Tagudin Campus

MODULE 1

THE MODULE

TITLE: ACCOUNTING CONCEPTS AND ITS CONSIDERATION

WHAT IS THE MODULE ALL ABOUT?

Module 1 will review and refresh the basic accounting knowlegde of the students.
It will share the history of accounting, accounting variations among countries. It
presented the different branches of accounting and users of accounting information. It
will discuss the differen type and forms of business organization . It will discuss teh
single and double entry bookkeeping.

LIST OF TOPICS TO BE STUDIED IN THE MODULE

A. Introduction
B. Definition of Accounting
C. Purpose of Accounting
D. Functions of Accounting
E. Branches of Accounting
F. Users of Accounting Information
G. Fundamental Concepts
H. Underlying assumptions
I. Business Organization
I.1 Forms
I.2 Purpose
I.3 Activities

INTENDED LEARNING OUTCOMES (ILO)

At the end of this module, the students would be able to:

1) Understand and explain the definition ,purpose, nature , functions and objectives
of accounting
2) Distinguish the branches of accounting, users of accounting information
3) Understand teh double entry bookkeeping concept and how it differs from single
entry bookkeeping
4) Appreciate the history of accounting, accounting variations among countries
5) Adopt the basic professional values and ethics

LEARNING CONTENT

ACCOUNTING CONCEPTS AND ITS CONSIDERATION

A. Introduction
Tagudin Campus

MODULE 1

Engaging in business is one of the most thrilling, most lucrative, and most fulfilling
endeavors out there. However, business is not for everyone – many have tried
and many have failed. With times changing at an ever-faster pace, engaging in
business is becoming more and more competitive. As a future business
professional, you need to equip yourself with the right knowledge that will help you
survive in the business world.
So why do we need accounting? Asking that question of an accountant is like
asking a farmer why we need rain. We need accounting because it’s the only way
for business to grow and flourish. Accounting is the backbone of the business
financial world. After all, accounting was created in response to the development
of trade and commerce during the medieval times.
Accounting is the conscious of the business world. When handled with care
and with respect, it performs as expected. When abuse occurs, and the system is
circumvented or overridden because of dishonesty and greed, it doesn’t work
correctly. Accounting is much like all other systems in place, they are only as good
as the people using them.

B. DEFINITION OF ACCOUNTING
ACCOUNTING is a service activity. It’s function is to provide quantitative
information, primarily financial in nature, about economic entities that is intended to be
useful in making economic decisions.

“Language of business”

Accounting as science and art

Fixed,
 Accounting is a social science with a body of knowledge which inflexible,
has been systematically gathered, classified, and organized. It organized
is influenced by, and interacts with, economic, social and and
political environments. systematic

 Accounting is a practical art which requires the use of

and judgment. Accounting creative skill

as an information system
ILOCOS SUR POLYTECHNIC STATE COLLEGE

Tagudin Campus

MODULE 1

 Accounting identifies and measures economic activities, processes

information into financial reports and communicates these reports to decision
makers.

Economic Activities and their classification

 Production – the process of converting economic

resources into outputs of goods and services that are
intended to have greater utility than the required
inputs.

 Exchange – the process of trading resources or

obligations for other resources or obligation.

 Income distribution - the process of allocating rights

to the use of output among individuals and groups in
society.

 Consumption – the process of using the final output

of the production process.

 Investment – the process of using current inputs to

increase the stock of resources available for output
as opposed to immediately consumable output.

 Savings – the process by which individuals and

groups set aside rights to present consumption in
exchange for rights to future consumption.
C. PURPOSE OF ACCOUNTING
BASIC PURPOSE OF ACCOUNTING: To provide quantitative information about
economic entities intended to be useful in making economic decisions.

TYPES OF INFORMATION PROVIDED BY ACCOUNTING

1. Quantitative information – expressed in numbers, quantities or units.

2. Qualitative information – expressed in words or descriptive form
3. Financial information – expressed in terms of money

ECONOMIC ENTITY VS BUSINESS ENTITY

 Economic entity – is a separately identifiable combination of persons and
property that uses or controls economic or scarce resources to achieve
certain goals or objectives. Scarce resources have no significant
characteristics.

Course Code: Elect 102

Descriptive Title: Financial Accounting
Instructor: Felix M. Del Rosario, CPA
ILOCOS SUR POLYTECHNIC STATE COLLEGE

Tagudin Campus

MODULE 1

o Not-for-profit or non-profit entity is one that carries out some socially

desirable needs of the community or its members whose activities are
not directed towards making profit.

o Business entity is an entity that produces and distributes goods or

services primarily for profit.

D.FUNCTIONS OF ACCOUNTING

 Identification. The accounting process of recognition or non-recognition of

business activities as accountable events or whether has accounting
relevance.

One that is quantifiable and has an effect on assets,

liabilities and equity. This also known as economic activity,
which is the subject matter of accounting.

Criteria for accountable event

1. It must affect a financial element of accounting
(increasing or decreasing asset, liability or equity)
2. It is a result of a past activity
3. Its cost can be measured reliably.

 Measurement. The accounting process of assigning of peso amounts or

numbers to the economic transactions and events. The unit of measure of
accounting is money, expressed in prices.

 Communication. The accounting process of preparing and distributing

accounting reports to potential users of accounting information and
interpreting the significance of this processed information.

o Recording. the process of systematically committing to writing

business transactions and events after they have been identified and
measured, in books of account in a systematic and chronological
manner according to accounting rules.
o Classifying. The grouping of similar and interrelated items into their
respective classes.
o Summarizing. Putting together or expressing in condensed or brief
form the recorded and classified statements in financial statements.

Course Code: Elect 102

Descriptive Title: Financial Accounting
Instructor: Felix M. Del Rosario, CPA
ILOCOS SUR POLYTECHNIC STATE COLLEGE

Tagudin Campus

MODULE 1

D. BRANCHES OF ACCOUNTING/AREA OF SPECIALIZATION

1. Financial Accounting. The recording of transactions, preparation of financial

statements and communication of financial information to external user
groups. Focuses on general purpose reports.

2. Auditing. The examination of financial statements by independent certified

public accountant for the purpose of expressing an opinion on the fairness of
presentation of financial statements.

3. Management Accounting. Incorporates cost accounting data and adapts

them for specific decisions which management may be called upon to make.
A management accounting system incorporates all types of financial and non-
financial information from a wide range of sources.

4. Financial Management. Relatively new branch of accounting that has been

grown rapidly over the last 35 years. Financial managers are responsible for
setting financial objectives, making plans based on those objectives, obtaining
the finance needed to achieve the plans, and generally safeguarding all the
financial resources of the entity.

5. Taxation / Tax accounting. Involves the preparation of tax returns and

rendering of tax advice, such as determination of tax consequences of certain
proposed business endeavors.

6. Government Accounting. 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.

7. Fiduciary Accounting. Handling of accounts managed by a person entrusted

with the custody and management of property for the benefit of another.

8. Social Responsibility. Reporting of programs and projects that have to do

with the upliftment of the welfare of the people of a community or of the
nation.

9. Environmental Accounting. The area of accounting that focuses on

programs, activities and projects that are focused care for Mother Earth.

Course Code: Elect 102

Descriptive Title: Financial Accounting
Instructor: Felix M. Del Rosario, CPA
ILOCOS SUR POLYTECHNIC STATE COLLEGE

Tagudin Campus

MODULE 1

One example of this is carbon accounting such as

“Cap and Scheme”, which is a process of
encouraging reductions in greenhouse gas
emissions.

10. Price-level Accounting. Otherwise known as Accounting for

Hyperinflationary Economies – simply defined, is accounting that recognizes
in the financial statements changes in the purchasing power of money.

E.USERS OF ACCOUNTING INFORMATION

 Internal Users are those who make decisions directly affecting the internal
operations of the business.

o Managers are directly involved in operation of the business. They

need accounting data to improve the efficiency and effective of the
organization.

o Employees use financial data to assess whether they are receiving

the right compensation and to check if they bargain for higher
remuneration, retirement benefits and employment opportunities.

o Officers, also called as the company executives who are interested

to know if the company is doing well in its operation so they can plan
for possible expansion or branching out to widen its geographical
and demographic market.
o Internal Auditors, there role is to protect and safeguard the resources
of the company against fraud or irregularities.

 External users are individuals or enterprises that have financial interest in

the business but they are not involved in the day activities of the
organization. These are:

o Investors (The providers of risk capital) are interested in

information which enables them to assess the ability of the
enterprise to pay dividends. They need information on whether they
should buy, hold or sell their shares in.

o Lenders are interested in information that enables them to

determine whether their loans, and their interest attaching to them
will be paid when due.

Course Code: Elect 102

Descriptive Title: Financial Accounting
Instructor: Felix M. Del Rosario, CPA
ILOCOS SUR POLYTECHNIC STATE COLLEGE

Tagudin Campus

MODULE 1

o Suppliers and other trade creditors are interested in information

that enables them to determine whether amount owing to them will
be paid when due.

o Customers are interested in the quality of goods and services that

they are getting from the entity.

o Government and their agencies require information in order to

regulate the activities of the enterprise, determine taxation policies
and as a basis for national income and similar activities,
o Public are assisted by information through Financial statements
about the trend and recent developments in the prosperity of the
enterprise and the range of its activities.

F.FUNDAMENTAL CONCEPTS
Entity Concept

The most basic concept in accounting is the entity concept. An

accounting entity is an organization or a section of an organization that stands
apart from other organizations and individuals as a separate economic unit.
Simply put, the transactions of different entities should not be accounted for
together. Each entity should be evaluated separately.
Periodicity Concept

An entity’s life can be meaningfully subdivided into equal time periods for
reporting purposes.

For the purpose of reporting to outsiders, one year is the usual

accounting period. Luca Pacioli, the first author of an accounting text, wrote in
1494: “Books should be closed each year, especially in a partnership, because
frequent accounting makes for long friendship.”
Calendar Year – starts in January and ends in December.

Fiscal Year – starts in any month and ends after 12 months

Stable Monetary Unit Concept

Course Code: Elect 102

Descriptive Title: Financial Accounting
Instructor: Felix M. Del Rosario, CPA
ILOCOS SUR POLYTECHNIC STATE COLLEGE

Tagudin Campus

MODULE 1

The Philippine Peso is a reasonable unit of measure and that its purchasing
power is relatively stable. This is the basis for ignoring the effects of inflation in the
accounting records.
a greater increase in the supply of money or credit than in the production of goods and
services, resulting in higher prices and a fall in the purchasing power of money

BASIC PRINCIPLES
Accounting practices follow certain guidelines. The set of guidelines and
procedures that constitute acceptable accounting practice at a given time is
GAAP, which stands for generally accepted accounting principles. In order
to generate information that is useful to the users of financial statements,
accountants rely upon the following principles.

Objectivity Principle. Accounting records and statements are based on the

most reliable data available so that they will be as accurate and as useful as
possible. Reliable data are verifiable when they can be confirmed by
independent observers.
Historical Cost. This principle states that acquired asset should be recorded at their
actual cost and not at what management thinks they are worth as at reporting date.
*Actual Cost- the total cost of producing or buying an item, which may include, e.g., its price plus
the cost of delivery or storage.

Revenue Recognition Principle. Revenue is to be recognized in the accounting

period when goods are delivered or services are rendered or performed.

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 and services.

Adequate Disclosure. Requires that all relevant information that would affect the
user’s understanding and assessment of the accounting entity be disclosed in the
financial statements.

Materiality. Financial reporting is only concerned 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.

Course Code: Elect 102

Descriptive Title: Financial Accounting
Instructor: Felix M. Del Rosario, CPA
ILOCOS SUR POLYTECHNIC STATE COLLEGE

Tagudin Campus

MODULE 1

Consistency Principle. The 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 disclosed in the financial
statements.

H.UNDERLYING ASSUMPTIONS
Accrual Basis

Financial Statements are prepared on the accrual on the accrual basis of

accounting and not as cash or its equivalent is received or paid. Under this
assumption, the effects of transactions and other events are recognized when they
occur and they are recorded in the accounting records and reported in the financial
statements of the periods to why they relate.
In short, transactions are recognized when “Revenue as they earned, even not yet
received and; Expenses as they incurred, even not yet paid.

In cash basis accounting, however, does not record a transaction until cash
is received or paid. Generally, cash receipts are treated as revenues and cash
payments as expenses.

Going Concern

Financial statements are normally prepared on the assumption that an

enterprise is a going concern and will continue in operation for a foreseeable future.
It is assumed therefore that the enterprise has neither the intention nor the need to
liquidate its operations.
I.BUSINESS ORGANIZATION

I.1 FORMS OF BUSINESS ORGANIZATIONS

 Sole Proprietorship. This business organization has a single owner called

the proprietor who generally is also manager. It tends to be small service-type
(e.g. physicians, lawyers and accountants) business and retail
establishments. The owner receives all profits, absorbs all losses and is solely
responsible for all debts of the business. From the accounting viewpoint, the
sole proprietorship is distinct from its proprietor. Thus, the accounting records
do not include proprietor’s personal financial records.

Course Code: Elect 102

Descriptive Title: Financial Accounting
Instructor: Felix M. Del Rosario, CPA
ILOCOS SUR POLYTECHNIC STATE COLLEGE

Tagudin Campus

MODULE 1

 Partnership. A business owned and operated by two or more persons who

bind themselves to contribute money, property or industry to a common fund,
with the intention of dividing the profits among themselves. Each partner is
personally liable for any debt incurred by the partnership, except limited
partner.

 Corporation. A business owned by its stockholders. It is an artificial being

created by operation of law, having the rights of succession and the powers,
attributes and properties expressly authorized by law or incident to its
existence. The stockholders are not personally liable for the corporation’s
debt.

I.2 PURPOSE OF BUSINESS ORGANIZATIONS

 Service companies perform services for a fee (e.g. law firms, accounting and
law firms, stock brokerage, beauty salons and recruitment agencies)

 Merchandising companies purchase goods that are ready for sale and then
sell these to customers (e.g. car dealers, clothing stores and supermarkets)

 Manufacturing companies buy raw materials, convert them into products and
then sell the products to other companies or to final consumers (e.g. paper
mills, steel mills, car manufacturers and drug manufacturers)

MICRO, SMALL AND MEDIUM ENTERPRISES (MSME)

 Micro Enterprises are those with assets, before financing of P 3 million or

less and employ not more than nine (9) workers.

 Small Enterprises are those with assets, before financing of above P 3

million to P 15 million and employ 10 to 99 workers.
 Medium Enterprises are those with assets, before financing of above P15
million to P100 million and employ 100 to 199 workers.

1.3 ACTIVITIES IN BUSINESS ORGANIZATIONS

 Operating Activities are the principal activities of the enterprise. They are
the transactions and events that enter into the determination of profit and loss.
E.g.:
o Sale of services

Course Code: Elect 102

Descriptive Title: Financial Accounting
Instructor: Felix M. Del Rosario, CPA
ILOCOS SUR POLYTECHNIC STATE COLLEGE

Tagudin Campus

MODULE 1

o Purchase of supplies

o Payment of various expenses like salaries and other benefits to

employees, utilities, taxes and repairs and maintenance, insurance,
transportation and gasoline expense.

 Investing Activities are the acquisition and disposal of long-term assets and
other investments. E.g.:

o Purchase of equipment, furniture, automobile and land o

Cost of developing and constructing office or building o Sale
of used fixed assets

o Loans and advances to other parties

o Investments in equity or debt instruments

 Financing Activities are activities that result in charges in the size and
composition of the contributed equity and borrowings of the enterprise. E.g.:
o Cash proceeds from issuing shares of stocks by a corporation

o Cash proceeds and repayment of bank loans and other long-term

barrowings.
Summary of the Module :
Module 1 discussed the vital consideration in the discussion of the accounting
concepts. It explain the different accounting principles and other accounting
standards that is important in the preparation of reliable financial statements which
include accrual principle, objectivity, going concern concept and historical concept.
The module discuss and differentiate the different forms and types of business
organization , the users of accounting information and lastly it presented the different
activities of any business organization.

References:
 De Guzman, Angeles A.(2018). Fundamentas of Accounting , Lorimar
Publishing Inc.,Real Excellence Publishing, Quezon City
 Palma, Roberto Z.( 2018) Basic Accounting ,Rex Bookstore, Manila
 Ballada, Win and Susan Ballada(2018), Basic Accounting Made It Easy , 14 th
Edition; Domdane Publishers and Made Easy Book, Manila

Course Code: Elect 102

Descriptive Title: Financial Accounting
Instructor: Felix M. Del Rosario, CPA
ILOCOS SUR POLYTECHNIC STATE COLLEGE

Tagudin Campus

MODULE 1

INTENDED LEARNING ACTIVITY

ACTIVITY 1

Name: _____________________ Class Schedule: ________________

Course/Year/Section: ____________ Date: _________________________

I. TRUE OR FALSE. Write TRUE if the statement is correct and FALSE if the
statement is incorrect.

1. Internal users are those who own and /or manage and control the business
entity.

2. The area of accounting that is concerned with internal reporting is

referred to as management accounting.

3. External users (the financing and public group) do not own and/or
manage and control the business entity.

4. The external users of financial statements include present and

potential investors, employees, lenders, suppliers and other trade
editors, customers, government and their agencies, and the public.
5. Financial statement are used by lenders to determine whether
borrowers can pay their loans and interest attached to them when
due.

6. Customers and public are examples of Internal Users.

7. Board of directors is an example of External users.

8. Investors need accounting information to assess their return on

investments.

9. The users of accounting information may be classified based on the

extent of their application in the affairs of the business.

10. Employees use the financial statements of their customers to determine the
continuity of the latter’s business.

11. Corporation is a form of business organization owned by an individual.

12. Stockholders are example of Internal users.

Course Code: Elect 102

Descriptive Title: Financial Accounting
Instructor: Felix M. Del Rosario, CPA
ILOCOS SUR POLYTECHNIC STATE COLLEGE

Tagudin Campus

MODULE 1

13. Going concern concept provide us that a business need to allocate the cost of
certain property because of the continuity of the existence of the business.

14. Manufacturing type of business is offering a certai services for fee.

15. Sole proprietorship is easy to organize and operate.

16. Financial information expressed in number , quantities or units.

17. Summarizing is grouping of similar and interrelated items into their respective
classes.

18. Fiduciary accounting involves the preparation of tax returns and rendering of
tax advise

19. Lenders are interested in the quality of goods and services that they are
getting from the entity

20. Objectivity principle states that accounting records are based on the most
reliable data available .
ACTIVITY 2

Answer the assessment made by your instructor by clicking the link given to
you testmoz.com/8136634.... passcode : trishamae

You may now proceed to the next module of this course. I hope you
have learned some information if not a lot in the
lessons discussed earlier.

Course Code: Elect 102

Descriptive Title: Financial Accounting
Instructor: Felix M. Del Rosario, CPA