ACCOUNTING

AND ITS
ENVIRONMENT
Learning Session 1
Part 2
Session objectives
 Session objectives

 Define accounting and explain its role

in business.
 Describe the fundamental business
model and find how it is applied to the
various types of business
Session objectives

 Distinguish between different forms and

activities of business organization.
4. Explain the importance of the purpose
and phases of accounting.
 Session objectives

5. Explain the fundamental concepts of

accounting
6. Describe parts of the information
system.
7. Explain how information system helps
the decision makers.
Ready for
the session?
 Quick review
There are many kinds and forms of businesses.

Businesses are integrated sets of activities.

Accounting is known as the language of business.

Question: how does accounting facilitate business

operations?
Purpose and
PHASES of
accounting
PURPOSE OF ACCOUNTING

- To record financial transactions and

produce financial reports that provide
useful information that assist management
in decision making
 Phases of the
accounting cycle

01 02
Identifying accountable Recording journal entries
events
 03 04
Posting journal entries Preparing an unadjusted
trial balance

05 06
Preparing financial Preparing a worksheet
statements
 07 08
Recording and posting Recording and posting
adjusting entries closing entries

09 10
Preparing a post-closing Recording and posting
trial balance reversing entries
Accounting process

- The accounting cycle is common to all

businesses, although the specific
application of accounting rules and
principles may vary depending on the
purpose, form, and even size of the
business.
Questions?
Fundamental
concepts in
accounting
Going concern assumption

- In the absence of evidence to the contrary,

the business is viewed as indefinitely
continuing in operation.

- The opposite of going concern is

liquidating concern.
ACCOUNTING ENTITY

- The business is treated as a separate

entity from its owners, managers, and
employees.
TIME PERIOD

- The indefinite life of an entity is

subdivided into time or accounting
periods which are of equal length for the
purpose of preparing financial reports
 Kinds of annual accounting periods
(assuming going concern)

calendar Fiscal year Natural

year business
year
MONETARY UNIT

- This concept assumes that transactions can

be measured in terms of Philippine Peso
and that the Philippine Peso has a stable
and constant purchasing power.
CONCEPTUAL FRAMEWORK

- Complete, comprehensive, and single

document promulgated by the
International Accounting Standards
Board that provides the underlying theory
used in the development and revision of
accounting standards
Financial reporting

- Financial reporting is the provision of

financial information that is useful to
users in making economic decisions
#1 OBJECTIVE OF FINANCIAL
REPORTING
- To provide financial information about
the reporting entity that is useful to
existing and potential investors, lenders,
and other creditors in making decisions
about providing resources to the entity
Primary USERS OF FINANCIAL
STATEMENTS

- Existing/Potential Investors – risk and

returns of investment
- Lenders/Other Creditors – payment of
debts
other USERS OF FINANCIAL
STATEMENTS
- Employees – stability and profitability of
business
- Customers – continuance of business
- Government – resource allocation &
legal conformance
- Public– social impact and public
accountability of businesses
Concerns in financial reporting

- Financial Position – relates to the

economic resources and claims of the
entity
- Financial Performance – relates to
profitability of the entity and the
predictability of future returns
LIMITATIONS OF FINANCIAL
REPORTING
- Applicable only to General-Purpose
Financial Statements

- General Purpose Financial

Statements are financial reports that
are prepared for the common users
of financial information.
#2 QUALITATIVE CHARACTERISTICS

- Qualities or attributes that make financial

accounting information useful to users.
These can either be

- Fundamental Characteristics
- Enhancing Characteristics
fundamental CHARACTERISTICS

- Relevance – capacity of information to

influence a decision
- Faithful Representation – quality of
information to purport to what really and
actually happened
INGREDIENTS OF RELEVANCE

- Predictive Value – information can be

used to predict future outcomes
- Confirmatory Value – information
provides feedback of previous evaluations
INGREDIENTS OF FAITHFUL
REPRESENTATION
- Completeness – information in reports
must facilitate understanding
- Neutrality – depiction in reports must be
free from bias
- Freedom from Error – reports are
reasonably accurate
enhancing CHARACTERISTICS

- There are four enhancing characteristics:

- Verifiability
- Comparability
- Understandability
- Timeliness
#3 ELEMENTS OF FINANCIAL
STATEMENTS
- Building blocks of financial statements
- The definition, recognition, and
measurement of elements of the financial
statements is covered under the
Conceptual Framework.
Categories of elements of financial
statements
- Financial Position Elements
- Asset
- Liability
- Equity
- Financial Performance Elements
- Income
- Expense
assets

- Resource controlled by the entity as a

result of past events and from which
future economic benefits are expected to
flow to the entity
- Examples: Cash, Building, Land
Liabilities

- Present obligation arising from past

events, the settlement of which is
expected to result in an outflow of
resources embodying economic benefits
- Examples: Loans, Payables to Suppliers
EQUITY

- Residual interest in assets after deducting

liabilities
- Example: Owner’s capital
INCOME

- Increase in economic benefits in the form

of inflow, increase in asset, or decrease in
liability that results to an increase in
equity, other than capital contribution
- Example: Income from selling goods or
gain from selling a building
KINDS OF INCOME

- Revenue is an income that arise from

ordinary business transactions of an
accounting entity.
- Gain is an income that arise from
rare/unique/extraordinary business
transactions of an accounting entity.
EXPENSE

- Decrease in economic benefits in the form

of outflow, decrease in asset, or increase
in liability that results to a decrease in
equity, other than capital distribution
- Examples: Salaries and advertising
expenses
KINDS OF expenses

- Expense is an expense that arise from

ordinary business transactions of an
accounting entity.
- Loss is an expense that arise from
rare/unique/extraordinary business
transactions of an accounting entity.
#4 Capital

- Ideally, capital is invested into the

business so that such capital grows over
time.
- Capital growth is measured by financial
performance.
Assessment of financial performance

- Financial performance is traditionally

assessed by comparing income and
expenses.
- Alternatively, the capital maintenance
approach can be used to assess financial
performance.
CAPITAL MAINTENANCE APPROACH

- Under the Capital Maintenance Approach,

net income is only recognized after the
capital has been maintained, excluding
the effects of any capital transactions.
Questions?
Accounting
information
systems
SYSTEM

- Group of two or more interrelated

components or subsystems that serve a
common purpose
Information SYSTEM

- Set of formal procedures by which data

are collected, processed into information,
and distributed to users
ACCOUNTING Information SYSTEM

- Process financial transactions

- Also processes non-financial
transactions that directly affect the
processing of financial transactions
Input-process-output (ipo) model

- As an information system, accounting also

adopts an IPO model, specifically:

- Input – source documents

- Process – accounting cycle
- Output – financial reports
Impact of accounting information systems

- Without financial information, decision

makers may end up choosing non-
strategic decisions that may have
irreversible, adverse effects to the entity.
Questions?
 Thank
YOU!
Rikk Nicholson M. Nalzaro, CPA

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