matching (Association of Cost and Effects)/
14. Entity Theory
15. Proprietary Theory
16. Residual Equity Theory
17. Fund Theory
18. Realization
19. Prudence (Conservatism)/

Common Branches of Accounting

ACCOUNTING

Governme Institution
Financial Managerial Cost Tax Fiduciary Estate Social Accounting Accounting
Auditing nt al
Accounting Accounting Acconting Accounting Accounting Accounting Accounting Systems Research
Accounting Accounting
Financial Accounting is the branch of accounting that focuses on general purpose financial statements. It is
governed by PFRSs.

- Did you know that financial accounting and financial reporting is often used
interchangeably? Although, both of them focus on general purpose financial
statements, the latter endeavors to promote principles that are also useful in
“other financial reporting.”

Financial statements (FS) are the structured representation of entity’s financial position and results of its
operation. It is the end product of accounting.

A complete set of FS consists of the following:

a. Statement of Financial Position

b. Statement of profit or loss and other comprehensive income
c. Statement of changes in equity
d. Statement of cash flows
e. Notes to FS
f. Additional statement of financial position

Financial Reporting involves the provision of financial information about an entity that is useful in making
economic decisions by external users and assessing management’s stewardship.

Primary objective:

1. To provide information about economic resources, claims to those resources, and changes
in those resources.
2. To provide information that is useful in making investment and credit decisions.
3. To provide information that is useful in assessing the amount of future cash flows.

Secondary objective:

To provide information that is useful in assessing management’s stewardship or the

effectiveness of the entity’s management.

Accounting Standards

The PFRSs represent the generally accepted accounting principles (GAAP) in the Philippines. The PFRS are
standards and interpretations adopted by the Financial Reporting Standards Council (FRSC). They comprise:

a. PFRSs
b. Philippine Accounting Standards (PAS)
c. Interpretations
The term “generally acceptable” means that either:

1. The standard has been established by an authoritative accounting rule-making body

2. The principle has gained general acceptance due to practice over time and has been proven to be
most useful.
HIERARCHY OF REPORTING STANDARDS

PFRSs

Judgement
1. The management shall refer to, and consider the applicability of,
the following in descending order:
a. PFRSs dealing with similar or related issues
b. Conceptual Framework
2. The Management may also consider the following:
a. Pronouncements of other standard-setting bodies
b. Accounting literature and accepted industry practices

Accounting Standards setting bodies and other relevant organizations

F in a n c ia l R e p o r tin g S ta n d a r d s C o u n c il ( F R S C )

P h ilip p in e In te r p r e ta tio n s C o m m itte e ( P IC )

B o a r d o f A c c o u n ta n c y (B O A )

S e c u ritie s a n d E x c h a n g e C o m m is s io n (S E C )

B u r e a u o f In te r n a l R e v e n u e ( B IR )

B a n g k o S e n t ra l n g P ilip in a s ( B S P )

C o o p e r a tiv e D e v e lo p m e n t A u th o r ity (C D A )
International Accounting Standards

International Accounting Standards Board (IASB) is the standard-setting body of the IFRS Foundation with the
main objectives of developing and promoting global accounting standards.

The standards issued by the IASB are the International Financial Reporting Standards (IFRSs), composed of
the following:

1. International Financial Reporting Standards (IFRSs)

2. International Accounting Standards (IASs)
3. Interpretations

Other relevant international organizations

a. International Financial Reporting Interpretations Committee (IFRIC)

b. IFRS Advisory Council (Previously known as the Standards Advisory Council ‘SAC’)
c. International Federation of Accountants (IFAC)
d. International Organization of Securities Commissions (IOSCO)

 Note that financial reporting standards continuously change primarily in response to user’s needs.

Life Application:
How can you apply accounting in real-life situations?

Come to think of it when cooking something at home, the first thing we often do is check if we have
the ingredients we need. If not, the next thing we do is list down all the items that we will purchase
in the supermarket. Then, after you get all the things you need, you proceed to the cashier to pay them the
total price of your groceries.
Finally, you thoroughly count your change to make sure that there is no overage or shortage. If you find any,
you are most likely going to approach the sales person to correct the error.
We’re you able to identify which parts were actions you did were related to accounting?
If yes, then good job!
But if not, then here’s a simple explanation on how groceries are related to accounting.
Summarizing; by looking at your kitchen, you were already summarizing which items you will buy and which
ones you will not.
Analyzing; the act of counting your change to know whether they gave you too much or too little is like an
accountant investigating if their business is receiving the correct amount of cash or revenue.
Reporting; lastly, reporting is when you try to communicate your data to other parties. Hence, when you
explained to the cashier that she gave you too much or too little change, you are reporting to her based on
how you analyzed what you previously summarized.
Summary

With every choice we make, whether for major or minor decision, we are unconsciously using the principles
of accounting. Hence, it is an inescapable part of everybody’s lives. Nevertheless, there are also other ways
that you could apply accounting to make your life better.
Accounting plays a vital role in running a business because it helps you track income and expenditures,
ensure statutory compliance, and provide investors, management, and government with quantitative
financial information which can be used in making business decisions.

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References:

Milan, Z.V. (2020). Conceptual Framework and Accounting Standards. 2020 Ed. Bandolin Enterprise.
Valix, C.A (2020). Conceptual Framework. 2020 Ed. GIC Enterprises & Co., Inc.
https://www.linkedin.com/pulse/accounting-skills-principles-you-can-use-everyday-life-chomwa-shikati
https://www.pdr-cpa.com/knowledge-center/blog/role-of-accounting-in-business