DEFINITION

Financial Reporting Standards Council (FRSC)

Accounting is a 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 decisions.

American Institute of Certified Public Accountants (AICPA)

Accounting is an 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 a financial character, and interpreting the
results thereof.
Accounting is often referred to as the “language of
business” because it serves to communicate financial
information about a company or organization. This vital function
enables stakeholders, such as investors, creditors, and management,
to understand a company’s financial performance and position.
THE FOLLOWING INFORMATION ABOUT THE BUISNESS IS USUALLY
COMMUNICATED:

1. The result of its financial operation, that is, whether the business is profitable or
not.

2. The status of it’s financial operation, that is, whether the business is stable and
has the capacity to settle financial obligations.

3. The cash inflows and outflows during the period, that is, whether the business
obtains its cash and where it spend the said cash.

4. Other information that are probable to happen in the future.

 Data

Measured

Transactions
Users for
Communicated decision
making
Events
Processed

Flow of Accounting Information

 BUSINESS ENTITY CONCEPT

JURIDICAL PERSON HUMAN PERSON

The owner and the business are two separate entities

Accounting is concerned only with the transactions of the business and not those
of the owners.
OWNER BUSINESS

ACCOUNTING
The medium of
communication between
the business entity and
the owner or other
users.
FUNCTIONS OF ACCOUNTING
 MECHANICAL PHRASE

RECORDING CLASSIFYING SUMMARIZING INTERPRETING

ANALYTICAL
PHASE

PROCEDURAL STEPS IN ACCOUNTING

RECORDING
o Other known as bookkeeping.
o It refers to he routine and mechanical process of writing down business
transactions.Only business transactions and events that are quantifiable or
measurable are recorded in the books of accounts in a chronological manner.
o 2 sets of book of accounts: JOURNAL and the LEDGER

Book of original Book of final

entry entry

All business transactions are Where all the transactions

recorded for the first time recorded in the journal is
classified
CLASSIFYING
o Refers to the process of sorting or grouping similar businesstransactions
and events into their respective kinds or classes.

o POSTING is the process of transferring the same information

from the journal to the ledger, and it is usually done at the end of the
month.
SUMMARIZING
The phase in accounting process which involves the preparation of the
financial statements.

Financial Statements
o Final product of accounting.
o Through these statements that accounting information is communicated to to
various interested users.
o It reflect the oerating performance and financial condition of the business.
The decisions of various users are highly dependent on the information
provided by the financial statements.
The complete set of Financial Statements
includes the following:
1. Statement of Financial Position
2. Statement of Comprehensive Income
3. Statement of Changes in Equity
4. Statement of Cash Flows
5. Notes to the Financial Statements

NOTE: The ACCOUNTING PROCESS ends

when the financial Statements have been prepared and issuedto interested
users.
INTERPRETING
Refers to the process of analyzing and evaluating the information
presented in the face of the financial statements and the accompanying
notes.

The Financial Statements present the following information:

1. Profitability of the business
2. Liquidy of the business
3. Stability of the business
4. Management efficiency
Profitability refers to the ability of the business to realize more revenues than
expenses. Reflected in the INCOME STATEMENT.
Liquidity refer to the ability of the business to pay its current maturing obligations
or those obligations that are payable within one year.
Stability refers to the ability of the business to pay its long-term financial obligations
and remain stable. Long-term obligations are those payables of the business that
mature beyond one year from date of the financial statement.

Note: Both LIQUIDITY AND STABILITY status of the business are shown in the
BALANCE SHEET.

Management Efficiency reflects how effective and efficient the management

is in utilizing its resources.
NATURE OF ACCOUNTING
 NATURE OF ACCOUNTING

1. Accounting is a process. In accounting, a series of logical and organized

steps are involved such as identifying, recording, measuring, and summarizing
financialdata. After, the summarized results are communicated to different parties
or “stakeholders”.

2. Accounting is an art. It takes creativity, skill and expertise to perform all

theaccounting steps and activities. Accounting education prepares students for the
accounting career.

3. Accounting is concerned with financial information and

transactions.Accounting is a system in business that is concerned with “money
matters.”
4. Accounting is a means, not than an end. You have read that
accounting contributes to the success of every business. Hence, accounting
serves as a tool to achieve business goals rather than being the goals themselves.

5. Accounting is an information system. Accounting is a repository

of a collection of information which are financial in kind. These information
are dealt with through a series of steps. Period by period, this accounting
information are summarized for the preparation of accounting reports or financial
statements
USERS OF ACCOUNTING
INFORMATION
Internal users are those who make decisions on behalf of the organization.
They are the following:

1.Managers/Management - They are people employed by the company to

perform management functions such as planning, organizing and running the
business affairs.

2.Employees/Labor Unions - They are ordinary company employees who

assess the company’s profitability and stability, and their consequence on future
salary and job security.

3.Owners/Stockholders - They provide capital to the business. They need

accounting information to check if the business is well. Accounting information also
helps them in deciding whether to withdraw or increase their investments. Overall,
they are interested to know if the business is profiting and how much.
External users are those who are not part of the company but need to use
accounting information to be able to make decisions.
They are the following:

1. Potential Investors - They are individuals or other business planning to

invest in the company.

2. Creditors and Potential Creditors - They are individuals, institutions or

banks who have lent or are planning to lend money to the company.

3. Customers - They refer to people who buy goods or acquire services from the
company at a price
4. Suppliers - They are businesses that provide supplies to other businesses.

5. Government - The government is concerned about regulating businesses and

their effects to the economy. They also want to check if businesses are paying their
taxes honestly.

6. Academe - Educational institutions use accounting information from the

financial statement of a company for academic purposes.

7. Public - The general public is composed to individuals who are not related to
the company.
BRANCHES OF ACCOUNTING
The ten branches of accounting:
1. Financial Accounting
2. Management accounting
3. Cost Accounting
4. Tax accounting
5. Auditing
6. Accounting information systems
7. Forensic accounting
8. Fiduciary accounting
9. Public accounting
10.Governmental accounting

Financial accounting deals with the recording and classifying of a

company’s financial transactions, as well as preparing and presenting financial
statements for internal and external stakeholders.
Management accounting also called managerial accounting,
management accounting primarily provides information for use by internal users,
that is, the management of the company.
Any information used for managerial decision-making forms part of management
accounting.

Cost accounting is sometimes considered a subset of management

accounting. It refers to the recording, presentation and analysis of costs related to
manufacturing.

Tax accounting this branch of accounting helps customers follow rules

laid down by tax authorities. It comprises tax planning and preparation of tax
returns, as well as determination of income and other taxes, tax advisory services
including analysis of the consequences of tax decisions, methods to minimize taxes
legally and other similar tax-related matters.
Auditing.There are two types of auditing: internal and external.
 Internal auditing refers to the evaluation of the acceptability of an
organization’s internal control structure by testing policies and procedures,
segregation of duties, degrees of authorization and other controls executed
by management.
 External auditing, on the other hand, deals with the inspection of financial
statements by an independent party to express an opinion as to compliance
with GAAP and fairness of presentation.

Accounting information systems tackles the development,

installation, execution and tracking of accounting systems and procedures used in the
accounting process. This includes accounting personnel direction, employment of business
forms and software management.
Forensic accounting handles fraud investigation, litigation and
court cases, claims and dispute resolution, and other areas that deal with legal
matters.

Fiduciary accounting. This branch of accounting deals with accounts

managed by a person who is entrusted with the custody and management of another's
property or assets. Some examples of the fiduciary branch of accounting are estate
accounting, receivership and trust accounting.
Public accounting handles companies that provide accounting
advisory services to customers based on their specific needs. This could
include auditing work, assisting with preparing tax returns, providing legal
advice or consulting on procedures tailored to the installation of technology
or computer programs.

Governmental accounting deals with the financial planning

and allocation of resources to departments within a local, state or federal
government.
Announcement:

UNIT TEST ON
MONDAY,
February 27, 2023.
TYPES OF BUSINESS
• Service Business
A service type of business provides customers with intangible products (products
that are not seen, felt or touched). Service based firms offer professional skills,
ability, advice, and other similar products. Examples of businesses offering
services are: salons, repair shops, schools, banks, accounting firms, law firms
etc.

• Merchandising Business
A merchandise buys products at wholesale price from the wholesale and sells the
product at retail price to the consumer. Merchandising businesses are "buy and
sell" businesses. They make profit when they sell the products at prices higher
than their cost price. A merchandising business sells a product without changing
its original form. Examples of merchandising businesses are: grocery stores,
convenience stores, distributors, and other resellers.
• Manufacturing Business
A manufacturing business purchases products with the aim of using them as
materials to make a new product. They usually buy capital good. Thus, the
manufacturer transform the products after purchase. A manufacturing business
puts together raw materials, labor, and overhead costs in its production process.
The manufactured goods (end products) will then be sold to the wholesalers,
retailers or consumers depending on the channel of distribution used.

• Hybrid Business
Hybrid businesses undertake in more than one type of business. They involve in
manufacturing, merchandising and services. A restaurant, for instance, puts together
ingredients in preparing a meal (manufacturing), sells chilled wine
(merchandising), and fills customer orders (service).
FORMS OF BUSINESS
• Sole Proprietorship
A Sole Proprietorship is a form of business owned by only one person. Sole
proprietorship business is easy to set up and it is cheapest among all forms of
ownership. The owner faces unlimited liability; this means that the creditors of the
business (the people the business owe) may go after the personal assets of the owner
if the business become insolvent. Small business entities usually adopt the sole
proprietorship form of business.
• Partnership
A partnership is a form of business owned by two or more people who
contribute resources (finance, name and time) into the business with the sole
aim of making profit. The partners share the profits of the business among
themselves in a profit-sharing ratio depending on the amount of capital
contributed into the business. 

There are different types of partnership. In general partnerships, all partners

have unlimited liability. In limited partnerships, creditors take over the
personal assets of the limited partners.
• Corporation
A corporation is a business that has a separate legal personality from its
owners. In corporation, the business organization is separated from its owners.
Ownership in a stock corporation is by shares of stock. In a corporation business,
the owners (shareholders) liability are limited but have limited involvement in the
company's operations. The board of directors controls the activities of the
corporation.
• Limited Liability Company

Limited liability companies (LLCs) are hybrid in nature, they have the
features of both a corporation and a partnership business. A LLC is not
incorporated; hence, it is not considered a corporation. But, the owners enjoy
limited liability like in a corporation. A LLC may Choose to pay its tax as a sole
proprietorship, a partnership, or a corporation.
• Cooperative

A cooperative is a type of business organization owned by a group of

people, operated for their mutual benefit. The people making up the group
are members. Cooperatives are either incorporated or unincorporated.
Examples of cooperatives are: cooperative banking, water and electricity
(utility) cooperatives, housing cooperatives and credit unions.
ACCOUNTING CONCEPTS
AND PRINCIPLES
BASIC ACCOUNTING ASSUMPTIONS

1. Going Concern Assumption

 The underlying assumption in the preparation of financial statements is
the going concern assumption.

 Financial statements are prepared on the assumption that the entity will
continue in operation into the foreseeable future without
the need or intention to stop operation. If there is significant doubt that
the business will continue in operations (“Going Concern Problem”), the
going concern assumption is foregone and financial statements will be
prepared under a TERMINATING CONCERN basis.
2. The Accounting Entity Concept

 An entity is an object of accounting. Accounting presents financial

information regarding an entity. An entity can be a business, a person, an
organization or the government.
 A business is a separate accounting entity from its owners. Hence, in
preparing financial reports about the business, transactions of the owners
are excluded.
3. Periodicity Assumption/Accounting Period Assumption

 The periodicity assumption is an offshoot of the going concern assumption.

The presumed indefinite life of the business is broken into
distinct equal periods called “accounting period” over which the
financial performance and financial condition of the business are accounted
and reported to users of the financial statements.

 Income is not measured from the start-up of business up to its dissolution

but is rather reported every accounting period.

 The length of the accounting period can either be weekly, monthly,

quarterly, semi-annually, or annually.
4. Accrual Basis
 The concept of accrual is also an offshoot of the accounting period assumption.
Under the accrual method, income are recorded in the accounting period
they are earned regardless of when they are collected whereas
expenses are recorded in the period incurred regardless of when they
are paid.
 The accrual basis or method of reporting income or expenses has the following
terms:
a) Accrued Income – an income that is already earned but is not
yet collected
b) Accrued Expense – an expense that is already incurred but not
yet paid
c) Deferred Income – an income that is already received but not
yet earned
d) Prepaid Expense – an expense that is already paid but not yet
incurred
5. Monetary or Measurement Concept

 Only financial transactions are recorded and reported in terms of

money such as the PESO. Nonfinancial information is not recorded but
information relevant to users of financial statement is noted via a memo
entry in the books.
6. Realization Concept
 Income is recognized when realized or earned. Income is said to be realized when
one of the contracting party performed his obligation on the contract, thud have
established a right to demand from the other party.
 Realization of income from sale of goods
o The ownership to the goods transfers to the customer depending on the
following shipping terms:
a) Freight on board (FOB) Shipping point- ownership of the goods
transfers to the buyer the moment goods leaves premises of the seller.
b) Freight on board (FOB) Destination- ownership of the goods transfers to
the buyer the moment goods arrive at the buyer’s warehouse.
 Realization of income from sale of services
o Income from sale of services is realized when services are rendered based on
the extent of completion.
7. Matching Concept
 The matching concept relates to the timing of recognition of an expense. It postulates
that expenditures shall be expensed in the accounting period the benefits of the
expenditure are realized by the entity. An expenditure is an outflow of resources or an
obligation requiring futureoutflow of resources.
 Types of expenditure:
a) Capital expenditures- expenditures that benefits future accounting period. These
are to be recorded as ASSETS.

Example: of this is the purchase of a building. Building can be utilized or more than one accounting period.
Thus, it is to be recorded as an asset.

b) Period expenditures-expenditures that benefits only the current accounting

period. These are to be recorded as ESPENSES.

An example of this is pens purchased. Generally, pens are

only to be utilized in one accounting period that qualifies it to be recorded as expense instead of asset.
8. Cash Basis of Accounting
 This is the opposite of Accrual Basis of Accounting. Under this
method, income is recorded when collected regardless of when earned
while expense is recorded when paid regardless of when it isincurred.

9. Duality Concept
 In accounting, each transaction is portrayed as a two-ford effect on the
elements of financial statements This is one of the mostimportant basic
accounting concepts you must appreciate.
Other Accounting Concepts
10. Conservatism
 This is also known as prudence. In case of doubt, assets and income
should not be overstated while liabilities and expenses should not be
understated.

11. Disclosure principle

 This states that all relevant and material information should be reported.

12. Objectivity principle

 Financial statements must be presented with supporting evidence.
13. Monetary unit principle
 Amounts are stated into a single monetary unit

14. Materiality principle

 In case of assets that are immaterial to make a difference in the financial
statements, the company should instead record it as an expense.
Example of this is when a school purchased an eraser with an
estimated useful life of three years. Since an eraser is immaterial
relative to assets, it should be recorded as an expense.
15. Terminating Concern
 With the support of strong evidence, the business assumes that the
business will cease its operations. Hence, the going concern cannot be
applied.

16. Historical Cost Concept

 Fixed assets must be reported in the financial statements on the cost on
which they were purchased. Fixed assets should not be recorded on their
market value unless especially when applying going concern principle
Read the problem carefully. Indicate which accounting concept and principles
violated. Support your answer by giving your analysis.

Mr. Camacho, an owner-manager of Muscle

Mass Fitness Gym bought a motorcycle for
personal use. The invoice was given to his
accountant who recorded it as an asset of the
business.
Sweet Foods Company ordered supplies needed in
the assembly line of its production department.
Upon order, the supplies immediately recorded as
operating expenses.
XYZ Corporation is an owner of the ABC Gasoline
Station at the same time an
operator of the QRS Bus Liner. Some of the expenses
of QRS Bus Liner are reported to the ABC Gasoline
Station to increase their expenses and minimize their
taxes.
A heavy duty stapler purchased at a cost of
P500. This was recorded as an asset and a
depreciation expense to decrease its value
by P50 per year for 10 years.
In the Balance Sheet of Japon Surplus, an equipment
purchased from Japan for 200,000 yen was reported
while all other assets were reported in Philippine peso.
ELEMENTS OF FINANCIAL
STATEMENTS
An account is the basic storage of information in accounting. It is a record of
the increases and decreases in a specific item of asset, liability, equity, income
or expense. An account may be depicted though a “T-account”.

The Five Major Accounts/ Elements of Financial Statements

1. Assets
2. Liabilities
3. (Owner’s) Equity/net assets/ Capital
4. Income
5. Expenses
Assets
- the resources you control that have resulted from past events and can provide
you with future economic benefits, which may include:
(a) Sold or exchanged for other assets;
(b)Use singly or in combination with other assets to produce goods for sale;
(c) Used to settle a liability;
(d) distributed.

Liabilities
-are your present obligations that have resulted from past events can require you to
give up resources when settling them.
(Owner’s) Equity/net assets/ Capital-assets minus liabilities

Income
-are increases in economic benefits during the period in the form of inflows or
enhancements of assets or decreases of liabilities that result in decrease in equity,
other than those relating to investments by the business owners.

o includes both revenue and gains

a) Revenue arises in the course of ordinary activities of a business and is
referred to by a variety of different names including sales, fees, interest,
dividends, royalties, and rent.
b) Gains represent other items that meet the definition of income and may or
may not rise in the course of the ordinary activities of an economic entity.
Expenses
- are decrease in economic benefits during the period in the form of outflows or
depletions of assets or increases of liabilities that result in decreases in equity,
other than those relating to distributions to the business owners.
- include both expenses and losses.
a) Expenses arise in the course of ordinary activities of a business.
b) Losses represent other items that meet the definition of expenses and may,
or may not, arise in the course of the ordinary activities of the entity.
Example:
In your barbeque business, the cost of the barbeque you have sold (cost of goods sold) is an
expense.

If you were able to sell the old umbrella carrying amount of ₱2,000 for ₱1,600, the difference now
of ₱400 represents a loss.