COLLEGE OF ACCOUNTANCY

C-AE13: Financial Accounting and Reporting

First Semester | AY 2020-2021

Module 1

A. Course Code – Title : C-AE13: Financial Accounting and Reporting

B. Module No – Title : M01 – Introduction to Accounting
C. Time Frame : 1 week (Week 1) – 6 hrs
D. Materials : Course Syllabus

1. Overview
This learning material provides an introduction to accounting. It focuses on
the history and definition of accounting, its role in business, the definition and
nature of business, forms of business organizations, and types of operation,
purpose and phases of accounting, fundamental accounting concepts and
principles, and the relevance of accounting to stakeholders as well as the role of
stakeholders as decision makers in business.
You should read clearly and understand well the topics explained herein.
Likewise, you are expected to answer the exercises given at the end of this
material.

2. Desired Learning Outcomes

At the end of the learning session, you should be able to:
a) Define accounting and describe its role in business;
b) Define business and describe its nature, the forms of business
organizations and types of operation, and explain the role of business
in society;
c) Explain the purpose and phases of accounting;
d) Cite and explain the fundamental accounting concepts and principles;
and,
e) Identify the users of accounting information and their specific roles as
decision makers.

3. Content/Discussion

Lesson 1 - History, Definition and Nature of Accounting

The first accounting book was written by Cotrugli in Naples, and the
double entry bookkeeping system could be traced from the book entitled Summa
de Aritmetica prepared in 1494 by an Italian mathematician, Fr. Luca Pacioli, the
father of accounting. (Manuel 2018)
Accounting is defined as a service activity whose main function is to
prepare financial reports that will provide relevant financial information about the
business. (Manuel 2018) This information is needed to arrive at informed economic
decisions.
Accounting may also be defined as 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. (Gilbertson, Lehman & Gentene 2017) A transaction is an activity
or event taking place in the business which is expressed in terms of money.
Accounting bridges the gap between the business and the parties
interested in the business. From the business activities which accounting
accumulates and records, financial reports are prepared. It is through these reports
called financial statements that vital financial information about the business is
communicated to the various users or stakeholders. This is why accounting is
known as the language of business.

Faculty: SISINIA T. QUIZON 1 | Page

 COLLEGE OF ACCOUNTANCY
C-AE13: Financial Accounting and Reporting
First Semester | AY 2020-2021

Lesson 2 – Business: Nature; Business Organizations: Forms, and Types of

Operation
Nature of a Business
A business is an economic unit that is engaged in buying and selling of
goods or services. Its major concern is how to maximize the use of all its resources-
men, money, machines, raw materials - in order to obtain profit, which is obtained
when the amounts received from the customers or clients are higher than the cost
of goods or services incurred or used up. This makes it possible for the business to
expand due to additional resources and funds. Consequently, the business pays
more taxes to the government to provide more and better services for the benefit
of the people.

Forms of Business Organizations:

1. Sole proprietorship- a business owned and usually managed by one
person, the owner.
2. Partnership- a business whereby two or more persons called partners
contribute money, property or industry into a common fund with the
intention of dividing the profits among themselves.
3. Corporation- a business organized as a separate legal entity from the
owners called shareholders who buy shares of stocks in the corporation.

Types of Business Operation:

1. A service business provides services for a fee to its customers or clients.
Examples: repair shop, beauty parlor, laundry shop, travel agency, law
firm, dental clinic, school, accounting firm, etc.
2. A merchandising business buys and sells goods or merchandise which do
not undergo any change in physical form. Examples: bookstore, drugstore,
hardware, supermarket, department store
3. A manufacturing concern buys raw materials and then processes these
materials into finished goods or products. It is the finished goods or
products that are sold to customers. Examples: shoe factory,
pharmaceutical laboratory, garment factory, steel mills, paper mills, bake
shop

Lesson 3 - Purpose and Phases of Accounting

The accounting function records the economic activities or transactions of
the business.
The accounting process starts with data gathering based on the business
documents which evidence the transactions that occurred. The transactions are
then analyzed to determine their effects, measured and then (1) recorded in a book
called the journal.
To make the data more meaningful and understandable, it must be
organized and (2) classified into groups or categories, and recorded in another book
called the ledger. These two phases cover the procedural phase of accounting
called bookkeeping.
What has been classified is then (3) summarized through the preparation of
the financial statements, which should be (4) interpreted or analyzed to help the users
make informed economic decisions.

Faculty: SISINIA T. QUIZON 2 | Page

 COLLEGE OF ACCOUNTANCY
C-AE13: Financial Accounting and Reporting
First Semester | AY 2020-2021

Lesson 4 – Fundamental Concepts and Principles in Accounting

In recording business transactions, the accountant should consider the
following fundamental concepts and principles underlying the accounting process
in order to make the information more meaningful and useful to the users.
1. Entity Concept – An accounting entity is a separate economic unit. It is
distinct and separate from its owner/s. The accounting process is primarily
for the entity.
2. Periodicity Concept – An entity’s life or entire period of existence can be
meaningfully divided into equal time periods (termed accounting period),
usually one year, for reporting purposes. This concept allows the
users/stakeholders to obtain timely information so that they can make
decisions about future activities.
3. Stable Monetary Unit Concept – The Philippine peso is the unit of measure
and its purchasing power is assumed to be relatively stable. Changes in the
purchasing power of the peso are not considered.
4. Going Concern – Financial statements are prepared on the assumption that
the entity will continue to be in operation for the foreseeable future. It does
not anticipate the closure of the business.
5. Objectivity principle – Accounting records and statements are based on the
most reliable data derived from activities documented by objective
evidence, such as official receipts, sales invoices, so that they will be as
accurate and as useful as possible, and the data are verifiable because they
are substantiated by documents.
6. Exchange Price or Cost Principle – Assets, liabilities, revenues and expenses
should be recorded at their actual cost, the amount agreed upon or the cash
paid or the cash equivalent, if no cash was paid at the time of the transaction.
7. Measurement in Terms of Money – All business transactions are measured
and recorded using only one unit of measure – money. In accounting, only
transactions or events measurable in terms of money are recorded in the
books of the entity.
8. Revenue Recognition Principle – Revenue is to be recognized or recorded in
the accounting period when goods are delivered or services are rendered
or performed, not when cash is received.
9. Expense Recognition Principle – Expenses should be recognized in the
accounting period in which goods and services are used up to produce
revenue, and not when the entity pays for those goods or services.
10. Adequate Disclosure – Requires that all relevant information that would
affect the user’s understanding and assessment of the accounting entity be
disclosed or presented in the financial statements.
11. Materiality – Financial reporting is concerned only with information that is
significant enough to affect evaluations and decisions. Materiality depends
on the size and nature of the item judged in the particular circumstances of
its omission.
12. Consistency Principle – The business firms should use the same accounting
method from period to period to achieve comparability over time within a
single enterprise. However, changes are permitted if justifiable, and should
be disclosed in the financial statements. (Ballada 2018 & Manuel 2018)

Lesson 5 – Stakeholders/ Users of Financial Information

The users of financial information in the form of financial reports or
financial statements are called stakeholders. A stakeholder is a person or entity
who has a stake, right, claim or interest in the business. These are the:

Faculty: SISINIA T. QUIZON 3 | Page

 COLLEGE OF ACCOUNTANCY
C-AE13: Financial Accounting and Reporting
First Semester | AY 2020-2021

1. Owner or investor – The one who puts in capital such as money or property
in a business endeavor. To minimize the risk of losing money, the owner or
investor must read the financial reports to seek answers to the questions: a)
Is the business profitable? b) Has it accumulated sufficient financial wealth
to remain stable?
2. Manager – The one who is responsible for running the business. Financial
reports make it possible to evaluate the performance of the business.
Questions asked: Are the plans being implemented beneficial to the
business? Is the business generating profits? A business that is incurring
losses depletes the wealth of the owner/s and is a reflection of inefficient
management.
3. Lender or creditor – (such as financing institutions) assesses the paying ability
of the business-borrower by reading the financial reports. Questions asked:
Will the business be able to pay its debt when it falls due? Does it have liquid
assets?
4. Supplier – offers goods or materials on cash basis or on credit terms.
Questions asked: If offered on credit, will the business-customer be able to
pay its account on the date it becomes due? Does it have liquid assets? The
accounting information to determine the credit worth of the business is also
based on its financial status.
5. Government – seeks to answer the following questions by reading the
financial reports. Is the business paying the right taxes? Is it filing the
required documents? Through its tax agent, the Bureau of Internal Revenue,
the government 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. The employees will assess the ability of the business to
grant these through the financial reports. A business that is losing cannot
afford to grant higher salaries and additional benefits.
7. Customer – assesses the company’s ability to continuously supply the goods
they need at the right price with the right quality. (Manuel 2018)

4. Progress Check
You are expected to answer the following questions as a means to check or monitor
your own progress. Try your best to finish in an hour.
Please observe intellectual and psychological honesty so that your teacher can
objectively determine how much you have learned, and what topics or areas are not
yet very clear to you.
a) Explain why business plays an important role in the economy of the country.
b) Describe the forms of business organization.
c) Define accounting. What is its basic purpose?
d) Why is accounting called the language of business?
e) Enumerate and distinguish the four phases of accounting.
f) Enumerate and briefly explain the fundamental accounting concepts and
principles.
g) Explain why the following stakeholders of University of the Assumption are
interested in its financial reports: Abiva, a publisher of textbooks; MOKSA, the
UA employees’ association; the UA President; the Bureau of Internal Revenue;
the students of UA.

Faculty: SISINIA T. QUIZON 4 | Page

 COLLEGE OF ACCOUNTANCY
C-AE13: Financial Accounting and Reporting
First Semester | AY 2020-2021

5. Assignment
a) Read Chapter 1 of your textbook so you will learn more about accounting and
the Accountancy profession, since apparently, this is the career path that you
have chosen.
b) Also, write down the reason/s why you decided to enroll in the academic
program, Bachelor of Science in Accountancy.

6. Assessment/ Evaluation
To be able to assess how much you have learned, answer the following exercises in 90
minutes. Please observe intellectual honesty to enable your teacher to objectively and
accurately measure your performance as well as to determine how comprehensive and
effective this module is.

1. May Perez is a graduate of culinary arts. She worked in London for ten years,
and she decided to go back home to Manila. She was able to save 100,000
British pounds, and so she decided to put up her own Café de Malate. She uses
only the best local coffee beans for her brewed coffee, and since pastry-making
is her expertise, she bakes sweet bread, cakes and rolls on the side.
At the time she put up her shop, the exchange rate of a Philippine peso to a
British pound was P68.
a) How much did May invest (translated to pesos) in her business?
b) What form of business did she set up?
c) What type of operation is her business engaged in?
d) Aside from profit, what may be other possible reasons why May
decided to put up her own business? (Manuel 2018)

2. There are several stakeholders who need financial reports. Based on the given
needs described in each statement, identify the stakeholder.
a) Requires the submission of a weekly performance report of the
different sales departments as a basis for a review and evaluation of
performance.
b) Penalizes individuals and business firms for late filing of tax returns
and for deficient payment of taxes.
c) Demands rollback of gas prices and threatens to stage a boycott.
d) Requires a project feasibility study as a basis for evaluating a project’s
profitability, solvency and liquidity before a loan can be approved.
(Manuel 2018)

3. In each of the following cases, cite what accounting principle was violated and
explain why.
a) The owner-manager bought a computer for personal use. The
purchase invoice was given to the accountant who recorded it as an
asset of the business.
b) No financial statements were prepared by Migs Tan for his business.
He explains that he will prepare these statements when he closes his
business which he predicts to take place after 20 years.
c) Albert operates a canteen beside his shoe store. The assets of the
canteen are included in the statement of financial position of the shoe
store.
d) On January 20, the owner bought a computer and paid only P40,000,
instead of P50,000, because he got a discount of P10,000. He asked the
accountant to record it at P50,000.

Faculty: SISINIA T. QUIZON 5 | Page

 COLLEGE OF ACCOUNTANCY
C-AE13: Financial Accounting and Reporting
First Semester | AY 2020-2021

e) Land purchased by Bay Restaurant was recorded based on the official

receipt and land title received from Fil Estate, the seller. (Manuel 2018)

7. References

Manuel, Zenaida Vera-Cruz (2018) 21st Century Accounting Process, Basic Concepts
and Procedures, Manila, Philippines: Zenaida Vera-Cruz Manuel.

Ballada, Win. (2020) Basic Financial Accounting and Reporting, Manila, Philippines:
Dom Dane Publishers & Made Easy Books.

Cabrera, Ma. Elenita B. & Cabrera, Gilbert Anthony B. (2018) Financial Accounting
and Reporting, Manila, Philippines: GIC Enterprises & Co., Inc.

Ferrer, Rodiel C. & Millan, Zeus Vernon B. (2017) Fundamentals of Accountancy,

Business and Management, Part 1, Baguio City, Philippines: Bandolin Enterprise.

Warren, Carl S., Reeve, James M., & Duchac, Jonathan E. ((2015) Accounting 25th
Edition, Pasig City, Philippines: Cengage Learning Asia Pte Ltd (Philippine
Branch).

Gilbertson, Claudia B., Lehman, Mark W., & Gentene, Debra H. (2017) Century 21
Accounting Multi-column Journal 10th Edition, Boston, MA 02210 USA: Cengage
Learning.

Wild, John; Kwok, Winston; Venkatesh, Sundar; Shaw, Ken W. & Chiappetta,
Barbara. (2016) Fundamental Accounting Principles 2nd Edition, 2 Penn Plaza, New
York: McGraw-Hill Education.

Faculty: SISINIA T. QUIZON 6 | Page