CHAPTER 1 2.

Non-reciprocal transfer- is a “one way” transaction wherein

there is nothing to receive any more after giving.
Accounting – is the process of identifying, measuring, and communicating
economic information to permit informed judgements and decisions by Example: Donations, gifts or charitable contributions, payments
users of the information. of taxes, imposition of fines, theft.
Three important activities included in the definition of accounting: 3. External event other than transfer- an event that involves
changes in the economic resources of an entity without
1. Identifying – the process of recognition or nonrecognition of a
transfer of resources or obligations involved.
transaction whether is it accountable or not. In other words, it is the
analyzing of events and transactions to determine whether or not
Example: Changes in fair values and price levels,
they will be recognized.
obsolescence, technological changes, vandalism.
Recognition – Refers to the process of including the effects of an
2. Internal events – an event that do not involve an external party or
accountable event in the statement of financial position.
just the entity alone.
Remember: that only accountable events (Economic activity) should
TYPES OF INTERNAL EVENT
be recognized which means that an event that has an effect on assets,
liabilities, and equity, income, or transfer expenses of an entity.
1. Production- process by which resources are transformed
into finished products.
Non-accountable events are not recognized but disclosed only on the
notes, if they have accounting relevance and may be recorded Examples: conversion of raw materials into finished goods,
through a memorandum entry. production of farm products, and the like.
2. Casualty- an unanticipated loss from disasters or other
TYPES OF EVENT OR TRANSACTION
similar events also known as act of God.
1. External transaction – are events that involve one entity and Example: Loss from fire, flood and other catastrophes.
another.
Measuring – involves assigning numbers, normally monetary terms or
TYPES OF EXTERNAL EVENTS assigning peso amount to the transaction and events.
1. Exchange (Reciprocal event) – an event wherein there is Historical Cost- the original acquisition cost and the most common used
reciprocal giving and receiving of economic resources. basis of measuring amount and usually combined with other measurement
bases.
Example: Sales, purchase, payment of liabilities, receipt of notes
receivable in exchange for accounts receivable. Accordingly, financial statements are said to be prepared using a mixture of
costs and values.

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  Costs – includes historical cost and current cost. The basic purpose of accounting is to provide information that is useful in
 Values- includes measuring events. making economic decisions.
VALUATION BY FACT OR OPINION Economic entities use accounting to record economic activities, process
data, disseminate information intended to be useful in making economic
The items measured are said to be valued by opinion when measurement is
decisions.
affected by estimates.
Economic entity- is a separately identifiable combinations of persons and
a. Estimates of uncollectible amounts of receivable.
property that uses or controls economic resources to achieve a certain goal
b. Depreciation and amortization expenses, which are affected by
or objectives.
estimates of useful life and residual value.
c. Estimated liabilities, such as provisions. a. Not-for-profit entity- activities are not directed towards making
d. Retained earnings, which is affected by various estimates of income profit. This entity is more focus on social cause or community.
and expenses. Examples: UNICEF, Red Cross and other charitable cause and a
like.
When measurement is unaffected by estimates, the items measured are said
to be valued in fact.
b. Business entity- one that operates primarily for profit or the goal
a. Ordinary share capital valued at par value of making money.
b. Land stated in acquisition cost
Economic activities are events or activities that affects the economic
c. Cash measured at face amount
resources (Assets), Obligations/claims (Liabilities) and the equity of
Communicating- is the process of transforming data into useful accounting economic entity.
information. In here we interpret and summarize the reports and distribute
a. Production- process of converting economic resources into
the reports to the potential users.
outputs of goods and service
a. Recording- refers to the process of writing the analyzed
accountable events in the journal through journal entries. b. Exchanges- process of trading resources for other resources

b. Classifying- involves the grouping of similar and interrelated c. Consumption- the process of using final output of the production
items into their perspective classes through posting in the ledger. process.

c. Summarizing- putting together or expressing in condensed form d. Income distribution- process of allocating rights to the use of
the recorded and classified transaction and events. output among individuals and groups of society.

Interpreting information involves the computation of financial statement e. Savings- the process of setting aside rights to present
ratios. consumption in exchange for rights in future consumption.
BASIC PURPOSE OF ACCOUNTING

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 f. Investment- the process of using currents inputs to increase the 1. As social science, accounting is a body of knowledge –
stock of resources available for output. systematically gathered, classified, and organized.

2. As a practical art, accounting requires the us of creative skills and

TYPES OF INFORMATION PROVIDED BY ACCOUNTING judgement.
ACCOUNTING AS AN INFORMATION SYSTEM
1. Quantitative information- information expresses in
numerical, quantities, or units. Accounting identifies information, measures economic activities,
process the information into financial reports and communicates
2. Qualitative information- information expressed in words and these reports to decision makers (primary users).
descriptive form.
ACCUNTING AS A LANGUAGE OF BUSINESS
3. Financial Information- information expressed in money.\
Because it is fundamental to the communication of financial
information. Its how we communicate to primary users the financial
TYPES OF INFORMATION CLASSFIED AS TO USERS’ NEEDS. information we analyze and summarize.

1. General purpose accounting information – designed to meet the CREATIVE AND CRITICAL THINKING
common needs of the most statement users.
a. Creative Thinking- involves the use of imagination and insights
2. Special purpose accounting information- designed to meet a specific to solve problems by finding new ideas among items of
needs of particular statement users. information. Most important in identifying alternative solutions.

SOURCES OF INFORMATION IN FINANCIAL STATEMENT b. Critical Thinking- involves the logical analysis of issues, using
inductive or deductive reasoning to test new relationships to
 Information is not exclusively obtained from entity’s accounting determine their effectiveness. Most important in evaluating
records alternative solution
 External sources:
 Fair value measurements The following are the steps in problem solving:
 Resolution of uncertainties  Recognizing a problem
 Future lease payments  Identifying alternative solutions
 Contractual commitments, and alike.  Evaluating the alternative
ACCOUNTING AS SCIENCE AND ART  Selecting a solution among the alternatives
 Implementing the solution

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 ACCOUNTING CONCEPTS 5. Time period (Periodicity/ Accounting period)- the life of the entity is
divided into series of reporting period.
Refers to the principles upon which the process of accounting is
 Calendar year- starts at January 1 and ends on
based.
December 31.
 Accounting assumptions- are the fundamental
 Fiscal year- also covers 12 months but starts on a date
concepts or principles and basic notions that provide
other that January 1.
the foundation of the accounting process.
 Accounting Theory- logical reasoning in a form of a
6. Materiality concept- information is material is its omission or
set of broad principle that provide general frame
misstatement could influence economic decisions. It is a matter of
which accounting practice can be evaluated and guide
professional judgement and base on size and nature of the item.
the development of new practices and procedures.
Note: Most accounting concepts are derived from the conceptual framework 7. Cost- benefit (Cost constraint/Reasonable assurance)- Cost of
and the Philippine Financial Reporting Standards (PFRSs). processing and communicating should not exceed benefit to be
derived from it.

Examples of accounting concepts: 8. Accrual basis of accounting- income is recognized when earned
rather than when cash is collected and expense are recognized when
1. Double-entry system- each accountable event is recorded in two incurred rather than when cash is paid.
parts—debit and credit.
2. Going concern assumption- the entity is assumed to carry one its 9. Historical Cost Concept (Cost principle)- the value of an asset is
operation an indefinite period of time. Meaning the entity does not determined on the basis of acquisition cost.
expect to end its operation in the foreseeable future.
3. Separate entity (entity concept/accounting entity/business entity 10. Concepts of articulation- all of the components of a complete set of
concept)- the entity is viewed differently or separately from its financial statements are interrelated or connects to one another.
owners.  Receivables and payables in the statement of
4. Stable monetary unit (Monetary unit assumption): financial positions provide information on expected
a. Assets, Liabilities, equity, income, and expenses are stated in cash receipts and cash disbursement in the future.
terms of a common unit* of measures (which is Peso in the
Philippines.) and peso is regarded as stable or constant and that 11. Full disclosure principle- full disclosure principle is a concept that
its instability is insignificant and therefore ignored. requires a business to report all necessary information about their
To be useful, accounting information should be stated in a common financial statements and other relevant information to any persons
denominator. If the value is in foreign money, we must convert it to peso who are accustomed to reading this information.
amount.

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 12. Consistency concept- the financial statements are prepared on the Asset- Liabilities- Preferred shareholders’ equity- Ordinary
basis of accounting principles that are applied consistently from one shareholders’ equity.
period to the next.
17. Fund theory- The objective is directed towards the cash flows,
exemplified by formula “Cash inflows – cash outflows = funds.”
13. Matching (Association of cause and effect)- requires that revenues And this concept is used in government and fiduciary accounting.
and any related expenses be recognized together in the same 18. Realization- is the point in time when revenue has been
reporting period. Thus, if there is a cause-and-effect relationship recognized. It also the process of converting non-cash assets into
between revenue and certain expenses, then record them at the cash or claims for cash.
same time. Example: when goods are sold for cash or in exchange for
accounts receivable or notes receivable.
14. Entity theory- The accounting objective is geared towards proper
income statement. All of the economic activity conducted by a 19. Prudence (Conservatism)- Be cautious in making estimates under
business is separate from that of its owners. uncertainties. Do not overestimate assets and income and do not
understate liabilities and expenses.
The accounting relationship for the balance sheet under the entity
theory is as follows: EXPENSE RECOGNITION PRINCIPLES

Assets = Equity 20. Matching concept- requires that revenues and any related
Assets = Liabilities + Shareholders’ Equity expenses be recognized together in the same reporting period.
15. Proprietary theory- proprietary theory states that there is no
Examples: cost of inventory is initially recognized as assets and
fundamental difference between owners of the business and the
recognized as expense when the inventory is sold.
business itself. Basically, the entity does not exist separately or
otherwise from its owners.
21. Systematic and rational allocation- Many costs cannot be directly
linked to specific revenue transactions. They can, however, be tied
Assets – Liabilities = Proprietor’s Equity
to a span of years and allocated as an expense to each of those years.
The equation entails that the proprietor owns the assets and
Examples: Depreciation of fixed assets, amortization of
liabilities of the business operation.
intangibles, and allocation of prepayments.
16. Residual equity theory- assumes that common shareholders to be the
22. Intermediate recognition- Some expenditures have no discernible
real owners of the business.
future benefit. In these cases, the expenditure is expensed
immediately.

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 Examples: office salaries, utilities and interest.
8. Estate accounting- refers to the handling of accounts for fiduciaries
COMMON BRANCHES OF ACCOUNTNG
who wind up the affairs of a deceased person.
1. Financial Accounting- is the branch of accounting that focuses on
general purpose financial statements. 9. Social accounting- the process of communicating the social and
 General purpose financial statements are those statements environmental effects of an entity’s economic actions to the society.
that cater the common needs of external users.
 Financial Accounting is governed by Philippine Financial 10. Institutional accounting- the accounting for non-profit entities other
Reporting Standards (PFRSs). than the government.

Financial Statements- are the structured of an entity’s financial 11. Accounting system- the installation of accounting procedures for the
position and results of its operations. accumulation of financial data and designing of accounting forms to
be used in data gathering.
Financial Reporting- is the provision of financial information about
an entity that is useful to external users. 12. Accounting research- pertains to the careful analysis of economic
events and other variables to understand their impact or decisions.
2. Management accounting- refers to the accumulation and
communication of information for use by internal users or ACCOUNTING STANDARDS
management.
The Philippine Financial Reporting Standards (PFRSs) represents
3. Cost accounting- is the systematic recording and analysis of the cost the generally accepted accounting principles (GAAP) in the
of materials, labors and overhead incident of labor. Philippines.

4. Auditing- is the process of evaluating the correspondence of certain The PFRSs are standard and Interpretations adopted by the Financial
assertions with established criteria and expressing an opinion. Reporting Standards Council (FRSC).
 Philippine Financial Reporting Standards (PFRSs)
5. Tax accounting- the preparation of tax returns and rendering a tax  Philippine Accounting Standards (PASs)
advice.  Interpretations

6. Government accounting- refers to the accounting for the government HIERARCHY OF REPORTING STANDARDS
and its instrumentalities. When selecting accounting policies, an entity should consider the
following:
7. Fiduciary accounting- refers to the handling of accounts managed by  Philippine Financial Reporting Standards (PFRSs)
the a person entrusted with the custody and management of property  (in the absence of PFRSs) use Judgement
for the benefits of another.  Conceptual Frameworks

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  Pronouncement of other standard-setting bodies
 The International Accounting Standards Boards (IASB) is the
standard setting body of the IFRS Foundation with the main
ACCOUNTING STANDARDS SETTING BODIES AND OTHER
objectives of developing and promoting global accounting standards.
RELEVANT ORGANIZATIONS.
1. Financial Reporting Standards Council (FRSC) is the official The standards issued by IASB are the International Financial
accounting standard setting body in the Philippines created under the Reporting Standards (IFRSs), composed of the following:
Philippine accountancy act of 2004 (R.A. 9298) a. International Financial Reporting Standards (IFRSs)
 Compose of fifteen (15) individuals b. International Accounting Standards (IASs)
c. Interpretations
2. Philippine Interpretation Committee (PIC)- is a committee formed
by the Accounting Standard Committee, with the role of reviewing
and interpreting of the International Financial Reporting
Interpretations Committee (IFRIC) for approval and adaptation by
the FRSC.

3. Board Of Accountancy (BOA)- is the professional regulatory board

created under R.A. 9298 to supervise the registration, licensure, and
practice of accountancy in the Philippines.

4. Securities and Exchange Commission- is the government agency

tasked in regulating corporations and partnerships, capital and
investments markets, and the investing publics.

5. Bureau of Internal Revenue (BIR)- administers the provisions of the

National Internal Revenue Code.

6. Bangko Sentral ng Pilipinas- influences the selection and application

of accounting policies by banks and other entities performing
banking operations

7. Cooperative Development Authority (CDA)- influences the selection

and application of accounting policies by cooperatives.

INTERNATIONAL ACCOUNTING STANDARDS

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