Introduction To Accounting

What is Accounting?
Accounting
The Accounting Standards Council
definition:
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
The Committee on Accounting Terminology
of the American Institute of Certified Public
Accountants definition:
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 a
financial character and
interpreting the results thereof.
Accounting
The American Accounting Association
definition:
Accounting is the process of
identifying, measuring and
communicating economic
information to permit
informed judgment and
decision by users of the
information.
Three Important Activities in the Accounting Process
IDENTIFYING
ACCOUNTING
PROCESS
MEASURING COMMUNICATING
IDENTIFYING
It means the recognition or nonrecognition
of “accountable” events.
Not all business activities are accountable.
An event is accountable or quantifiable
when it has an effect on assets, liabilities
and equity.
Only economic activities are emphasized
and recognized in financial accounting.
Economic Activities
Referred to as transactions which may be
classified into external and internal.
1. External Transactions
 Those economic events involving one entity and
another entity.
Examples: Purchase of merchandise from a supplier,
borrowing money from a bank, sale of merchandise to
customer
2. Internal Transactions
 Economic events involving the entity only.
Examples: Production and casualty losses
MEASURING
It is the process of determining the
monetary amounts at which the elements of
the financial statements are to be
recognized and carried in the balance sheet
and income statement.
The Philippine peso is the unit of
measuring accountable economic
transactions,
Four Financial Bases or Financial Attributes
1. Historical cost – original acquisition cost.
2. Current cost – replacement cost or current
purchase price.
3. Realizable value – current selling price or the
amount that could currently be obtained by
selling the asset in an orderly disposal.
4. Present value – discounted value of the future
net cash inflows that the asset is expected to
generate in the normal course of the business.
COMMUNICATING
It is the process of preparing and distributing
accounting reports to potential users of
accounting information. Users include
investors, owners, managers, creditors, and
other interested parties.
It is for this reason that accounting has been
called the “language of business”.
Implicit in the communication process are
recording, classifying and summarizing aspects
of accounting.
COMMUNICATING
1. Recording or journalizing is the process of
systematically maintaining a record of all
economic business transactions after they
have been identified and measured.
2. Classifying or posting is the sorting or
grouping of similar and interrelated economic
transactions into their respective class.
3. Summarizing in the preparation of financial
statements.
Purpose of Accounting
“to provide quantitative
financial information
about a business that is
useful to statement users
particularly owners and
creditors in making
economic decisions.”
ACCOUNTANCY PROFESSION
 Republic Act No. 9298 is the law regulating
the practice of accountancy in the Philippines
also known as Philippine Accountancy Act of
2004.
 Accountancy has developed as profession
attaining a status equivalent to that law and
C A medicine.
P  The Board of Accountancy is the body
authorized by law to promulgate rules and
regulations affecting the practice of profession
in the Philippines.
ACCOUNTING ASSUMPTION
The basic notions or
fundamental premises on
which the accounting process
is based.
It is the foundation of
accounting which are the
“givens” and they exist without
saying.
Also known as postulates and
underlying assumptions
5 BASIC ACCOUNTING
ASSUMPTIONS
1. Accrual
2. Going Concern
3. Accounting Entity
4. Time Period
5. Monetary Unit
Note: Conceptual framework mentions two

assumptions, namely accrual and going concern.
ACCRUAL ACCOUNTING
That income is recognized when earned
regardless of when received and
expense is recognized when incurred
regardless of when paid.
GOING CONCERN ASSUMPTION
That the accounting entity is viewed as
a continuing in operation indefinitely in
the absence of evidence in the contrary.
Also known as the continuity
assumption.
ACCOUNTING ENTITY ASSUMPTION
The business enterprise is a separate
from the owners, managers and
employees who constitutes the firm.
Accordingly, the transaction of the
business should not be merged with the
transactions of the owners.
MONETARY UNIT ASSUMPTION
Has two aspects, namely,
quantifiability and stability of the
peso
Quantifiablility means that
A,L,C,I,E should be stated in
terms of unit of measure which is
the PhP.
Stability of peso means that the
purchasing power of the peso is
stable or constant.
Assignment!
1. What are the purposes of conceptual
framework?
2. What is the scope of the conceptual
framework?
3. What are the qualitative characteristics
that determine the usefulness of
information in financial statements?
4. Explain each of the four principal
qualitative characteristics.
CONCEPTUAL FRAMEWORK
Summary of the terms and concepts that
underlie the preparation and presentation of
financial statements
Underlying theory for the development of
accounting standards and revision of
previously issued accounting standards.
An attempt to provide an overall
theoretical foundation for accounting
which will guide standard setter, preparers
and users of financial information in the
preparation and presentation of statements.
Purpose of Conceptual Framework
1. Assists the Financial Reporting Standard Council
(FRSC) in developing accounting standards that
represents Philippine GAAP.
2. Assists preparers of financial statements in applying
accounting standards and in dealing with issues not
yet covered by GAAP.
3. Assists the FRSC in its review and adoption of
International Accounting Standards (IAS).
4. Assist users of financial statements in interpreting the
information contained in the financial statements.
5. Assists auditors in forming an opinion as to whether
financial statements conform with Philippine GAAP.
Scope of Conceptual Framework
1. Objective of financial statements.
2. Qualitative characteristics that determine the
usefulness of information in financial statements.
3. Definition, recognition and measurements of the
elements from which financial statements are
constructed.
4. Concepts of capital and capital maintenance.
Note: Prospectuses and computations prepared for

taxation purposes are outside the scope of the
framework.
Objective of Financial Statements
“to provide information about

the financial position,
performance and cash flows of
an entity that is useful to a wide
range of users in making
economic decision.”
Financial Position
comprises its assets, liabilities and

equity at a particular time.
pertains to the economic resources,
liquidity, solvency, financial
structure and capacity for
adaptation. This information is
pictured in the balance sheet.
Economic Resources
Refer to the assets owned by the entity.
Information about the economic
resources controlled by the entity and
its capacity to modify these resources
is useful in predicting the ability of the
entity to generate cash and cash
equivalents in the future.
Liquidity
The availability of cash in the near
future to cover currently maturing
obligations.
Solvency
Availabilityof cash over a long term to
meet financial commitment when they
fall due.
Financial structure
The source of financing for the assets
of the entity either from borrowed
capital or invested or equity capital.
Capacity for adaptation

Abilityof the entity to use its available
cash for unexpected requirements and
investments opportunities.
Also known as financial flexibility
Financial Performance
comprises its revenue, expenses and

net income or loss for a period of
time.
Performance is the level of income
earned by the entity through the
efficient and effective use of its
resources.
Also known as results of operation
and is portrayed in the income
statement.
Financial Reporting
Encompasses not only financial statements but
also other means of communicating
information that relates directly or indirectly
to the financial accounting process.
Example of financial reports
a. Financial statements
b. Financial highlights
c. Summary of important financial figures
d. Analysis of FS
e. Significant ratios
f. Description of major products
g. Listing of corporate officers and directors
Objective of Financial Reporting
The AICPA Financial Accounting
Standards Board in its Statement of
Financial Accounting Concepts enumerates
the following objectives:
1. To provide information useful in
investment, credit and similar decision.
2. To provide information useful in
assessing cash flow prospects.
3. To provide information about enterprise
resources, claims to those resources and
changes in them.
Concepts in Conjunction with the
Objective of FR
1. Entity theory
2. Proprietary theory
3. Residual equity theory
4. Fund theory
Entity Theory
 the accounting objectives is geared
toward proper income determination.
Proper matching of cost and revenue
is the ultimate end.
Emphasize the importance of income
statement
Assets = Liabilities + Capital

Proprietary Theory
 the accounting objective is directed
toward proper valuation of assets.
Emphasizes the importance of the
balance sheet.
Assets - Liabilities = Capital

Residual Equity Theory
 the accounting objective is also
proper valuation of assets.
Applicable where there are two
classes of stockholders (common and
preferred)
Assets – Liabilities – Preferred

stockholders’ equity = Common
stockholders’ equity
Fund Theory
The accounting objective is neither
proper income determination nor
proper valuation of assets but the
custody and administration of funds.
Fund = Cash inflows – Cash outflows

Users of the Financial Statements
1. Investors
2. Employees
3. Lenders
4. Suppliers and other trade creditors
5. Customers
6. Government and other Agencies
7. Public

Introduction To Accounting

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Introduction To Accounting

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What is Accounting?

Note: Conceptual framework mentions two

Note: Prospectuses and computations prepared for

“to provide information about

comprises its assets, liabilities and

Capacity for adaptation

comprises its revenue, expenses and

Assets = Liabilities + Capital

Assets - Liabilities = Capital

Assets – Liabilities – Preferred

Fund = Cash inflows – Cash outflows

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