ACCOUNTING 1 MARY JOSEFA MAE FAUSTO
ABM 11P-1
Accounting – is a system designed to identify,
collect, process, measure and communicate
economic information.
AICPA – American Institute of Certified Public
Accountants.
 The American Institute of Certified Public
Accountants (AICPA) defines accounting
as: 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.
NATURE OF ACCOUNTING
1. Standards of Discipline – accountants
must follow certain standards in
performing their professional services.
 GAAP – Generally Accepted
Accounting Principles.
 120 CPD (Continuing Professional
Development) units for renewing CPA
license, every 3 years.
2. Art and Science – Accounting as an art
follows a certain style to make its reporting
more meaningful and relevant. Accounting
as a science follows a systematic process
before the financial statements will be
produced.
3. Service Activity – Accountants are merely
concerned with giving professional services
to the client.
4. Language of Business – assistance for their
individual needs; users may asses.
FUNCTIONS OF ACCOUNTING
1. Recording – this is the simple and basic
function of accounting. Business
Transactions (buyer and seller).
 Journal – book of original entry.
2. Classifying – concerned with the
systematic analysis of the journalized data.
Groupings (ALICE)
 Ledger – also known as T- accounts.
Book of final entry.
3. Summarizing – involves presenting and
condensing the classified data in a
systematic matter.
Balance Sheet – statement of financial
position.
 Income Statement – statement of
financial performance, statement of
comprehensive income, statement of
profit and losses.
 Trial Balance – equality of debit and
credit.
COMPONENTS OF FINANCIAL STATEMENT
 Balance Sheet
 Income Statement
 Statement of changes in owner’s
equity.
 Statement of Cash flows
 Notes of Financial Statement
4. Analysis and Interprets – the final and end
function of accounting.
5. Communicate – this is done through
preparation and distribution of accounting
reports.
Fra Luca Pacioli – Father of Accounting; an
Italian mathematician and professor.
BRANCHES OF ACCOUNTING – specialized field of
accounting.
1. Financial Accounting – the discipline of
accounting concerned with recording and
classifying business transactions. Making of
financial statements.
2. Management Accounting – to provide
assistance to the internal users of financial
information particularly the management in
doing economic decisions.
 Planning (to produce), Executing (to
buy), Controlling (maintaining).
 Ratio Analysis
 Financial Statement Analysis
 Cashflow Analysis
 Forecasting – historical data
3. Government Accounting – mostly focused on
the allocation of the resources and funds of
the National Government.
4. Auditing – Reviewing, Examination,
Verification, Evaluation and Inspection.
 Checking errors to the financial
statement.
 Checking cash collection vs. receipts.
External Auditing – critical examination of
financial statement. Not part of the company.
Internal Auditing – deals with the operational
efficiency and effectiveness of the company
regarding protection of company’s assets,
accuracy and reliability of data, and managerial
policies of Board of Directors. Part of the
company.
5. Tax Accounting – concerned on the proper
measurement of the amount to be paid by
one entity or individual.
 Tax – life blood of a country.
 BIR – Bureau of Internal Revenue
3 Inherent of the Government
 Eminent Domain – power to take
private property for public use.
 Police Power – Airforce, Army, Navy
 Power of Taxation – collecting taxes.
6. Cost Accounting – deals with the valuation
of the materials.
7. Accounting Education – One of the
professional field one CPA can engage.
CPA/MBA
8. Accounting Research – a particular topic
that will help and benefit the entire
industry and profession of accountancy.
CPD/seminars
CPA Board Exam – a national examination
given by the Philippine Regulatory Commission
to qualified BSA graduates to become a CPA.
Accounting Information – are financial data
relevant in the financial statements vital in
making decision on the future.
USERS OF ACCOUNTING INFORMATION –
people who will use the accounting
information in making decision.
 Internal User – inside the company
 External User – outside the company.
1. Government – for financial statements; to
know a company’s tax.
2. Lenders – this type of user can be able to
asses the capability of one entity to pay its
long term and short-term obligations.
Check the company to know if they can
pay.
3. Investors – mostly concern how much will
they earn if they will invest in a company
(Return of Investment).
4. Management – Leaders, President, Board
Members.
To know what is happening in business
improvement.
5. Public – concerned on the info; advantages
and disadvantages.
6. Supplier and Trade Creditors – depends on
the financial statements of a company
most especially if this company has a trade
credit.
7. Employees – concern with the financial
capability of one company to pay their
compensation.
8. Customer – use the financial statement of
their supplies to asses the latter’s
continuity of the business.
TYPES OF FINANCIAL INFORMATION
1. Profitability – the increase in the owner’s
capital. Simply the company’s net income
at the end of one period.
2. Liquidity – the company has the capability
to pay their short-term obligation.
3. Solvency – the company has the capability
to pay their long-term obligation.
4. Stability – the capacity of one entity to
sustain its growth and to meet future
expansion.
5. Capital Structure – the source of financing
one company has.
6. Financial Flexibility – has the excess cash
after satisfying its claim and obligations to
meet additional investment.
FORMS OF BUSINESS ORGANIZATIONS
1. Sole Proprietorship – owned by one
person. The owner has unlimited liability.
2. Partnership – association of 2 or more
persons. Governed by the provisions of
the Civil Code articles 1767 to 1867.
 Partnership is grounded on common
trust and confidence.
 Group of persons who are willing to
contribute money, property, or
industry to a common fund with the
intention of dividing profits.
3. Corporation – is entity held by five or more
individuals whose ownership is evidence by
share of stocks.
  Require/s compliance to the Securities
and Exchange Commission, Bureau of
Internal Revenue, and Bangko Sentral
ng Pilipinas.
 Section 2 of the Corporation code
defines corporation as an artificial
being created by the operation of law.
 At least 51% shares to become a CEO.
 30% tax.
PRIMARY ACTIVITIES OF BUSINESS
1. Service Business – the business renders
services to clients for exchange for a fee.
2. Merchandising Business – engages buying
and selling of goods.
3. Manufacturing Business – this business
type converts raw materials into finished
goods before offered to certain business.
Merchandise Inventory – are the goods held
for sale by a merchandising business.
Revenue – sometimes called income; is the
flow of resources towards the business.
Raw materials – are converted into finished
products.
Finished Product – are the products sold by
the manufacturing concern.
Accounting assumptions – are the basic
notions or fundamental premises on which
accounting process is based.
 Also known as Postulates.
 Suggests basis of reasoning, belief, and
truths.
 Like a building structure that required a
solid foundation to avoid or prevent
future collapse and provide room for
expansion, and so with accounting.
4 BASIC ASSUMPTIONS
1. Going Concern – means that in the
absence of evidence to the contrary, the
accounting entity is viewed as continuing
in operation indefinitely.
 Assumes that the business will
continue their operation.
 Financial Statement is assume
foreseeable in the future.
 Going Concern is abandoned =
bankruptcy.
2. Accounting Entity – the entity is separated
from the owners, managers, and
employees who constitute the entity.
 The reason for the entity assumption
is to have a fair presentation of
financial statement.
 Accounting Entity – Sole
proprietorship, Partnership and
Corporation.
 Entity – owners, employees, and
managers.
3. Time Period – a completely accurate
report of the financial position and
performance of an entity cannot be
obtained until the entity is finally dissolved
and liquidated.
 Time Period: Every end of the year.
Required 1 year.
 Calendar Year Method: January 1 (
start of the business ) – December 31 (
making of financial statement)
 Fiscal Year Method: February, March
to November; No DECEMBER.
Example: March 1, 2018 – February 28,
2019.
 Interim Financial Statement – presents
every middle of the year. Example:
January 1 – June 30, July 1 – December
31.
4. Monetary Unit – The monetary unit
assumption has two aspects, namely
quantifiability and stability of zero.
 Quantifiability – aspect means that the
ALICE should be stated in terms of in
unit of measure which is the peso of
the Philippines.
 Monetary unit of the Philippines is
peso.
Stability of the peso – power of the peso.
Example:
Year 1999: 1 dollars = 20 pesos
Year 2019: 1 dollars = 52 pesos
Ignored the stability of the peso ( currency is
not stable )
Conceptual Framework – is composed of
ideas, concepts, and assumptions that underlie
the preparation and presentation of
accounting information to external users.
Qualitative Characteristics – are the qualities
or attributes that make financial accounting
information useful to the others.
Fundamental Qualitative characteristics relate
to the content or substance of financial
information.
FUNDAMENTAL QUALITATIVE
CHARACTERISTICS:
Relevance – is the capacity of the
information to influence a decision.
Faithful Representation – means that
financial reports represent economic
phenomena or transaction in words or
numbers ; Loyal in presenting financial
representations.
INGRIDIENTS IN FAITHFUL REPRESENTATION:
1. Completeness – requires that relevant
information is presented in a way that
facilitates understanding and avoid
erroneous implication.
2. Neutrality – not bias in the presentation or
preparation of financial information.
3. Free from error – no mistakes; there are
no errors or omissions in the description of
the phenomenon or transaction; no errors
in the process.
Materiality – is a practical rule in accounting
which indicates that strict adherence to GAAP
is not required when the items are not
significant enough to affect the financial
statement.
 Also known as Doctrine of
Convenience.
 Depends on the company to name it
material or immaterial.
Enhancing Qualitative Characteristics relate to
the presentation or form of the financial
information. Intended to increase the
usefulness of the financial information that is
relevant and faithfully represented.
ENHANCING QUALITATIVE CHARACTERISTICS:
1. Comparability – means the ability to bring
together for the purpose of noting points
of likeness and difference.
 Horizontal Analysis ( comparing
present to past Financial Statements;
actual form )
 Vertical Analysis (comparing in
percentage form)
 Left (present form) Right (past form)
Comparability within an entity – is the quality
of information that allows comparison within a
single entity through time or from accounting
period to the next.
2. Consistency – the accounting methods and
practices should be applied on a uniform
basis from period to period; to avoid
confusion.
3. Understandability – requires that financial
information must be comprehensible or
intelligible if its be most useful.
 The information should be presented in
a form and expressed terminology that
a user understands.
4. Timeliness – means that the financial
information must be available early
enough when a decision is to be made.
Generally Accepted Accounting Principles
– described as broad rules adopted by the
accounting profession as guides in measuring,
recording, and activities of a business.
The framework on the preparation of
financial statements issue by the Philippine
Accounting Standards enumerates the
following underlying assumptions:
1. Accrual Basis – the effects of transactions
and other events are recognized when they
occur and not as cash or its equivalent is
received or paid on the period to which
they relate.
2. Going Concern – Financial Statements are
normally prepared on the assumption that
an enterprise will continue in operation for
the near future.
3. Cost Principle – Under the Measurements
of the Elements of Financial Statements,
assets are recorded at an amount of cash
to acquire them at the time of acquisition.

4. The Entity Concept – this assumes that the

business enterprise is separate from the
owner, employees, and managers who
constitute the firm.
5. Time Period Consumption – this concept
requires that the indefinite life of the
enterprise be divided into equal interval of
time called time period or accounting
period.
6. Monetary Unit Assumption – this speaks
of the ability to quantify the assets,
liabilities and the capital in terms of a unit
measure.
 The unit of measure in the Philippines
is peso.

Principles – standards of accuracy and probity

that apply to those carrying out accounting
procedures.
Policies – the accounting bases used by a
company when preparing its financial
statements.
Conceptual Framework – sets of theoretical
principles that underlies the practice and
regulations of financial accounting.
Assumption – that the International
Accounting Standards Committee recognize as
underlying the preparation of financial
statements.

3 LEVELS OF CONCEPTUAL FRAMEWORK

First Level – The why or purpose of
accounting. Objective of Financial Reporting.
Second level – the bridge between level 1 and
3.
Third level – the how or implementation of
accounting.