Accounting

The process of identifying, measuring, and communicating economic information.

Identifying
Process of Analyzing Events and Transactions

●​ Recognition: Process of including the effects of an accountable event.

○​ Accountable Event: An event that affects the assets, liabilities, equity, income,
or expenses of an entity (also known as economic activity).
○​ Non-Accountable Event: Not recognized but disclosed only in the notes.

Types of Events or Transactions

1.​ External Events (Involve an entity and another external party):

○​ Exchange (Reciprocal Transfer): Involves giving and receiving.
○​ Non-Reciprocal Transfer: Involves a one-way transfer.
○​ External Events Other than Transfers: Does not involve a transfer.
2.​ Internal Events (Does not involve an external party):
○​ Production: Transformed into finished goods.
○​ Casualty: Unanticipated loss.

Measuring
The process of assigning numbers, usually monetary.

●​ Financial Statements: Prepared using a mixture of costs and values.

●​ Valuation by Fact or Opinion:
○​ Affected by Estimate: Measures are said to be valued by opinion.
○​ Unaffected by Estimate: Measures are said to be valued by facts.

Communicating
The process of transforming economic data into useful accounting information.

1.​ Recording: Journal entries.

2.​ Classifying: Posting in the ledger.
3.​ Summarizing: Preparation of financial statements.
4.​ Interpreting: Computation of financial statement ratios.

Basic Purpose of Accounting

To provide information that is useful in making economic decisions.

Economic Entities Use Accounting to Record Economic Activities

●​ Economic Entity: A separately identifiable combination of persons and property.

○​ Not-for-Profit Entity: Not directed towards making a profit.
○​ Business Entity: Operates primarily for profit.

Economic Activities

Activities that affect the economic resources (assets):

1.​ Production: Process of converting economic resources into outputs of goods and
services.
2.​ Exchange: Process of trading resources.
3.​ Consumption: Process of using the final output.
4.​ Income Distribution: Process of allocating rights to the use of output.
5.​ Savings: Rights to future consumption.
6.​ Investment: Process of using current inputs to increase the stock.

Types of Information Provided by Accounting

1.​ Quantitative Information: Expressed in numbers.
2.​ Qualitative Information: Expressed in words.
3.​ Financial Information: Expressed in money.

Types of Accounting Information Classified as to Users'

Needs
 1.​ General Purpose: Meets common needs.
2.​ Specific Purpose: Meets specific needs.

Sources of Information in Financial Statements

Not obtained exclusively from an entity's accounting records; some are from external sources.

Accounting as Science and Art

●​ As a Social Science: A body of knowledge.
●​ As a Practical Art: The use of creative skills.

Accounting as an Information System

Identifies and measures economic activities.

Accounting as the Language of Business

Facilitates communication of financial information.

Creative and Critical Thinking in Accounting

1.​ Creative Thinking: Use of imagination.
2.​ Critical Thinking: Logical analysis.

Accounting Concepts
Principles upon which the process of accounting is based.
Accounting Assumptions

●​ Double-Entry: Debit and credit.

●​ Going Concern: Indefinite period of time.
●​ Separate Entity: Viewed separately from its owners.
●​ Stable Monetary Unit: Assets, liabilities, equity, income, and expenses are stated in
terms of a common unit of measure.
○​ Should be stated in a common denominator (e.g., foreign currencies converted to
pesos).
●​ Time Period: Series of reporting periods.

Accounting Principles

●​ Materiality Concept: Omission or misstatement could influence economic decisions.

●​ Cost-Benefit: Costs should not exceed the benefits.
●​ Accrual Basis of Accounting: Income is recognized when earned, and expenses are
recognized when incurred.
●​ Historical Cost: Basis of acquisition cost.
●​ Concept of Articulation: Financial statements are interrelated.
●​ Full Disclosure: Reflects a series of judgmental trade-offs.
●​ Consistency: Consistent application from one period to the next.
●​ Matching: When the related revenue is recognized.

Entity Theories
1.​ Entity Theory: Proper income determination.
2.​ Proprietary Theory: Proper valuation of assets.
3.​ Residual Equity Theory: Two classes of shares issued.
4.​ Fund Theory: Neither proper income determination nor proper valuation of assets.

Realization
The process of converting non-cash assets into cash.

Prudence
Making estimates under conditions of uncertainty.
Expense Recognition Principles
1.​ Matching Concept: Costs directly related to revenue are recognized as expenses in the
same period.
2.​ Systematic and Rational Allocation: Costs not directly related to revenue are initially
recognized as assets.
3.​ Immediate Recognition: Costs not meeting the definition of an asset are expensed
immediately.

Common Branches of Accounting

1.​ Financial Accounting: General-purpose financial statements.
2.​ Management Accounting: Accumulation and communication of information.
3.​ Cost Accounting: Costs of material.
4.​ Auditing: Evaluating the correspondence of assertions.
5.​ Tax Accounting: Preparation of tax returns.
6.​ Government Accounting: Accounting for the government and its instrumentalities.
7.​ Fiduciary Accounting: Handling accounts managed by a person entrusted.
8.​ Estate Accounting: Deceased person's accounts.
9.​ Social Accounting: Communicating the social and environmental effects.
10.​Institutional Accounting: Accounting for non-profit entities.
11.​Accounting Systems: Installation of accounting procedures.
12.​Accounting Research: Analysis of economic events and other variables.

Bookkeeping and Accounting

●​ Bookkeeping: Process of recording accounts or transactions.
●​ Accountancy: Profession or practice of accounting.

Four Sectors in the Practice of Accountancy (RA 9298)

1.​ Practice of Public Accountancy: Rendering services to more than one client.
2.​ Practice in Commerce and Industry: Employment in the private sector.
3.​ Practice in Education/Academics: Employment in educational institutions.
4.​ Practice in the Government: Employment in government.
Philippine Financial Reporting Standards
Standards adopted by the Financial and Sustainability Reporting Standards Council (FSRSC),
the official accounting standard-setting body in the Philippines.

International Financial Reporting Standards

1.​ For SMEs: Issued by the International Accounting Standards Board (IASB).
2.​ For Sustainability Disclosure Standards: Issued by the International Sustainability
Standards Board.

Accounting Standard-Setting Bodies and Relevant

Organizations
1.​ Financial and Sustainability Reporting Standards Council: Official accounting
standard-setting body in the Philippines.
2.​ Philippine Interpretations Committee: Prepares interpretations of accounting
standards.
3.​ Board of Accountancy: Professional regulatory board.
4.​ Securities and Exchange Commission: Regulates corporations and partnerships.
5.​ Bureau of Internal Revenue: Administers the National Internal Revenue Code.
6.​ Bangko Sentral ng Pilipinas: Application of accounting policies for banks.
7.​ Cooperative Development Authority: Application of accounting policies for
cooperatives.

International Accounting Standards

●​ Accounting Standard-Setting Body: Part of the IFRS Foundation.
●​ Established: April 1, 2001, as part of the International Accounting Standards Committee
(IASC).
●​ IASC: A non-profit organization.
●​ July 1, 2010: IASC Foundation was renamed the International Financial Reporting
Standards Foundation (IFRS Foundation).
Other Relevant International Organizations
1.​ International Financial Reporting Interpretations Committee (IFRIC):
○​ Prepares interpretations of how specific issues should be accounted for under
the application of IFRS.
2.​ IFRS Advisory Council:
○​ A group of organizations and individuals with an interest in international financial
reporting.
3.​ International Federation of Accountants (IFAC):
○​ A non-profit, non-governmental, non-political organization representing the global
accountancy profession.
4.​ International Organization of Securities Commissions (IOSCO):
○​ An international body of securities commissions.