Integrated Accounting

Fundamentals
BAINTE1X
COURSE
PACK
NO. 01

OBJECTIVES
At the end of the session, the
learners will be able to:

1. Understand the meaning of

accounting and its importance.

2. Identify the business activities

and users associated with
accounting and explain why
they need accounting
information.
3. Describe the forms of business
organizations and types of
operations.
Melita Santos Soriano
4. Describe the different
branches of accounting.

5. Understand the picture of the

accountancy profession.

6. Understand and explain the

accounting principles and
assumptions.
Education that works.
LESSON No. 01

The Accounting Environment

and Accounting Framework

At the end of the session, the learners will

Objectives: be able to:
1. Understand the meaning of accounting
and its importance.
2. Identify the business activities and
users associated with accounting and
explain why they need accounting
information.
3. Define business and describe the forms
of business organizations and types of
operations.
4. Describe the different branches of
accounting.
5. Understand the picture of the
accountancy profession.
6. Understand and explain the accounting
principles and assumptions.
7. Understand the financial statements
and the information contained therein
 TOPIC 1
❖THE ACCOUNTING ENVIRONMENT AND ACCOUNTING FRAMEWORK
• Accounting: Defined
• Business: Motives and Roles
• Business Organizations and Operations
• The Users of Accounting Information
• Branches of Accounting
• The Accountancy Profession
• Accounting Principles and Assumptions
 ACCOUNTING: DEFINED
“Accounting is the 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 financial character, and interpreting the
results thereof.”

– American Institute of Certified Public Accountants (AICPA)

“Accounting is the process of identifying, measuring

and communicating economic information to permit
informed judgment and decision by users of the
information.”

– American Accounting Association (AAA)

“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 decision.”

– Accounting Standards Council (ASC),

Succeeded by Financial Reporting Standards Council (FRSC).
 BUSINESS: MOTIVES AND ROLES
Business affects almost all aspects of our lives. Products and services are provided by different
businesses. You buy food you eat from the market or grocery or restaurant. From the bookstore, you
buy your books and supplies. The clothes and shoes you wear come from the department store, you
take a bus, jeep, or taxi when you go to school. You interact with several businesses everyday of your
life. It is therefore important that we take time to look at what business is, its various motives and
roles.

A business is an economic unit that controls resources and engages in buying and selling of goods or
services. A major problem in business is determining how best to use the resources – what machines
are needed, what labor skills are required, how many men to employ, how much fixed capital and
working capital are needed, what raw materials to be used – all with the end view of earning profit.
In a business endeavor, success is possible when money, machines, men, and materials are used
efficiently at the least possible cost. Most often success is measured in terms of profit and increase
in funds. Profit is obtained when the amount received for goods and services sold is more than the
amount paid for such goods or services. Profit therefore generates more resources or funds for the
business. With more funds, there is a need for the business to expand. Subsequently, more
properties are acquired in the form of land, building, machinery and materials, more men are hired,
more goods are produced or sold, and more taxes are paid to the government.

Accounting is an information system that measures, processes, and communicates financial

information about an economic entity. An economic entity is a unit that exists independently, such as
a business, a hospital, or a governmental body. Accountants focus on the needs of decision makers
who use financial information, whether those decision makers are inside or outside a business or
other economic entity. Accountants provide a vital service by supplying the information decision
makers need to make “reasoned choices among alternative uses of scarce resources in the conduct
of business and economic activities.”
 THE USERS OF ACCOUNTING INFORMATION

Owner Public
Business Entity

Financial
Government
Statements
Managers

Lenders
Employees
Customers
Suppliers
Investors
 BUSINESS ORGANIZATIONS AND OPERATIONS

FORMS OF BUSINESS ORGANIZATIONS

A sole proprietorship is a business organized by one person who usually acts as

manager. As sole owner he enjoys all the profits by himself. Most small businesses such
as beauty parlors, dress shops, barbershops and bakeries are sole proprietor-owned
since only a small amount of capital is needed, and its operation is simple and
manageable.

A partnership is a business owned by two or more individuals who contribute money,

property and talent. These individuals are called partners. They manage the business
and share the profits among themselves. Professional firms such as that of lawyers,
accountants, engineers usually put up a partnership.

A corporation is a business organized as a separate legal entity from the owners. The
word corporation comes from the Latin word “corpus” meaning body. As a legal entity,
it can enter into contracts, own property and issue stocks. The investors are called
stockholders whose rights over the business are expressed in the number of shares
bought and are evidenced by certificates of stock.

TYPES OF BUSINESS OPERATIONS

A service business is the simplest type of business which performs service, for a fee, to a
client or customer. Examples are the schools, airlines, travel agencies, barbershops,
beauty parlors and the like.

A merchandising business is one which buys goods or merchandise that are physically
ready for sale and sells these products at higher prices. A good example of this is a
bookstore whose line of merchandise ranges from books and magazines to office and
school supplies.

A manufacturing business buys raw materials first and after changing the form sells the
product to the customer. The cost of the product manufactured consists of the cost of
buying the raw materials, the cost of direct labor or compensation paid to the workers
who process the raw materials and the cost of manufacturing overheads needed to
process the product. Examples of manufacturing businesses are the garment factories,
shoe factories, drug laboratories, and food processing companies.
 THE USERS OF ACCOUNTING INFORMATION

An owner may be the single capitalist in a sole proprietorship business or an existing co-
owner in a partnership or corporation. The owner or shareholder’s primary concern from
the financial reports is to check the financial position and performance of the company and
monitor his ownership interest over the entity’s net assets.

Internal users of accounting information are managers who plan, organize, and run the
business. These include marketing managers, production supervisors, finance directors, and
company officers. In running a business, internal users must answer many important
questions, as shown in the illustration below.

Users with a Direct Financial Interest

Another group of decision makers who need accounting information are those with a direct
financial interest in a business. They depend on accounting to measure and report
information about how a business has performed. Most businesses periodically publish a set
of general-purpose financial statements that report their success in meeting the goals of
profitability and liquidity. These statements show what has happened in the past, and they
are important indicators of what will happen in the future.

Investors. Those, such as company’s stockholders, who may invest in a business and acquire
a part ownership in it are interested in its past success and its potential earnings. A thorough
study of a company’s financial statements helps potential investors judge the prospects for
profitable investment. After investing, they must continually review their commitment, again
by examining the company’s financial statements.

Most companies, borrow money for both long-term and short-term operating needs.
Creditors, those who lend money or deliver goods and services before being paid, are
interested mainly in whether a company will have the cash to pay interest charges and to
repay the debt at the appropriate time. They study a company’s liquidity and cash flow as
well as its profitability. Banks, finance companies, mortgage companies, securities firms,
insurance firms, suppliers, and other lenders must analyze a company’s financial position
before they make a loan.
 BRANCHES OF ACCOUNTING
The accountancy field comprises many subjects which are described below, each of which
has a large body of concepts and theories:

Bookkeeping is the routine activity of recording, classifying and summarizing business

transactions in a systematic manner. It is the procedural aspect of accounting.
Financial Accounting involves the preparation and interpretation of financial statements
primarily for external users.
Cost Accounting deals with the recording, classifying and summarizing the details of
materials, labor and overhead necessary to produce and sell a product or service. The
emphasis is on cost determination, cost analysis and cost control.
Managerial Accounting is the presentation of accounting data primarily for internal users.
The special reports will assist managers in planning and controlling the operation of the
business and in managing enterprise resources.
Auditing deals with independent verification and examination of the accounting records for
the purpose of giving an opinion on the fairness of its operation. It is required that an
auditor must first pass the licensure examination given by the board of accountancy.
Government Accounting which uses fund accounting, deals with the administration or use
of funds to bring about service to the community. Its objective is more on how the funds are
used to service the people rather than to earn profit. Aside from the government, fund
accounting is also applicable to non-profit organization such as charitable institutions.
 THE USERS OF ACCOUNTING INFORMATION

Users with an Indirect Financial Interest

In recent years, society as a whole, through governmental and public groups, has become
one of the largest and most important users of accounting information. Users who need
accounting information to make decisions on public issues include tax authorities, regulatory
agencies, and various other groups.

Tax Authorities. Government at every level is financed through the collection of taxes.
Companies and individuals pay many kinds of taxes, including national and local taxes,
business and income taxes; social security and other payroll taxes; excise taxes; and transfer
taxes. Each tax requires special tax returns and often a complex set of records as well.
Proper reporting is generally a matter of law and can be very complicated. The National
Internal Revenue Code, for instance, contains variety of rules governing the preparation of
the accounting information used in computing national income taxes.

Regulatory Agencies. Most companies must report periodically to one or more regulatory
agencies at the national and local levels. For example, all publicly traded corporations must
report periodically to the Securities and Exchange Commission (SEC). This body, set up by
Congress to protect the public, regulates the issuing, buying, and selling of stocks in the
country. Companies listed on a stock exchange also must meet the special reporting
requirements of their exchange.

Other Groups
Labor unions study the financial statements of corporations as part of preparing for contract
negotiations; a company’s income and costs often play an important role in these
negotiations. Those who advise investors and creditors—financial analysts, brokers,
underwriters, lawyers, economists, and the financial press—also have an indirect interest
in the financial performance and prospects of a business. Consumer groups, customers, and
the general public have become more concerned about the financing and earnings of
corporations as well as the effects that corporations have on inflation, the environment,
social issues, and the quality of life. And economic planners use aggregated accounting
information to set and evaluate economic policies and programs.
 THE ACCOUNTANCY PROFESSION

The practice of Accountancy shall include, but not limited, to the following:

(a) Practice of Public Accountancy - shall constitute in a person,

i. be it his/her individual capacity, or as a partner or as a staff member in an accounting or
auditing firm;
ii. holding out himself/herself as one skilled in the knowledge, science and practice of
accounting, and as a qualified person to render professional services as a certified public
accountant, or offering or rendering, or both, to more than one client on a fee basis or
otherwise, services such as
• the audit or verification of financial transactions and accounting records; or
• the preparation, signing, or certification for clients of reports of audit, balance sheet,
and other financial, accounting and related schedules, exhibits, statements or reports
which are to be used by stockholders or for publication or for credit purposes, or to
be filed with a court or government agency, or to be used for any other purpose; or
• the design, installation, review and revision of accounting systems and controls ; or
the preparation and/or review of income tax returns when related to accounting and
auditing procedures; or
• when he/she represents his/her clients before government agencies on tax and other
matters related to accounting; or
• renders professional assistance in matters relating to accounting procedures and the
recording and presentation of financial facts or data.

(b) Practice in Commerce and Industry - shall constitute in a person,

i. involved in decision making requiring professional knowledge in the science of
accounting, as well as the accounting aspects of finance and taxation, or
ii. when he/she represents his/her employer before government agencies on tax and other
matters related to accounting; or
iii. when such employment or position requires that the holder thereof must be a certified
public accountant.

(c) Practice in Education/Academe - shall constitute in a person,

i. in an educational institution which involve teaching of accounting, auditing, management
advisory services, accounting aspect of finance, business law, taxation, and other
technically related subjects.

(d) Practice in the Government- shall constitute in a person,

i. who holds, or is appointed 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
ii. where a civil service eligibility as a certified public accountant is a prerequisite.
 ACCOUNTING PRINCIPLES AND ASSUMPTIONS

Stable
Periodicity Monetary Unit

Objectivity
Going Concern
Assumption

Conservatism

Financial
Business Entity Statements
Concept

Historical
Cost Principle

Substance
Over Form

Accrual
Principle
Full Disclosure
Principle Materiality &
Aggregation
 ACCOUNTING ASSUMPTIONS
BUSINESS ENTITY CONCEPT – This concept assumes that a business enterprise is
separate and distinct from the owner or investor. It is assumed that in preparing
the financial statements only the properties, liabilities, income and expenses of a
Business Entity particular business are reported therein. Personal properties and liabilities of
Concept
the owner are not included in the business financial statements.

GOING CONCERN – Based on this assumption, it is expected that the business is

a continuing concern or that it has an indefinite existence. This is the reason why
properties are recognized at cost without regard to the change in their market
Going Concern
Assumption values in subsequent periods. This concept supports the exchange price or cost
principle.

PERIODICITY – How often should the accountant prepare the financial

statements specially since it is assumed that the business is a continuing
concern? It is understood that a complete and accurate financial picture of the
business can only be made at the end of its life. However, since that statement
users need financial information on a regular basis and the success of its
Periodicity
business operation depends on financial information contained in the accounting
reports, then its life has to be divided into specific time intervals called
accounting period.

UNIT OF MEASURE (MONETARY) – All business transactions are measured and

recorded using only one unit of measurement. Since money is used as a medium
of exchange, it is therefore the most practical unit of measuring financial data. At
Stable
Monetary Unit this point, it is worthwhile to note that in accounting, only data measurable in
terms of money are recognized and recorded in its books.
 ACCOUNTING PRINCIPLES
a. EXPENSE RECOGNITION PRINCIPLE – There can be no revenue earned
without expenses being incurred. There are three ways of recognizing
expenses:
i. Expense is recognized when revenue is recognized because it is directly
associated to it, meaning the expense would not have been incurred if
there was no revenue. Example, If a customer is in a far place and you
have delivered the goods he ordered, you have to spend for delivery
expense.
ii. Resources or assets that will benefit the business over a number of years
Accrual should be spread out as expense over the years that will benefit from its
Principle use. Example, you bought a delivery truck for P50,000 and it is expected
be used by the company for 5 years. Depreciation expense of P10,000
should be recognized every year for five years for using the delivery truck.
iii. Periodic expenses are necessary to operate the business such as salary of
your employees, rent of your store, telephone, light and water used.
Most often the expenses in this category are incurred or used up by the
business by hour, day or month.

MATERIALITY AND AGGREGATION – An entity shall present separately each

material class of similar items and shall present separately items of dissimilar
Materiality &
Aggregation nature or function unless they are immaterial.

FULL DISCLOSURE PRINCIPLE – The full-disclosure principle means that the

financial reports should include any information that could affect the decisions
made by external users. Of course, the benefits of that information should
Full Disclosure
Principle exceed the costs of providing the information.

SUBSTANCE OVER FORM – This accounting concept dictates that assessment of

business transaction is based on its economic substance even if it will conflict
Substance with its legal form.
Over Form
 ACCOUNTING PRINCIPLES
OBJECTIVITY – This principle requires that financial data entered in the records
must be verifiable and supported by documents such as invoices, vouchers, or
Objectivity official receipts.

CONSERVATISM – A business should never prepare financial statements that will

cause balance sheet items such as assets to be overstated or liabilities to be
understated, sales revenues to be overstated, or expenses to be understated.
Situations might exist where estimates are necessary to determine the inventory
values or to decide an appropriate depreciation rate. The inventory valuation
Conservatism
should be lower rather than higher. Conservatism in this situation increases the
cost of sales and decreases the gross margin (also called the gross profit).

HISTORICAL COST PRINCIPLE– Assets should be recorded based on cost which is

the amount exchanged at the time the item was acquired. A machine with a list
price of ₱50,000 which was purchased at a discount of ₱1,000 should be
recorded at ₱49,000. An equipment which was purchased at a price of ₱50,000
but could be purchased in another store for ₱51,000 should be recorded at
Historical
Cost Principle ₱50,000. Land costing ₱ 750,000 at the time it was acquired was purchased on
installment basis payable in 4 yearly installments of ₱200,000 or a total
installment price of ₱ 800,000 should be recorded at ₱750,000 which is the
amount or value exchanged at the time the asset was acquired.

ACCRUAL PRINCIPLE
a. REVENUE RECOGNITION PRINCIPLE – Revenue is recognized when it is
earned. For a service business, revenue is earned when service has been
rendered. For merchandising or manufacturing concern, revenue is
earned when the merchandise or product has been sold or delivered to
Accrual the customer. Thus, service rendered in June but collected in July should
Principle
be recorded as income in June. Note that, generally, collection whether
is cash or in property is not a requirement for recognizing revenue.
 KEY TERMS

Additional Related Terminologies

Business. An integrated set of activities and assets that is capable of being conducted and
managed for the purpose of providing a return in the form of dividends, lower costs or other
economic benefits directly to investors or other owners, members or participants.

Management refers to the people who are responsible for operating a business and meeting
its goals of profitability and liquidity. In a small business, management may consist solely of
the owners. In a large business, management usually consists of people who have been
hired to do the job. Managers must decide what to do, how to do it, and whether the results
match their original plans. Successful managers consistently make the right decisions based
on timely and valid information.

Profitability is the ability of the company to increase the owner’s net worth by generating
more revenues than costs and expenses.

Solvency is the ability of the company to pay its long-term debts.

Liquidity is the ability of the company to pay for its currently maturing obligations.

An auditor is a person who is licensed to make an independent review of the financial

records of the firm.

A tax consultant is one who is skilled in tax matters whose services cover tax advising,
planning, and preparation.

A management consultant is one whose services range from design and installation of a
computerized information system to financial analysis, financial planning, and cost controls,
among others.

An accountant is a person with a degree in accountancy whose duties include general and
cost accounting supervision.

A bookkeeper is a person with knowledge in accounting. He does routinary work of

recording, classifying and summarizing phases of accounting.

A controller is the chief accounting officer of a company whose functions encompass

preparation of financial reports, performance reports, budgets, controls, and tax studies.
 PRE-ASSESSMENT ACTIVITY

ACTIVITY 1: VIDEO DISCUSSION

Instructions: In 3 to 5 minutes, record a video of

yourself, while eyes are closed, discussing the
assigned accounting principles and assumptions (in
your own words – but of course in English)

Assigned principles and assumptions:

First letter of surname Principles and Assumptions

A to H Going Concern,
Stable Monetary Unit, and
Conservatism
I to R Historical Cost Principle,
Accrual Principle, and
Materiality and Aggregation
S to Z Business Entity Concept,
Objectivity, and
Substance Over Form

Submission site to be uploaded later. (with your

surname as the file name).
 SELF-PACED ACTIVITY

SUMMARY
On a very handy booklet (do-it-yourself if you want), make a hand-
written summary of the topics covered in this course pack. Make it as
concise-but-informative as you can.

Submit on our August 29 class