BASIC FINANCIAL ACCOUNTING AND --allows users to obtain timely information to

REPORTING: MIDTER REVIEWER serve as basis on making economic decisions

about future activities
ACCOUNTING: --one year or 12 months is the usual accounting
--quantifies business communication (language period
of business)
--is a service activity. Its function is to provide STABLE MONETARY CONCEPT
quantitative information, primarily financial in --the purchasing power of peso is stagnant
nature, about economic entities that is intended --the accounting entity must use a common
to be useful in making economic decisions. denominator, e.g., convert foreign currencies into
(Accounting Standards Council: ASC) Philippine peso.
--is an information system that measures,
processes, and communicates financial GOING CONCERN
information about an economic entity. (Financial --underlying assumption that the entity will
Accounting Standards Board: FASB) continue its operations for the foreseeable future
--An accounting information system is the GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
combination of personnel records, and (GAAP)
procedures that a business uses to meet 3 CRITERIA FOR THE GENERAL ACCEPTANCE OF
its need for financial information AN ACCOUNTING PRINCIPLE:
The Accounting Process -> Accounting 1. Relevance
Information --it results to information that is meaningful and
-> Decision Makers -> Economic Activities useful to those who need to know something
--is a science-- is the process of identifying, about a certain organization
measuring, and communicating economic 2. Objectivity
information to permit informed judgement and --the resulting information is not influenced by
decision by users of the information (American the personal bias or judgement of those who
Accounting Association: AAA) furnish it
Phases of Accounting: --objectivity connotes reliability and
1. Recording trustworthiness
2. Classifying --also connotes verifiability, involves finding out if
3. Summarizing the information is correct
4. Interpreting 3. Feasibility
--is an art—the art of recording, classifying and --it can be implemented without undue
summarizing in a significant manner and in terms complexity or cost.
of money, transactions and events which are in
part at least of a financial character and BASIC PRINCIPLES
interpreting the results thereof. OBJECTIVITY PRINCIPLE
--accounting records and statements are based on
FUNDAMENTAL CONCEPTS the most reliable data available so that they will
ENTITY CONCEPT be as accurate and as useful as possible.
--the transactions of different entities should not --no bias or judgement
be put together, each entity should be evaluated
separately HISTORICAL COST
--e.g., the personal transactions or records of the --assets should be recorded at their actual cost
owners should not affect or be recorded in the not at that the management thinks they are
entity’s records worth as at reporting period

PERIODICITY CONCEPT REVENUE RECOGNITION PRINCIPLE

--subdividing an entity’s life into equal time --revenue is recognized when goods are delivered
period for reporting purposes and services are rendered

EXPENSE RECOGNITION PRINCIPLE

--expenses are recognized when goods and SECTION 4 (Scope of Practice)
services are used up to produce revenue and not 1. Practice in Public Accountancy
when the entity pays for those goods --render professional services as a CPA to more
than one client on a fee basis
ADEQUATE DISCLOSURE 2. Practice in Commerce and Industry
--all relevant information that would affect the --involved in decision making, requiring
user’s understanding and assessment of the professional knowledge in the science of
accounting entity be disclosed in the financial accounting
statement 3. Practice in Education or Academe
--a person in an educational institution which
MATERIALITY involves teaching accounting, auditing, etc.
--concerned with information that is significant 4. Practice in Government
enough to affect evaluations and decisions --position in an accounting professional group in
--consider the size and nature of the item government

CONSISTENCY PRINCIPLE SECTION 5 (The Professional Regulatory Board

--use the same accounting method from period to of Accountancy and its Composition)
period to achieve comparability over time with a --composed of a chairman and 6 members
single enterprise, however, changes are permitted appointed by the President of the Philippines
if justifiable and disclosed in the financial form a list of 3 recommendees for each position
statement. and ranked by the Commission, from a list of 5
nominees for each position.
ACCOUNTANCY IN THE PHILIPPINES --elect a vice-chairman among the members for
Republic Act No. 3105—the law which paved way one term only (1 year)
for local accountants to do the work for which, up
to that time was performed by foreign
accountants in the country SECTION 6 (Qualifications of Members of the
Professional Regulatory Board)
 Don Vicente Fabella—first Filipino CPA in --CPA with at least 10 years of work experience in
the United States any scope of accountancy
 Dr. Nicanor Reyes—founder of FEU
(former Institute of Accountancy) SECTION 13 (The CPA Examinations)
 Belen Enrile-Gutierrez—first Filipino CPA --required to undergo a licensure examination in
 Jaime Hernandez and Paciano Diaz—first compliance with the requirements prescribed by
and second Filipino auditor generals of the Commission in accordance with RA 8981
COA
 Manuel Villar—Filipino Tycoon SECTION 14 (Qualifications of Applicants for
 Washington SyCip—past president of IFAC, Examination)
only Asian who held the position of
founder and past chairman of SGV & Co. SECTION 15 (Scope of Examination)
 Jose W. Diokno --FORMER SUBJECTS:
 Wenceslao Lagumbay  Theory of Accounts
 Albert Ramulo  Business Law and Taxation
 Andres Soriano—founder of one of the  Management Services
country’s leading conglomerates  Auditing Theory
 Manuel Morales—member of the  Auditing Problems
Monetary Board of BSP during Ramos  Practical Accounting Problems 1
presidency  Practical Accounting Problems 2
--REVISED:
ACCOUNTANCY ACT OF 2004 (RA 9298)  Financial Accounting and Reporting (FAR)
--signed by Gloria Macapagal-Arroyo in May 13,  Taxation
2004
  Regulatory Framework for Business --integrated national professional organization
Transactions (RFBT) of CPAs in the Philippines
 Advanced Financial Accounting and --values: integrity, professional excellence,
Reporting (AFAR) innovation, discipline, teamwork, social
 Management Advisory Services responsibility, and commitment
 Auditing --4, geographical areas, 9 regions, 4 sectors
--PROPOSED AMENDMENTS --25 national directors; 21 geographical directors
 Financial Accounting and Reporting and 4 sectorial directors
 Business Analysis and Reporting (also
known as MAS) ACCOUNTING STANDARDS IN THE PHILIPPINES
 Auditing Accounting Standards Council (ASC)
 Information Systems and Control (new --created by PICPA to establish and improve
sub) accounting standards that will be generally
 Taxation accepted in the Philippines
 RFBT
Financial and Sustainability Reporting Standards
SECTION 16 (Rating in the Licensure Exam) Council (FSRSC)
--general average of 75% with no grade lower --Per Sec. 9a of RA 9298, FSRSC shall be the new
than 65% in any given subject accounting standard setting body
--rating of 75% and above in at least majority of
the subject, he/she shall receive conditional CORE COMPETENCIES FRAMEWORK FOR
credit for the subjects passed provided that ACCOUNTANTS
he/she will take the examination 2 years from the --to improve the entry-level qualification
preceding examination requirements for Filipino CPAs
--failure to obtain at least a general average of --to produce technically competent and ethical
75% and a rating of at least 65% in each subject, professional accountants ready to compete
he/she shall be considered failed internationally

SECTION 17 (Report of Ratings) 1. Knowledge

--the board shall submit the ratings obtained by  General Knowledge
each candidate within 10 calendar days after the --developing international perspective
examination, unless extended for just cause  Organizational and Business Knowledge
----conversant of international business
SECTION 18 (Failing Candidates to take refresher and have understanding of how the global
course) business system works
--2 failed examinations shall be disqualified to  Information Technology (IT) Knowledge
take another set of examination unless he/she --implementation and use of IT
completed at least 24 units of subject given in the  Accounting Knowledge
licensure examination --proficiency in accounting
--PROPOSED AMENDMENTS: unlimited chance
to take the examination 2. Skills
 Intellectual
--RA 9298, Sec. 30 Article 4, “all registered CPAs --ability to carry out abstract logical
whose name appears in the roster of CPAs shall thinking and understand critical thinking
be united and integrated through their  Interpersonal
membership in a one and only registered and --the ability to work in groups and being a
accredited national organization or registered and team player
licensed CPAs…”  Communication
--active listening skills and the ability to
Philippine Institute of Certified Public communicate effectively one’s point of
Accountants (PICPA) view, both orally and written.
3. Values --based in race, religion, ethnicity, gender, marital
 Professional Ethics status, or sexual preference.
--work in accordance with the highest 5. Fiduciary Responsibilities
standards of professionalism --the professional must put the client’s interest
 Moral Values ahead of his own
--discern what is morally right or wrong

International Federation of Accountants (IFAC) 6. Sexual Harassment

--international body representing all the major --unwanted repeated or aggressive sexual
accounting bodies across the world commentary
--aims to develop high standards of professional
accountants and enhance the quality of services SARBANES-OXLEY ACT
they provide --attempt to protect investors since Pres.
7 key roles: Franklin Roosevelt’s 1993 Securities Act
1. Co-Pilot following the Great Depression
--leads strategically
2. Navigator CODE OF ETHICS FOR PROFESSIONAL
--steers an organization toward value creation ACCOUNTANTS IN THE PHILIPPINES
3. Brand Protector --a professional accountant is an individual who
--protects an organization hold a valid certificate issued by the Board of
4. Storyteller Accountancy, whether he or she be in public
--enlightens internal and external stakeholders practice, industry, commerce, the public sector or
on organization’s narrative education.
5. Digital and Technology Enabler
--enables a cognitive and data-drive business FUNDAMENTAL PRINCIPLES
that utilizes digitalization 1. Integrity
6. Process and Control Expert --should be straightforward and honest in all
--ensure efficient and effective end-to-end professional and business relationships
processes and workflows
7. Trusted Professional 2. Objectivity
--challenges the organization when needed --should not allow bias, conflict, or undue
with professional objectivity influence of others to override professional or
business judgement
ROLE OF ETHICS IN BUSINESS 3. Professional Competence and Due Care
 Ethics: concerned with right and wrong --maintain professional knowledge and skill at
and how conduct should be judged to be the level required to ensure that client receives
good or bad competent professional service
 Ethical Dilemma: a situation where there a. Attainment
is no obvious right or wrong decision but b. Maintenance
rather a right or wrong answer --Diligence: encompasses the responsibility to act
Examples of Ethical Dilemma: in accordance with the requirements
1. White Collar Crime 4. Confidentiality
--fraud, embezzlement, theft of equipment and --should not disclose any such information to
supplies etc. third parties without proper and specific
2. Whistle-blowing authority unless there is a legal right
--going to authorities or media with proof that a 5. Professional Behavior
company is engaged in wrong-doing --comply with relevant laws and regulations and
3. Conflicts of Interest should avoid any action that discredits the
--a person must play two conflicting roles in a profession
situation
4. Discrimination
  CPR—Control, Potential to produce
economic benefits, and Right

BRANCHES OF ACCOUNTING LIABILITY

1. Financial Accounting --a present obligation of the entity to transfer
--focused on the recording of business economic resource as a result of past events
transactions and the periodic preparation of  The entity has an obligation
reports on financial position and results of  The obligation is to transfer economic
operations resource
2. Cost Accounting  The obligation is a present obligation that
--systematic recording and analysis of the cost of exists as a result of past events, (only if):
materials, labor, and overhead incident to the --the entity has already obtained
production of goods or rendering of services economic benefits or taken an action
3. Government Accounting --as a consequence, the entity will or may
--concerned with the identification of the sources have to transfer an economic resource
and uses of resources consistent with the that it would not otherwise have had to
provisions of city, municipal, provincial, or transfer
national law --obligation is a duty or responsibility that
4. Taxation cannot be avoided, usually owed to another
--preparation of tax returns and the consideration party
of the tax consequences of proposed business
transactions or alternative courses of action EQUITY
5. Auditing --the residual interest in the assets of the entity
--inspection of an entity’s financial statements or after deducting all its liabilities
business processes to ascertain their --claims against the entity that do not meet the
correspondence with established criteria definition of a liability
6. Management Accounting --for Sole Proprietorship, only one owner’s
--incorporates cost accounting data and adapts equity account
them for specific decisions which management --in Partnership, owner’s equity exists for each
may be called upon to make partner
7. Bookkeeping --in Corporation, owner’s equity or stockholders’
--mechanical task involving the collection of basic equity consists of share capital, retained
financial data earnings and reserves representing
8. Cost Bookkeeping appropriations of retained earnings among
--process that involves the recording of cost data others
in the book of records
FINANCIAL PERFORMANCE
ELEMENTS OF FINANCIAL STATEMENTS INCOME
 Assets, liabilities and equity—relate to a --increases in assets, or decreases in liabilities,
reporting entity’s financial position that results in increases in equity, other than
 Income and expense—relate to a those relating to contributions from holders of
reporting entity’s financial performance equity claim

ASSET EXPENSE
--present economic resource controlled by the --decreases in assets, or increases in liabilities,
entity as a result of past events that results in decreases in equity other than
--an economic resource is a right that has the those relating to contributions from holders of
potential to produce economic benefits equity claim
 a. it expects to realize the asset, or intends to
ACCOUNTING EQUATION sell or consume it, in its normal operating cycle;
Assets = Liabilities + Owner’s Equity b. it holds the asset primarily for the purpose of
trading;
c. it expects to realize the asset within twelve
months after the reporting period; or
d. the asset is cash or a cash equivalent (as
defined in PAS No. 7) unless the asset is
restricted from being exchanged or used to settle
a liability for at least twelve months after the
THE DOUBLE-ENTRY SYSTEM reporting period.
--every debit entry must have a corresponding --All other assets should be classified as non-
credit entry current assets.
--each transaction affects at least two accounts --Operating cycle is the time between the
acquisition of assets for processing and their
DEBIT realization in cash or cash equivalents. When the
--increases in assets entity's normal operating cycle is not clearly
--decreases in liabilities and equity identifiable, it is assumed to be twelve months.
CREDIT
--decreases in assets CURRENT ASSETS
--increases in liabilities and equity CASH
--is any medium of exchange that a bank will
NORMAL BALANCE OF AN ACCOUNT accept for deposit at face value
Assets—Debit (increased by Debit) --it includes coins, currency, checks, money
Liabilities—Credit (increased by Credit) orders, bank deposits and drafts.
Owner’s Capital—Credit (increased by Credit) CASH EQUIVALENTS
Withdrawals—Debit (increased by Debit) --Per PAS No. 7, these are short-term, highly
Income—Credit (increased by Credit) liquid investments that are readily convertible to
Expenses—Debit (increased by Debit) known amounts of cash and which are subject to
an insignificant risk of changes in value.
ACCOUNTING EVENTS AND TRANSACTIONS NOTES RECEIVABLE
--an accounting event is an economic occurrence --a written pledge that the customer will pay the
that affects the assets, liabilities, and equity of an business a fixed amount of money on a certain
entity date.
ACCOUNTS RECEIVABLE
TYPES AND EFFECTS OF TRANSACTIONS --claims against customers arising from sale of
1. Source of Assets (SA) services or goods on credit. This type of
--increase in asset, increase in claims receivable offers less security than a promissory
2. Exchange of Assets (EA) note.
--increase in asset, decrease in another asset INVENTORIES
3. Use of Asset (UA) Per PAS No. 2, these are assets which are:
--decrease in asset, decrease in claims (a) held for sale in the ordinary course of
4. Exchange of Claims (EC) business; (b) in the process of production for
--increase in claims, decrease in another claim/s such sale; or
(c) in the form of materials or supplies to be
STATEMENT OF FINANCIAL POSITION consumed in the production process or in the
ASSETS rendering of services.
--Assets are should be classified only into two: PREPAID EXPENSES
current assets and non-current assets. Per revised --expenses paid for by the business in advance. It
Philippine Accounting Standards (PAS) 1, an entity is an asset because the business avoids having to
shall classify assets as current when: pay cash in the future for a specific expense.
These include insurance and rent. These prepaid
items represent future economic benefits-assets- services, the buyer agrees to pay for them in the
until the time these start to contribute to the near future.
earning process; these, then, become expenses. NOTES PAYABLE
--like a note receivable but in a reverse sense. In
NON-CURRENT ASSETS the case of a note payable, the business entity is
PROPERTY, PLANT AND EQUIPMENT the maker of the note; that is, the business entity
--Per PAS No. 16, these are tangible assets that is the party who promises to pay the other party
are held by an enterprise for use in the a specified amount of money on a specified
production or supply of goods or services, or for future date.
rental to others, or for administrative purposes ACCRUED LIABILITIES
and which are expected to be used during more --amounts owed to others for unpaid expenses.
than one period. Included are such items as land, This account includes salaries payable, utilities
building, machinery and equipment, furniture and payable, interest payable and taxes payable.
fixtures, motor vehicles and equipment. UNEARNED REVENUES
ACCUMULATED DEPRECIATION --the business entity receives payment before
--a contra account that contains the sum of the providing its customers with goods or services,
periodic depreciation charges. The balance in this the amounts received are recorded in the
account is deducted from the cost of the related unearned revenue account (liability method).
asset-equipment or buildings—to obtain book When the goods or services are provided to the
value. customer, the unearned revenue is reduced and
income is recognized.
INTANGIBLE ASSETS CURRENT PORTION OF LONG-TERM DEBT
Per PAS No. 38, these are identifiable, --are portions of mortgage notes, bonds and
nonmonetary assets without physical substance other long-term indebtedness which are to be
held for use in the production or supply of goods paid within one year from the balance sheet date.
or services, for rental to others, or for
administrative purposes. These include goodwill, NON-CURRENT LIABILITIES
patents, subscription lists and non-competition MORTGAGE PAYABLE
agreements, copyrights, licenses, franchises, --records long-term debt of the business entity
trademarks, brand names, secret, processes, for which the business entity has pledged certain
assets as security to the creditor. In the event
LIABILITIES that the debt payments are not made, the
Per revised Philippine Accounting Standards (PAS) creditor can foreclose or cause the mortgaged
No. 1, an entity shall classify a liability as current asset to be sold to enable the entity to settle the
when: claim.
a. it expects to settle the liability in its normal BONDS PAYABLE
operating cycle; --obtain substantial sums of money from lenders
b. it holds the liability primarily for the purpose to finance the acquisition of equipment and other
of trading; needed assets. They obtain these funds by issuing
C. the liability is due to be settled within twelve bonds. The bond is a contract between the issuer
months after the reporting period; or and the lender specifying the terms of
d. the entity does not have an unconditional repayment and the interest to be charged.
right to defer settlement of the liability for at
least twelve months after the reporting period. OWNER'S EQUITY
All other liabilities should be classified as non- CAPITAL (from the Latin capitalis, meaning
current liabilities. "property"). This account is used to record the
original and additional investments of the
CURRENT LIABILITIES owner of the business entity. It is increased by
ACCOUNTS PAYABLE the amount of profit earned during the year or is
--represents the reverse relationship of the decreased by a loss. Cash or other assets that the
accounts receivable. By accepting the goods or owner may withdraw from the business
ultimately reduce it. This account title bears the --portion of the cost of a tangible asset (e.g.
name of the owner. buildings and equipment) allocated or charged as
WITHDRAWALS expense during an accounting period.
--owner of a business entity withdraws cash or UNCOLLECTIBLE ACCOUNTS EXPENSE
other assets, such are recorded in the drawing or --amount of receivables estimated to be doubtful
withdrawal account rather than directly reducing of collection and charged as expense during an
the owner's equity account. accounting period.
INCOME SUMMARY --Bad Debt Expense
--a temporary account used at the end of the INTEREST EXPENSE
accounting period to close income and expenses. An expense related to use of borrowed funds.
This account shows the profit or loss for the
period before closing to the capital account. THE ACCOUNTING CYCLE
The accounting cycle refers to a series of
sequential steps or procedures performed
accomplish the accounting process.
INCOME STATEMENT The steps in the cycle and their aims follow:
INCOME  Step 1 (Transaction Analysis)
SERVICE INCOME Identification of Events to be Recorded
--earned by performing services for a customer or Aim: To gather information about transactions or
client; for example, accounting services by a CPA events
firm, laundry services by a laundry shop.  Step 2 (Transactions are Journalized)
SALES Transactions are Recorded in the Journal
--earned as a result of sale of merchandise; for generally through the source documents.
example, sale of building materials by a Aim: To record the economic impact of
construction supplies firm. transactions on the firm in a journal, which is a
form that facilitates transfer to the accounts.
EXPENSES  Step 3 (Posting)
COST OF SALES Journal Entries are Posted to the Ledger
--cost incurred to purchase or to produce the Aim: To transfer the information from the journal
products sold to customers during the period; to the ledger for classification.
also called cost of goods sold.  Step 4
SALARIES OR WAGES EXPENSE Preparation of a Trial Balance (Unadjusted)
--all payments as a result of an employer- Aim: To provide a listing to verify the equality of
employee relationship such as salaries or wages, debits and credits in the ledger.
13th month pay, cost of living allowances and  Step 5
other related benefits. Preparation of the Worksheet including
TELECOMMUNICATIONS, ELECTRICITY, FUEL AND Adjusting Entries
WATER EXPENSES Aim: To aid in the preparation of financial
--expenses related to use of telecommunications statements.
facilities, consumption of electricity, fuel and  Step 6
water. Preparation of the Financial Statements
RENT EXPENSE Aim: To provide useful information to decision-
Expense for space, equipment or other asset makers.
rentals  Step 7
SUPPLIES EXPENSE Adjusting Journal Entries are Journalized and
--Expense of using supplies (e.g. office supplies) in Posted
the conduct of daily business. Aim: To record the accruals, expiration of
INSURANCE EXPENSE deferrals, estimations and other events from the
--Portion of premiums paid on insurance worksheet.
coverage (e.g. on motor vehicle, health, life, fire,  Step 8
typhoon or flood) which has expired. Closing Journal Entries are Journalized and
DEPRECIATION EXPENSE Posted
Aim: To close temporary accounts and transfer -- The accounts in the general ledger are classified
profit to owner's equity. into two general groups:
 Step 9 1. balance sheet or permanent accounts (assets,
Preparation of a Post-Closing Trial Balance liabilities and owner's equity).
Aim: To check the equality of debits and credits 2. income statement or temporary accounts
after the closing entries. (income and expenses). Temporary or nominal
 Step 10 accounts are used to gather information for a
Reversing Journal Entries are Journalized and particular accounting period. At the end of the
Posted period, the balances of these accounts are
Aim: To simplify the recording of certain regular transferred to a permanent owner's equity
transactions in the next accounting period. account.

This cycle is repeated each accounting period. CHART OF ACCOUNTS

The first three steps in the accounting cycle are --listing of all the accounts and their account
accomplished during the period. The fourth to numbers in the ledger is known as the chart of
the ninth steps generally occur at the end of the accounts. The chart is arranged in the financial
period. The last step is optional and occurs at statement order, that is, assets first, followed by
the beginning of the next period liabilities, owner's equity, income and expenses.
The accounts should be numbered in a flexible
SOURCE DOCUMENTS manner to permit indexing and cross-referencing.
Transactions and events are the starting points in When analyzing transactions, the accountant
the accounting cycle. By relying on source refers to the chart of accounts to identify the
documents, transactions and events can be pertinent accounts to be increased or decreased.
analyzed as to how they will affect performance If an appropriate account title is not listed in the
and financial position. Source documents identify chart, an additional account may be added,
and describe transactions and events entering
the accounting process. These original written TRIAL BALANCE
evidences contain information about the nature --a list of all accounts with their respective debit
and the amounts of the transactions. or credit balances. It is prepared to verify the
These are the bases for the journal entries; some equality of debits and credits in the ledger at the
of the more common source documents are sales end of each accounting period or at any time the
invoices, cash register tapes, official receipts, postings are updated.
bank deposit slips. The procedures in the preparation of a trial
balance follow:
RECORDING 1. List the account titles in numerical order.
THE JOURNAL 2. Obtain the account balance of each
--chronological record of the entity’s transactions account from the ledger and enter the
--Journal Entry: shows all the effects of a business debit balances in the debit column and
transaction in terms of debits and credits the credit balances in the credit column.
--General Journal: simplest journal which is the 3. Add the debit and credit columns.
book of original entry. 4. Compare the totals.
--The trial balance is a control device that helps
POSTING minimize accounting errors. When the totals are
--transferring the amounts from general journal equal, the trial balance is in balance. This equality
to appropriate accounts in the ledger provides an interim proof of the accuracy of the
records but it does not signify the absence of
THE LEDGER errors.
--grouping of accounts --For example, if the bookkeeper failed to record
--General Ledger: “reference book” of the payment of rent, the trial balance columns are
accounting system used to classify and equal but in reality, the accounts are incorrect
summarize transactions and to prepare data for since rent expense is understated and cash
basic financial statements overstated.