Chapter 1: The World of Accounting  Entity Concept

The History of Accounting  Periodicity Concept

 It can be related to the beginning of arithmetic in 7000  Stable Monetary Concept
BC.
 Oldest accounting records are in clay tablets, about 5000 Criteria for General Acceptance of an Accounting Principle
years old found in Tigris-Euphrates Valley.  Relevance
 In 600 BC, the Greeks introduced the coined money.  Objectivity
 During middle ages, credit instruments were used. The  Feasibility
Italian Merchants developed the double-entry
bookkeeping. Demand for Information
 Owners – They are concerned on how the business is
Luca Pacioli – An Italian who wrote the first book containing doing.
the double entry bookkeeping entitled “Everything About  Managers –They are for planning and controlling the
Arithmetic, Geometry and Proportion” in 1494. business.
- He has been regarded as the father of double-entry
accounting. The Basic Principles
 Objectivity
o The Italian accounting practice was adopted by other  Historical Cost
trading countries.  Revenue Recognition
o In the 20th century Americans dominated the business  Expense Recognition
environment and they developed their own accounting  Adequate Disclosure
practice similar to those of the Italians.  Materiality
 Consistency Principle
Nicolas Petri – The first person to group similar transactions
in a separate record. Broad Categories of Accounting
 Financial Accounting – supply of information to the
Types of Business owners of an entity
 Service  Infrastructure  Management Accounting – supply of information to the
 Trader / Merchandiser  Financial managers of an entity
 Manufacture  Insurance
 Raw Materials Why Study Accounting?
 To make sure that you follow legal requirements
Forms of Business Organizations  To help you do a better job
 Sole Proprietorship
 Partnership o Accountancy – It refers to a profession.
 Corporation o Accounting – It refers to a subject.
o Professional Accountant – An individual who holds a
Activities in Business Organizations valid certificate issued by the Board of Accountancy,
 Financing Activities whether he or she be in public practice, industry,
 Investing Activities commerce, public sector or education.
 Operating Activities
Scope of Accountancy Practice
Definitions of Accounting  Public
 The art of recording, classifying and summarizing in  Commerce and Industry
a significant manner, and in terms of money,  Education / Academe
transactions and in events, which are in part at least  Government
of a financial character and interpreting the results
thereof. The Role of Ethics in Business
 it is a service activity. Ethics – It is concerned with right and wrong and how
 It is an information system that measures, processes conduct should be judged to be good or bad.
and communicates financial information about an - Ethics in Financial Reporting
identifiable economic entity.
Code of Ethics for Certified Public Accountants
Phases of Accounting The Fundamental Principles:
1. Recording
2. Measuring  Integrity – straightforward and honest
3. Classifying  fair dealing and truthfulness
4. Summarizing  Objectivity – does not allow bias, conflict of interest or
5. Interpreting undue influence
 Professional Competence and Due Care – continuing
Pacioli’s Double-Entry Bookkeeping duty to maintain professional knowledge and skill
 It is a recording system.  Confidentiality – should not disclose information without
 It provides an accurate record of what has happened to a proper and specific authority unless there is a legal or
business over the specified period of time. professional right or duty to disclose
 Extracted information can help the manager operate the  Professional Behavior – comply with relevant laws and
business more effectively. regulations
 avoid any action that discredits the
profession
Branches of Accounting
Fundamental Accounting Concepts
 Auditing  Brings greater financial capability of the business
 Bookkeeping  Combines special skills, expertise and experience of the
 Cost Accounting partners
 Financial Accounting  Offers relative freedom and flexibility of action in
 Financial Management decision-making
 Management Accounting  Risks are shared
 Taxation
 Government Accounting The Advantages of Partnership Over Corporation

Chapter 2: Accounting Principles and Reporting standards  Easier and less expensive
 More personal and informal
Entity – It is something that can be recognized as having its
own separate identity. The Disadvantages of Partnership

2 Kinds of Entity:  Profits are shared

 Easily dissolved and thus unstable compared to a
 Economic Entity – major purpose: to produce a profit corporation
for its owners  Mutual Agency and Unlimited Liability may create
 Social Entity – a nonprofit organization personal obligations to partners.
 Less effective than a corporation in raising large
Forms of Business Organizations amounts.

1. Sole Proprietorship 3. Corporation

 Owner: Proprietor (generally is also the manager)  Owner: Stockholders

 It includes small service-type businesses and retail  It is an ARTIFICIAL being.
establishments.  It is created by operation of LAW.
 The owner receives ALL profits, absorbs ALL losses and  It is having the rights of SUCCESSION.
is SOLELY responsible for ALL debts of the business.  It is having the power and attributes expressly
 It is distinct from its proprietor. authorized by law or incident to its existence.
 The stockholders are not personally liable for the
REMEMBER: The accounting records of the sole
corporation’s debts.
proprietorship DO NOT INCLUDE the proprietor’s personal
 It is a separate legal entity.
financial records.
The Advantages of a Corporation
The Advantages of Sole Proprietorship:
 The corporation has the legal capacity to act as a
 Easy to set-up and discontinue
legal entity.
 Requires a small amount of capital to start
 Shareholders have limited liability.
 Profits all accrue to the owner
 It has continuity of existence.
 Total control on the part of the owner
 Its management is centralized to the BOD.
The Disadvantages of Sole Proprietorship  Shareholders are not general agents of the business.
 Shares of stock can be transferred without the
 Unlimited Personal Liability consent of the other shareholders.
 Limited Management Skills  Greater ability to acquire funds
 Limited access to capital
 Lacks continuity in case of death or incapacity of owner The Disadvantages of Corporation

2. Partnership  Complicated in formation and management

 Greater degree of government supervision
 Owner: two or more persons  High cost of formation and operation
 It is operated by two or more persons.  Heavier taxation
 They bind themselves together to contribute MONEY,
PROPERTY, or INDUSTRY to a common fund, with the
INTENTION OF DIVIDING PROFITS among themselves. Sole Proprietorship A=A
 Each partner is personally liable for any debt incurred Partnership A + B = AB
by the partnership.
 It is distinct from the personal affairs of each partner. Corporation A+B=C

The Characteristics of a Partnership

Cooperatives – It is an autonomous and duly registered
1. Mutual Contribution association of persons, with a common bond of interest who
2. Division of Profits or Losses have voluntarily joined together to achieve their social,
3. Co-ownership of Contributed Assets economic, and cultural needs and aspirations by making
4. Mutual Agency equitable contributions to the capital required.
5. Limited Life
6. Unlimited Liability
7. Income Taxes
8. Partner’s Equity Accounts

The Advantages of Partnership over Proprietorship The Comparison of Business Organizations

 Sole Entity Concept – An accounting entity is an organization or a
Proprietorship Partnership Corporation section of an organization that stands apart from other
Owner Proprietor Partners Stockholders organizations and individuals as a separate economic unit.

Number of One two or more many Periodicity Concept – An entity’s life can be meaningfully
owners subdivided into equal time periods for reporting purposes.
Responsible yes yes no
 It allows the users to obtain timely information to
for business
debts / serve as a basis on making decisions about future
liabilities activities.
 Usual accounting period: 1 year
Separate yes yes yes
Stable Monetary Unit Concept – The Philippine peso is a
legal
reasonable unit of measure and that its purchasing power is
entity
relatively stable.

 “Each peso has the same purchasing power as any

other peso at any time.”
The Purpose of Business Organizations
 The basis for ignoring the effects of inflation in the
1. Service – to perform services for a fee accounting records.
2. Merchandising – to purchase goods that are ready for
Need for Generally Accepted Accounting Principles (GAAP)
sale and then sell these to customers
3. Manufacturing – to buy raw materials, convert them into  Meaningful and useful financial information
products and then sell the products to other companies  Reliable financial information
or to final consumers  Comparability
The Phases of Accounting  Consistency

Criteria for General Acceptance of an Accounting Principle

 Recording
 Measuring CRITERIA IMPLICATIONS
 Classifying
Relevance  Resulting information is
 Summarizing
meaningful and useful to
 Interpreting those who need to know
something about a certain
The Users of Information
organization
USER INFORMATION NEEDED Objectivity  Resulting information is not
Government  Allocation of influenced by the personal
resources bias or judgment of those
 Activities of the who furnish it
enterprise  Connotes reliability,
trustworthiness and
Suppliers & other trade  Amounts owing to
verifiability
creditors them will be paid
when due
Feasibility  It can be implemented
without undue complexity or
Public  Tends and recent
Cost
development
Lenders  Loans and the
related interest will
be paid when paid
due
Investors  Buy, hold, or sell
Customers  Continuance of an
enterprise
Employees  Stability and
profitability of
employers
 Remuneration,
retirement benefits,
and employment
opportunities

The Fundamental Concepts