NATURE AND DEFINITION OF ACCOUNTING o Business Owners – make decisions

Accounting as a Science depending on the report and its

o Accounting is the process of identifying, interpretation
measuring, and communicating economic o Business Managers – direct and
information to permit informed judgment control the business enterprise; make
and decisions by users of information decisions
Accounting as an Art o Labor Unions – demand for increase
o Accounting is the art of recording, in the salary of their union members
classifying, summarizing in a significant o Budget Officers/Accountants/Auditors –
manner and it terms of money, transactions prepare the company budget; know
and events which are in part of a financial the progress of the company’s
character and interpreting the results thereof operation
to interested users. External users (Indirect Users)
Accounting as an Information System o They are the decision-making individuals
o Accounting is a service activity, which outside the business who are affected in
functions to provide quantitative some way by the performance of the
information, primarily financial in nature, business.
about economic entities that is intended to o Government – checks the correctness
be useful in making economic decisions. of tax payments; BIR; Securities
And Exchange Commission (SEC)
HOW CAN ONE BECOME A CERTIFIED o Potential Investors – check the
PUBLIC ACCOUNTANT (CPA) soundness of the business enterprise
o Finish a program in accountancy before they invest
o Take a review class for six months o Creditors – check on the paying
o Take the cpa licensure examination capacity of the customers before
o Given twice a year: May and October extending credit
o Subjects covered:
 Theory of Accounts HISTORY OF BOOKKEEPING
 Practical Accounting I and II o Luca Pacioli (Father of Accounting)
 Auditing Theory and o 1445 at Borgo San Sepulcro Tuscany, Italy –
Auditing Problems Luca Pacioli’s birth year and place
 Management Advisory o 1494 – bookkeeping system described in
Services great detail
 Law and Taxation o November 10, 1494 – Luca Pacioli published
o After passing the exam, the PRC shall issue what is generally recognized as the first
a CPA license complete text on bookkeeping
o Luca Pacioli’s 5th book title: Summa de
USERS OF ACCOUNTING INFORMATION Arithmetica, Geometria, Proportioni et
Internal users (Direct User) Proportionalita
o They are the decision-making individuals o English translation of the title: Everything
inside the business who are responsible for About Arithmetic, Geometry and Proportion
the performance of the business o The Summa’s 36 chapters include texts on
o They need accounting information for bookkeeping, entitled De Computis et
planning and controlling the firm’s operation Scripturis (Of Reckonings and Writings)
 o In 1497, he accepted an invitation from BRANCHES OF ACCOUNTING
Lodovico Sforza to work in Milan Public Accounting
o There he met, collaborated with, lived with, o It is a professional service rendered by a
and taught mathematics to Leonardo da certified public accountant and his
Vinci employees to the public for a fee
o Benedetto Cotrugli is believed to have o Ex. Sycip, Gorres, Velayo & Company,
written the first double entry bookkeeping R.G. Manabat & Company, Isla Lipana &
book in 1458 Company, Punongbayan Amper &
o Cotrugli’s book was not published until Company
1573 so Pacioli may claim the first Private Accounting
published text o An accounting job done by private
o Cotrugli is credited with inventing the businesses
double-entry bookkeeping process, although o The number of accountant in the firm
it was Pacioli who is often credited with depends upon the size and the needs of the
codifying and writing the book on the
business
accounting process.
o Accountants in private firms may or may not
FUNCTIONS OF ACCOUNTING be a CPA; however the controller or head of
Record Keeping the department is usually a CPA.
o To maintain systematic and chronological o Ex. CPAs employed in companies like
record of financial transactions and to post Nestle, Coca-cola or Gardenia
them subsequently to the various ledger Government Accounting
accounts and finally to prepare the final o The main customer is the government,
accounts to find out the profit or loss of the because it needs the services of accountants
business at the end of the accounting period in different agencies like BIR, SEC, COA,
Protecting of Properties or BSP.
o To calculate the accurate amount of o Government officials rely on accumulated
depreciation on assets by choosing the accounting data
appropriate method applicable to any o Accountants are responsible in the
particular asset accumulation of these data
o To design a desirable system to protect the o They also check and audit income, payroll
properties and assets of the business from and tax returns submitted to the government
unauthorized and unwarranted users Research and Education / Academe
Communication of Results o The customers here are students
o Always to communicate the results of the o Ex. Researcher, professor, teacher or CPA
recorded transactions to the different parties reviewer
who are interested in the particular business
Meeting Legal Requirements DIFFERENT ACCOUNTING AREAS
o To devise and develop such a system of Basic Accounting or Bookkeeping
keeping records and reporting the results for o The simplest task of an accountant
legal requirements to enable the proprietor o This is the systematic recording, classifying,
or the authority to file various statements and summarizing of business transactions in
like income tax returns, sales tax returns, a company
etc. Financial Accounting
 o Concerned with the recording of transactions o May also be described as broad rules
and the preparation of reports from these adopted by the accounting profession as
records (meant for external users) guides in measuring, recording, and
Managerial Accounting reporting financial affairs of a business.
o Meant for internal users Regulatory Bodies
o Provides special information for the o International Accounting Standards Board
managers of a company (IASB)
o The purpose is to generate information that a o Professional Regulation Commission
1
manager can use to make sound internal (PRC)
decisions o Professional Regulatory Board of
1
Cost Accounting Accountancy (PRBOA)
o Involves the determination and control of o Philippine Institute of Certified Public
costs, particularly the costs of manufacturing Accountants (PICPA)2
processes and manufactured products o Financial Reporting Standard Council
Government Accounting (FRSC)2
o Study of how the allocation of government o {Philippine Financial Reporting Standards}
budget for the citizen’s projects are recorded o {Generally Accepted Accounting
and prepared Principles}
Auditing Business Entity Concept
o The principal service that a public o States that the transactions associated with a
accountant offers business must be separately recorded from
o Examines and checks the accuracy of reports those of its owners or other businesses
Tax Accounting Going Concern
o The management of accounting practices o Is the assumption that an entity will remain
that incorporate tax laws in business for the foreseeable future
o States that businesses should be treated as if
FORMS OF BUSINESS ORGANIZATION they will continue to operate indefinitely or
o According to ownership at least long enough to accomplish their
o According to the nature of business objectives
Accounting Period / Periodicity Concept
TYPES OF BUSINESS OPERATION o The life of the business can be divided into
Service Concern uniform specific time intervals called
o This deals with the rendering of services to periods
customers o Calendar Accounting Period – a period that
Trading or Merchandising starts in January 1 and ends in December 31
o Deals with the buying of goods and selling o Fiscal Accounting Period – any 12
the same goods in the same form for profit consecutive months not starting in January 1
Manufacturing Concern (ex. Jan 2-Jan 1 of the following year,
o Involves purchase of raw materials into March 18-March 17 of the following year)
finished products o Interim Accounting Period – a financial
reporting period that is shorter than a full
GENERALLY ACCEPTED ACCOUNTING year
PRINCIPLES (GAAP) Units of Measure/Monetary Unit Concept
o GAAP is an international convention of
good accounting practices
 o All business transactions are measured and recognized in the same accounting period
recorded using only one unit of during which the related revenue was earned
measurement. Timeliness
Stable Monetary Unit Concept o Refers to the need for accounting
o States that you have to assume that the value information to be presented to the users in
of currency you are using 5 or even 30 years time to fulfil their decision making needs
ago is the same value today Materiality
o Deals with economic changes such as o States that an accounting standard can be
inflation and deflation ignored if the impact of doing so has such a
Cost Principle/Historical Cost Principle small impact on the financial statements that
o Requires that assets be recorded at the cash a reader of the financial statements would
amount (or its equivalent) at the time that an not be misled
asset is acquired o The concept of materiality allows you to
o Deals with the asset value change such as violate another accounting principle if the
appreciation and depreciation amount is so small that the reader of the
Objectivity Concept financial statements will not be misled
o The financial statements of an organization o Only material items should be presented
be based on solid evidence separately in the financial statements
Approximation Estimation o The materiality concept varies based on the
o States that the use of estimates in the reports size of the entity
is done when it is impossible or impractical
to provide exact numbers. ACCOUNTING ELEMENT
Conservatism Accounts – a name or description of particular
o Gives guidance on how to record uncertain events or situation
events and estimates Account – is a storage unit used to collect and store
o The main idea behind this principle is that information of similar nature
when faced with two reasonable possibilities ASSETS
for recording a transaction, you should o Are economic resources owned by the
choose on the side of being conservative business
(safe side) o They include properties and other things of
o This means recording uncertain losses while value the ownership title of which is in the
refraining from recording uncertain gains name of the business
Accrual Basis of Accounting CURRENT ASSETS
o A system of accounting based on the accrual o Are those assets which can be reasonably
principle, under which revenue is recognized converted into cash within a short period of
(recorded) when earned, and expenses are time or within one accounting period or
recognized when incurred within the regular operation of the business
o Totals of revenues and expenses are shown o Current assets are also used to liquidate
in the financial statements (prepared at the current liabilities
end of an accounting period), whether or not o Included here are cash, AR and NR which
cash was received or paid out in that period are expected to be realized into cash,
o Revenue Recognition (recognize revenue merchandise inventory which are expected
when it is earned) and Expense Recognition to be sold and prepaid expenses which are
or Matching Principle (expenses should be expected to be used or consumed
Cash or Cash on Hand and In Bank
 o Includes currency of cash items on hand, o Included here are accounts payable, notes
peso or foreign currency deposits in banks payable, accrued expenses and unearned
which are unrestricted and immediately for income
use in the current operations of the business Accounts Payable
Receivables o Are indebtedness arising from purchase of
o Represent amounts collectible from goods and services
customers arising from sales of Notes Payable
merchandise, claims for money lent, or the o Are short-term indebtedness supported by
performance of service written promises to pay
o This is represented in the balance sheet as Accrued Expenses
accounts receivable o Are expenses already incurred but are not
o If the receivable is supported by a yet paid as of the balance sheet date
promissory note, it is represented as notes Unearned Income
receivable o Arises when payments for undelivered
Inventories goods or services not yet rendered are
o Constitute items of tangible personal received
property: o This item is included among current
o Merchandise Inventory / finished liabilities because it requires current asset
goods for its liquidation, say the delivery of
o Goods-in-process merchandise inventory
o Raw materials FIXED OR LONG-TERM LIABILITIES
Prepaid Expenses o Are those which mature beyond one year
o Those which are already paid before they are from the balance sheet date
used or consumed o Examples are mortgages payable, bonds
NONCURRENT ASSETS payable, and notes payable due beyond one
o Are those not classified as current year
o Include property, plant, and equipment CAPITAL
(PPE) o This represents the equity or claim of the
o Tangible assets used in the operation of owner on the assets of the business
business, have useful life that exceeds o It is the interest in the assets of the business
beyond one year and are not intended for after deducting all its liabilities
sale o Asset, Liability, Capital (A = L + C or C =
o Examples: Land, building, equipment, A – L)
furniture and fixtures o Capital is affected by the following;
o Other noncurrent assets are long term o Initial and additional contributions
investments, intangible assets (e.g. patent, of owner/s (increase capital)
copyright, trademark, goodwill, bond) o Income (revenue, gains) (increase
LIABILITIES capital)
o Are debts or obligations of the business to o Withdrawals made by owner/s
an individual or to an organization (decrease capital)
CURRENT OR SHORT-TERM LIABILITIES o Expenses (loss) (decrease capital)
o Are those which are due for payment within
a short period of time or one year
o These obligations require a current asset for
payment
INCOME (REVENUE, GAINS)
o Refers to an increase in benefit during the
accounting period in the form of increase in
asset or decrease in liability that results in
increase in equity
o Ex. Rent income, Interest income

EXPENSES
o Are decreases in benefit during the
accounting period in the form of a decrease
in asset or an increase in liability that results
in decrease in equity

ARNONOOB 120918