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BLUE NOTES
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Accounting Defined
(ASC) Accounting Standards Council
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 decisions.
(AICPA) American Institute of Certified Public Accountants
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.
(AAA) American Accounting Association
Accounting is the process of identifying, measuring, and communicating economic information to permit informed
judgment by users of the information.
Important Activities in Accounting Process
 Identifying (accountable or non-accountable transactions or events)
 Measuring (in terms of money)
 Communicating
- recording (journalizing)
- classifying (posting in general ledger)
- summarizing (preparation of financial statements)
Purpose of Accounting
Provide quantitative financial information about a business that is useful in making economic decisions – through
– the financial statements.

Areas of Practice of Accountancy Profession

1. Public Accounting
INDEPENDENT and expert financial services to the public.
-auditing
-taxation
-management advisory services
2. Private Accounting - employment in business entities as accounting staff, chief accountant, internal auditor,
controller.
Controller is the highest accounting officer in a business entity.
3. Government Accounting – encompasses the process of analyzing, classifying, summarizing, and communicating all
transactions involving the receipt and distribution of government funds and property and interpreting the results
thereof.

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Authorities and Regulatory Bodies of Philippine Vs. International Standards

Accounting in the Philippines
Professional Regulation Commission (PRC) PHILIPPINE INTERNATIONAL
- conducts the CPA Board Exam STANDARDS ISSUER STANDARDS ISSUER
- issue license SFAS ASC*
Board of Accountancy (BOA) (Statement (Accounting
- body authorized by law to of Financial Standards
promulgate rules and regulations Accounting Council)
affecting the practice of the Standards)
accountancy profession in the PAS ASC* IAS IASC**
Philippines. Philippine (Accounting (International (International
Philippine Institute of Certified Public Accounting Standards Accounting Accounting
Accountants (PICPA) Standards Council) Standards) Standards
GAAP Defined Committee)
Generally Accepted Accounting PFRS FRSC IFRS IASB
Principles (GAAP) represents the (Philippine (Financial (International (International
conventions, rules, procedures, Financial Reporting Financial Accounting
practice and standards followed in Reporting Standards Reporting Standards Board)
the preparation and presentation of Standards) Council) Standards)
financial statements.
* The ASC is now replaced by the FRSC.
IFRS Defined ** The IASC is now replaced by the IASB.
IFRS is a set of principles-based FRSC is the accounting standard setting body created by the PRC upon
international accounting standards recommendation of the BOA to assist the BOA in carrying out its
stating, how particular types of powers and functions provided under RA 9298.
transactions and other events
should be reported in financial FRSC Composition
statements. 14 members and 1 chairman
IFRS Standards Composition The 14 members shall be representatives from the following:
1. International Financial Reporting
Board of Accountancy 1
Standards Securities and Exchange Commission 1
(IFRS 1-13) Bangko Sentral ng Pilipinas 1
2. International Accounting Standards
Bureau of Internal Revenue 1
(IAS 1-41) Commission on Audit 1
3. Interpretations by the Standard
Major organization of preparers and
Interpretations Committee (SIC)
users of financial statements 1
4. Interpretations by the International
Accredited national professional organization of CPAs:
Financial Reporting Interpretations Public Practice 2
Committee (IFRIC) Commerce and Industry 2
Accounting Assumptions Academe 2
The basic notions or fundamental Government 2
premises on which the accounting
process is based. The chairman and the members have term of 3 years renewable for
Also known as postulates another term.
Underlying Accounting Assumption
GOING CONCERN
-the entity is viewed as continuing in operation indefinitely.
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Implicit Accounting Assumptions
ACCOUNTING ENTITY
The entity is separate from the owners,
managers and employees who
constitute the entity.
TIME PERIOD
The indefinite life of an entity is
subdivided into time periods or
accounting periods which are usually of
equal length.
MONETARY UNIT has two aspects:
QUANTIFIABILITY
The assets, liabilities, equity, income and
expenses should be stated in terms of a
unit of measure which is the peso.
STABILITY OF THE PESO – the
purchasing power of the peso is stable
or constant and that its instability is
insignificant and therefore may be
ignored.
CONCEPTUAL FRAMEWORK
It is a summary of the terms and
concepts that underlie the preparation
and presentation of financial statements
for external users.
Purpose of Conceptual Framework
1. To assist the FRSC in developing FINANCIAL PERFORMANCE
accounting standards that represent
Philippine GAAP
2. To assist preparers of financial
statements in applying accounting
standards and in dealing with issues not
yet covered by GAAP
3. To assist the FRSC in its review and
adoption of IAS
4. To assist users of financial statements in
interpreting the information contained
in the financial statements
5. To assist auditors in forming an opinion
as to whether financial statements
conform with Philippine GAAP
6. To provide information to those
interested in the work of the FRSC in the
formulation of PFRS
USL Blue Notes 3
Scope of Conceptual Framework
1. Objective of financial reporting
2. Qualitative characteristics of useful financial information
3. Definition, recognition, and measurement of the elements
from which financial statements are constructed
4. Concepts of capital and capital maintenance
Note: The Conceptual Framework is not a PFRS. In case where there is
conflict between the requirements of the framework and PFRS, the
latter shall prevail.
Classification of Users According to the New Conceptual Framework
1. Primary users – investors, lenders, other creditors
2. Other users - employees, customers, governments, public
FINANCIAL REPORTING
The provision of financial information about an entity to external
users that is useful in making economic decisions and for
assessing the effectiveness of the entity’s management.
Some Information Provided by the Financial Statements
Statement of Financial Position
LIQUIDITY
The availability of cash in the near future to cover currently
maturing obligations.
SOLVENCY
The availability of cash over a long term to meet financial
commitments when they fall due.
Statement of Comprehensive Income
Changes in economic resources and claims that result from
entity’s operation.
Concepts in Financial Reporting Objectives
ENTITY THEORY
The accounting objective is geared towards proper income
determination. (Assets = Liabilties + Capital)
PROPRIETARY THEORY
The accounting objective is directed toward proper valuation of
assets. (Assets – Liabilities = Capital)
RESIDUAL EQUITY THEORY
The accounting objective is also proper valuation of assets.
(Assets – Liabilites – Preference Sharehoders’ Capital = Ordinary
Shareholders’ Capital)
FUND THEORY
The accounting objective is proper custody and administration of
funds.
Note: The product of financial reporting is the financial statements.
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FINANCIAL STATEMENTS EXPENSES

The means by which the information Decrease in economic benefits during the accounting period in the
accumulated and processed in form of an outflow or decrease in asset or increase in liability that
financial accounting is periodically results in decrease in equity, other than distribution to equity
communicated to users. participants.
Complete Set of Financial Statements RECOGNITION
1. Statement of Financial Position The process of reporting or recording an asset, liability, income, or
2. Income Statement expense on the face of the financial statements.
3. Statement of Comprehensive Recognition Principles
Income 1. Asset Recognition Principle
4. Statement of Changes in Equity
2. Liability Recognition Principle
5. Statement of Cash Flows
3. Income Recognition Principle
6. Notes, comprising a summary of
4. Expense Recognition Principle
significant accounting policies and
ASSET RECOGNITION PRINCIPLE
other explanatory notes.
Asset is recognized when
Elements of Financial Statements 1. It is probable that future economic benefits will flow to the
Financial Position Financial Performance entity.
1. Assets 4. Income 2. The cost or value of the asset can be measured reliably.
2. Liabilities 5. Expenses LIABILITY RECOGNITION PRINCIPLE
3. Equity Liability is recognized when
1. It is probable that an outflow of resources embodying
ASSETS
economic benefits will be required for the settlement of a
Resources controlled by the entity as a
present obligation.
result of past transactions or events and
2. The amount of the obligation can be measured reliably.
from which future economic benefits are
expected to flow to the entity. INCOME RECOGNITION PRINCIPLE
Income is recognized when
LIABILITIES
1. It is probable that future economic benefits will flow to the
Present obligations of the entity arising
entity as a result of an increase in an asset or a decrease in a
from past transactions or events the
liability.
settlement of which is expected to result
2. The economic benefits can be measured reliably.
in an outflow of resources embodying
economic benefits. EXPENSE RECOGNITION PRINCIPLE
Expense is recognized when
EQUITY
1. It is probable that a decrease in future economic benefits has
The residual interest in the asset of the
occurred.
entity after deducting all of its liabilities.
2. The decrease in economic benefits can be measured reliably.
INCOME
Increase in economic benefit during the INCOME EXPENSE
accounting period in the form of an
inflow or increase of asset or decrease of REVENUE GAINS EXPENSE LOSSES
liability that results in increase in equity, Arises in the Do not arise in Arises in the Do not arise
other than contribution from equity course of the course of course of in the course
ordinary ordinary ordinary of ordinary
participants.
regular regular regular regular
activities of an activities. activities of an activities.
entity. entity.

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MATCHING PRINCIPLE
Those costs and expenses incurred in earning a revenue should be reported in the same period the revenue is
reported.
MATCHING PRINCIPLES
PRINCIPLE RECOGNITION EXAMPLE
1. Cause and Effect The expense is recognized when the Cost of goods sold
Association Principle revenue is already recognized Bad debts expense
Warranty expense
Sales commission
2. Systematic and Rational The cost is expense by allocating it Depreciation
Allocation over the periods benefited Amortization
Insurance expense and other prepayments.
3. Immediate Recognition The cost incurred is expense Advertising expense
Principle outright because of uncertainty of Administrative expenses
economic benefits Losses from sale of assets

Measurement of the Elements of Financial FAIR PRESENTATION

Statements The faithful representation of the effects of
MEASUREMENT transactions and other events in accordance with
The process of determining the monetary amounts at the definitions and recognition criteria laid down in
which the elements of the financial statements are to the Conceptual Framework
be recognized and carried in the financial statements. GOING CONCERN
The accounting entity is viewed as continuing in
Four Measurement Bases Or Financial Attributes operation indefinitely in the absence of evidence to
HISTORICAL COST (past purchase exchange price) the contrary.
The amount of cash or cash equivalent paid or the fair ACCRUAL BASIS
value of the consideration given to acquire an asset at Income is recognized when earned regardless of
the time of acquisition when received and expense is recognized when
CURRENT COST (current purchase exchange price) incurred regardless of when paid.
The amount of cash or cash equivalent that would MATERIALITY AND AGGREGATION
have to be paid if the same or an equivalent asset was The specific requirements of PFRS need not be met
acquired currently of the resulting information is not material.
REALIZABLE VALUE (current sale exchange price) Note: An entity shall present separately each material class of similar
The amount of cash or cash equivalent that could be items. An entity shall present separately items of dissimilar nature or
obtained by selling the asset in an orderly disposal function unless they are immaterial.
PRESENT VALUE (future exchange price) OFFSETTING
The discounted value of the future net cash inflows Assets and liabilities, and income and expenses,
that the item is expected to generate in the normal when material shall not be offset against each other,
course of business unless permitted by another PFRS.
FREQUENCY OF REPORTING
General Features in the Preparation and An entity shall present a complete set of financial
Presentation of Financial Statements statements at least annually.
1. Fair presentation and compliance with PFRS COMPARATIVE INFORMATION
2. Going concern The financial statements of the current period shall
3. Accrual Basis be presented with comparative figures of the
4. Materiality and aggregation financial statements of the preceding year.
5. Offsetting CONSISTENCY OF PREPARATION
6. Frequency of Reporting The presentation and classification of financial
7. Comparative Information statement items shall be uniform from one
8. Consistency of Operation accounting period to the next.
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COMPLETENESS
QUALITATIVE CHARACTERISTICS All significant and relevant information leading to
OF FINANCIAL STATEMENTS the preparation of financial statements shall be
clearly reported.
NEUTRALITY
FUNDAMENTAL ENHANCING The financial statements should not be prepared so
as to favor one party to the detriment of another
party.
Relevance Verifiability
FREE FROM ERROR
Faithful Comparability
There are no errors or omissions in the description
Representation Understandability of the phenomenon, and the process used to
Timeliness produce the reported information has been selected
and applied with no errors in the process.
QUALITATIVE CHARACTERISTICS
The qualities and attributes that make financial  SUBSTANCE OVER FORM means that transactions and
accounting information useful to the users. events should be accounted for in accordance with
RELEVANCE their economic substance rather than their legal form.
The capacity of the information to make a
difference in a decision made by users.  CONSERVATISM means when alternatives exist, the
Ingredients: alternative which has the least effect on equity shall
Predictive Value be chosen.
Confirmatory Value
Materiality VERIFIABILITY
Means that different knowledgeable and
PREDICTIVE VALUE
independent observers could reach consensus,
It can help users increase then likelihood of
although not necessarily complete agreement, that a
correctly predicting or forecasting outcome of
particular depiction is a faithful representation.
events.
CONFIRMATORY VALUE COMPARABILTY
If it provides feedback about previous The ability to bring together for the purpose of
evaluations. noting points of likeness and difference.
MATERIALITY Kinds:
Comparability within an entity
Information is material if its omission or
Comparability across entities
misstatement could influence the economic
decision that the users make on the basis of the Note: To achieve comparability, there must be consistency in
financial information about the entity. accounting method and principles use.

FAITHFUL REPRESENTATION UNDERSTANDABILITY

The financial reports represent economic Requires that the financial information must be
phenomena or transactions in words and comprehensible or intelligible if it is to be useful.
numbers.
Ingredients: TIMELINESS
Completeness Having information available to decision makers
Neutrality in time to influence their decisions.
Free from error

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Accounting Process 5. Noncounterbalancing Error

1. Analyzing the business documents or Error which if not detected is not automatically
transactions. counterbalanced or corrected in the following
2. Journalizing accounting period.
3. Posting
METHODS OF RECORDING EXPENSES
4. Preparing the unadjusted trial balance
5. Preparing adjusting entries.
6. Preparing the financial statements
7. Preparing the closing entries EXPENSE METHOD ASSET METHOD
8. Preparing a post-closing trial balance The original payment The original payment
9. Preparing the reversing entries is debited to an is debited to an asset
Accounting Records expense account. account.
1. Journal – records of chronological transactions
2. Ledger – group of accounts used in summarizing
the effects of transactions in each elements of
financial statements.
Classes of Accounts
1. Real Accounts – represents assets, liabilities and METHODS OF RECORDING INCOME
equity INCOME
2. Nominal Accounts – represents revenues and
expenses
3. Mixed Accounts– represents those with real and INCOME METHOD LIABILITY METHOD
nominal element An income account is A liability account is
credited for the credited for the
CONTRA VS. ADJUNCT ACCOUNTS
receipt of the income. receipt of the income.
Contra Accounts – deducted from the related account.
Adjunct Account – added to the related account.
KINDS OF ERRORS
CLOSING ENTRIES are made at the end of an accounting
1. Transposition
period after adjusting entries and financial statements
- The figures are interchange.
have been prepared for the purpose of closing all nominal
- Eg. 1234 is written as 4123.
or temporary accounts.
2. Transplacement
- Error in placing the decimal point. REVERSING ENTRIES are made at the beginning of the
new accounting period in order to transfer all accrued and
3. Error of Omission
prepaid items established by adjusting entries to the
- The transaction is not recorded.
nominal accounts that are used in recording transactions
4. Counterbalancing Errors during the new accounting period.
- Error which if not detected is automatically
counterbalanced or corrected in the following Items that could be reversed:
accounting period. a. Accruals
b. Deferrals under the expense and income
method

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