FINANCIAL ACCOUNTING & REPORTING (Fundamentals) Proportioni and Proportionista,” published on November

Chapter 01 Introduction to Accounting 10, 1494 in Venice.

Definition of accounting  The concept of “double entry recording” is being used to
 Accounting is a process of identifying, recording and this day. Thus, Fra Luca Pacioli is considered as the father
communicating economic information that is useful in of modern accounting.
making economic decisions. Common Branches of Accounting
Essential elements of the definition of accounting Branch of Type of Accounting
Users of Servers
1. Identifying – The accountant analyzes each business Accounting Service Provides
transaction and identifies whether the transaction is an 1. Financial  General record-  All
“accountable event” or “non-accountable event.” This is Accounting keeping, i.e., businesses
because only “accountable events” are recorded in the maintenance of use financial
books of accounts. “Non-accountable events” are not Journals and accounting in
recorded in the books of accounts. Ledgers their record-
2. Recording – The accountant recognizes (i.e., records) the  Preparation of keeping.
“accountable events” he has identified. This process is general purpose These
called “journalizing.” After journalizing, the accountant financial records
then classifies the effects of the event on the “accounts.” statements (FS) provide
This process is called “posting.” information
3. Communicating – At the end of each accounting period, that is also
the accountant summarizes the information processed in used in the
the accounting system in order to produce meaningful other
reports. Accounting information is communicated to branches of
interested users through accounting reports, the most accounting.
common form of which is the financial statements.  Businesses
Nature of Accounting prepare
 Accounting is a process with the basic purpose of general
providing information about economic activities intended purpose FS
to be useful in making economic decisions. at least
Types of information provided by Accounting annually for
1. Quantitative information the use of
2. Qualitative information lenders,
3. Financial information investors, ot
Functions of Accounting in Business government
1. To provide external users wi th information that is regulatory
useful in making investment and credit decisions; bodies
and 2. Management  Preparation of  Required by
2. To provide internal users with information that is Accounting specifically management
useful in managing the business. tailored to aid them
Brief History of Accounting management in
 Accounting can be traced as far back as the prehistoric reports performing
times, perhaps more than 10,000 years ago. their
 Archaeologists have found clay tokens as old as 8500 B.C. management
in Mesopotamia which were usually cones, disks, spheres function.
and pellets. 3. Government  General record-  Required by
 These tokens correspond to commodities like sheep, Accounting keeping and the
clothing or bread. preparation of governments
 They were used in the Middle West in keeping records. financial reports and its
After some time, the tokens were replaced by wet clay for the agencies.
tablets. During such time, experts concluded this to be government
the start of the art of writing. and agencies. It
 Double entry records first came out during 1340 A.D. in is also includes
Genoa. the preparation
 In 1494, the first systematic record keeping dealing with of budgets and
the “double entry recording system” was formulated by accountability
Fra Luca Pacioli, a Franciscan monk and mathematician. reports.
The “double entry recording system” was included in 4. Auditing  Expression of an  Businesses
Pacioli’s book titled “Summa di Arithmetica Geometria opinion on the with gross
correspondence quarterly
 between revenues of parties.
management ₱150,000 are 8. Accounting  Accounting  Required by
assertions and required to Research research business
established have their papers, articles owners,
criteria. financial and similar professional
* The most common statements publication. organizations
form of such opinion audited by , and other
is the Independent an interested
Auditors’ Report independent parties.
which is attached to Certified Users of Accounting Information
audited financial Public 1. Internal users – those who are directly involved in
statements. Accountant managing the business. Examples:
(CPA).  Business owners who are directly involved in
5. Tax  Preparation of  All managing the business
Accounting tax returns. businesses  Board of directors
 Providing tax are required  Managerial personnel
advice. to file tax 2. External users – those who are not directly involved in
returns. managing the business. Examples:
 Some  Existing and potential investors (e.g., stockholders
taxpayers who are not directly involved in managing the
may require business)
the  Lenders (e.g., banks) and Creditors (e.g., suppliers)
professional  Non-managerial employees-
advice of a  Public
tax Forms of Business Organizations
practitioner Forms of
regarding the Business Ownership Formation/Registration
management Organization
of taxes. 1. Sole  One  Registration with
6. Cost  Analysis of costs  Businesses Proprietor individual the DTI
Accounting of products or use cost (i.e., sole
services. accounting proprieto
to analyze r)
the cost of 2. Partnership[  More  Formed by
their than one contractual
products or (i.e., agreement.
services and partners)  Registered with the
the effects of SEC.
those costs 3. Corporation  More  Formed by
in, among than one operation of law.
others, (i.e.,  Registered with the
earnings and stockhold SEC.
pricing ers)
policies 4. Cooperative  More  Formed in
7. Accounting  Teaching of  Required by than one accordance with
Education accounting and business (i.e., the Cooperative
related students, members) Code.
subjects. business  Registered with the
owners, CDA.
accounting Advantages and Disadvantages
practitioners Sole Proprietorship
in their Advantages Disadvantages
continuing  You are the boss and you  You assume all the risk of
Professional keep all the profits. loss.
Developmen  Decision making is  You take all
t (CPD), and simple because you have responsibility and rely
other complete control over mostly on yourself in
interested the business. making decisions.
 Relatively easier and less  It is more difficult to a regular investor does
costly to form because raise capital because you not need to work for the
there are fewer formal rely mostly on your corporation to earn
business requirements. personal assets and income.
loans to initially finance  Limited liability of the  A corporation is more
the business. owners because difficult and more costly
 Lower extent of  You are personally liable stockholders are liable to form because there
government regulation for the debts and for corporate debts only are more formal
and relatively lower obligations of the up to the amount they business requirements.
taxes. business. have invested.
Partnership  Greater capital and ease  Greater extent of
Advantages Disadvantages in raising additional government regulation
 Better business decisions  Making business funds because a and higher taxes.
can be made because decisions may give rise corporation can issue
“two heads are better to conflict among shares to a wider extent
than one.” partners. of investors.
 You share the business  You don’t keep all the  If the corporation is  Unlike for a sole
risk and the profits because you need listed, you can easily proprietorship or a
responsibility of running to share them with your transfer your shares to partnership where
the business with your partners. other investors by selling business profits are
partners. them in the stock easily distributed to the
 Compared to  Limited life, in the sense market. Many investors owner(s), in a
corporations and that a partnership can be earn profit this way-by corporation, you have to
cooperatives, a easily dissolved by the buying shares at a cheap wait for the board of
partnership is easier to withdrawal, retirement, price, wait for prices to directors to declare
form because only a death, or insanity of one go up, and then sell dividends before you get
contractual agreement of the partners. them. This activity is your share in the profits
between the partners is referred to as stock of the corporation.
needed. trading.
 Greater capital  Lesser capital compared  Unlimited life, in the 
compared to a sole to a corporation. sense that the
proprietorship. withdrawal, retirement,
 Relatively lower extent  A partnership (other death or insanity of one
of government than a general of the stockholders does
regulation compared to professional partnership) not dissolve the
corporations. is taxed like a corporation.
corporation.
 Unlimited liability. The  Although a corporation
partners can be held has a legal life of 50
liable for partnership years, this can be
debts up to their renewed for an
personal assets. indefinite number of
Corporation renewals.
Advantages Disadvantages Cooperative
 A stockholder who is not  Your "say" on corporate Advantages Disadvantages
a member of the affairs depends on the  Unlike in a corporation,  A cooperative is prone to
corporation's board of number of shares you your "say" on poor management.
directors is relieved from own. Those who own cooperative affairs is not Cooperatives are, more
managerial more shares are the affected by the number often than not, managed
responsibilities. Only the bosses and enjoy a of shares you own. This by members who were
stockholders that are larger share of the is because, in a elected as board of
elected as members of corporation's profits. cooperative, each directors rather than by
the board of directors member is entitled to employed professional
and those they hire or one vote regardless of managers. Since there is
appoint are tasked with his or her shareholdings. a 'one- member, one-
managerial However, members with vote' policy in a
responsibilities. This can larger shareholdings are cooperative, influential
be an advantage because entitled to larger members tend to
 amount of profit (net dominate the election
surplus). process. The result is that
those who get elected
may not be the ones who
are most qualified for the
task.
 A cooperative is  A cooperative is
generally exempt from susceptible to
paying taxes. This is the corruption. Due to its
main advantage of a management structure
cooperative and the and lack of profit motive,
most common reason the elected officers may
why cooperatives are be inclined to act on
organized. Moreover, a their personal interests.
cooperative may receive
assistance from the
government.
 Compared to a  The Cooperative Code
corporation, a places some restrictions
cooperative is easier and on the distribution of a
less costly to form cooperative's profit to its
because there are fewer members. More
formal business specifically, the Code
requirements. requires a cooperative to
appropriate a portion of
its annual profit to some
funds. Only the
remaining portion can be
distributed to the
members.
Furthermore, when the
cooperative is dissolved,
the amount accumulated
in a fund called the
"reserve fund" shall not
be returned to the
members, but rather
donated to another
cooperative or to the
community.
 Limited liability - the  Compared to a supplies necessary in
members are liable for corporation, it is more
cooperative debts only difficult for a cooperative
up to the amount they to sustain growth. This is
have invested. in part because of the
lack of profit motive and
lack of management
expertise. Moreover, a
cooperative's success
strongly depends on the
members' cooperation
and members are not
always willing to
cooperate. The success
of a business depends on
continuing effort. Sadly,
many cooperatives are
 Unlimited life, in the  Unlike in a corporation
sense that the
withdrawal, retirement,
death or insanity of one
of the members does
not dissolve the
cooperative.
Although a cooperative
has a legal life of 50
years, this can be
renewed for an
indefinite number of
renewals.
Types of Business According to Activities
1. Service business
2. Merchandising (Trading)
3. Manufacturing
Service Business
Advantages
 You don't need to worry  You may not have a
about inventory costs,
warehousing and
distribution costs
because you don't have
any inventory. You only
have some minimal
providing your services.
 You may only need a  Service
small capital because
what you are selling is
your skill set and you
only need yourself to
render a service. If you
are a manufacturer, you
need to buy raw
materials and
machinery to produce 
zealous at the start but
fail to sustain continuing
effort resulting to the
waning down of their
activities.
This does not mean
though that all
cooperatives are small
businesses. There are
many multi-billionaire
cooperatives in our
country. Some might be
located in your
community.
where the stockholder
can freely transfer his
shares, in a cooperative,
there are restrictions on
the transfer of a
member's shares. For
example, the approval of
the board of directors
must first be obtained
before a member can
transfer his or her
shares.
Disadvantages
flexible personal time
because you need to be
directly involved in
providing a service to a
customer. You can stock
inventory but not service.
Until your business is big
enough to be able to hire
other professionals to do
the work for you, you will
need to render the
services yourself.
businesses
normally suffer first from
decline in demand during
times of economic
difficulty. This is because
most services are
perceived as luxuries
rather than necessities
for survival.
 your product.
 You are perceived as an  Your business' success
expert in your chosen depends on your
field. credibility.
 Since a service business is
founded on good
reputation, it is more
costly to commit an error
in a service business
compared to a technology.
merchandising business.
Merchandising Business
Advantages Disadvantages
 Compared to a  You need to have a retail
manufacturing firm, you store to display your
may need a much lower goods and the store
start up capital because must be in a strategic
you don't need to location for it to attract
acquire machineries to more customers.
produce your goods.
 You can take advantage  Less flexibility in
of price fluctuations. For managing costs. This is
example, when goods because the cost of your
are on sale, you can goods is based primarily
acquire them at a on their purchase price,
discounted price and which you do not
resell them at a much control.
higher price. You can't
do this in a service
business.
 Lower cost of quality.  Keeping track of
This is because "what inventory is tedious,
you buy is what you sell." most especially when
you are selling numerous
and varied items with
fast turnover rate. Also,
you can incur additional
costs due to spoilages,
theft, breakages,
damages, and
obsolescence.
 It is much easier to start  Self-satisfaction is low
a merchandising because you did not
business because you produce the products
don't need to have an you sold.
expertise or a special skill
(service business) and
you don't need to have
invented a new product
or have conceptualized
an nnovative idea for an
existing product
(manufacturing
business).
Manufacturing Business
Advantages Disadvantages
 You have a high growth  You need a high start-up
potential. capital.
 You have the  Conceptualizing a viable
opportunity to manufacturing business is
establish a brand that difficult.
could last longer than
your lifetime.
 Self-satisfaction is high.  You need to be
continuously innovative
and abreast of changes in
 You may not need to  Warehousing and logistics
have a strategically costs can be high.
located retail store to
display your products.
 You can have a better  You rely on raw materials.
pricing policy because 
mass production can
decrease your unit cost
(often called
'economies of scale').
 Greater flexibility in  Managing a manufacturing
managing costs. business can be difficult
because production
processes are often
complicated and there is
always some room for
improvement.
Chapter 02 Accounting Concepts and Principles
Basic Accounting Concepts
1. Separate entity concept
2. Historical cost concept
3. Going concern assumption
4. Matching
5. Accrual Basis
6. Prudence (or Conservatism)
7. Time Period
8. Stable monetary unit
9. Materiality concept
10. Cost-benefit
11. Full disclosure principle
12. Consistency concept
Basic Accounting Concepts
 Separate entity concept – The business is viewed as a
separate entity, distinct from its owner(s). Only the
transactions of the business are recorded in the books of
accounts. The personal transactions of the business
owner(s) are not recorded.
 Historical cost concept (Cost principle) – assets are
initially recorded at their acquisition cost.
 Going concern assumption – The business is assumed to
continue to exist for an indefinite period of time.
 Matching – Some costs are initially recognized as assets
and charged as expenses onl y when the related revenue
is recognized.
 Accrual Basis of accounting – income is recorded in the
period when it is earned rather than when it is collected,
 while expense is recorded in the period when it is
incurred rather than when it is paid.
 Prudence – The observance of some degree of caution
when exercising judgments under conditions of
uncertainty. Such that, if there is a choice between a
potentially unfavorable outcome and a potentially
favorable outcome, the unfavorable one is chosen. This is
necessary so that assets or income are not overstated
and liabilities or expenses are not understated.
 Reporting Period – The life of the business is divided into
series of reporting periods.
 Stable monetary unit – Assets, liabilities, equity, income
and expenses are stated in terms of a common unit of
measure, which is the peso in the Philippines. Moreover,
the purchasing power of the peso is regarded as stable.
Therefore, changes in the purchasing power of the peso
due to inflation are ignored.
 Materiality concept – An item is considered material if its
omission or misstatement could influence economic
decisions.
Materiality is a matter of professional judgment and is
based on the size and nature of an item being judged.
 Cost-benefit – The costs of processing and
communicating information should not exceed the
benefits to be derived from the information’s use.
 Full disclosure principle – Information communicated to
users reflect a balance between detail and conciseness,
keeping in mind the cost-benefit principle.
 Consistency concept – Like transactions are accounted
for in like manner from period to period.
Philippine Financial Reporting Standards (PFRSs)
The PFRSs are Standards and Interpretations adopted by the
FRSC. They consist of the following:
1. Philippine Financial Reporting Standards (PFRSs);
2. Philippine Accounting Standards (PASs); and
3. Interpretations
Qualitative Characteristics
I. Fundamental Qualitative Characteristics
i. Relevance (Predictive Value, Confirmatory Value,
Materiality)
ii. Faithful Representation (Completeness, Neutrality,
Free from error)
II. Enhancing Qualitative Characteristics
i. Comparability
ii. Verifiability
iii. Timeliness
iv. Understandability
Fundamental vs. Enhancing
 The fundamental qualitative characteristics are the
characteristics that make information useful to users.
 The enhancing qualitative characteristics are the
characteristics that enhance the usefulness of
information
Relevance
 Information is relevant if it can affect the decisions of
users.
 Relevant information has the following:
a. Predictive value – the information can be used in
making predictions
b. Confirmatory value – the information can be used in
confirming past predictions
Materiality – is an ‘entity-specific’ aspect of relevance.
Faithful representation
 Faithful representation means the information provides a
true, correct and complete depiction of what it purports
to represent.
 Faithfully represented information has the following:
a. Completeness – all information necessary for users
to understand the phenomenon being depicted is
provided.
b. Neutrality – information is selected or presented
without bias.
c. Free from error – there are no errors in the
description and in the process by which the
information is selected and applied.
Enhancing Qualitative Characteristics
1. Comparability – the information helps users in
identifying similarities and differences between different
sets of information.
2. Verifiability – different users could reach consensus as to
what the information purports to represent.
3. Timeliness – the information is available to users in time
to be able to influence their decisions.
4. Understandability – users are expected to have:
a. reasonable knowledge of business activities; and
b. willingness to analyze the information diligently.
Chapter 03 The Accounting Equation
The Accounting Equation
Assets = Liabilities +Equity
Definitions
 ASSETS – are the economic resources you control that
have resulted from past events and can provide you with
economic benefits.
 LIABILITIES – are your present obligations that have
resulted from past events and can require you to give up
economic resources when settling them.
 EQUITY – is assets minus liabilities.
The Expanded Accounting Equation
Assets = Liabilities + Equity + Income - Expenses
Definitions
 INCOME – is increases in economic benefits during
the period in the form of increases in assets, or
decreases in liabilities, that result in increases in
equity, excluding those relating to investments by
the business owner.
 EXPENSES – are decreases in economic benefits
during the period in the form of decreases in assets,
or increases in liabilities, that result in decreases in
equity, excluding those relating to distributions to
the business owner.
 The difference between income and expenses
represents profit or loss.
Applications of the accounting equation
 1. If total assets is ₱10,000 and total liabilities is in a specific item of asset, liability, equity, income or
₱6,000, how much is the total equity? expense.
A= L +E The T-Account
10,000 = 6,000 + ?
10,000 = 6,000 + 4,000
10,000 = 10,000
2. If total liabilities is ₱5,000 and total equity is ₱4,000,
how much is the total assets?
A= L +E
?= 5,000 + 4,000
9,000 = 5,000+4,000
9,000= 9,000
3. If total assets is ₱10,000 and total equity is ₱3,000,
how much is the total liabilities?
A= L +E
The Five Major Accounts
10,000 = ? + 3,000
1. ASSETS – are the resources you control that have
10,000 = 7,000 + 3,000
resulted from past events and can provide you with
10,000 = 10,000
economic benefits.
4. If total income is ₱10,000 and total expensesa re
2. LIABILITIES – are your present obligations that have
₱3,000, how much is the profit or loss?
resulted from past events and can require you to give up
INCOME – EXPENSES = NET PROFIT or (LOSS))
economic resources when settling them.
10,000 – 3,000
3. EQUITY – is assets minus liabilities.
7,000
4. INCOME – are increases in economic benefits during the
NET PROFIT
period in the form of inflows or enhancements of assets
5. If total income is ₱10,000, total expenses are ₱8,000,
or decreases of liabilities that result in increases in
total liabilities is ₱7,000, and total equity (before
equity, other than those relating to investments by the
profit or loss) is ₱6,000, how much is the total
business owners.
assets?
5. EXPENSES – are decreases in economic benefits during
A = L + Eq + I –Exp
the period in the form of outflows or depletions of assets
?= 7,000+ 6,000 +10,000 – 8,000
or increases of liabilities that result in decreases in
15,000 = 7,000+ 6,000+10,000- 8,000
equity, other than those relating to distributions to the
15,000 = 15,000
business owners.
6. If total income is ₱3,500 and total expenses are
Classification of the Five Major Accounts
₱4,500, how much is the profit or loss?
INCOME – EXPENSES = NET PROFIT/(LOSS) Balance Sheet Accounts Income Statements Account
3,500 – 4,500 1. Assets 1. Income
= (1,000) 2. Liabilities 2. Expense
NET LOSS 3. Equity
7. If total assets is TWICE the total equity and the total Chart of Accounts
equity is ₱3,000, how much is the total liabilities? A chart of accounts is a list of all the accounts used by a
A = L+ E business.
2(3,000) = ? + 3,000 Common Account Titles
6,000 = ? + 3,000 BALANCE SHEET ACCOUNTS
6,000 = 3,000 + 3,000 ASSETS
6,000 = 6,000 a. Cash
8. If total liabilities is ₱6,000 and total equity is ₱4,000, b. Accounts receivable
how much is the total assets? c. Allowance for bad debts
A = L +E d. Notes receivable
? = 6,000 + 4,000 e. Prepaid supplies
10,000 = 6,000+ 4,000 f. Prepaid rent
10,000 = 10,000 g. Prepaid insurance
h. Land
i. Building
Chapter 04: Types of Major Accounts j. Accumulated depreciation - Building
The Account k. Equipment
 An account is the basic storage of information in l. Accumulated depreciation - equipment
accounting. It is a record of the increases and decreases LIABILITIES
a. Accounts payable
b. Notes payable
 c. Interest payable
d. Salaries payable
e. Utilities payable
f. Unearned
EQUITY
a. Owner’s capital (or Owner’s equity)
b. Owner’s drawings
INCOME
a. Service fees
b. Sales
c. Interest income
d. Gains
EXPENSES
a. Cost of sales (or Cost of goods sold)
b. Freight-out
c. Salaries expense
d. Rent expense
e. Utilities expense
f. Supplies expense
g. Bad debt expense
h. Depreciation expense
i. Advertising expense
j. Insurance expense
k. Taxes and licenses
l. Transportation and travel expense
m. Interest expense
n. Miscellaneous expense
o. Losses