ACCOUNTING NOTESs

CHAPTER 1 : Intro to accounting

Business- aka enterprise or firm
Organization engaged in trade of goods and services

Two types of Business

1. Profit oriented
a. Examples: food manufacturers, gas stations, bookstores
2. Non-profit oriented
a. an organization permitted to use surplus revenues to achieve its goals
(i.e. self-preservation) rather than doing profit distribution
b. Examples: charities, educational institutions

Forms of Business Enterprises (acc to nature of business)

1. Service Business
a. offers services and generates profit by charging fee
b. Simplest form of business
2. Merchandising Business/ Trading Concern
a. Buys goods and sells them in their original form
3. Manufacturing Business
a. Buys goods ( raw materials) and convert it into finished products
(finished goods)
b. Most complex
Legal Forms of Business
1. Sole Proprietorship
a. One owner called proprietor
b. Most basic legal form of business
c. Advantages
i. Easiest to form
ii. Less complex business transactions
iii. Minimal regulatory requirements
iv. Decisions are implemented faster
v. Solo profits
d. Disadvantages
i. Limited financing capability
ii. No second opinion
iii. Bears risks alone
iv. Unlimited personal liability
2. Partnerships
a. Association of two or more persons called partners
b. Governed by the Civil Code of the Philippines

c.
d.
e.
f.
g.
h.

Easier to organize than the corporation

Burden of operations management is shared
Better decision-making
Can raise more capital than sole proprietorship
Disagreement is inevitable
May be dissolved through agreement, withdrawal, death, and
incapacity of the partner
i. Unlimited personal liability
3. Corporation
a. Most complex
b. Artificial being created by law ( Corporation Code)
c. Stockholder- owner of the corporation
d. Certificate of stock issued when bought shares
e. Greatest capacity to raise capital
f. Can exists not longer than 50 years
g. Limited liability of owners
h. Cost of forming is relatively high
i. Subject to higher income tax rate

Economic Decisions
1. needs reliable information
2. making right decisions requires great skill, timing, sound professional
judgement, and use of financial information

Financial Information
1. summary of transactions of a business over a period of time
2. recorded/ summarized by acountants or bookkeepers
3. most financial information comes from accounting
Accounting
1. art of recording, classifying, and summarizing transactions and events
2. process of identifying, measuring and communicating economic information
tto permit informed judgement
3. service activity aiming to provide quantitative info about economic entities
Basic Purpose of Accounting
1. supply financial information to make informed judgements and better
decisions
2. provide the following:
a. resources and business obligations
b. interest being paid on current liabilities
c. cash inflows and outflows
Accounting the language of business

1. language used to communicate financial information to interested parties

Accounting and Bookkeeping
1. bookkeeping
a. procedural or mechanical aspect of accounting
b. set-up and maintenance of accounting records
c. may be done by non-accountants
2. Accounting
a. Interpretation of information recorded under bookkeeping
b. Can only be done by CPAs

The Accountancy Profession

a. Requires mastery of particular intellectual skill acquired through training and
education
a. Must passed the test administered by PRBA
b. Adherence by its members to a common code of values and conduct
established by its administering body (code of ethics)
c. Acceptance of duty to society as a whole

The Philippine Accountancy Act of 2004

a. governed by R.A. no. 9298
b. signed into law with the following objectives:
i. standardization and regulation
ii. examination for registration of CPAs
iii. supervision of accounting in the Phils.
c. Creates the Professional Regulatory Board of Accountancy (agency
tasked to enforce the Phil. Acctcy Act)
i. 1 chairman and 6 members appointed by the President of rep of
PH

Sectors of Accounting Practice

1. Public Practice
a. Render independent professional accounting services to the public
i. Auditing- most common service provided by the CPAs
1. Independent examination of financial statements for the
purpose of expressing an opinion on the fairness
ii. Tax services- preparation of taz returns
iii. Management Consulting Services-providing advisory/ consulting
service to clients on matters of accounting
2. Commerce and Industry
a. Assist management in planning and controlling a companys operations
b. Chief accountant/ controller- highest accounting officer
3. Education

a. Empl0ys accountants as professors, reviewers, or researchers

4. Government
a. Hired in COA, BIR, Dept. of Finance, Dept. of Budget and Management,
And SEC

Brief History of Accounting

a. 8500 B, tradesmen used clay objects to represent commodities (middle east)
b. Ancient civilizations ( Babylon, Greece, and Egypt) used clay tablets (Biblical
Times)
a. In later years, papyri were used for record-keeping
c. 13th to 15th centuries, growth of commerce and trade
a. Systematic record-keeping methods were developed
b. Florentine, Venetian, Genoan used these methods
c. Double-entry first appeared in Genoa (1340 AD)
Luca Pacioli- wrote a book which contains discussions on double-entry bookkeeping
system

Industrial Revolution
a.
b.
c.
d.

From artisan/ craftsman method to assembly-line method

Large commodities were produced
Cost Accounting was developd to addressed costs
Corporate for of business was formed to accommodate increasing large
amounts of funds

Fields of Accounting
1. Finacial Accounting focuses on the preparation and
presentation of general-purpose financial statements
2. Management Accounting- financial reporting for internal
users (i.e. management)
3. Cost Accounting- measures a business coststo help
management in controlling expenses
4. Tax accounting- compliance with tax laws and minimizing
companys tax bill by legal means
5. Government Accounting- encompasses the process of
analyzing, classifying, summarizing, and communicating
all transactions
a. Focus is on the proper custody, disposition and
accounting for public funds

Accounting and Information Technology

a. Accounting can now be performed with speed and accuracy with computers

CHAPTER 2: Basic Accounting Concepts and the Financial Statements

Generally Accepted Accounting Principles

a. Comprises the conventions, rules, processes, standards, and underlying

assumptions that are used in preparing financial statements
b. Not rigid or unchanging
Financial Reporting Standards Council
a. Official accounting standard setting body in the Philippines
b. Professional Regulation commission created FRSC
c. Improve and establish accounting standars that will be generally acceptedin
the PH
d. Has 14 representatives
a. Chairman and members serve a three-year term subject to renewal

Philippines Financial Reporting Standards

a. Issued by FRSC
b. Accounting standards based on the Intl Financial Reporting Standards (IFRS)
issued by the Intl Accounting standards (IASB)
c. Constitutes the generally accepted accounting standards observed in PH
d. It includes:
a. Philippine Accounting Standards (PAS)
b. Philippine Financial Reporting Standards (PFRS)
c. Philippine Interpretations developed by the Phil Interpretations
Committee
Basic Accounting Concepts
1. Business Entity Principle
a. Business is distinct and separate frm the owners
i. Personal transactions of owners are not included in the records
of the business
2. Dual-effect of business transactions
a. Entries to two or mor accounts
b. Total of left side is equal to toatal of right side
3. Matching principle
a. Pofit or loss is computed by deducting the expenses incurred from the
income earned during an accounting period
b. Income recorded must be mtched against the expenses
4. Accrual Basis
a. Income and expense is recognized when earned or incurred regardless
of payment
5. Stable Monetary Unit
a. Philippine Peso monetary unit
b. Peso not affected by inflation
6. Periodicity (Time Period Concept)
a. One year (industry)
7. Going Concern (Continuity assuwmption)
a. Going concern and will continue in operation for the foreseeable future
b. No intention of liquidating

c. Liquidating concern basis- changed into this if enterprise is no longer

considered a going concern

Conceptual Framework Defined

a. Statement of generally accepted theoretical principles which form the frame
of reference for a particular field of study

Conceptual Framework for Financial Reporting

a. Forms the theoretical basis for determining which events should be
accounted and should be communicated
b. Theory of accounting against which practice problems can be tested
objectively
c. Purpose:
a. Assist preparers and users of financial statements, standard setting
bodies in the formulation of new accounting standards
d. Not considered as an accounting standard
e. IFRS will prevail

Scope of the Conceptual Framework

A.
B.
C.
D.

Objective of financial reporting

Qualitative characteristics of fs
Definition and recognition
Concepts of capital and capital maintenance

Objective of General Purpose Financial reporting

a. Provide financial reporting to provide financial information about the
reporting entity
b. Emphasizes providers of capital ( potential investors, lenders and
creditors)