OVERVIEW OF ACCOUNTING (NOTE 1)
ACCOUNTING - Process of identifying, 1. EXTERNAL EVENTS - Events that involve
measuring, and communicating economic an external party.
information to permit informed judgment and A. Exchange (Reciprocal Transfer) -
decisions by users of information. Giving and receiving.
B. Non-Reciprocal Transfer – One-
BASIC PURPOSE OF ACCOUNTING way transaction.
To provide information about economic C. External Event Other Than
activities intended to be useful in making Transfer - An event that involves
economic decisions. changes in the economic resources or
obligation of an entity caused by an
THREE IMPORTANT ACTIVITIES : external party or external source but
1. IDENTIFYING - The process of analyzing does not involve transfers of resources
events and transactions to determine whether or obligation.
or not they will be recognized. 2. INTERNAL EVENTS - Events that do not
Only accountable events are recognized. involve an external party.
Accountable Events- Any business A. Production - Process by which
event that impacts the account balances resources are transformed into
of a company's financial statements. The finished goods.
recording of these events must follow B. Casualty - An unanticipated loss
the accounting equation which specifies from disasters or other similar events.
that assets must equal liabilities plus
shareholders' equity. MEASUREMENT
Accounting Equation – A = L + E The several measurement bases used in
Asset - A resources that contains accounting include, but not limited to, the
economic value or provides a future following :
benefit. It can often generate cash flows 1. Historical Cost
in the future. 2. Fair Value
Liability - Debts or obligations the 3. Present Value
company owes resulting from past 4. Realizable Value
transaction. 5. Current cost, and
Equity - Also called the owner's equity 6. Sometimes inflation-adjusted costs.
as it is the value that an owner of
business has left over after liabilities are
deducted. Most commonly used is Historical Cost.
2. MEASURING - Involves assigning This is usually combined with the other
numbers, normally in monetary terms, to the measurement bases. Accordingly,
economic transactions and events. financial statements are said to be
prepared using a mixture of costs and
values.
3. COMMUNICATING - The process of VALUATION BY FACT OR OPINION
transforming economic data into useful When measurement is affected by
accounting information, such as financial estimates, the items measured are said to be
statements and other accounting reports, for valued by opinion.
dissemination to users. When measurement is unaffected by
estimates, the items measured are said to be
TYPE OF EVENTS : valued by fact.
OVERVIEW OF ACCOUNTING (NOTE 1)
Concept of Articulation - All of the
TYPES OF ACCOUNTING components of a complete set of financial
INFORMATION CLASSIFIED AS TO statements are interrelated.
USERS' NEEDS Full Disclosure Principle - Financial
General Purpose Accounting Information statements provide sufficient detail to
- Designed to meet the common needs of disclose matters that make a difference to
most statement users. This information is users, yet sufficient condensation to make
governed by the Philippine Financial the information understandable, keeping
Reporting Standards (PFRSs) in mind the costs of preparing and using it.
Special Purpose Accounting Information - Consistency Concept - Financial statements
Designed to meet the specific needs of are prepared on the basis of accounting
particular statement users. This policies which are applied consistently
information is provided by other types of from one period to the next.
accounting, tax basis, accounting, etc. Matching - Costs are recognized as
expenses when the related revenue is
BASIC ACCOUNTING CONCEPTS : recognized.
Double-Entry System - Each accountable
event is recorded in two parts debit and
credit.
Going Concern - The entity is assumed to
carry on its operations for an indefinite Residual Equity Theory - This theory is
period of time. applicable where there are two classes of
Separate Entity - The Entity is treated shares issued, ordinary and preferred.
separately from its owners. The equation is "Assests - Liabilities -
Stable Monetary Unit - Amounts in the Preferred Shareholders' Equity =
financial statements are stated in terms of a Ordinary Shareholders' Equity."
common unit of measure; changes in Fund Theory - The accounting objective is
purchasing power are ignored. the custody and administration of funds.
Time Period - The life of the business is Realization - The process of converting
divided into series of reporting periods. non-cash assets into cash or claims for
Materiality Concept - Information is cash.
material if its omission or misstatement Prudence (Conservatism) - The inclusion
could influence economic decisions. of a degree of caution in the exercise of the
Cost-Benefit - The cost of processing and judgments needed in making the estimates
communicating information should not required under conditions of uncertainty,
exceed the benefits to be derived from it. such that assets or income are not over
Accrual Basis of Accounting - Effects of stated and liabilities or expenses are not
transactions are recognized when they understood.
occur (and not as cash is received or paid)
and they are recognized in the accounting COMMON BRANCHES OF
periods to which they relate. ACCOUNTING :
Historical Cost Concept - The value of an Financial Accounting - Focuses on general
asset is determined on the basis of purpose financial statements.
acquisition cost. Management Accounting - Focuses on
special purpose financial reports for use by
an entity's management.
OVERVIEW OF ACCOUNTING (NOTE 1)
Cost Accounting - The systematic
recording and analysis of the costs of
materials, labor, and overhead incident to
production. ACCOUNTING STANDARDS IN THE
Auditing - The process of evaluating the PHILIPPINES
correspondence of certain assertions with the Philippine Financial Reporting Standards
established criteria and expressing an (PFRSs) are Standards and Interpretations
opinion thereon. adopted by the Financial Reporting Standard
Tax Accounting - The preparation of tax Council (FRSC). They comprise :
returns and rendering of tax advice, such as 1. Philippine Financial Reporting
the determination of tax consequences of Standards (PFRSs)
certain proposed business endeavors. 2. Philippine Accounting Standards
Government Accounting - Refers to the (PASs); and
accounting for the government and its 3. Interpretations.
instrumentalities, placing emphasis on the
custody of public funds, the purposes for THE NEEDS FOR REPORTING
which those funds are committed, and the STANDARDS
responsibility and accountability of the Entities should follow a uniform set of
individuals entrusted with those funds. generally acceptable reporting standards
when preparing and presenting financial
FOUR SECTORS IN THE PRACTICE OF statements; otherwise, financial statements
ACCOUNTANCY : would be misleading.
1. Practice of Public Accountancy - Involves The term "generally acceptable" means that
the rendering of audit or accounting related either :
services to more than one client on a fee basis. A. The standard has been established
2. Practice in Commerce and Industry - by and authoritative accounting
Refers to employment in the private sector in a rule-making body; or
position which involves decision making B. The principle has gained general
requiring professional knowledge in the science acceptance due to practice over time
of accounting and such position requires that the and has been proven to be most
holder thereof must be a CPA. useful.
3. Practice in Education/Academe -
Employment in an educational institution The process of establishing financial
which involves teaching of accounting, auditing, accounting standards is a democratic process
management, advisory services, finance, in that a majority of practicing accountants
business law, taxation, and other technically must agree with a standard before it
related subjects. becomes implemented.
4. Practice in the Government - Employment
or appointment to a position in an accounting
professional group in the government or in a
government-owned and/or controlled
corporation where decision making requires
professional knowledge in the science of
accounting, or where civil service eligibility as a
CPA is a prerequisite.
OVERVIEW OF ACCOUNTING (NOTE 1)
Its basic purpose is to provide economic
activities that can be useful in economic
decision.
2. Explain the basic concepts applied in
accounting.
Accounting concepts help the users to have
an organized, standard, and relevant
financial statement that will satisfy the
investors, employees, and other
stakeholders.
Basic Accounting Concepts :
Double-Entry System
Going Concern
Separate Entity
Stable Monetary Unit
Time Period
Materiality Concept
Cost-Benefit
Accrual Basis of Accounting
Historical Cost Concept
Concept of Articulation
Full Disclosure Principle
Consistency Concept
Matching
Residual Equity Theory
Fund Theory
Realization
Prudence (Conservatism)
3. State the branches of Accounting the sectors
in the practice of accountancy.
LEARNING OBJECTIVES : Common Branches of Accounting :
1. Define accounting and state its basic purpose.
Accounting is a process of identifying, Financial Accounting
measuring and communicating economic Management Accounting
information to permit an informed Cost Accounting
judgement. Audit
Tax Accounting
OVERVIEW OF ACCOUNTING (NOTE 1)
Government Accounting
Four Sectors in the Practice of Accountancy.
Practice of Public Accountancy
Practice in Commerce and Industry
Practice in Education/Academe
Practice in the Government
4. Explain the importance of a uniform set of
financial reporting standards.
The importance of following a uniform set
of financial reporting standards is that the
financial statement your doing would not
be misleading.
