C-AE13: Financial Accounting and Reporting
Module 1: Introduction to
Accounting
Lesson 1 – History, Definition and Nature
of Accounting
 First accounting book – written by
Cotrugli in Naples
 Double entry bookkeeping system –
could be traced from ‘Summa de
Arithmetica, Geometria,
Proportioni et Proportionalita’ by
Italian Mathematician, Fr. Luca
Pacioli (father of accounting) in
1494.
Accounting
- Is a service activity whose main
function is to prepare financial
reports that will provide relevant
information and make informed
economic decisions about the
business
- art of recording, classifying, and
summarizing.
- bridges the gap between the
business and interested parties.
- language of the business.
Financial statements – vital financial
information about the business
Transaction – activity or an event expressed
in terms of money; two parties involved.
Lesson 2 – Business Nature; Business
Organizations: Forms, and Types of
Operations
Nature of a Business
Business
- an economic unit that is engaged in
buying and selling of goods and
services.
- major concern is how to maximize
the use of all its resources (men,
money, machines, raw materials) in
order to obtain profit.
Forms of Business Organizations
1. Sole Proprietorship – owned by one
person
2. Partnership – two or more person
called partners
3. Corporation – separate legal entity
from shareholders (known as
stockholders) who buy shares of
stocks in the company.
Solo Corporation (ex. UA – owned by
Archdiocesan)
Types of Business Organization
1. Service – provides services
2. Merchandising (also known as
trading)– buys and sells or
merchandise
3. Manufacturing – buys raw materials
and processes into finished goods or
products.
Lesson 3 – Purpose and Phases of
Accounting
 The accounting function records the
economic activities or transactions
of the business.
Four Phases
1. Record – in the journal (book of
original entry)
2. Classify – into groups and categories
in ledger (book of final entry)
These two phases cover the procedural
phase of bookkeeping.
3. Summarized – preparation of
financial statements
4. Interpret – analyzing financial
statements to help users make
informed economic decisions.
C-AE13: Financial Accounting and Reporting
Lesson 4 – Fundamental Concepts and
Principles in Accounting
 Accountants should consider in
order to make the information more
meaningful and useful to the users.
1. Entity Concept (or Business Entity
Concept
- separate economic unit
- distinct and separate from its
owners.
2. Periodicity Concept
- entity’s life is divided into equal time
periods (accounting period).
- Allows users to obtain timely
information for future activities.
Calendar – starts in January, ends
with the same year (12 months).
Fiscal – doesn’t follow the calendar;
starts in any month (12 months).
3. Stable Monetary Unit
- Philippine peso is the unit of
measure
- Changes in the purchasing power of
the peso are not considered.
4. Going Concern
- Financial statements are prepared in
the assumption that the business
will continue its operation in the
future.
- Doesn’t anticipate the closure of the
business; if the business is not going
concern; it means it’s gone bankrupt
and assets were liquidated.
5. Objectivity Principle
- Accounting records are based on
most reliable data
- Objective evidences such as official
receipt (receipt of cash) and sales
invoice (evidence of purchase)
- Accurate and useful; verifiable data
6. Exchange Price or Cost Principle
- Transactions should be recorded at
their actual cost, the amount
agreed upon, or cash equivalent
7. Measurement in terms of Money
- One unit of measure – money.
- Only transactions/events
measurable in terms of money are
recorded in the books of entity.
Accrual Concept (Revenue & Expense) –
receipt of cash is not the basis.
8. Revenue Recognition Principle
- Recognized when goods are
delivered/services are rendered,
not when cash is received.
9. Expense Recognition Principle
- Recognized when goods and
services are incurred/used up to
produce revenue, not when the
entity pays for it.
10. Adequate Disclosure
- All relevant information that affect
the user’s understanding and
assessment
11. Materiality
- Information that is significant
enough to affect evaluation and
decisions
- Depends on the size and nature of
the item being judged
12. Consistency
- Should use same accounting
method from period to period to
achieve comparability.
- Changes is permitted, and should be
disclosed in the financial statements.
C-AE13: Financial Accounting and Reporting
Lesson 5 – Stakeholders/Users of Financial
Information
Stakeholder – person or entity who has a
stake, right, claim or interest in the
business. These are the:
1. Owner or Investor
- The one who puts capital such as
money or property in business.
2. Manager
- Responsible in running the business
- Financial reports make it possible to
evaluate the performance of the
business
- A business that is incurring losses
wealth is a reflection of inefficient
management.
3. Lender or Creditor (such as financial
institutions)
- Assesses the paying ability of the
business-borrower
4. Supplier
- Offers goods or materials on cash
basis or on credit terms
5. Government
- Bureau of Internal Revenue
investigates tax returns and assesses
the correctness of the reported
profit, as well as the tax paid by the
business.
6. Employee
- Wants higher wages and benefits,
good working conditions, and
security of tenure
- Assess the ability of the business to
grant these
7. Customer
- Assesses the company’s ability to
continuously supply the goods they
need at the right price with the right
quality.
Module 2: The Accounting
Equation
Lesson 1 – The Accounting Equation
 Whatever the business owns, it
owes to others.
 Every transaction has a “dual
effect”, at least two self-balancing
effects on the accounting equation.
 Effects are analyzed in terms of
“increases” and “decreases” to both
sides (left and right).
 Expanded Equation
Assets = Liabilities + Owner’s Equity
 Not Expanded Equation
Assets = Owner’s Equity
- Because liability is also an equity
Business – generates profit, employment,
and paying taxes (for national
development).
Lesson 2 – Elements of the Accounting
Equation
a) Assets
- Present economic resource
controlled by the entity as a result of
past events.
Economic resource – a right that has the
potential to produce economic benefits
(such as the right to receive cash, goods or
services), and rights that do not correspond
to an obligation of another party (such as
rights over physical properties and the right
to use intellectual property).
b) Liability
C-AE13: Financial Accounting and Reporting

- Present obligation of the entity to

transfer an economic resource as a
result of past events.
- Owed to another party or parties
- Obligations to transfer economic
resource includes obligations to pay
cash, to deliver goods or services, to
exchange economic resource with
another party, etc.
- Also an equity

c) Equity
- Residual interest/claim/right of the
owner
1) Income
- contributions from holders of
equity claims.
- inc. in asset, dec. in liability, inc.
in equity
2) Expense
- distributions to holders of
equity claims
- dec. in asset, inc. in liability,
dec. in equity

Lesson 3: Business Transactions and their

Dual Effects on the Accounting Equation
 An accounting event is an economic
occurrence that causes changes in
an entity’s assets, liabilities, and/or
quity.