Chapter 1 Overview of Accounting

(Intermediate Financial
Accounting 1A)
LECTURE AID
2016
ZEUS VERNON B. MILLAN
Chapter 1 Overview of
Accounting
Learning Objectives
Define accounting and understand its
basic purpose.
Understand the basic concepts applied in
accounting.
Know the branches of accounting and
sectors in the practice of accountancy.
Understand the need for financial
reporting standards and how they are
developed.
Appreciate the reason for the adoption of
International Financial Reporting
Standards.
IFA PART 1A: Zeus Vernon B. Millan
Definition of Accounting
Accounting is the process of identifying,

measuring, and communicating economic
information to permit informed judgment and
decisions by users of information.
AAA (American Association of Accountants)
(OPTIONAL APPLICATION: PROBLEM 1-2: #1)
Three important activities included in the definition of accounting
1.
2.
3.
Identifying - the process of analyzing events and transactions to

determine whether or not they will be recognized in the books.
Only accountable events are recognized in the books.
Measuring - involves assigning numbers, normally in monetary
terms, to the economic transactions and events.
Communicating - the process of transforming economic data
into useful accounting information, such as financial statements
and other accounting reports, for dissemination to users.
TYPES OF EVENTS
1. External events events which involve an entity and an external
party.
a. Exchange (reciprocal transfer) reciprocal giving and receiving
b. Non-reciprocal transfer one way transaction
c. External event other than transfer an event that involves
changes in the economic resources or obligations of an entity
caused by an external party or external source but does not involve
transfers of resources or obligations.
2. Internal events events which do not involve an external party.
d. Production the process by which resources are transformed into
finished goods.
e. Casualty an unanticipated loss from disasters or other similar
events.
Measurement bases
1.
2.
3.
4.
5.
6.
7.
8.
Historical Cost - price based on past exchange

Current Cost price based on current exchange
Realizable (settlement) value net cash that could currently
be obtained by selling the asset in an orderly disposal.
Present value price based on future exchange
Fair value - the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market
participants at the measurement date.
Fair value less costs to sell Costs to sell are the incremental
costs directly attributable to the disposal of an asset, excluding
finance costs and income tax expense.
Revalued amount is the assets fair value at the date of the
revaluation less any subsequent accumulated depreciation and
subsequent accumulated impairment losses.
Inflation-adjusted costs amounts adjusted to the measuring
unit current at the reporting date.

Basic purpose of accounting
The basic purpose of accounting is to provide

information about economic activities intended
to be useful in making economic decisions.
Types of accounting information classified as to users needs
General purpose accounting information - designed to

meet the common needs of most statement users. This
information governed by the Philippine Financial
Reporting Standards (PFRSs).
Special purpose accounting information - designed to

meet the specific needs of particular statement users.
This information is provided by other types of
accounting, e.g., managerial accounting, tax basis
accounting, etc.
(OPTIONAL APPLICATION: PROBLEM 1-2: #5

Basic Accounting Concepts
Going concern assumption - the entity is assumed to carry

on its operations for an indefinite period of time.
Separate entity the entity is treated separately from its
owners.
Stable monetary unit - amounts in financial statements are
stated in terms of a common unit of measure; changes in
purchasing power are ignored.
Time Period the life of the business is divided into series of
reporting periods.
Materiality concept information is material if its omission
or misstatement could influence economic decisions.
Cost-benefit (Reasonable assurance/ Pervasive constraint/
Cost constraint) the cost of processing and communicating
information should not exceed the benefits to be derived from it.
Basic Accounting Concepts - Continuation
Accrual Basis of accounting effects of transactions are recognized

when they occur (and not as cash or its equivalent is received or paid) and
they are recognized in the accounting periods to which they relate.
Historical cost concept (Cost principle) the value of an asset is to be
determined on the basis of acquisition cost.
Concept of Articulation all of the components of a complete set of
financial statements are interrelated.
Full disclosure principle financial statements provide sufficient
detail to disclose matters that make a difference to users, yet sufficient
condensation to make the information understandable, keeping in mind
the costs of preparing and using it.
Consistency concept financial statements are prepared on the basis of
accounting principles which are followed consistently from one period to
the next.
Matching (Associating cause and effect) costs are recognized as
expenses when the related revenue is recognized.
(OPTIONAL APPLICATION: PROBLEM 1-2: #6

Basic Accounting Concepts - Continuation

Entity theory the accounting objective is geared towards the proper
income determination. It emphasizes the income statement and is

exemplified by the equation Assets = Liabilities + Capital.
Proprietary theory the accounting objective is geared towards the
proper valuation of assets. It emphasizes the importance of the
balance sheet and is exemplified by the equation Assets Liabilities
= Capital.
Residual equity theory this theory is applicable where there are two
classes of shares issued, ordinary and preferred. The equation is Assets
Liabilities Preferred Shareholders Equity = Ordinary
Shareholders Equity.
Fund theory the accounting objective is the custody and administration
of funds.
Realization the process of converting non-cash assets into cash or
claims to cash.
Prudence (Conservatism) the inclusion of a degree of caution in the
exercise of the judgments needed in making the estimates required under
conditions of uncertainty , such that assets or income are not overstated and
liabilities or expenses are not understated.
Common branches of accounting
Financial accounting/ Financial Reporting - focuses on general purpose

financial statements.
Management accounting focuses on special financial reports geared
towards the needs of an entitys management.
Cost accounting - the systematic recording and analysis of the costs of
materials, labor, and overhead incident to production.
Auditing - a systematic process of objectively obtaining and evaluating evidence
regarding assertions about economic actions and events to ascertain the degree of
correspondence between these assertions and established criteria and
communicating the results to interested users.
Tax accounting - the preparation of tax returns and rendering of tax advice,
such as determination of tax consequences of certain proposed business
endeavors.
Government accounting - the accounting for the national government and its
instrumentalities, focusing attention on the custody of public funds and the
purpose or purposes to which such funds are committed.
Four sectors in the practice of accountancy
1.
2.
3.
4.
Practice of Public Accountancy - involves the rendering of audit or

accounting related services to more than one client on a fee basis.
Practice in Commerce and Industry - refers to employment in the private
sector in a position which involves decision making requiring professional
knowledge in the science of accounting and such position requires that the holder
thereof must be a certified public accountant.
Practice in Education/Academe employment in an educational institution
which involves teaching of accounting, auditing, management advisory services,
finance, business law, taxation, and other technically related subjects.
Practice in the Government employment or appointment to a position in an
accounting professional group in government or in a governmentowned and/or
controlled corporation, including those performing proprietary functions, where
decision making requires professional knowledge in the science of accounting, or
where a civil service eligibility as a certified public accountant is a prerequisite.
Accounting standards in the Philippines
Philippine Financial Reporting Standards (PFRSs) are

Standards and Interpretations adopted by the Financial Reporting
Standards Council (FRSC). They comprise:
1. Philippine Financial Reporting Standards (PFRSs);
2. Philippine Accounting Standards (PASs); and
3. Interpretations
OPEN FORUM
QUESTIONS????
REACTIONS!!!!!
END
(EXERCISES: PROBLEM 1-6)

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(Intermediate Financial

Accounting is the process of identifying,

AAA (American Association of Accountants)

(OPTIONAL APPLICATION: PROBLEM 1-2: #1)

IFA PART 1A: Zeus Vernon B. Millan

Three important activities included in the definition of accounting

Identifying - the process of analyzing events and transactions to

(OPTIONAL APPLICATION: PROBLEM 1-2: #2)

IFA PART 1A: Zeus Vernon B. Millan

Historical Cost - price based on past exchange

(OPTIONAL APPLICATION: PROBLEM 1-2: #4)

Basic purpose of accounting

The basic purpose of accounting is to provide

IFA PART 1A: Zeus Vernon B. Millan

Types of accounting information classified as to users needs

General purpose accounting information - designed to

Special purpose accounting information - designed to

(OPTIONAL APPLICATION: PROBLEM 1-2: #5

Basic Accounting Concepts

Going concern assumption - the entity is assumed to carry

IFA PART 1A: Zeus Vernon B. Millan

Basic Accounting Concepts - Continuation

Accrual Basis of accounting effects of transactions are recognized

(OPTIONAL APPLICATION: PROBLEM 1-2: #6

Basic Accounting Concepts - Continuation

income determination. It emphasizes the income statement and is

(OPTIONAL APPLICATION: PROBLEM 1-2: #7)

Common branches of accounting

Financial accounting/ Financial Reporting - focuses on general purpose

(OPTIONAL APPLICATION: PROBLEM 1-2: #8)

Four sectors in the practice of accountancy

Practice of Public Accountancy - involves the rendering of audit or

(OPTIONAL APPLICATION: PROBLEM 1-2: #9)

IFA PART 1A: Zeus Vernon B. Millan

Accounting standards in the Philippines

Philippine Financial Reporting Standards (PFRSs) are

(OPTIONAL APPLICATION: PROBLEM 1-2: #10)

IFA PART 1A: Zeus Vernon B. Millan

IFA PART 1A: Zeus Vernon B. Millan

IFA PART 1A: Zeus Vernon B. Millan

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