ACCOUNTING NOTES CHAP 1-6

Definition of Accounting
- Is a system that helps businesses track events that affect them which the process involves identifying
the events that affect a business, recording these events, and communicating the summarized
results of all events within a particular period to interested parties
- Involves the processes of identifying, recording, and communicating financial information to
internal and external users alike
- "Accounting is service activity. Its function is to provide quantitative information, primarily
financial in nature, about economic entities, that is intended to be useful in making economic
decision." (Accounting Standards Council)
- "Accounting 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 financial character, and
interpreting the results thereof." (American Institute of Certified Public Accountants)
- "Accounting is the process of identifying, measuring and communicating economic
information to permit informed judgment and decision by users of the information."
(American Accounting Association)

The Accounting Process

1. Identification of economic events relevant to a business
2. Recording of relevant economic events
3. After a lapse of a specific period (usually one year), summarize all the recorded economic events
into accounting reports

Phases of Accounting Process

According to the American Institute of Certified Public Accountants (AICPA)
1. Recording
- Also called journalization - involves the routing and mechanical process of committing to
writing business transactions and events on the book of accounts in a chronological
sequence
2. Classifying
- Involves sorting or grouping of similar and interrelated transactions and events
- Function is performed by posting to the ledger - a group of "accounts" which are systematically
categorized into asset accounts, liability accounts, capital accounts, revenue accounts and
expense accounts
3. Summarizing
- Preparation of financial statements (balance sheet, statement of retained earnings, income
statement, statement of cash flows)
4. Interpreting
- Analytical phase of accounting. This is performed by answering four basic questions, namely:
Is the company liquid, solvent, stable and profitable?
Liquidity - the ability of a company to meet its obligations as they come due
Solvency - the ability to pay current obligations
Stability - the ability to pay long-term obligations
Profitability - the ability to increase capital not from additional investment, but from the results of operations.

Nature of Accounting
1. Accounting is a process because it performs the functions of identifying, recording and
communicating economic events with the end goal of providing information to internal and
external parties.
2. Accounting is an art of recording, classifying, summarizing, and finalizing financial data and is
the combination of techniques and its application requires applied skills and expertise.
3. Accounting deals with financial information and transactions. It deals with quantifiable
financial transactions.
4. Accounting is a means and not an end. Accounting is a tool to achieve specific objectives and can
be thought of as the plane that will bring you to your destination.
5. Accounting is an information system. It is recognized as a storehouse of information and
collects processes and communicates financial information of any entity.
 Functions of Accounting
1. Keeping systematic record of business transactions
- Records should be systematic enough to enable easy understanding of readers. No matter how
comprehensive the records are, if they are not produced systematically, then they provide little to
no value.
2. Protecting properties of the business
- Records serve as the evidence that properties of a business do exist or how much of a particular
resource does a company have and it also helps in preventing employee fraud and
misappropriation of company resources.
3. Communicating results to various parties in or connected with the business
- Communication of the results of operations of a company is essential for all concerned parties to
enable them to take well-informed decisions.
4. Meeting legal requirements
- The government requires some companies to provide financial reports quarterly, semi-annually, or
annually as this aims to protect the public by providing them the necessary information to make
sound decisions.
- An accountant's primary task is to supply financial information to statement users so that they could
make informed judgment and better decision
Summary
 Accounting is a system that identifies, records, and communicates relevant economic
events to interested users.
 Nature of accounting: Accounting is a process; an art; deals with financial information and
transactions; a means, not an end; and an information system
 Functions of accounting in business: Keeping systematic record of business transactions;
protecting properties of the business; communicating the results to various parties interested in
or connected in the business; and meeting legal requirements
 History of accounting; From its early development in Mesopotamia to the modern accounting
system used in the present day

Users of Financial Information

User - an interested party of the FS - medium between entity & users
Direct Users - directly interested in the financial activities of a business firm
1. Owners or stockholders
2. Prospective owners or stockholders
3. Management - making future financial statements or assessing nature and extent of financing needs
4. Creditors - ascertaining whether to grant loans or not
5. Employees - security of employees and satisfactory compensation
6. Taxing Authorities - for proper computation or assessment of taxes or penalties
7. Customers - to anticipate price changes
Indirect Users - assist or protect those who have or contemplate having a direct interest
1. Regulatory or registration authorities - to assess reasonableness of rate
2. Labor unions - formulation of wage and contract demands
3. Stock exchange - accepting or canceling listing of securities in the stock market
4. Trade associations - compile industry statistics, make comparisons, and analyze industry results
5. Lawyers - consulted for the purpose of determining whether contractual provisions are fulfilled
and advises on the legality of dividends, profit sharing agreement and pension plans
6. Financial analyst and advisors - properly advise investors and potential investors whether to
retain, increase, decrease, or acquire an investment
7. Financial press and reporting agencies - descriptive analysis and computation of trends and ratios

Accounting vs. Bookkeeping

Bookkeeping - procedural and is largely concerned with development and maintenance of accounting
records and "how" of accounting
Accounting - conceptual and is concerned with the why, reason, or justification for any action adopted

Accounting vs. Accountancy

 Are synonymous because both refer to the entire field of accounting theory and practice
 Limitedly, accountancy refers to the profession of accounting practice while accounting is
used in reference only to a particular area of accountancy
Accounting Theory - the system of ideas that provides accountancy practice with a logical and systematic basis.
Consists of the many explanations, reasons, and justifications, why is what it is and why it is not otherwise

Basic notions in accounting which are various referred to as assumptions, postulates, concepts, axioms,
principles, standards, doctrines, conventions, procedures, rules and methods. No matter what they are called,
these basic notions constitute accounting theory.

BRANCHES OF ACCOUNTING
a. Financial accounting - primarily concerned with the recording of business transactions and the
eventual preparations of financial statements
Financial statements - provide information useful to a wide range of users in their economic decisions
- Main goal is to provide the information needs of external users that have no capability to
request information directly from management
- Standardized financial statements allow the users to compare the results of operations of
different companies regardless of size and nature
- Enhances the comparability of different companies, and improve the understandability of
the company's financial statements and useful for creditors
General Purpose Financial Statements
- Used external parties to evaluate the performance of the company
Specific Purpose Financial Statements
- Utilized by internal parties to guide them in the decision-making process for the company
Primary Users of General-Purpose Financial Primary Users of Special Purpose Financial
Statements Statements
o Investors o Top management (e.g.,
o Creditors Board of directors of a
o Shareholders/stockholders company, CEO, CFO, COO)
o Government agencies o Department managers
o Auditors (e.g., sales manager,
o Other interested outside production manager)
parties o Other internal parties

b. Management accounting - function is the accumulation and communication of information for use
by internal parties or management
- Focuses on the preparation of financial reports used by managers in their day-to-day decision-
making
- Used in deciding how the business should act going forward and provides value to the business
- Management reports are for internal users only
- Do not need to follow accounting standards such as the PFRS and PAS
- Contain forecasted information used in manager in planning and information regarding the
amount of cash on hand, the level of sales revenue for a particular period, costs incurred,
or even the comparison of actual results with budgeted amounts and is forward-looking

Roles of Management Accountants

 Advise managers about the financial implications of projects
 Explain the financial consequences of business decisions
 Formulate business strategy
 Monitor spending and finance control
 Conduct internal business audits
 Explain the impact of the competitive landscape
 Bring a high level of professionalism and integrity to the business

Management Accounting Skill Set

 Analysis - analyze information and use it to make business decisions
 Strategy - formulate business strategies that will increase the company's wealth and create value for
the company's shareholders
 Risk - able to identify risk that can potentially have detrimental effects to the company and give
recommendations how to manage such risks
 Planning - able to apply accounting techniques in the planning and budget creation phase of a business
  Communication - able to identify what information the management needs and also explain
the numbers to non-financial managers

c. Tax accounting - preparation of tax returns and determination of tax consequences of certain
proposed business endeavor
Tax - lifeblood of the government
 Tax accounting records some financial transactions in a different manner, adheres to some guidelines in
the PFRS and PAS, but it is not required to implement everything written in such standards
 Tax accounting follows the pronouncements of the National Internal Revenue (NIRC). NIRC = tax
accounting, PFRS and PAS = financial accounting

d. Government accounting - the principles and procedures associated with the accounting for the
national government and its political instrumentalities
- The custody of public funds and the purpose or purposes to which such funds are committed
- Used by all government agencies

Section 109 of Presidential Decree 1445 - "government accounting is defined as an accounting system which
"encompasses the process of analyzing, recording, classifying, summarizing, and communicating all transactions
involving the receipt and disposition of government of government fund and property and interpreting the
result thereof."
Objectives:
1. To provide information concerning past operations and present conditions
2. To provide a basis for guidance for future operations
3. To provide for control of the acts of public bodies and offices in the receipt, disposition, and
utilization of funds and property
4. To report on the financial position and the results of operations of government agencies for the
information and guidance of all persons concerned
New Government Accounting System (NGAS)
- Enhances responsibility accounting in all government agencies
- Relates financial results to a particular responsibility center (I.e., agency)
Government Accounting Process
- Involves the Commission on Audit (COA), the Department of Budget and Management (DBM), the
Bureau of Treasury (BTr), and all other government agencies
 COA - responsible for the keeping of the government's general accounts
o Tasked to keep and update the accounting books of the whole organization
o Disseminates accounting rules and regulations to be used by all agencies
 DBM - Section 2, Chapter 1, Title XVII, Book IV of the Administration Code of the Philippines
o "DBM shall be responsible for the formulation and implementation of the National Budget with
the goal of attaining our national socio-economic plans and objectives. The Department shall be
responsible for the efficient and sound utilization of government funds and revenues to
effectively achieve the country's development objectives."
 BTr - responsible for safekeeping of the national funds
o Management and control of the disbursements of such funds
o Maintaining accounts of financial transactions of all-natural government agencies

e. Cost accounting - provides information for management accounting and financial accounting
Cost - the resource sacrificed to achieve an objective
Cost object - anything that you wish to find the cost
Cost driver - an activity that is a cause of the incurrence of costs
Direct cost - costs that can economically be traced to a cost object
Indirect cost - costs that cannot be traced to a cost object
Fixed cost - costs that do not change within a relevant range of activity
Variable cost - costs that change as the level of activity or production increases

f. Auditing - the examination of financial statements by independent certified public accountant for the
purpose of expressing an opinion as to the fairness with which the financial statements are prepared
- Process that includes numerous steps to determine whether or not a company's
financial statements are presented truthfully
- Unbiased examination and evaluation of the financial statements of an organization
Auditors - accountants that perform the auditing procedure and have the competence to perform their roles
and are independent from the company being audited
- The work of an auditor starts where the work of an accountant starts
Audited financial statements - financial statements that underwent the process of auditing
Auditor's opinion - the basis whether or not the financial statements are prepared truthfully and without any
material errors.

g. Accounting systems - installation of accounting procedures for the accumulation of financial data

h. Accounting education - aims to educate students in the field of accountancy

i. Accounting research - deals with the creation of new knowledge

Users of Accounting Information

External Users
1. Customers - One user group that is particularly interested in the accounting information of a business

2. Creditors - Creditors ask for a fee, usually in the form of interest, when you use their money is
because money loses its value over time
- Biggest fear: not get paid the amount due to them. Main reason why creditors take a close
look in a company's financial statements
- "High risk, high return"
Three main factors considered by creditors before lending to a company:
a. Riskiness of lending
b. Profitability of the company
c. Company's amount of borrowings

3. Potential Investors - Like creditors, put their resources (usually money) in a business hoping to earn
a decent amount of return
- Unlike creditors who are assured to earn the interest and fees, investors may win or lose in
their investment
- A gamble when investing in a business
- Enjoy no limit on the amount of profits they can receive
- Financial statements provide the necessary information to decide if they will invest in
the business
- Are more afraid compared to creditors of the possibility that they will lose their money
- The level of profits presented in the financial statements is a primary concern for investors

4. Government - Different government agencies are assigned to check if businesses follow guidelines
provided by law in their operations and see if businesses are not trying to deceive the other users of
financial statements by misrepresenting the amount of earnings or manipulating portions of the
company's financial statements
- Taxing authorities - uses financial statements to compute for the amount of taxes payable by a
company
- The government particularly looks at the income, revenues, and expenses of a company and
ensure that companies do not overstate their income to attract more investors and creditors

5. Academe - (e.g., professors, researchers, and students) benefit from the accounting information in the
financial statements and utilize FS for academic purposes
- Financial statement also serves as a blueprint to help students in understanding the field
of accountancy
- Researchers study the financial statements to identify particular trends in a specific industry or
the economy as a whole where the results will help the government in assessing the condition
of the economy.
- Researchers also aim to improve the accountancy practice in the country by searching for
loopholes and possible improvements in the accounting standards currently being used

6. Public
Other decisions of the public affected by financial statements:
- Whether or not it is wise to start a business given the current economic conditions
- To stay on your current job or look for a higher-paying job
- Determining the best use of a person's resources
- Determining the optimal level of savings and consumption

Internal Users
1. Management - All mangers must know the company inside and out and are able to identify problem
and respond to them accordingly.

Some of the questions that can be answered when manager study the financial statements:
a. What areas of the business are becoming problematic?
b. What segments of the business underperformed during the last period? What is the cause of
such underperformance?
c. Is the level of company expenses becoming alarming?
d. How does the company handle its debt? Is the company incurring too much borrowing that will
be difficult to pay in the long run?
e. Does the company use its resources in the best possible way?

2. Employees - sometimes take a look at the company's financial statements primarily for personal reasons
- Concerned with the company's profitability. If the company they are working for are
profitable, employees feel that will timely and adequately receive their compensation and
additional benefits
- The current condition of a company also impacts employee morale and performance.
Companies that are performing well almost always have employees that are motivated

3. Owners or Stockholders - the existing investors of the company and already invested their resources
in the company
- Take an active role in the management of the business while others just wait for the generation
of profits
- Want to know if their investments will yield acceptable returns

Type of User Definition Example of Users Decisions made using

accounting
information/Benefits from
accounting information
Customers Main source of income of Patrons, clients, people Whether or not to build
businesses; acquire acquiring goods or relationship with the
goods and services for a services of a company business, to have any
fee for a fee dealings with the business
Creditors Providers of additional Banks, lending Whether or not to lend
funds when the initial institutions, wealthy resources to the business,
investment of owners is individuals; sometimes try to see if the business is
exhausted; lend resources the government can also not very risky before lending
to businesses usually in lend resources to a funds
the form of money company
Potential Providers of additional Wealthy individuals, Whether or not to invest in
Investors funds when the initial other businesses the business, primary
investment of owners is planning to invest concern is the ability of the
exhausted; invest business to provide
resources in the business acceptable returns
hoping to earn decent
returns
Government An external user whose Different government Oversees business
primary role is to regulate agencies, taxing operations with the end goal
businesses; studies authorities, government of improving the economy;
financial statements to officials checks the accuracy of the
determine amount of financial statements to
taxes payable compute for the correct
amount of taxes payable
 Academe Uses accounting Professors, lecturers, Uses accounting information
information primarily for students, and in the teaching of
academic purposes researchers accountancy; researches
loopholes and possible
improvements in the field of
accountancy
General Public Citizens and residents of Common people not Concerned with the overall
the country even though connected with the performance of the
they do not plan to company economy; use financial
transact with the business; information to estimate
use financial statements to economic performance
gauge the condition of the
economy
Management Employees that can make Board of directors, top Uses financial information in
decisions for the management, middle- making business decisions;
company; considered the level managers, allows management to
brain of the company supervisors identify problems
immediately and to respond
accordingly
Employees Persons in the company Laborers, field workers, Check if the business is
aside from managers and non-managerial profitable enough to provide
owners or stockholders; employees compensation and other
do not have authority to benefits
implement decisions
Owners or Existing investors of the Founders of the Mainly concerned with the
Stockholders company, concerned company, owners, returns earned from their
mostly with the profits of stockholders, partners, investment; owners taking
the company proprietors active roles in the
operations of the business;
also make decisions

FORMS OF BUSINESS ORGANIZATIONS

Four Forms of Business Organization: Sole Proprietorship, Partnership, Corporation, Cooperative
Businesses are organizations commonly made to earn profit

SOLE PROPRIETORSHIP - businesses formed by a single individual and is the simplest form under which a
business can operate
- Do not have separate legal existence, owners can opt to operate the business under their own names
or use fictitious names such as Aling Nene Sari-Sari Store
- A business operating as a sole proprietorship enters into contracts and can also sue and be sued
under the owner's name
Advantage of a Sole Proprietorship
1. Ease of formation
- Does not have to go through a rigid registration process before it can operate
- Carinderias and sari-sari stores are prevalent businesses operating as sole proprietorships which do
not require huge amounts of investments
- Formulated with small amount of capital and the whole process is easy and inexpensive, and it
normally spans for only a short amount of time

2. The owner has full control of the business

- The owner can single-handedly decide on matters pertaining to the business and can easily
make decisions to solve problems faced by the business
- Does not experience internal conflict regarding business decisions

3. Owners can mix personal and business assets

- Sole proprietorship are not separate juridical entities distinct from the owners
- If a business is experiencing financial difficulties, a sole proprietor may use personal assets to help the
business recover

4. Owners have all the profits for themselves

- All the profits generated belong to the owner
 - Do not need to worry about the determination of profit-sharing schemes

5. Simple taxation
- Profits are the income of the owner and the owner needs only to declare the income of the business
in his or her tax return and it will be taxed accordingly

Disadvantages of a Sole Proprietorship

1. Unlimited liability
- The owner is personally liable for all the debts incurred by the business since a sole proprietorship has
no separate legal existence distinct from the owner (owner and sole proprietorship are treated as
one)
Unlimited liability def. - creditors, customers, the government, and other outside parties can go after the
personal assets of the owner even after extinguishing all the assets of the business in the satisfaction of their
claims

2. Difficulty of raising additional capital

- The initial investment is the capital of the business
- When all of the initial investments are used up, the owner is the only person that can provide
additional capital
- Cannot sell interest (i.e., ownership rights) in the business
- In case a sole proprietor does not have enough resources to use as capital, the only remedy available to
the business is to look for creditors willing to lend additional funds.

3. Owner's bias
- When deciding how the company will move forward, the owner always has the final word which can be
detrimental to a business when the owner's bias prevails and he or she does not make rational decisions
- The workload of a sole proprietor is also much heavier than the owners of other forms of business
organizations

PARTNERSHIP- is a contract whereby two or more persons bind themselves to contribute money, property, or
industry to a common fund, with the intention of diving the profits among themselves
1. Two or more persons are needed to form a partnership
2. Money is not the only resource that a person can contribute in a partnership
3. A partnership must be established for the purpose of obtaining profit
4. Partnerships are the common form of business organizations used by companies who generate profits
by the practice of a profession

General Features of a Partnership

1. Separate legal existence
- Partnerships having juridical personalities separated and distinct from their owners (partners)
- A partnership can enter into contracts and acquire property (belongs to the partnership not to
the individual partners) under its own name
- Even if a partnership has a separate legal existence. Its income is not taxed as a separate entity. It will
be included in their respective tax returns and it will be taxed accordingly after the income has been
distributed to the partners.

2. Mutual Agency
- Partners can perform acts for the partnership even without asking permission from other partners
Mutual Agency def. - the acts of a partner are binding on a partnership even though he or she has no
authority to do so as long as the act concerns the normal business operations of the partnership

3. Unlimited liability
- Even though having a separate legal existence, partners are still liable for debts and obligations that
cannot be paid by partnerships assets
- Creditors and other parties can go after the personal assets of the partners when partnership assets
are not enough to satisfy their claims

4. Limited life
- Partnership life can be easily ended through partnership dissolution or liquidation
Partnership dissolution
 - Occurs when one of the partners withdraws from the partnership or if a new partner is admitted
Dissolution
- Occurs when there is a change in the relationship among the partners
- Does not necessarily mean that the partnership will cease to exist and they only lead the formation of
a new partnership
Partnership liquidation
- Ends the operations of the partnership
- During liquidation, partnership assets are sold, liabilities are paid, and the remaining assets are
distributed to the partners

5. Co-ownership of partnership property

- Once a partner has contributed his or her money and/or property, it is no longer belongs to him or her.
- The contributed money and property belong to the partnership and the partners only have
a proportionate share of partnership assets

6. Partnership agreement
- Contracts are perfected through oral or written agreements. However, to protect the interests of
all partners, it is ideal to form a partnership in a written contract – articles of partnership
a. Name of the partnership
b. Location of the principal office of the partnership
c. The names, citizenship, and residence of the partners
d. Term for which the partnership is to exist
e. The purposes for which the partnership is formed
f. Original capital contributions of the partners
g. Profit and loss sharing agreement of the partners

Limited Partnership
- Have limited liability and are exposed to a lower level of risk
- If a limited partner participates in the management of the partnership, he or she loses the
limited liability protection and he or she becomes a general partner
Limited Liability Partnership
- Aims to protect innocent partners from the malpractice and wrongdoings of other partners
- Possesses multiple insurance claims to protect the partners from such wrongful acts of other partners
Limited Liability Company
- Have features of both a corporation and a partnership and can participate in management without
losing the limited liability protection

Advantages and Disadvantages of Different Forms of Partnership

Form of Partnership Advantages Disadvantages
General Partnership Simple and inexpensive to create Owners (partners) personally
and operate liable for business debts
Limited Liability Partnership -limited partners have limited -general partners are personally
personal liability for business liable for business debts
debts as long as they do not -more expensive to create than
participate in management regular partnership
-general partners can raise cash -suitable mainly for companies
without involving outside that invest in real estate
investors in management of
business
Limited Partnership -mostly of interest to partners in -unlike a limited liability
old-line profession such as law, company, owners remain
medicine and accounting personally liable for many types
-owners are not personally liable of obligations, owned to
for the malpractice of other business creditors, lenders and
partners landlords
-often limited to a short list of
professions
Limited Liability Company Owners have limited personal More expensive to create than
liability for business debts even if regular partnership
they participate in management
CORPORATION- law defines, "an artificial being created by operation of law, having the right of succession and
the powers, attributes, and properties expressly authorized by law or incident to its existence."
- Can be organized to generate profit or it may be not-for-profit
- Corporations can be classified as publicly held (thousands of stockholders) or privately held (only a few
only)
1. A corporation is an artificial being. Separate entity distinct from its owners.
2. A corporation is created by operation of law.
3. A corporation has the right of succession. Ownership rights can be passed to other persons through
sale, donation, or any other mode of transfer
4. The law is the source of the powers and attributes of a corporation.

General Features of a Corporation

1. Separate legal existence
- Can enter into contracts and transactions under its name and perform acts that can be done by
natural persons except those that are purely personal in nature such as voting and holding positions in
public office
- The acts of the owners or stockholders do not bind the corporation and are often involved in decision-
making through voting but this does not give them the right to perform acts for the corporation
- Has management structure that is composed of individuals with specific authorities

2. Limited liability
- The personal assets of the stockholders of a corporation are protected from the claims of creditors
and other outside parties
- Even if the corporation is bankrupt or has unpaid claims due to accidents and lawsuits, the stockholders
cannot be obliged to pay any deficiency

3. Transferable ownership rights

- Stocks - represents the ownership rights in a corporation and are represented by a stock certificate
- Intangible asset evidencing a proportionate share in the properties of a corporation and can be
transferred to other persons through sale, donation, or other modes of transfer even without
consent of other stockholders unless the corporation is privately held
- A corporation may sell additional stocks to existing stockholders or to other persons outside the
company. This enables a corporation to acquire additional capital with relative ease.

4. Virtually unlimited life

- A corporation shall exist for a period not existing 50 years from the date of its formation and may,
however, be extended for periods not existing 50 years
- there is no limit to the number of extensions a corporation can avail of and corporation is also
not affected by the withdrawal, death, and admission of stockholders

5. Corporation management
- Management structure is more complex than that of the other forms of business organizations
- Stockholders may elect or be a member of a board of directors to manage the corporation who
represents the interest of the stockholders and they are responsible for creating operating policies for
the company

6. Government Regulations
- Subject to stricter government regulation than sole proprietorships and partnerships and are closely
monitored by the government as large corporations provide employment opportunities to the
public and stimulate the growth of the company
- The bankruptcy of a large corporation can cause the whole economy to spiral downwards and
regulations are designed not only for the protection of public interest, but for the stockholders' as well

7. Double Taxation
- Income of a corporation is taxed on the corporate level and the individual level
- The income is already taxed before being distributed to the stockholders. Once a stockholder
receives his or her share of the incomes, it is included in his or her tax return and will be taxed for the
second time
 8. Dividends
- Is not required to distribute to stockholders the income it generated from operations
- The stockholders will only be entitled to receive a share of the income once the board of directors
approves the distribution
- Dividends - are the income distributed to stockholders and may be in the form of cash, stock,
or property
- Given to the stockholders on a regular basis to keep them happy or else they tend to
become dissatisfied and sell their stocks

Advantages and Disadvantages of a Corporation

Advantages Disadvantages
-ability to acquire additional capital -heavily regulated by the
-transferable ownership rights government
-limited liability of stockholders -double taxation
-virtually unlimited life -not easy to form
-large pool of human capital -more expensive to form than sole
proprietorship and partnership

COOPERATIVES- according to the Cooperative Code of the Philippines, "a cooperative is a duly registered
association of persons, with a common bond of interest, who have voluntarily joined together to achieve a
lawful common social or economic end, making equitable contributions to the capital required and accepting a
fair share of the risks and benefits of the undertaking in accordance with universally accepted cooperatives
principles."
- Primary objective is to provide goods and services to its members and enable them to attain increased
income and savings
A cooperative may be formed by at least 15 persons for any of the following purposes:
1. To encourage thrift and savings mobilization among the members
2. To generate funds and extend credit to the members for productive and provident purposes
3. To encourage among members systematic production and marketing
4. To provide goods and services and other requirements to the members
5. To develop expertise and skills among its members
6. To acquire land and provide housing benefits for the members
7. To insure against losses of the members
8. To promote and advance the economic, social, and educational status of the members

Characteristics of a Cooperative:
1. It can sue and be sued under its own name
2. It has the right of succession
3. Members of a cooperative are subject to limited liability
4. It shall exist for a period not exceeding 50 years from date of formation. The cooperative term may
be extended for period not exceeding 50 years
5. A cooperative has its own set of board of directors
6. Income of a cooperative (called net surplus) belongs to its members.

TYPES OF BUSINESS ACCORDING TO ACTIVITIES

Operating Cycle- the time it takes for a company to create products, sell these products, and collect cash
payments from customers
Three Major Types of Businesses:
1. Service Companies - firms that generally use their employees to provide intangible products or services
to customers
- Primary source of revenue is the performance of services often referred to as service revenues
- Major phases of operating cycle include paying out money for employees and other operating expenses.
Performing the services, and collecting cash payments from customers
- Advantage: absence of inventory or tangible goods held by the company, they do not
require production facilities and that frees up cash for other important business matters
- Disadvantage: inability to standardize services as services performed vary from one client to another
- Constant evaluation and trainings are administered and trainings and employment benefits are also
vital to attract, retain, and motivate highly skilled employees
 Operating Cycle of Service Companies

2. Merchandising Companies - sells tangible products and this business buys finished or almost
finished goods from their suppliers and resells the same to customers
- Sales revenue or sales - revenues primarily earned from the sale of the goods or merchandise
- Retailer- a merchandising company that sells goods directly to customers
- Wholesaler- merchandising company that sells goods to retailers
- Operating cycle is typically longer than that of service company
- Inventory - purchases of goods to be held for resale and starts the operating cycle
- Company sells the inventory to customers then cycle ends with receipt of cash payments
- Advantage: Existence of tangible product provides leeway to make customers notice their products,
thereby promoting sales and consume less conversion time, effort and cost
- Disadvantage: inventory holds cost

Operating Cycle of Merchandising Companies

3. Manufacturing Companies - manufacturers, complicated organizations that create their own products
as they use raw materials, components, or parts which are processes using machines, computers, and
labor to produce finished goods
- Employ large-scale production which is done in manufacturing plants and earn revenues primarily
from the sale of products
- Products can be sold directly to consumers, retailers, and other manufacturers
- Operating cycle has the longest period compared to service and merchandising
- Advantage: manufacturing one's product is quality control wherein the company can ensure that their
products meet the standards set and benefit from having products that are easily noticed by
customers, thus promoting sales
- Disadvantage: need initial capital outlay to run production facilities and that requires are large sum of
money, overhead costs are incurred and require frequent monitoring to make sure they're not
overspending or wasting resources, need to finance their quality control procedures to avoid product
failure costs and further costs of managing, handling, and storing of goods.
 Operating Cycle of Manufacturing Companies

Type of Definition Input Output Advantage Disadvantag Examples

Business s es
According to
Activities
Service Firms that Labor Intangible; -Absence -Inability to Accounting
generally services of standardize and law firms,
use their inventory services hospitals,
employees -No -Maintaining schools, salons
to provide production human
services to facilities capital
customers
Merchandising Firms that Goods or Tangible; -Visible Managing Supermarkets,
buy finished merchandise Merchandise products inventory convenience
goods or bought from -Less stores,
almost suppliers conversion, bookstores,
finished time and department
goods from effort stores
their
suppliers
and resell
the same to
customers
Manufacturing Firms that Raw Tangible; -Quality -Generally, Car
create their materials, Manufactured control need companies,
own labor, products -Visible production consumer
products overhead products facilities products
-High companies,
conversion electronics
costs companies,
-Cost of energy
quality manufactures
control
-Managing
inventory

ACCOUNTING PRINCIPLES AND CONCEPTS

Introduction
 Accounting concepts, principles and assumptions are essential in the practice of accountancy
 Financial statements become more comparable and more useful to users if these concepts,
principles, and assumptions are followed by businesses
 Serve as the foundation of accounting in order to avoid misunderstandings and enhance
the understanding and usefulness of the financial statements
Accrual Accounting - "the effects of business transactions should be recognized in the period in which they
occurred. Income should be recognized in the period when it is earned regardless of when the payment is
received. Expenses should be recognized in the period when it is incurred regardless of when the expenses are
paid."
 An accountant does not have to wait for cash to be received or for cash to be paid before he or
she records a business transaction
 Use of accounts such as accounts receivable, accounts payable, prepaid expenses, accrued
expenses, deferred income, and accrued income are possible
 Results in FS that are more accurate and more reliable in terms of assessing the past performance of
the company
 Cash basis accounting- opposite of accrual accounting
- Income is recognized when cash is received and expenses are recognized when cash is paid
- The receipt and/or payment of cash is a requisite before transactions are recorded in the
accounting records of a company

Matching Principle - closely related to accrual accounting

 Expenses are recognized in the same period as the related revenue. Revenues of a business always
come with expenses
 States that related revenues and expenses should always go together. If revenues are recorded in
period 1, the related expenses should also be recorded in period 1
 Provides more accurate and more reliable information in the financial statements and prevents
understatement of expenses in one period while overstating expenses in the next period

Use of Judgment and Estimates

Accounting estimates - approximations made by accountants or the management in the preparation of financial
statements
 Essential part of the preparation of financial statements and does not undermine their
reliability Warranty expense - an item in the accounting records that requires the use of estimates
Warranty - guarantee made by the seller to the buyer promising to repair or replace the thing sold if necessary
within a specified period of time
 The use of accounting estimates cannot be abused by an entity by purposely overestimating expenses
 Judgment used in making accounting estimates should be backed up by a reasonable basis and is
more desirable to use less judgment in the accounting process because the use of judgment leads to
more subjective FS

Prudence - Also called conservatism in accounting sense

 "In the simplest words, conservatism means in case of doubt, record any loss and do not any gain."
 Income and assets are not overstated and liabilities and expenses are not overstated
 Whether an accountant is unsure whether or not to recognize an expense, the concept pf prudence
states that he or she should recognize it in the accounting records. On the other hand, if an
accountant is unsure whether or not to recognize income, prudence states that he or she should not
recognize it
Albeit prudence - preferred course of action when making judgments; deliberately being too conservative is not
an allowed practice

Substance over Form - Information presented in the financial statements of a company should truthfully and
faithfully represent the financial condition and financial performance of the company
 An accountant should look at the substance of every financial transaction rather than its legal form
 The substance of a transaction does not differ from its legal form and a transaction where the
substance differs from the legal form is a lease
 When the substance differs from the legal form, follow the substance of the transaction

Going Concern Assumption - States that the operations of a business will continue indefinitely into the future
 Operations of a business will not stop in the near future and it will not be forced to liquidate its assets
to pay off its liabilities which allows accountants to defer recognition of expenses in the future
The following items are evidences that a company is not a going concern:
1. The results of operations consistently show losses
2. Inability to pay the obligations of the company in time
3. Loan defaults
4. Suppliers do not sell on credit to the company
5. Legal processing against the company

Accounting Entity Assumption - the business is separate from the owners, managers, and employees operating
the business
 Personal transactions of an owner should also not affect the FS of his or her businesses
 Whether the effect is beneficial or detrimental to the company, an accountant should not record
any personal transactions of the owners, managers, or employees
 Main purpose is for the fair presentations of the financial statements of the company

Time Period Assumption - users of accounting information of a company needs periodic reports to enable them
to make economic decisions
 A supplier needs reports consistently to decide if it is still beneficial to transact with the company
  States that the indefinite life of a company can be divided into periods of equal length for
the preparation of financial reports
 Every year, most businesses produce financial reports for the benefit of the users of accounting
information
 Companies usually want to present good results for the fourth quarter of their operations, that is
why some companies prefer to use the fiscal year
Calendar year - a 12-month period that ends on December 31
Fiscal year - a 12-month period that ends on any month of the year

Generally Accepted Accounting Principles (GAAP) - consists of accounting principles, standards, rules and
guidelines that companies follow to achieve consistency and comparability in their FS
 Enhances the consistency and comparability of a company's FS, it will be easier for external users to
examine if the company is doing well currently or in relation to its past performance
 Helps the management in understanding trends persistent in the company and is agreed upon
by practitioners

International Financial Reporting Standards (IFRS) - pronouncements issued by the International Accounting
Standards Board (IASB) that intend to enhance the comparability of the financial statements of all
companies around the world
 Will provide a way for users of accounting information to easily understand the results of operations
of companies all around the globe
The following factors are considered in the decision to adapt the IFRS:
1. Philippine organizations' support of international accounting standards
2. Increasing internalization of businesses which greatly calls for a common language for
financial reports
3. Improvements of international accounting standards or removal of free choices of accounting
treatments
4. International accounting standards being recognized by the World Bank, Asian
Development Bank, and World Trade Organization

Philippine Financial Reporting Standards (PFRS) - form that The Philippine Financial Reporting Standards
Council (FRSC) issues standards to be used
The PFRS include all the following:
1. PFRS which corresponds to INFRS
2. Philippine Accounting Standards (PAS) which corresponds to International Accounting
Standards (IAS)
3. Interpretations of accounting standards issued by the Philippines Interpretations Committee in
accordance with Interpretations of the International Financial Reporting Interpretations
Committee (IFRIC) and the Standing Interpretations Committee

Basic Features of Financial Accounting - distillation of the characteristics and limitations of the financial
accounting process

The ASC mentions 13 basic features namely:

1. Accounting Entity - specific business enterprise
 The business enterprise is separate from the owners, managers, and employees who constitute
the firm
 As an exception to the entity concept, where parent-subsidiary relationship exists, consolidated
statements for the affiliates are usually made because for practical and economic purposes, the
parent and the subsidiary are a single economic unit
 The personal transactions of the owners should not be allowed to distort the FS of the firm

2. Going Concern - in the absence of evidence to the contrary, the accounting entity is viewed as
continuing in operation indefinitely
 Assets are normally recorded at cost - very foundation of the cost principle

3. Monetary unit or measurement in terms of money - two aspects: quantifiability and stability of the
peso
Quantifiability aspect - the assets, liability, capital, income and expenses should be stated in terms of a unit of
measure
Stability of the peso - the purchases power of the peso is stable or constant and that its instability is insignificant
and therefore may be ignored
Stable peso postulate - amplification of the going concern so much so that adjustments are unnecessary to
reflect any changes in purchasing power
 Accounting function is to account for pesos only and not for changes in purchasing power

Current Cost Accounting

Current replacement cost - the current market price to be paid for the acquisition of a similar asset
 Recognition of a holding gain or holding loss
 Replacement cost higher than historical cost, holding gain arises
 Replace cost lower than historical cost, holding loss occurs
 Cost Peso Accounting
Index number - FS restated in terms of the current purchasing power of the peso
 Nonmonetary items are restated while monetary items remain the same
 Monetary items are those assets and liabilities whose amounts are fixed in the sense that the
peso balances that they represent remain the same
 Assets and liabilities are classified as monetary items
 Restatement procedure requires the use of a fraction whose numerator is the index at the
end of the current year, whose denominator is the index on acquisition date

4. Measurements of Economic Resources and Obligations - the subject matter of financial accounting is
economic activity of the measurement of economic resources and obligations - activities that can be
quantified are given accounting recognition
 A transaction or event is quantifiable when it has an effect on the three accounting values -
assets (resources), liabilities (obligations) and capital

5. Time Period - the indefinite life of an enterprise is subdivided into time periods or accounting periods
 FS are prepared at the end of every accounting period and the accounting period or fiscal
period is one year

6. Accrual - income is recognized when earned regardless of when received and expenses are
recognized when incurred regardless of when paid
 Prepaid expenses, accrued expenses, deferred income, accrued income

7. Exchange Price - the measurement of economic resources and obligations is normally based on past
exchanged price or original acquisition cost

8. Approximation or Estimate - incorrect to assume that the FS are absolutely correct

 FS combination of matters of fact and matters of estimate
 Most assets (exception of cash) are matters of estimate
 Most liabilities are factual
 Most revenues are factual but expenses are a mixture of fact and estimate
 Such estimates should be founded on reason, long usage and experience

9. Judgment - the use of estimates necessarily involves a substantial area of informed judgment
 Employed in the choice of an accounting method to measure and report
 LIFO (last in, first out) and FIFO (first in, first out). If the judgment is proper income
determination or proper matching, the LIFO should be used. If judgment is proper valuation
of asset, the FIFO should be employed
 Requires the use of the percentage of completion method rather than the completed contract
method rather than the completed contact method in the matter of reporting income on long-
term construction contract if the degree of completion can reasonably be determined

10. General Purpose Financial Statements -FS are neutral and addressed to the common needs of
various users

11. Fundamentally Related Financial Statements - balance sheet, income statement, statement of retained
earnings, and statement of cash flows are basically related to one another because they are based on
the same underlying financial statements

12. Substance Over Form - economic substance of transactions and events are usually emphasized
when economic substance differs from legal form
Example:
 The lessee leased a property from the lessor. The terms of the lease, among others, include
the following:
1. The lease is noncancelable
2. The term of the lease is 75% of the life of the asset
 Earnings per share would simply involve dividing the net income for a period by the
average number of common shares outstanding

13. Materiality - also known as doctrine of convenience

 practical rule in accounting which dictates that strict adherence to accounting theory is not
required when the items are not significant enough to affect the evaluation, decision and
fairness of the financial statements
 "An item is material if knowledge of it would affect the decision of informed users of the
financial statements."
In the exercise of judgment in determining materiality, the following factors may be considered
1. Size of the item in relation to the total of the group to which the item belongs
2. Size of the company in terms of total sales or capital
3. Nature of the item - an item may be inherently material because by its very nature it
affects economic decision

Generally Accepted Accounting Principles

  Encompasses the conventions, rules and procedures necessary to define what is accepted accounting
practice
 Are conventional and developed on the basis of experience, reason, custom, usage and
practice necessity
Three Classifications:
1. PERVASIVE PRINCIPLES - relate to FS as a whole and specify the general approach in recognizing and
measuring transactions and events that affect financial position and operating results

A. Pervasive measurement principles

a. Initial Measurement Principle (Cost principle) - assets and liabilities generally are initially
recorded at exchange price or original acquisition cost

b. Realization Principle (Revenue principle) - revenue should be recognized when

earned Revenue recognized conditions:
1.The earning process is complete or virtually complete
2.An exchange has taken place
 These conditions lead to traditional revenue recognition at the point of sale. For
business engaged in rendering services, the point of sale is that point when services
are already rendered. However, the point-of-sale realization concept is not absolute.
There are recognized exceptions:
1. Extractive industries, point of production
a. The precious metals have a fixed monetary value and an
established selling price
b. Production is the major economic effort in producing gold and silver and
therefore this being done, revenue may now be recognized
c. The selling costs are usually not very substantial

2. Long term installment sales, point of collection

a. There is possibility of cancellation of the contract
b. Substantial collection costs may be incurred

3. Long term construction contracts, percentage of completion method

a. The degree of completion can be determined with reasonable accuracy

4. Cash basis - income is recognized when received regardless of when earned

 Reason: simplicity and convenience

5. Sunk cost or cost recovery method - highly speculative transaction where the
ultimate outcome is completely unpredictable

c. Matching principles or expense recognition principles - those costs and expenses incurred
in earning the revenue should be reported in the same period

Three expenses recognition principles:

1.Cause and effect association principle - strict matching concept
 the expenses are recognized when the revenue is already recognized

2.Systematic and rational allocation principle - the cost incurred will benefit future
periods and that there is an absence of a direct or clear association of the expense
with specific revenue
 some costs are expensed by simply allocating them over the periods benefited

3.Immediate recognition principle - the cost is expensed outright in the period incurred
a. The cost incurred during the current period provides no discernible benefit
b. The cost recorded as assets in prior period no longer provides discernable benefit
c. Allocation either on the basis of association with revenue or among several accounting
periods is considered to serve no useful purpose

d. Unit of measure principles - the financial statements should have a common denominator, that
is, the unit of measure
1. FS without monetary amounts would be largely unintelligible or
incomprehensible

B. Modifying conventions
a. Conservatism – when alternatives exist, the alternative which has the least effect on the owner’s
equity should be chosen
 Is not a license to deliberately understate net income and net
assets Conservatism is applied as follows:
1. If there is a choice between two acceptable asset values, lower figure is selected
2. If there is a choice between two acceptable liability amounts, higher figure is selected
3. Probable (not possible) loss is recognized if the amount can be reasonably estimated
4. Probable or possible gain is not recognized
 b. Emphasis on Income – the income statement has come to be regarded as the most important of
the financial statements

c. Application of Judgment – background of significant uncertainties in the measurement of assets and

liabilities, judgment becomes an inevitable consequence

2. BROAD OPERATING PRINCIPLES

A. Principle of selection - convention that guides the recognition or nonrecognition of "accountable"
events
 Only those activities that have an effect on the assets, liabilities, and capital are considered
accountable events (quantifiable)

B. Principle of measurement -convention that determines the quantification of financial data

Four measure principles
a. Past exchange price - historical cost, primary basis of measurement
b. Current purchase exchange price - current replacement cost or market value in connection with
the lower of cost or market rule
c. Current sale exchange price - current selling price which is usually used in measurement
inventory of precious metals
d. Future exchange price - present value or discounted value of future net money receipts

C. Principle of statement presentation - specific guidelines in making the FS more useful

and understandable and guide the communication of information to interested users
These principles are:
1. The basic statements include the balance sheet, income statement, statement of retained
earnings and statement of cash flows
2. The balance sheet should be prepared in conformity with GAAP
3. The income statement should be prepared in accordance with GAAP
4. The statement of cash flows should properly describe all cash effects of the company's
operating, financing and investing activities
5. The basic time period for financial statements is one year
6. Financial information about foreign operations should be translated into Philippine pesos
7. Proper classifications are to be made, like sales, cost sales, selling expenses, administrative
expenses, current assets, investments, property, plant and equipment, intangibles, etc.
8. There should be disclosure of significant accounting policies
9. No particular form of FS is presumed better than all others
10. The earnings per share should be disclosed on the face of the income statement

3. DETAILED PRINCIPLES - prescribe definitely how transactions are recorded, classified, summarized
and presented
 Means of implementing the pervasive and broad operating principles

Sources of Accounting Principles

 A principle is "generally accepted" if it has substantial authoritative support
1. SFAS (statements of financial accounting standards." by the (ASC)
2. Custom, usage of practice found in business
3. Writings or views of CPAs
4. Views of the financial community - stock exchanges, commercial, and investment bankers)
5. Published pronouncements of professional bodies like the PICPA and AICPA
6. Regulations and accounting pronouncements of the Similarities and Exchange Commission
7. Statements by the Board of Accountancy
8. Laws

Characteristics and Limitations

1. Financial accounting and financial statements are primarily historical
2. Financial account present general-purpose information and therefore designed to serve the
common needs of users
3. Financial Statements are fundamentally related
4. Information about financial position and results or operations is classified based on presumed needs of
users
5. Transactions and events of similar characters are grouped and presented in summary form
6. Financial statements are expressed in terms of a unit of measure - peso
7. Financial statements generally do not purport to reflect current value
8. The accrual accounting is usually followed
9. Estimates and informed judgment are used in assigning peso amounts to complex and
uncertain transactions
10. When economic substance differs from legal form, the economic substance of the transaction
is emphasized

SFAC - BY FASB - AICPA (CONCEPTS)

SFAS - BY ASC - PICPA (STANDARDS)
ACCOUNTING PRINCIPLES AND USERS OF FINANCIAL STATEMENTS (GRADE 11 LESSON)
Financial Statements:
1. Income Statement - revenue
2. Balance Sheets – assets, liabilities, and equity (three permanent accounts)
3. Statement of Cash Flow (SCF) - inflow and outflow of cash
4. Statement of Changes in Equity (SCE) - shows the balance and capital of the owner

 The primary purpose of accounting is to provide financial information or financial reports to statement
users, whether internal user or external user.
 The product of the accounting process is what you call the financial statement.
 After preparation of the financial statement, the auditor will conduct an audit. The auditor will examine
whether the financial statement is in accordance with the standard or principles and concepts of
accounting. The auditor will examine whether the financial statements taken as a whole are free of
material mis-statement, whether due to due to error and are presented unfairly in all material respects,
in accordance with the financial reporting standards.

BASIC ACCOUNTING CONCEPTS/PRINCIPLES

- Basic accounting principles will guide in the preparation or the presentation of the accounts in
your financial statements.
- The accounting assumptions and principles provide the basis in preparing, presenting, and
interpreting general purpose financial statements.
- Purpose of financial statements is to provide or assist the users of information in making
economic decisions or informed judgement and better decision of the operation of the
organization.

1. Accrual Principle (Accrual Basis of Accounting)

- Foundation of the accrual basis of accounting
- Income/revenue is recognized when earned regardless of when collected and purchases/expenses are
recognized when incurred regardless of when paid (means that you have already purchased a particular
item or an asset in the particular or specific period of time however this is one credit. No outflow of
cash but already received the item)
- Purchases are recorded automatically during the transaction even without outflow of cash
- It is important for the construction of financial statements that show what actually happened in an
accounting period, rather than being artificially delayed or accelerated by the associated cash
flows.
- If we wait for the time of payment or time of collection, there would be delayed in recording
of transactions which is why accrual method is used in recording transaction in accounting
- No inflow of cash still considered by as income
- Recognize income/revenue and bills/accounts receivable from customers
- Example: When there are purchases on credit. (Example of accrual accounting)
Received bill from PECO (Expenses are recognized when incurred regardless of when paid) - upon receiving the
bill, immediately recognized bills payable, record expenses like electricity
Rendered services on account (Income is recognized when earned regardless of when collected)

Two Types of Revenue Recognition in Accounting

a. Accrual Basis Accounting
b. Cash Basis Accounting
- Is where we record income when collected, regardless when service was rendered or sale of the item,
record expenses when paid, regardless when incurred
- Opposite of accrual accounting
- Focus on outflow and inflow of cash
- Don't recognize revenue because there is no inflow of cash
- We have to wait for the collection and the payment of expenses before we recognize revenue
and expenses

2. Accounting Entity Concept/Economic entity principle

- A specific business enterprise is treated as one accounting entity, separate and distinct from its owners
- All the assets, liabilities and capital of the business is different from the owner's assets and liabilities.
- the concept that the transactions of a business should be kept separate from those of its owners
and other businesses.
- This prevents intermingling of assets and liabilities among multiple entities, which can cause
considerable difficulties when the financial statements/reports of a fledgling business are first audited
- This will provide the users of the financial information of financial report informed judgement and
better decision about the operation the business entity.

3. Conservatism Principle
- the concept that you should record expenses and liabilities as soon as possible, but to record revenues
and assets only when you are sure that they will occur.
- introduces a conservative slant to the financial statements that may yield lower reported profits, since
revenue and asset recognition may be delayed for some time.
- this principle tends to encourage the recordation of losses earlier, rather than later. This concept can be
taken too far, where a business persistently misstates its results to be worse than is realistically the case.

4. Consistency Principle
- the concept that, once you adopt an accounting principle or method, you should continue to use it until
a demonstrably better principle or method comes along.
- Not following the consistency principle means that a business could continually jump between different
accounting treatments of its transactions that makes its long-term financial results extremely difficult to
discern.
- Primary purpose is for the organization to use at least one accounting method in recognizing a particular
account

5. Cost Principle
- the concept that a business should only record its assets, liabilities, and equity investments at
their original purchase costs.
- The presentation of assets, liabilities, and capital on the financial statements, specifically on the balance
sheet must be based on cost
- principle is becoming less valid, as a host of accounting standards are heading in the direction
of adjusting assets and liabilities to their fair values

6. Full Disclosure Principle

- the concept that you should include in or alongside the financial statements of a business all of
the information that may impact a reader's understanding of those statements
- accounting standards have greatly amplified upon this concept in specifying an enormous number of
informational disclosures.

7. Going Concern Principle

- Also known as continuing concern concept or continuity assumption, it means that the business entity
will continue to operate indefinitely
- This is the concept will remain in operation foreseeable future
- means that you would be justified in deferring the recognition of some expenses, such as deprecation
(refers to the amount or the value of a certain property which depreciates over time. Ex. Building, until
later periods, until it is justified that the organization or business will stop its operation but if there is
no reason or material uncertainty related to going concern issue, you still need to report recognition of
some expenses
- recognize all expenses at once and not defer any of them.
- No forever, only going concern. No absolute assurance that the business will continue over time

8. Matching Principle
- the concept that, when you record revenue, you should record all related expenses at the same time.
- you charge inventory to the cost of goods sold at the same time that you record revenue from the
sale of those inventory items.
- cornerstone of the accrual basis of accounting. The cash basis of accounting does not use the
matching the principle.

9. Materiality Principle
- the concept that you should record a transaction in the accounting records if not doing so might
have altered the decision-making process of someone reading the company's financial statements
- A vague concept which is difficult to quantify which causes controllers to record even the
smallest transactions
 10. Monetary Unit Principle
- the concept that a business should only record transactions that can be stated in terms of a unit of
currency.
- Transactions are recorded in terms of money and are quantifiable. The currency has a stable
purchasing power.
- it is easy enough to record the purchase of a fixed asset, since it was bought for a specific price,
whereas the value of the quality control system of a business is not recorded.
- keeps a business from engaging in an excessive level of estimation in deriving the value of its assets
and liabilities.

Ex.: Hiring of an employee- transaction that is not quantifiable and entry should not be recorded
Purchase of machinery for cash P13,000- expressed in money and entry should be recorded for the outflow
of cash

11. Reliability Principle

- the concept that only those transactions that can be proven should be recorded.
- This concept is of prime interest to auditors, who are constantly in search of the evidence
supporting transactions.
- Example, a supplier invoice is solid evidence that an expense has been recorded.

12. Revenue Recognition Principle

- the concept that you should only recognize revenue when the business has substantially completed
the earnings process

13. Time Period Concept/Principle

- The indefinite life of an enterprise is subdivided into time periods or accounting periods which
are usually of equal length for the purpose of preparing financial reports
- the concept that a business should report the results of its operations over a standard period of time.
- This qualifies as the most obvious of all accounting principles, but is intended to create a standard set
of comparable periods, which is useful for trend analysis

Two time periods for the preparation of financial reports:

- Calendar method - starts January 1 to December 31
- Accounting method/cycle - starts based on the month that the business started and ends exactly a
year later

USERS OF ACCOUNTING INFORMATION: the owners and investors, management, suppliers, lenders, employees,
customers, the government and the general pub