Accounting is the 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.

Recording (or journalizing)

Process of systematically maintaining a record of all economic business

transactions after they have been identified and measured.

Classifying

Sorting or grouping of similar and interrelated economic transactions into their

respective classes.

Accomplished by posting to the ledger. Ledger is a group of accounts which are

systematically categorized into asset accounts, liabilities, capital, revenue, and expense
accounts.

Summarizing

Presentation of financial statements which include the balance sheet, income

statement, statement of changes in equity, and statement of cash flows.

Accounting is the process of identifying, measuring, and communicating economic

information to permit informed judgment and decision by users of the information.

Identifying

Deals with recognition or nonrecognition of business activities as accountable

events. *An event is accountable or quantifiable when it has an effects on assets,
liabilities, or capital. Only economic activities are emphasized and recognized in
accounting.

Measuring

Deals with assigning of peso amounts to the accountable economic transactions

and events. Example: Purchased goods on account amounting to P 100,000.
Communicating

Process of preparing and distributing accounting reports to potential users of

accounting information.

Types Of Business Operations

 Service business – provides services for a fee. Examples: beauty parlor,

barbershop, travel agency, internet shop, schools, etc.
 Merchandising – buys and sells goods or merchandise. Examples: bookstores,
drugstores, etc.
 Manufacturing – buys raw materials, converts these into finished products, and
then sells the finished products.

FORMS OF BUSINESSES

Sole proprietorship – set up and managed by one person

 Advantages:
1. Can be managed easily by the proprietor
2. Proprietor gets all the profits
3. Minimum requirement to legally operate.
 Disadvantages:
1. Has definite life. Owner may just one day want to close it
2. Has unlimited liability. Creditor can attach the owner’s personal assets in
case of insolvency.

Partnership – owned by two or more persons called partners. Professionals

such as lawyers, accountants, engineers, and doctors can put up a partnership
or consultancy firm.

 Advantage(s):
 1. Management is more efficient because of division of responsibilities
among partners.
 Disadvantage(s):
1. Definite life
2. Partners, except limited partners, have unlimited liability.

Corporation – organized as a separate legal entity from the owners. An investor

buys shares of stocks and becomes a shareholder. It is managed by a Board of
Directors elected by the shareholders from among themselves.

 Advantages:
1. More capital can be raised
2. More stable than partnership because it is not affected by the withdrawal
of a shareholder.
3. Higher profits can be obtained
 Disadvantages:
1. Subject to more legal and tax requirements
2. Abuse of power by the Board of Directors could certainly affect the welfare
of the corporation and its shareholders.

ACCOUNTING AS A PROFESSION

1. Public Accounting

The field of public accounting is composed of individual practitioners, small

accounting firms and large multinational organizations that render independent and
expert financial services to the public.

1.a. Auditing

Primary service offered by public accounting practitioners. External auditing is

the examination of FS by independent CPA for the purpose of expressing an opinion as
to the fairness with which the financial statements are prepared.
1.b. Taxation

Taxation service includes the preparation of annual ITR and determination of tax
consequences of certain proposed business endeavors. The CPA frequently represents
the client in tax investigation. CPA must be familiar with the tax laws and regulations
and updated with the changes in taxation law and cout cases concerned with
interpreting taxation law.

1.c. Management advisory services

It includes:

1. Quality control
2. Installation and modification of accounting system
3. Budgeting
4. Forward planning and forecasting
5. Advice on merger and acquisition
6. Others

PRIVATE ACCOUNTING

Many CPAs are employed in business entities in various capacity as accounting staff,
chief accountant, internal auditor, and controller. The highest accounting officer in an
entity is known as the controller.

GOVERNMENT ACCOUNTING

The focus is the custody and administration of public funds. Many CPAs are employed
in many branches of the government, such as

1. BIR
2. COA
3. DBM
 4. SEC
5. BSP

ACCOUNTING PRINCIPLES

 Accrual principle - economic events are recognized by matching revenues

to expenses (the matching principle) at the time when the transaction occurs
rather than when payment is made or received.
 Going Concern Assumption - under this assumption, also known as
continuity assumption, the primary financial statements of a business
enterprise are prepared on the assumption that the normal operations of the
enterprise will continue indefinitely.
 Business Entity Principle – assumes that the business and its owner are
separate and distinct entities.
 Periodicity Concept – the assumption that the operating life of the business
may be divided into time-periods.
 Monetary Concept – the assumption that the business transactions can be
objectively measured or quantified in terms of “peso”
 Recognition – process of capturing for inclusion in the FS an item that meets
the definition of an asset, liability, capital, income, or expenses.
 Derecognition – removal of all or a part of a recognized asset, liability,
capital, income, or expense from an entity’s FS.
 Deferral – postponement of the recognition of an expense already paid but
not yet incurred, or of revenue already collected but not yet earned.

FINANCIAL STATEMENTS

Means by which the information accumulated and processed in financial

accounting is periodically communicated to the users. End product or main output of the
financial accounting process.
Complete set of FS:

 Statement of financial position – Balance Sheet

 Income statement
 Statement of changes in equity
 Statement of cash flows
 Notes to FS

NOTE: Frequency of reporting: At least annually

Statement of financial position / Balance Sheet

Shows the three elements: Assets, Liabilities, and Capital/Equity Investors,

creditors, and other users analyze the balance sheet to evaluate such factors as
liquidity, solvency, the need of the entity for additional financing.

Income Statement

Formal statement showing the financial performance of an entity for a given

period of time Financial performance is also known as the results of operations.

FORMS OF BUSINESS ORGANIZATION

1. Sole Proprietorship – single owner (proprietor)

2. Partnership – two or more owners (partners)

3. Corporation – at least five owners or investors (shareholders)

TYPES OF BUSINESS

1. Service – provides intangible products (products with no physical form).

Examples: salons, repair shops, schools, accounting firms, law firms)
2. Merchandising – “buy and sell”

3. Manufacturing – converting raw materials into finished products

FUNDAMENTAL CONCEPTS

• Entity Concept – business transactions must be recorded separately from those

of its owners.

• Periodicity Concept – dividing company’s ongoing activities in annual semi-

annual, quarterly, or monthly.

• Going Concern – Business entity will continue to operate indefinitely.

BASIC PRINCIPLES

• Conservatism – choosing the alternative that will result in less net income
and/or less asset amount.

• Comparability – FS of one company can be compared to the FS of another

company in the same industry.

• Consistency – consistent application of accounting principles, procedures, and

practices.

• Materiality – accounting standard can be ignored if the net impact of doing so

has such a small impact on the financial statements that a reader of the financial
statements would not be misled.

• Adequate disclosure – full disclosure of all relevant information in the FS that

would affect the user’s understanding and assessment of the entity.

• Accrual principle – expense is recognized when incurred and not when paid,
and income/revenue is recognized/recorded when earned/realized and not when
cash is received.
 A=L+C

Debit = Credit

ASSET

Definition

- present economic resource controlled by the entity as a result of past events.

Classification

• Current – an entity shall classify asset as current when:

a. it expects to realize the asset, or intends to sell or consume it, in its

normal operating cycle

b. it holds the asset primarily for the purpose of trading

c. it expects to realize the asset within twelve months after the reporting
period; or

d. the asset is cash or a cash equivalent (as defined in PAS 7) unless the
asset is restricted from being exchanged or used to settle a liability for at
least 12 months after the reporting period.

Examples: Cash and Cash Equivalents, Accounts Receivable,

Inventory and Supplies, Prepaid Expenses, etc.

• Noncurrent Assets – all other assets not classified as current.

Examples: Land, Buildings, Machinery, Furniture and Fixtures,

Service/Delivery Vehicle, etc.

Operating Cycle – time from acquisition of asset to realization on cash or cash

equivalents. If not clearly identified, it is assumed to be twelve months.
LIABILITIES

Definition

- Present obligation of the entity to transfer an economic resource as a result of

past events.

Classification

- Current – an entity shall classify liability as current when:

a. it expects to settle the liability in its normal operating cycle

b. it holds the liability primarily for the purpose of trading

c. due to be settled within 12 months after the reporting period

d. the entity does not have an unconditional right to defer settlement of the
liability for at least 12 months after the reporting period.

Examples: Accounts Payable, Notes Payable, Accrued Liabilities,

etc.

• Noncurrent Liabilities – all other liabilities not classified as current

Examples: Mortgage Payable, Bonds Payable, etc.

CAPITAL

Definition

- Residual interest in the assets of the enterprise after deducting all its liabilities.

NOTE: Balance Sheet Items (L, and A,C)are Permanent or Real Accounts, while
Income Statement Items are temporary or nominal accounts.
NOTE: At the end of the accounting period, all nominal or temporary accounts will be
closed to Capital Account, a permanent or real account.

Expense and Revenue

Revenue

 Gross inflow of economic benefits during the period arising from the course of
the ordinary activities of an entity when those inflows result in increases in equity,
other than increases relating to contributions from equity participants.

Expense

• Cost of operations that a company incurs to generate revenue.

• Utilities Expense, Supplies Expense, Rent Expense, Depreciation Expense, etc.