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Overview of Accounting

Accounting is the process of identifying, measuring, and communicating economic information. It involves three main activities: identifying economic events, measuring them using various bases like historical cost and fair value, and communicating the information through financial statements and reports. Financial statements provide both quantitative and qualitative information to meet the general needs of most users according to accounting standards.
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0% found this document useful (0 votes)
43 views7 pages

Overview of Accounting

Accounting is the process of identifying, measuring, and communicating economic information. It involves three main activities: identifying economic events, measuring them using various bases like historical cost and fair value, and communicating the information through financial statements and reports. Financial statements provide both quantitative and qualitative information to meet the general needs of most users according to accounting standards.
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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❖ Fair Value

❖ Realizable Value
❖ Current Cost
❖ Inflation-adjusted costs
FSs are said to be prepared using a mixture of costs and
values.
Accounting • COSTS include historical cost and current
Is the process of identifying, measuring, and cost.
communicating economic information to permit • VALUES include other measurement bases.
informed judgments and decisions by users of
information (American Association of Accountants) Valuation by fact or opinion
Often refereed to as a “language of business” Use of estimated is essential in providing relevant
because it is fundamental to the communication of information. Thus, FSs are said to be a mixture of
financial information. fact and opinion.

• ESTIMATES means the items measured


THREE IMPORTANT are said to be valued by OPINION.
ACTIVITIES IN ACCOUNTING o Examples:
▪ Estimates of uncollectible
IDENTIFYING amounts of receivables
▪ Depreciation and
Analyzing events or transactions to know if they amortization expenses,
should be recognized or not. which are affected by
• If recognized, make a journal entry. estimates of useful life
and residual value
• Only accountable events are
▪ Estimated liabilities, such
recognized/journalized. ACCOUNTABLE
as provisions
EVENTS/ECONOMIC ACTIVITY are one that ▪ Retained Earnings, which
affects assets, liabilities, equity, income, or is affected by various
expenses of an entity. estimates of income and
• NON-ACCOUNTABLE EVENTS are not expenses.
recognized but if there is accounting • UNAFFECTED BY ESTIMATES means that
relevance, it should be disclosed to notes to the items measured are said to be
financial statements through a
valued by FACT.
memorandum entry.
o Examples:
▪ Ordinary share capital
MEASURING valued at par value
Involves assigning numbers, usually in monetary ▪ Land stated at acquisition
terms, to economic transactions and events. cost
▪ Cash measured at face
Several measurement bases include but not limited to: amount
❖ Historical costs (most commonly used)
❖ Present Value
COMMUNICATING ECONOMIC ENTITY
A separately identifiable combination of
Process of transforming economic data into
useful accounting information, such as FSs and persons and property that uses or controls
other accounting reports, for dissemination to economic resources to achieve certain goals or
users. objectives.

THREE ASPECTS
❖ Recording – process of systematically TYPES OF INFORMATION
committing into writing the identified and
measured accountable events in the journal PROVIDED BY ACCOUNTING
through journal entries
❖ QUANTITATIVE INFORMATION
❖ Classifying – grouping of similar and - expressed in numbers, quantities, or
interrelated items into their respective units
classes through postings in the ledger ❖ QUALITATIVE INFORMATION
❖ Summarizing – expressing in condensed - expressed in words or descriptive
form the recorded and classified form
transactions and events. - found in the notes to FSs as well as
- includes the preparation of FSs and on the face of the other FSs
other accounting reports ❖ FINANCIAL INFORMATION
- expressed in money
Interpreting involves the computation of financial
statement ratios.
TYPES OF ACCOUNTING
- Bangko Sentral ng Pilipinas (BSP) require certain
financial ratios to be disclosed in the notes to financial INFORMATION CLASSIFIED AS
statements.
TO USERS’ NEEDS
BASIC PURPOSE OF ❖ GENERAL PURPOSE ACCOUNTING INFORMATION
- designed to meet the common needs of
ACCOUNTING most statement users
- provided under financial accounting
Basic purpose is to provide information that is useful in
making economic decisions. - governed by GAAP represented by the PFRSs
❖ SPECIAL PURPOSE ACCOUNTING INFORMATION
Various sources of information: - designed to meet the specific needs of
❖ Financial Statements particular statement users
❖ Current events - provided by other types of accounting other
❖ Industry publications than financial accounting, e.g., managerial
❖ Internet resources accounting and tax basis accounting
❖ Professional advices
❖ Expert systems
Examples of Accounting Concepts:
SOURCES OF INFORMATION IN
FINANCIAL STATEMENTS ❖ DOUBLE-ENTRY SYSTEM - each accountable
Information in the FSs is not obtained exclusively event is recorded in two parts – debit and
from the entity’s accounting records. Some are credit
obtained from external sources. ❖ GOING CONCERN ASSUMPTION – the entity is
assumed to carry on its operations for an
Examples:
indefinite period of time
• Fair value measurements - mixture of costs and values is appropriate
• Resolutions of uncertainties only when the entity is a going concern
• Future lease payments • LIQUIDATING CONCERN
• Contractual commitments - the appropriate measurement
basis is realizable value
ACCOUNTING AS SCIENCE AND ART (estimated selling price less costs
❖ As a social science, accounting is a body of to sell for assets and expected
knowledge which has been systematically settlement amount for liabilities)
gathered, classified, and organized. ❖ SEPARATE ENTITY (Business Entity Concept)
❖ As a practical art, accounting requires the use - the entity is viewed separately from its
of creative skills and judgment. owners
- personal transactions of the owners are not
ACCOUNTING CONCEPTS recorded in the entity’s accounting records
❖ STABLE MONETARY UNIT (Monetary Unit
Refer to the principles upon which the process of
accounting is based. Assumption)
- ALEIE are stated in terms of a common unit
Used interchangeably with: (common denominator) of measure, the
Philippine peso; and
❖ ACCOUNTING ASSUMPTIONS (Accounting
- the purchasing power of the peso is
postulates)
regarded as stable or constant and instability
- fundamental concepts or principles and
is ignored.
basic notions that provide the foundation of
❖ TIME PERIOD (Periodicity) – the life of the entity
the accounting process
is divided into series of reporting periods
❖ ACCOUNTING THEORY
• CALENDAR YEAR – starts on January
- set of broad principles that provide general
1 and ends on December 31 of the
frame for reference by which accounting
same year.
practice can be evaluated
• FISCAL YEAR – also covers 12
- guide the development of new practice and
months but starts on a date other
procedures
than January 1
- comprises the Conceptual Framework and
❖ MATERIALITY CONCEPT – information is
the Philippine Financial Reporting Standards
material if its omission or misstatement could
(PFRSs)
influence economic decisions
- a matter of professional judgment
❖ COST-BENEFIT (Cost constraint/Reasonable ❖ MATCHING (Association of cause and effect) –
assurance) – the cost of processing and costs are recognized as expenses when the
communicating information should not related revenue is recognized
exceed the benefits to be derived from it. ❖ ENTITY THEORY (income statement) – the
❖ ACCRUAL BASIS OF ACCOUNTING – income is accounting objective is geared towards
recognized when earned rather than when proper income determination.
cash is collected and expenses are recognized - proper matching of costs against revenues
when incurred rather than when paid. - ASSETS=LIABILITIES+CAPITAL
- recorded in the accounting records and ❖ PROPRIETARY THEORY (balance sheet) - the
reported in the FSs of the periods to which accounting objective is geared towards
they relate proper valuation of assets
❖ HISTORICAL COST CONCEPT – the value of an - ASSETS-LIABILITIES=CAPITAL
asset is determined on the basis of ❖ RESIDUAL EQUITY THEORY – applicable when
acquisition cost there are two classes of shares issued –
- this concept is not always maintained such ordinary and preferred
as when inventories are measured at NRV - ASSETS-LIABILITIES-PREFERRED SHAREHOLDERS’
rather than at cost when applying the “lower EQUITY=ORDINARY SHAREHOLDERS’ EQUITY
of cost and NRV” measurement - applied in the computation of book value
❖ CONCEPT OF ARTICULATION – all the per share and return on equity
components of a complete set of financial ❖ FUND THEORY – accounting objective is the
statements are interrelated. custody and administration of funds
- when users use the FSs in making decisions, - cash inflows – cash outflows=fund
they need to use each financial statements in - used in government accounting and
conjunction with the other FSs. fiduciary accounting
❖ FULL DISCLOSURE PRINCIPLE – companies ❖ REALIZATION – process of converting non-
should disclose all information that is cash assets into cash or claims for cash
relevant to their financial statements. - concept that deals with revenue recognition
❖ CONSISTENCY CONCEPT – the FSs are ❖ PRUDENCE (Conservatism) – the use of caution
prepared on the basis of accounting when making estimated under conditions of
principles that are applied consistently from uncertainty, such that assets or income are
one period to the next not overstated and liabilities or expenses are
- Changes in accounting policies are made not understated.
only when: - when exercising prudence, the one which
• Required or permitted by the has the least effect on equity is chosen
PFRSs ❖ SUBSTANCE OVER FORM - concept that the
• When the change results to financial statements and accompanying
more relevant and reliable disclosures of a business should reflect the
information underlying realities of accounting
transactions
Changes in accounting policies are disclosed
in the notes
Example: You are a man, that’s the External users are those who are not involved in
FORM, but if you are a woman at heart, that’s managing the entity
SUBSTANCE

EXPENSE RECOGNITION PRINCIPLES Financial Statements vs. Financial


❖ MATCHING CONCEPT (Direct association of costs
Report
and revenues) – costs that are directly related
FINANCIAL STATEMENTS are the structured representation of an
to the earning of revenue are recognized as entity’s financial position and results of its operations. They
expenses in the same period the related are the end product of the accounting process.
revenue is recognized.
Examples: cost of inventory is initially FINANCIAL REPORT includes FSs plus other information
recognized as asset and recognized as provided outside the FSs that assists in the interpretation of a
expense (cost of sales) when the inventory is complete set of FSs or improves users’ ability to make
sold; freight out and sales commissions efficient economic decisions
❖ SYSTEMATIC AND RATIONAL ALLOCATION –
costs that are not directly related to the Financial Statements Financial Report
earning of revenue are initially recognized as
assets and recognized as expenses over the Statements of Financial Statements of Financial
Position Position
periods their economic benefit are
consumed, using some method of allocation Statement of profit or Statement of profit or loss
Examples: the cost of equipment is loss and other and other comprehensive
initially recognized as asset and subsequently comprehensive income income
recognized as depreciation expense over the
Statement of changes in Statement of changes in
periods the equipment is used; amortization, equity equity
expensing of prepayments, and effective
interest method of allocation Statement of cash flows Statement of cash flows

❖ IMMEDIATE RECOGNITION – costs that do not Notes Notes


meet the definition of an asset, or ceases to
meet the definition of an asset, are expensed Additional statement of Additional statement of
immediately financial position financial position

Examples: casualty losses and Other information


impairment losses
PRIMARY OBJECTIVE OF FINANCIAL REPORTING
FINANCIAL ACCOUNTING
To provide information about an entity’s
Branch of accounting that focuses on general economic resources, claims to those resources, and
purpose financial statements changes in those resources.

Governed by the Philippine Financial Reporting SECONDARY OBJECTIVE OF FINANCIAL REPORTING


Standards (PFRSs)
To provide information useful in assessing the
entity’s management stewardship (how efficiently
and effectively the entity’s management has useful, e.g., double-entry recording and other implicit
discharged its responsibilities to use the entity’s concepts
economic resources)
Majority of practicing accountants must agree with a
BOOKKEEPING standard before it becomes implemented.

Refers to the process of recording the accounts or HIERARCHY OF REPORTING STANDARDS


transaction of an entity.
When selecting its accounting policies, an entity considers the
Normally ends with the preparation of the trial following in descending order:
balance.
a. PFRSs
Unlike accounting, bookkeeping does not require the b. In the absence of PFRSs, management shall
interpretation of the significance of the processed use its judgment in developing and applying
information. an accounting policy that results in
information that is relevant and reliable.
In making the judgment:
ACCOUNTING STANDARDS
• Management shall (must)refer to, and
The Philippine Financial Reporting Standards (PFRSs) consider the applicability of, the following
represent the generally accepted accounting sources in descending order:
principles (GAAP) in the Philippines. o The requirements in PFRs
dealing with similar and
The PFRSs are Standards and Interpretations adopted related issues;
by the Financial Reporting Standard Council (FRSC). They o The Conceptual Framework
comprise: • Management may (optional) also consider
the following:
a. PFRSs (accompanied by guidance to assist entities in
applying their requirements) o Pronouncements of other
b. Philippine Accounting Standards (PASs); and standard-setting bodies
c. Interpretations o Accounting literature and
accepted industry practices
The need for reporting standards Although the selection of appropriate accounting
For FSs to be useful, they should be prepared using policies is the responsibility of the entity’s
reporting standards that are generally acceptable. management, the proper application of accounting
Entities should follow a uniform set of reporting principles is most dependent upon the professional
standards when preparing and presenting FSs. judgment of the accountant.

The term “generally acceptable” means that either: ACCOUNTING STANDARD SETTING
a. The standard has been established by an BODIES AND OTHER RELEVANT
authoritative accounting rule-making body, e.g., the ORGANIZATIONS
PFRSs adopted by the FRSC; or
b. The principle has gained several acceptances due to
❖ FINANCIAL REPORTING STANDARDS COUNCIL
practice over time and has been proven to be most (FRSC) – the official accounting standard
setting body in the Philippines created under
the Philippine Accountancy Act of 2004 (R.A.
No. 9298)
❖ PHILIPPINE INTERPRETATIONS COMMITTEE
(PIC) – a committee formed by the
Accounting Standards Council (ASC), the
predecessor of FRSC, with the role of
reviewing the interpretations of the
International Financial Reporting
Interpretations Committee (IFRIC) for
approval and adoption by the FRSC
❖ BOARD OF ACCOUNTANCY (BOA) – the
professional regulatory board created under
R.A. No. 9298 to supervise the registration,
licensure, and practice of accountancy in the
Philippines.
❖ SECURITIES AND EXHANGE COMMISSION (SEC)
– is the government agency tasked in
regulating corporations and partnerships,
capital and investment markets, and the
investing public.
❖ BUREAU OF INTERNAL REVENUE (BIR) –
administers the provisions of the National
Internal Revenue Code
❖ BANGKO SENTRAL NG PILIPINAS (BSP) –
influences the selection and application of
accounting policies by banks and other
entities performing banking functions
❖ COOPERATIVE DEVELOPMENT AUTHORITY (CDA)
– influences the selection and application of
accounting policies by cooperatives

CHANGES IN REPORTING STANDARDS


Once established, financial reporting standards are
continually reviewed, revised, or superseded.
Changes to reporting standards are primarily made in
response to user’s needs. Legal, political, business
and social environments also influences changes in
reporting standards.

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