FINANCIAL ACCOUNTING AND REPORT 1

By: Prof. Romalyn Endozo

MONDAY & WEDNESDAY 5:00-8:00 PM
SY. 2022-2023

1. QUANTITATIVE INFORMATION – numbers,

CHAPTER 1 : INTRODUCTION TO ACCOUNTING quantities, or units
\ 2. QUALITATIVE INFORMATION – words or
DEFINITION OF ACCOUNTING descriptive form. It is found in notes to
financial statements as well as on the face
Accounting is a process of identifying, recording of the other components of financial
and communicating economic info that is useful in statements.
making economic decisions. 3. FINANCIAL INFORMATION – expressed in
money. It is also quantitative info because
Essential elements of the definition of accounting: monetary amounts are normally expressed
1. IDENTIFYING in numbers.
 the accountant analyzes each
business transaction and identifies ACCOUNTING AS SCIENCE AND ART
whether the transaction is an 1. SOCIAL SCIENCE – body of knowledge
“accountable event” or “non- which has been systematically gathered,
accountable event. classified and organized.
 This is because only “accountable 2. PRACTICAL ART – use of creative skills and
events” are recorded in the books judgement
of accounts.

“Accountable events” or ‘economic

events’ are those that affect assets, liab,
equity, income or expenses of a business.

2. RECORDING Bookkeeping and accounting are NOT the same.

 the accountant recognizes (records)
the identified “accountable events”.  BOOKKEPPING refers to the process of
This process is called journalizing recording the accounts or transactions of
an entity. It normally ends with the
Account is the basic storage of information in preparation of the trial balance. Unlike
accounting (cash, land, sales) accounting, bookkeeping does not require
the interpretation of the significance of the
3. COMMUNICATING information processed.
 at the end of each accounting  ACCOUNTING covers the whole process of
period, the accountant summarizes identifying, recording, and communicating
the information processed in the information to interested users.
accounting system in order to
produce meaningful reports. FUNCTIONS OF ACCOUNTING IN BUSINESS
 Accounting info is communicated to
interested users through ACCOUNTING is often referred to as the “language
accounting reports, the most of business” because it is fundamental to the
common form of which is the communication of financial information.
financial statements.
ACCOUNTING has the following two broad
NATURE OF ACCOUNTING functions in a business:
1. To provide external users with information
Accounting is a process with the basic purpose of that is useful in making, among others,
providing information about economic activities investment and credit decisions; and
that is intended to be useful in making economic 2. To provide internal users with information
decisions. that is useful in managing the business.

TYPES OF INFORMATION PROVIDED BY USERS OF ACCOUNTING INFORMATION

ACCOUNTING 1. INTERNAL USERS – directly involved in
managing the business
 FINANCIAL ACCOUNTING AND REPORT 1

By: Prof. Romalyn Endozo

MONDAY & WEDNESDAY 5:00-8:00 PM
SY. 2022-2023
EXAMPLE
 Business owners Other ancient civilizations keepin
 Board of directors records are Babylonia (4500 B.C.), Egypt (2250
 Managerial Personnel B.C.), China and Greece. In the middle ages (13th
and 15th centuries), trade flourished in places
2. EXTERNAL USERS – not directly involved such as Florence, Venice and Genoa. This has
EXAMPLE brought advancement in account keeping
 Existing and potential investors methods. In 1211 A.D., one of the systems in
(stockholders) accounting was kept by a Florentine banker.
 Lenders (banks) and Creditors However, the system was primitive as the concept
(suppliers) of equality for entries was absent. Double entry
 Government agencies (BIR, SEC) records first came out during 1340 A.D. in Genoa.
 Non-managerial employees
 Customers In 1494, the first systematic record keeping
 Public dealing with the "double entry recording system"
was formulated by Fra Luca Pacioli, a Franciscan
TYPES OF ACCOUNTING INFORMATION monk and mathematician. The "double entry
CLASSIFIED AS TO USER’S NEEDS recording system" was included in Pacioli's book
1. GENERAL PURPOSE accounting titled "Summa di Arithmetica Geometria
information – meet common needs. It is Proportioni and Proportionista," published on
provided by financial accounting and November 10, 1494 in Venice.
prepared by external users.
2. SPECIAL PURPOSE accounting information The concept of "double entry recording" is being
– meet specific needs. It is provided by used to this day. Thus, Fra Luca Pacioli is
management accounting or other branches considered as the father of modern accounting.
of accounting and is prepared primarily for
internal users. BRANCHES OF ACCOUNTING

BRIEF HISTORY OF ACCOUNTING 1. Financial accounting – focuses on general

purpose of financial statements
Accounting can be traced as far back as
Financial reporting – is the provision of
the prehistoric times. Since the dawn of financial information about an entity that is
civilization when mankind began to engage in useful to external users
trade, perhaps more than 10,000 years ago, 2. Management accounting – accumulation
methods of record keeping, and accounting have and communication of information for use
been invented. by internal users.
3. Government accounting – accounting for
government and its instrumentalities
4. Auditing – involve the inspection of an
entity’s financial statements or business
processes to ascertain their
correspondence with an established
criteria.
As early as 8500 B.C, accounting5.hasTax accounting – preparation of tax returns
already existed. Archaeologists have found clay and rendering tax advice
tokens as old as 8500 B.C. in Mesopotamia which 6. Cost accounting – systematic recording
were usually cones, disks, spheres and pellets. and analysis of the costs of materials,
These tokens correspond to commodities like labor, and overhead incident to the
sheep, clothing or bread. They were used in the production of goods or rendering of
Middle West in keeping records. services.
7. Accounting education – teaching
After some time, the tokens were replaced accounting and accounting-related
by wet clay tablets. During such time, experts subjects in an organized learning
concluded this to be the start of the art of writing. environment. It is a process of facilitating
(Source: http://EzineArticles.com/456988) the acquisition of knowledge and skills
 FINANCIAL ACCOUNTING AND REPORT 1

By: Prof. Romalyn Endozo

MONDAY & WEDNESDAY 5:00-8:00 PM
SY. 2022-2023
regarding one or more of the other 4. MATCHING (or association of cause and
branches of accounting. effect)
8. Accounting research – careful analysis of  Some costs are initially recognized
economic events and other variables to as assets and charged as expenses
understand their impact on decisions. only when the related revenue is
recognized.
Financial accounting focuses on the information
needs of external users, while management 5. ACCRUAL BASIS
accounting focuses on the information needs of  Economic events are recorded in
internal users. the period in which they occur
rather than the point when they
External users are those who are not directly affect cash.
involved in managing the business. Internal users
are those who are directly involved in managing 6. PRUDENCE (or conservatism)
the business.  Accountant observes some degree
of caution when exercising
judgments needed in making
CHAPTER 2 : ACCOUNTING CONCEPTS AND accounting estimates under
PRINCIPLES conditions of uncertainty. If the
accountant needs to choose
INTRODUCTION between a potentially unfavorable
Accounting concepts and principles outcome versus a potentially
(assumptions or postulates) favorable outcome, the accountant
 are a set of logical ideas and procedures chooses the unfavorable one.
that guide the accountant in recording
and communicating economic 7. TIME PERIOD (Periodicity, acc period, or
information reporting period concept)
 provide reasonable assurance that  The life of the business is divided
information communicated to users is into series of reporting periods.
prepared in a proper way.  Calendar year
 Fiscal Year
BASIC ACCOUNTING CONCEPTS  Interim Period

Conceptual Framework for Financial Reporting 8. STABLE MONETARY UNIT

 All are stated in terms of a common
1. SEPARATE ENTITY CONCEPT unit of measure, which is peso.
 The business is viewed as a  The purchasing power of peso is
separate person, distinct from regarded as stable
owner(s).  Changes in the purchasing power
 Only transactions of the business is due to inflation are ignored.
recorded
9. MATERIALITY CONCEPT
2. HISTORICAL COST CONCEPT (Cost  Guides accountant in applying
Principle) accounting principles
 Assets are initially recorded at their  Accounting principles are only
acquisition cost applicable to material items.
 Item is material if its omission or
3. GOING CONCERN ASSUMPTION misstatement could influence
 The business is assumed to economic decisions.
continue exist for an indefinite  A matter of professional judgement
period of time. and is based on the size and nature
 Liquidating concern is the opposite of an item.
of this assumption.
10. COST BENEFIT (Cost constraint)
 FINANCIAL ACCOUNTING AND REPORT 1

By: Prof. Romalyn Endozo

MONDAY & WEDNESDAY 5:00-8:00 PM
SY. 2022-2023
 The cost of processing and
communicating information should
not exceed the benefits to be
derived from the information’s use.

11. FULL DISCLOSURE PRINCIPLE

 Related to both the concepts of
materiality and cost-benefit.
 Information should be
communicated to users to reflect a
series of judgemental tradeoffs that
strive for:
a. Sufficient detail to disclose matters
that make a difference to users, yet
b. Sufficient condensation to make the
information understandable,
keeping in mind the costs of
preparing and using it.

12. CONSISTENCY CONCEPT

 Requires a business to apply
accounting policies consistently,
and present it from one period to
another.
 Accounting policies use this year
shall be the same accounting
policies used last year.
 It can be change if it is required by
the standard or the change would
result in more relevant and more
reliable information.