(Financial Accounting &

Reporting 1A)
LECTURE AID

2017

ZEUS VERNON B. MILLAN

FAR PART 1A: Zeus Vernon B. Millan

 Chapter 1 Overview of Accounting

Learning Competencies
• Define accounting and understand its basic
purpose.
• Understand the basic concepts applied in
accounting.
• Know the branches of accounting and sectors in
the practice of accountancy.
• Understand the need for financial reporting
standards and how they are developed.
• Appreciate the reason for the adoption of
International Financial Reporting Standards.

FAR PART 1A: Zeus Vernon B. Millan

 Definition of Accounting

• Accounting is the process of identifying,

measuring, and communicating economic
information to permit informed judgment and
decisions by users of information.
AAA (American Association of Accountants)

FAR PART 1A: Zeus Vernon B. Millan

 Three important activities included in the
definition of accounting
1. Identifying - the process of analyzing events and transactions to
determine whether or not they will be recognized in the books.
Only accountable events are recognized in the books.
2. Measuring - involves assigning numbers, normally in monetary
terms, to the economic transactions and events.
3. Communicating - the process of transforming economic data
into useful accounting information, such as financial statements
and other accounting reports, for dissemination to users.

FAR PART 1A: Zeus Vernon B. Millan

 TYPES OF EVENTS
1. External events – events which involve an entity and an external
party.
a. Exchange (reciprocal transfer) – reciprocal giving and receiving
b. Non-reciprocal transfer – “one way” transaction
c. External event other than transfer – an event that involves
changes in the economic resources or obligations of an entity
caused by an external party or external source but does not involve
transfers of resources or obligations.

2. Internal events – events which do not involve an external party.

a. Production – the process by which resources are transformed into
finished goods.
b. Casualty – an unanticipated loss from disasters or other similar
events.

FAR PART 1A: Zeus Vernon B. Millan

 Measurement bases
1. Historical Cost - price based on past exchange
2. Current Cost – price based on current exchange
3. Realizable (settlement) value – net cash that could currently
be obtained by selling the asset in an orderly disposal.
4. Present value – price based on future exchange
5. Fair value - the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market
participants at the measurement date.
6. Fair value less costs to sell – Costs to sell are the incremental
costs directly attributable to the disposal of an asset, excluding
finance costs and income tax expense.
7. Revalued amount is the asset’s fair value at the date of the
revaluation less any subsequent accumulated depreciation and
subsequent accumulated impairment losses.
8. Inflation-adjusted costs – amounts adjusted to the measuring
unit current at the reporting date.
(OPTIONAL APPLICATION: PROBLEM 1-2: #4)
FAR PART 1A: Zeus Vernon B. Millan
 Basic purpose of accounting

• The basic purpose of accounting is to provide

information about economic activities intended
to be useful in making economic decisions.

FAR PART 1A: Zeus Vernon B. Millan

 Types of accounting information classified as to
users’ needs
• General purpose accounting information - designed to
meet the common needs of most statement users. This
information governed by the Philippine Financial
Reporting Standards (PFRSs).

• Special purpose accounting information - designed to

meet the specific needs of particular statement users.
This information is provided by other types of
accounting, e.g., managerial accounting, tax basis
accounting, etc.

FAR PART 1A: Zeus Vernon B. Millan

 Basic Accounting Concepts
• Going concern assumption - the entity is assumed to carry on its
operations for an indefinite period of time.
• Separate entity – the entity is treated separately from its owners.
• Stable monetary unit - amounts in financial statements are stated
in terms of a common unit of measure; changes in purchasing power are
ignored.
• Time Period – the life of the business is divided into series of
reporting periods.
• Materiality concept – information is material if its omission or
misstatement could influence economic decisions.
• Cost-benefit (Reasonable assurance/ Pervasive constraint/ Cost
constraint) – the cost of processing and communicating information
should not exceed the benefits to be derived from it.
FAR PART 1A: Zeus Vernon B. Millan
 Basic Accounting Concepts - Continuation
• Accrual Basis of accounting – effects of transactions are recognized when they
occur (and not as cash or its equivalent is received or paid) and they are recognized in
the accounting periods to which they relate.
• Historical cost concept (Cost principle) – the value of an asset is to be
determined on the basis of acquisition cost.
• Concept of Articulation – all of the components of a complete set of financial
statements are interrelated.
• Full disclosure principle – financial statements provide sufficient detail to
disclose matters that make a difference to users, yet sufficient condensation to make
the information understandable, keeping in mind the costs of preparing and using it.
• Consistency concept – financial statements are prepared on the basis of
accounting principles which are followed consistently from one period to the next.
• Matching (Associating cause and effect) – costs are recognized as expenses when
the related revenue is recognized.

FAR PART 1A: Zeus Vernon B. Millan

Basic Accounting Concepts - Continuation
• Entity theory – the accounting objective is geared towards the proper
income determination. It emphasizes the income statement and is
exemplified by the equation “Assets = Liabilities + Capital.”
• Proprietary theory – the accounting objective is geared towards the
proper valuation of assets. It emphasizes the importance of the
balance sheet and is exemplified by the equation “Assets – Liabilities
= Capital.”
• Residual equity theory – this theory is applicable where there are two
classes of shares issued, ordinary and preferred. The equation is “Assets –
Liabilities – Preferred Shareholders’ Equity = Ordinary
Shareholders’ Equity.”
• Fund theory – the accounting objective is the custody and administration
of funds.
• Realization – the process of converting non-cash assets into cash or
claims to cash.
• Prudence (Conservatism) – the inclusion of a degree of caution in the
exercise of the judgments needed in making the estimates required under
conditions of uncertainty , such that assets or income are not overstated and
liabilities or expenses are not understated.

FAR PART 1A: Zeus Vernon B. Millan

Common branches of accounting
• Financial accounting/ Financial Reporting - focuses on general
purpose financial statements.
• Management accounting – focuses on special financial reports
geared towards the needs of an entity’s management.
• Cost accounting - the systematic recording and analysis of the costs
of materials, labor, and overhead incident to production.
• Auditing - a systematic process of objectively obtaining and evaluating
evidence regarding assertions about economic actions and events to
ascertain the degree of correspondence between these assertions and
established criteria and communicating the results to interested users.
• Tax accounting - the preparation of tax returns and rendering of tax
advice, such as determination of tax consequences of certain proposed
business endeavors.
• Government accounting - the accounting for the national
government and its instrumentalities, focusing attention on the custody
of public funds and the purpose or purposes to which such funds are
committed.

FAR PART 1A: Zeus Vernon B. Millan

 Four sectors in the practice of accountancy
1. Practice of Public Accountancy - involves the rendering of audit
or accounting related services to more than one client on a fee basis.
2. Practice in Commerce and Industry - refers to employment in
the private sector in a position which involves decision making
requiring professional knowledge in the science of accounting and such
position requires that the holder thereof must be a certified public
accountant.
3. Practice in Education/Academe – employment in an educational
institution which involves teaching of accounting, auditing,
management advisory services, finance, business law, taxation, and
other technically related subjects.
4. Practice in the Government – employment or appointment to a
position in an accounting professional group in government or in a
government–owned and/or controlled corporation, including those
performing proprietary functions, where decision making requires
professional knowledge in the science of accounting, or where a civil
service eligibility as a certified public accountant is a prerequisite.
FAR PART 1A: Zeus Vernon B. Millan
 Accounting standards in the Philippines

• Philippine Financial Reporting Standards (PFRSs) are

Standards and Interpretations adopted by the Financial Reporting
Standards Council (FRSC). They comprise:
1. Philippine Financial Reporting Standards (PFRSs);
2. Philippine Accounting Standards (PASs); and
3. Interpretations

FAR PART 1A: Zeus Vernon B. Millan

 CLASSROOM
DISCUSSIONS &
COMPUTATIONS
PROBLEM 1-2: THEORY & COMPUTATIONAL

FAR PART 1A: Zeus Vernon B. Millan

 QUESTIONS????
 REACTIONS!!!!!

FAR PART 1A: Zeus Vernon B. Millan

 SEATWORK
(PROBLEM 1-4: CLASSROOM ACTIVITY)

FAR PART 1A: Zeus Vernon B. Millan