DEFINITION AND NATURE OF ACCOUNTING

(AMERICAN ACCOUNTING ASSOCIATION ‘AAA’) -

Accounting is the process of identifying, measuring and communicating
economic information to permit informed judgement and decision by users of the
information.
IDENTIFYING - analytical component.
MEASURING - technical component.
COMMUNICATING - formal component.

(ACCOUNTING STANDARDS COUNCIL ‘ASC’)

Accounting is a service activity. The accounting function is to provide
quantitative information, primarily financial in nature, and economic entities, that is
intended to be useful in making economic decisions.
Important Point in the Definition of Accounting
1. Accounting is about quantitative information.
2. The information is likely to be financial in nature.
3. The information should be useful in decision making.

(AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS ‘AICPA’)

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.

PURPOSE OF ACCOUNTING
To provide Quantitative, Financial Information about economic entities that is intended to be
useful in making decisions.
ACCOUNTING AS A SCIENCE
• Accounting is a Body of Knowledge which has been systematically
gathered, classified, and organized.
Naglalaman ng Principles
ACCOUNTING AS AN ART
• Accounting requires Creative Skills and Judgement.
because it established rules of accounting

IDENTIFYING - this accounting process is the recognition or nonrecognition of business

activities as accountable events”.
1. Accountable Events are expressed in Monetary Unit.
2. An event is Accountable or Quantifiable when it has an effect on assets, liabilities and
equity.
3. The subject matter of accounting is economic activity or the measurement of
economic resources
and economic obligations.
4. Only economic activities are emphasized and recognized in accounting.
5. Sociological and Psychological matters are beyond accounting.
MEASURING - this accounting process is the assigning of peso amounts to the accountable
economic transactions and events.
1. If accounting information is to be useful, it must be expressed in terms of common
financial denominator.
2. Financial statements without monetary amounts are largely unintelligible or
incomprehensible.
3. Philippine Peso is the unit of measuring accountable economic transactions.
4. The bases of measurements are historical cost and current value.
 HISTORICAL COST - is the original acquisition cost and the most common
measure of financial transactions.
CURRENT VALUE - includes fair value, value in use, fulfillment and current cost.
COMMUNICATING - the accounting process of preparing and distributing accounting
reports to the potential users of accounting information.
1. The identifying and measuring is useless if the information contained in accounting
records cannot be communicated in some form to potential users.
2. The communication process is the reason why accounting is called the “universal
language of business.”
3. The implicit in the communication process are the recording, classifying and
summarizing aspects of the accounting.
EXTERNAL AND INTERNAL TRANSACTIONS
Economic activities of an entity are referred to as transactions which may be classified as
external and
internal transactions.

• EXTERNAL TRANSACTIONS (Exchange Transactions)

Economic events involving one entity and another entity.
1. EXCHANGE (Reciprocal Transfer)
There is reciprocal giving and receiving of economic resources or discharging of
economic obligations.
Example: Purchase of goods from a supplier, borrowing money from a bank, sale
goods to a customer. Etc.
2. NON-RECIPROCAL TRANSFER
"One way" Transaction
Example: Donation Gifts, charitable contributions, payment of taxes, imposition of
fines, and etc.
3. EXTERNAL EVENT OTHER THAN TRANSFER
Changes in Economic resources or obligations caused by external and internal
eevent.
Example: Changes in fair value, price levels, obsolescence, technological changes
and etc.
• INTERNAL TRANSACTIONS
Economic events involving the entity only.
1. PRODUCTION
The process of transforming resources into products.
2. CASUALTY
Any sudden and unanticipated loss from fire, flood, earthquake and other odinarily
termed as an act of God.

ACCORDING TO AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANT.

RECORDING (JOURNALIZING)
The process of systematically maintaining records 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 categories. This is accomplished by posting to the ledger.
LEDGER
Is a group of accounts which are systematically categorized into assets accounts,
liability accounts, equity accounts, revenue accounts and expense accounts.
 SUMMARIZING
The preparation of financial statements. Includes: statement of financial activities,
income statement, statement of comprehensive income, statement of changes in equity
and statement of cash flows.

ACCOUNTING AS AN INFORMATION SYSTEM

Accounting is an information system that measures business activities, processes information
into reports and communicates the reports to decision makers. The key product of this system
is a set of financial statements.
FINANCIAL STATEMENTS
• Includes the Balance Sheet and Income Statement.
FINANCIAL REPORTS
• Tells us how well an entity is performing in terms of profit and loss and where it
stands in financial terms.
• Financial Reports encompasses all aspects in Financial statements.
Includes other Information, like explaination
INPUT - Identified Accountable Event
PROCESS - Recording, Classifying, Summarizing
OUTPUT - Accounting Report (Financial Statement)

ACCOUNTING AS THE LANGUAGE OF THE BUSINESS

EXTERNAL USERS:
• Users of Information OUTSIDE the entity.
EXAMPLES: Investors, Creditors, Government, and the public and maybe an
EMPLOYEE.
INTERNAL USERS:
• Users of Information WITHIN the entity.
EXAMPLES: CEO, Management, and EMPLOYEES (If the problem is silent).
TYPES OF ACCOUNTING INFORMATION:
1. General Purpose: COMMON NEEDS provided by FINANCIAL ACCOUNTING for
External Users.
2. Special Purpose: SPECIFIC NEEDS provided by MANAGEMENT ACCOUNTING
for Internal Users..
NOTE: The communication process is the reason why accounting is called the “universal
language of business.”Fundamental to the communication of financial information.

OVERALL OBJECTIVE OF ACCOUNTING

1. To provide quantitative financial information about a business that is useful to
statement users
particularly owners and creditors in making economic decisions.
2. The accountant's primary task is to supply financial information so that the statement
users could
3. make informed judgments and better decisions.
4. The ESSENCE of accounting is decision-usefulness.
International Financial Reporting Standards
The Accountancy profession has develop standards that are generally accepted
COMMON BRANCHES OF ACCOUNTING

1. FINANCIAL ACCOUNTING
• Focuses General Purposes only for EXTERNAL USERS.
• Governed by PHILIPPINE FINANCIAL REPORTING STANDARDS.

2. MANAGEMENT ACCOUNTING
• Focuses on Special Purposes with in the Entity for INTERNAL USERS.
Information in management accounting will not disclose to public for the
purpose of keeping secret from competitors.

3. COST ACCOUNTING
• Is the systematic recording and analysis of the costs of materials, labor and
• overhead incident to the production of goods or rendering of services.
Para malaman kung ano dapat ang cost ng isang product o serbisyo.

4. AUDITING
• involves the inspection of an entity’s financial statements or business
processes to ascertain their correspondence with established criteria.

Internal Auditing
• Inspection of an Entity's business processes.
External Auditing
• Inspection of Financial Statements. Aim to determine whether the
accounting records for a business are complete and accurate. (Financial
Accounting)

5. TAX ACCOUNTING
• is the preparation of tax returns and rendering a tax advice, such as the
determination of tax consequences of certain proposed business endeavors.

6. GOVERNMENT ACCOUNTING
• refers to the accounting for the government and its instrumentalities,
focusing attention on the custody of public funds.
7. ACCOUNTING EDUCATION
• It is a process of facilitating the acquisition of knowledge and skills regarding
one or more of the branches of accounting.
Mga Accountant na nag tuturo ng Accounting at iba pa na related sa field.

8. ACCOUNTING RESEARCH
• pertains to the careful analysis of economic events and other variables to
understand their impact on decisions.

9. ACCOUNTING SYSTEM
• The installation of accounting procedures for the accumulation of financial data
and designing of accounting forms to be used in data gathering.

10. FIDUCIARY ACCOUNTING

• refers to the handling of accounting managed by a person entrusted with the
custody and management of a property for the benefit of another.
Any assets or ari arian ng ferson na ipina manage ng iba o ipinagkatiwala sa iba.

11. ESTATE ACCOUNTING

• refers to the handling of accounts for fiduciaries who wind up the affairs of a
deceased person.
Ari-arian ng Tao na namatay na na ipinamana o ipinagkatiwala sa iba
 12. SOCIAL ACCOUNTING
• the process of communicating the social and environmental effects of an
entity’s economic actions to the society.

13. INSTITUTIONALACCOUNTING
• the accounting for non-profit entities other than the government.

ACCOUNTING CONCEPTS AND ASSUMPTIONS

DOUBLE ENTRY SYSTEM

• Transaction recorded in DEBIT and CREDIT.

GOING CONCERN ASSUMPTION

• The entity carry on its operation in the indefinite period.
Magpapatuloy pa ang isang negosyo kailanman. Kung ang negosyo ay magsasara ang
tawag diyan ay "Quitting Concern"

SEPARATE ENTITY (OTHER TERM; ENTITY CONCEPT, ACCOUNTING ENTITY, BUSINESS

ENTITY)
• The entity viewed separately from its owners.
• Transactions of the owners will not be the same of its business and vice versa.
Magkahiwalay ang Negosyo at may ari, at ganon din sa kanilang transactions.

STABLE MONETARY UNIT (OTHER TERM: MONETARY UNIT)

• All assets, liabilities, equity, income and expenses are expressed in terms of monetary
unit.
• In the Philippines, Peso is the monetary unit.
Amounts that expressed in foreign monetary unit will be translated or converted into
Philippine Peso.

TIME PERIOD
• The life of the entity is divided into series of reporting period.
• An accounting period is usually in 12 months and may either a Calendat year or Fiscal
year.
Pag ang negosyo mag tuloy-tuloy sa kaniyang operasyon. Dapat ang period ito hati-
hatiin kada period of time para matukoy ang progress nito.

MATERIALITY CONCEPT
• The information is material if its omission or mistatement could influence economic
decision.
Pag ang impormasyon ay nakaka apekto sa desisyon ng isang user, ang impormasyon
na ito ay Material. Halimbawa, ang SM Mall ay nawalan ng isang libo, hindi ito material
dahil isang libo lang yan, di naman yan makakaapekto sa desiyon ng mga user na mag
expand ng negosyo.

COST BENIFIT
• The cost of processing and communicating information should not exceed the benifits
derived from it.

ACCRUAL BASIS OF ACCOUNTING

• The effects of transaction of ther events are recognized when they occur (and not as
cash as received or paid)
• Under this concept, income are recognized when "Earned". Expenses are recognized
when "Incurred" rather than when the cash is paid.
Irecord mo na ang Income pag naka render kana ng service kahit hindi pa bayad ng
customer. Irecord mo na din ang Expense pag na incur mo na kahit hindi mo pa bayad.
HISTORICAL COST CONCEPT
• The value of an asset is determined on the value of acquisition cost (Value that you
bought before).

CONCEPT OF ARTICULATION
• All components in financial statement are relevant and interrelated.

FULL DISCLOSURE PRINCIPLE

• Recognized the nature and information included in financial statement reflects a series
of judgementak trade-offs.
• Disclose information with understandability statements.
NOTE: Not all information will be disclosed, some information will be keep secret for a
special purposes.

CONSISTENCY CONCEPT
• The financial are prepared on the basis of accounting principles that are applied
consistently.
Financial Statements will present consistently every period. Any treatment happened in
the period is the same treatment will be apply to the next period.

MATCHING
• Cost are recognized as expenses when the related revenue is recognized.
If there is Revenue the there is expenses. Revenue is always the partner of expenses.

ENTITY THEORY
• The accounting objective is geared towards proper income determination.

PROPRIETARY THEORY
• The accounting theory is geared towards the the proper valuation of assets.

RESIDUAL EQUITY THEORY

• Applicable when there are two classes of shares issued (Preferred or ordinary).

FUND THEORY
• Neither proper income determination nor proper valuation of assets but the custody
and administration of funds.

REALIZATION
• The process of converting non-cash assets into cash or claims for cash.

PRUDENCE/CONSERVATISM
• Use of caution when making estimates under condition of uncertainly, such that asset or
income will not overstated, liabilities and expenses will not understated.
Accountants should conservative in terms of Income and Expenses. In Income,
accountant should expect in lower expectations. Also in Expense, accountants should
expect in higher expectations.
FORMS OF BUSINESS ORGANIZATION

1. SOLE PROPRIETORSHIP
• One Owner
• Registered by DEPARTMENT OF TRADE AND INDUSTRY (DTI)
2. PARTNERSHIP
• Owned by TWO or MORE person bind themselves to contribute money, property, or
industry in a common fund.
• Registered with SECURITIES AND EXCHANGE COMMISSION (SEC)
3. CORPORATION
• Owned by One or more individual
• Unlike Partnership, corporation created by the operation of law rather than a
contract.
• Ownership in Corporation represent SHARE OF STOCK
• The owners are called SHAREHOLDER or STOCKHOLDER.
• Registered with SECURITIES AND EXCHANGE COMMISSION (SEC)
4. COOPERATIVE
• Owned by MORE THAN ONE individual.
• Formed with the accordance with the provision of The Philipine Cooperative Code of
2008.
• The owners are called MEMBERS.

BASIC BUSINESS ENVIRONMENT

1. SERVICE BUSINESS
• Rendered service as its main product.
2. MERCHANDISE/TRADE BUSINESS
• Buy and Sell
3. MANUFACTURING BUSINESS
• Process the raw materials into finished product.

IMPORTANCE AND PROBLEM ETHICS IN ACCOUNTING.

ACCOUNTING ETHICS
• STANDARD OF CONDUCT
Accountants should serve fairly.

IMPORTANCE OF ETHICS IN ACCOUNTING

• To create trust and customer confidence
• Create comfort zone
• Foster collaboration

CODE OF ETHICS
1. INTEGRITY
• A professional accountant should be straight forward and honest.
2. OBJECTIVITY
• Accountants should be fair.
3. PROFESSIONAL COMPETENCE AND DUE CARE
• Professional accountant should perform service with due care, competence,
and diligence.
Accountants should know the responsibility of doing their job in their chosen
field.
4. CONFIDENTIALITY
• Should not used or disclose any information without authority.
Not all information will be disclose.
5. PROFESSIONAL BEHAVIOR
• Should act in a manner with the good reputation of the profession.
 6. COMPLIANCE WITH TECHNICAL STANDARDS
• Carryout service in accordance with relevant technical.
Accountants should follow the standards in order to present accurate and
relevant information.

CLASSICAL NOTION OF STEWARDSHP

The classical notion of stewardship applies the valuation and stewardship role.

VALUATION
• Gives emphasis on how accounting MEASURES THE VALUE of the firm.
STEWARDSHIP
• Gives emphasis on how accounting AFFECTS THE VALUE of the firm.
How well the steward manage the resources of a business entrusted to it.

FLORENTINE VERSUS VENETIAN APPROACH

FLORENTINE APPROACH VENETIAN APPROACH

• AMATINO MANUCCI • Created by Andrea Barbarigo
- inventor of Double Entry Bookkeping • LUCA PACIOLI
system.
- The Father of Modern Accounting.
- Introduced Florentine Approach.
- revised the Double Entry Bookkeping
• Each transaction is recorded with at least system.
one account debited and credited. - wrote Summa De Arithmetica
• 14th century. - Gave emphasis on ledger posting.

SAVARY AND NAPOLEON COMMERCIAL CODE

HISTORICAL COST - Value that base on origin value or the acquisition cost.
FAIR VALUE - Value of something upon measuring.

HISTORY, DEVELOPMENT OF STANDARD SETTING BODIES.

INTERNATIONAL ACCOUNTING STANDARDS BOARD (IASB)
• Adopted and replaced INTERNATIONAL ACCOUNTING STANDARDS COUNCIL
(IASC)
• Publishes standards in a series of pronouncements called INTERNATIONAL
FINANCIAL
REPORTING STANDARDS (IFRS).
• The IASC pronouncements continued to be designated as INTERNATIONAL
ACCOUNTING
STANDARDS (IAS)
• The standard-setting process includes in the correct order (research, discussion
paper, exposure
draft and accounting standard).
FINANCIAL REPORTING STANDARDS COUNCIL (FRSC)
• In the Philippines, the development of the generally accepted accounting principles
were
formalized initially through the creation of the ACCOUNTING STANDARDS COUNCIL
(ASC).
• 15 members with a chairman of FRSC must have a term of 3 years renewable for
another
term. Any member of the ASC shall not be disqualified from being appointed to the
FRSC.
• The FRSC is the accounting standard setting body that was created by the
Professional
Regulation Commission upon the recommendation of the Board of Accountancy.
• The accounting standards promulgated by the FRSC constitute the “highest
hierarchy” of
generally accepted accounting principles in the Philippines.
• The approved statements of the FRSC are known as Philippine Financial Reporting
Standards
(PFRS).
BOARD OF ACCOUNTANCY
• Helps the government regulates the profession of Certified Public Accountant.
• Responsible of CPA licensure exam.
• Promulgate rules and regulations affecting the practice of the accountancy
professions in the Philippines.
PHILIPPINE INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANT
• To improve the service quality rendered by a CPA.
• 4 sectors practice of Accountancy.
PHILIPPINE INTERPRETATIONS COMMITTEE (PIC)
▪ Formed by the FRSC in August 2006 and has been replaced by the
INTERPRETATIONS
COMMITTEE
▪ INTERPRETATION COMMITTEE (IC) that was formed by the ASCl in May 2000.
▪ Its role is to prepare interpretations of PFRS for approval by the FRSC and to
provide timely
▪ guidance on the Financial reporting issues not specifically addressed in the
current PFRS.
▪ The interpretations are intended to give authoritative guidance on issues that are
likely to
receive unacceptable treatment because the standards do not provide the
specific and
clear cut rules and regulations.
▪ US - Generally Accepted Accounting Principles (GAAP)
INTERNATIONAL FINANCIAL REPORTING INTERPRETATION COMMITTEE (IFRIC)
• Committee that prepares interpretations of how specific issues should be
accounted for under application of IFRS.
• Replaced the STANDINGS INTERPRETATION COMMITTEE (SIC).
THE ACCOUNTANCY PROFESSION
At present, Republic Act No. 9298 in the law regulating the practice of accountancy in the
Philippines. This law is known as the Philippine Accountancy Act of 2004. To qualify to practice the
accounting profession, a person must finish a degree in Bachelor of Science in Accountancy and
pass the government examination given by the Board of Accountancy (the body authorized by the
law to promulgate rules and regulations affecting the practice of the accountancy profession in the
Philippines and it is responsible for preparing and grading the Philippine CPA examination). The
computer-based examination is offered twice a year (May and October) in authorized testing centers
around the country.

The Certified Public Accountants generally practice their profession in three main areas, namely:
1. PRACTICE OF PUBLIC ACCOUNTANCY
2. PRACTICE IN COMMERCE/INDUSTRY
3. PRACTICE IN THE GOVERNMENT
4. PRACTICE IN EDUCATION/ACADEME

I. PRACTICE OF PUBLIC ACCOUNTANCY

The field of public accounting or public accountancy is composed of individual practitioners,
Small accounting firms and large multinational organizations that render independent and
expert financial services to the public.

Public Accountants usually offer three (3) kinds of services, namely:

1. AUDITING (EXTERNAL AUDITING)

• It has been traditionally the primary service offered by most public accounting
practitioners.
• is an examination of statements by an independent certified public accountant
for the purpose of expressing an opinion as to the fairness with which the
financial statements are prepared.
• This is the attest function of independent CPAs.
• BIR requires audited financial statements to accompany the filing of annual
income tax returns
• Banks and other lending institutions frequently require an audit by an
independent CPA before granting a loan to a borrower.
• Creditors and prospective investors place considerable reliance on audited
financial statements on making economic decisions.

2. TAXATION (TAXATION SERVICE)

• Inudes preparation of annual income tax returns and determination of tax
consequences of a certain proposed business endeavors.
• CPA does not infrequently represent the client in tax investigations.

3. MANAGEMENT ADVISORY SERVICES

• This term has no precise coverage but is used generally to refer to services to
clients on matters of accounting, finance, business policies, organization
procedures, product costs, distribution and many other phases of business
conduct and operations.

Services of Management advisory services

A. Advice on installation of computer system
B. Quality control
C. Installation and modification of accounting system
D. Budgeting
E. forward planning and forecasting
F. Design and modification of retirement plans
G. Advice on mergers and consolidations.
IV. 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.
The Accountant here is an Instructor or Teacher

II. PRACTICE IN COMMERCE/INDUSTRY

• The major objective of the private accountant is to assist management in planning
and controlling the entity’s operations. It also has responsibility for the
determination of the various taxes and the entity is obliged to pay. Private
accounting includes maintaining the records producing the financial reports,
preparing the budgets and controlling and allocating the resources of the entity.
Private Accounting: The Accountant is an EMPLOYEE OF SOME PRIVATE
COMPANY.

III. PRACTICE IN THE GOVERNMENT

It encompasses the process of analyzing, classifying and communicating all
transactions involving the receipt and disposition of government funds and property
and interpreting the results thereof. It focuses on the custody and administration of
public funds.

Some Government Facilities

A. Bureau of Internal Revenue
B. Commission on Audit
C. Department of budget and management
D. Securities and exchange commission
E. Bangko sentral ng Pilipinas

CONTINUING PROFESSIONAL DEVELOPMENT (CPD)

REPUBLIC ACT NO. 10912 is the law mandating and strengthening the continuing
professional development program for all regulated professionals, including the accountancy
profession.

REPUBLIC ACT NO. 9298 (The Philippine Accountancy Act of 2004)

CONTINUING PROFESSIONAL DEVELOPMENT (CPD)

• Refers to the inculcation and acquisition of advanced knowledge, skills,
proficiency, and ethical and moral values after the initial registration of the certified
public accountants for assimilation into professional practice and lifelong learning.
• It raises and enhances the technical skill and competence of the certified public
accountants.
• Required for the renewal of CPA license and accreditation of CPA to practice the
accounting profession.
• It has become mandatory for CPA’s.

CPD CREDIT UNITS

1. Refers to the CDP credit hours required for the renewal of CPA license and
accreditation of a CPA to practice the accounting profession every three years.
2. Under the BOA resolution, all CPA regardless of area or sector of practice is required
to comply with the 120 CPD credit units.
3. Recently promulgated, only 15 CPD credits are required for the renewal of CPA
license. However, 120 CPD credit units are required for accreditation of CPA to
practice the accounting profession.

EXEMPTION FROM CDP

1. To be permanently exempted from CDP requirements of a CPA is upon
reaching the age 65 years old.
2. However, this is only applied to the renewal of CPA license and not for the
accreditation to practice the accounting profession.
DIFFERENTIATIONS

ACCOUNTING VS AUDITING
• In a broad sense, accounting embraces auditing.
• In a limited sense, accounting is essentially constructive in nature. It ceases when financial
statements are already prepared.
• However, auditing is analytical, the work of an auditor begins when the work of the accountant
ends.

ACCOUNTING VS BOOKKEEPING
• Bookkeeping is procedural and largely concerned with the development and maintenance of
accounting records, and it is the “how” of the accounting.
• Accounting is conceptual and is concerned with the why, reason or justification for any action
adopted.

ACCOUNTING VS ACCOUNTANCY
• Accountancy refers to the profession of accounting practice.
• Accounting is used in reference only to a particular field of accountancy such as public
accounting, private accounting and government accounting.

FINANCIAL ACCOUNTING VS MANAGERIAL ACCOUNTING

• Financial accounting is primarily concerned with the recording of the business transactions
and the eventual preparation of financial statements. It focuses on the general purpose reports
that are known as financial statements intended for internal and external users. Also, it is the
area of accounting that emphasizes reporting to creditors and investors.
• Managerial accounting is the accumulation and preparation of financial reports for internal
users only.

FINANCIAL STATEMENT VS. FINANCIAL REPORTS

• FInancial Reports encompasses not only Financial Statements but has also other information
like financial highlights, summary and important financial figures.
• Financial Reports includes non-financial information such as the description of the product
and a listing of corporate officers.
• Financial Statements those statements such as the balance sheet, income statement, cash
flows statement, and Capital statement including the notes.

The main purpose of Financial Reporting is provide information about the Entity's economic
resources "Assets", claims to those resources "Liabilities & Owners Equity" and changes in
those.
The secondary purpose of Financial Reporting is to provide information in assesing in the
Management's stewardship.