-o0oPURPOSE AND PHASES OF ACCOUNTING

What is the purpose of accounting?

// It handles the financial operations of the business.
// It provides information and advice to other
departments.
What are business transactions?
// These are the economic activities of a business.
// Recording these business transactions is a
significant function of accounting.
// Accounts are produced to aid management in
planning, control and decision-making and to
comply with regulations.
What are the phases of accounting?
1. Transactions must be measured.
// In order that accounting information will be useful,
it must be expressed in terms of a common financial
denominator money.
// Money serves as both a medium of exchange and
a measure of value.
// To measure a business transaction
+ the account must decide when the transaction
occurred (recognition issue)
+ what value to place on the transaction (valuation
issue) + how the components of the transaction
should be classified (classification issue).
++ By simply measuring and recording transaction,
the resulting information will be of limited use.
2. Transactions
must
be
classified
and
summarized.
// These are done so that information will be useful
in making decisions.
// Classification reduces the effect of numerous
transactions into useful groups or categories.
// Summarization
is achieved through the
preparation of financial statements.
++ These summarize the effects of all business
transactions that occurred during some period.
3. Information must be interpreted or analyzed.
// done to evaluate the liquidity, profitability, and
solvency of the business organization
++ Accounting provides the decision-makers with
information to make reasoned choices among
alternative uses of scarce resources in the conduct
of business and economic activities.
-o0oFUNDAMENTAL CONCEPTS
1. Entity Concept
// the most basic concept in accounting
{ Accounting entity }
// an organization or a section of an organization
that stands apart from other organizations and
individuals as a separate economic unit
++ Transactions of different entities should not be
accounted together.
++ Each entity should be evaluated separately.
2. Periodicity Concept
// an entitys life can be meaningfully subdivided
into equal time periods for reporting purposes
++ It is aimless to wait for the actual last day of
operations to perfectly measure the entitys profit.

// allows users to obtain timely information to serve

as a basis on making decisions about future
activities
3. Stable Monetary Unit Concept
{ Philippine Peso }
// reasonable unit of measure
// its purchasing power is relatively stable
// allows accountant to add and subtract peso
amounts
// peso has same purchasing power as any other
peso
++ basis for ignoring the effects of inflation in the
accounting records
-o0oCRITERIA FOR GENERAL
ACCOUNTING PRINCIPLE

ACCEPTANCE

OF

AN

// Accounting practices follow certain guidelines.

{ GAAP }
// Generally Accepted Accounting Principles
// encompass the conventions, rules, and procedures
necessary to define accepted accounting practice at
a particular time
ACCOUNTING PRINCIPLES
// created by humans
// not deduced from basic axioms nor can be verified
by observation and experiment
// evolves
// evolutionary process is going on constantly
// are not eternal truths
++ The general acceptance depends on how well it
meets the criteria:
1. Relevance
// It results in information that is meaningful and
useful to those who need to know something about
a certain organization.
2. Objectivity
// resulting information is not influenced by personal
bias or judgment of those who furnish it
//
connotes
reliability,
trustworthiness,
and
verifiability (there is a way of finding out whether
the information is correct)
3. Feasibility
// implemented without undue complexity or cost
-o0oBASIC PRINCIPLES
1. Objectivity Principle
// accounting records and statements are based on
the most reliable data available accurate and
useful
// reliable data areverifiable when they can be
confirmed by independent observers
++ accounting records are based on information
that flows from activities documented by objective
evidence.
// without this principle, records would be based on
whims and opinions disputes
2. Historical Cost
// acquired assets must be recorded at their actual
cost not at what management thinks they are worth
as at reporting date.
3. Revenue Recognition Principle

// revenue is to be recognized when goods are

delivered or services are rendered or performed
4. Expense Recognition Principle
// expenses should be recognized when goods and
services are used up to produce revenue and not
when the entity pays for the goods and services
5. Adequate Disclosure
// requires that all relevant information that would
affect users understanding and assessment of an
accounting entity be disclosed in the financial
statements
6. Materiality
++ financial reporting is only concerned with
information that is significant enough to affect
evaluations and decisions
// it depends on the size and nature of the item
judged
// in deciding whether an item or an aggregate of
items is material, the nature and size of the item are
judged together
// either could be the determining factor
7. Consistency Principle
// firms must use the same accounting method from
period to period to achieve comparability over time
within a single enterprise
// changes are permitted if justifiable and disclosed
in financial statements
-o0oTHE ACCOUNTANCY PROFESSION
CHARACTERISTICS
1. All members are Certified Public Accountants
passed the CPA Licensure Examinations
earned a Bachelor of Science in Accountancy
degree
2. CPA have their own body of language uses
terminology peculiar to the profession
(debits, credits, etc.)
3. CPAs adhere to a Code of Ethics
{ Code of Ethics }
// upholds the CPAs responsibility to serve the public
with competence and integrity
{ public }
// they in return expresses their confidence to CPAs
by relying on the financial statements they audit
4. Like other professions, CPAs are members of
a national organization, the PICPA
{ PICPA }
// role is to ensure the continued improvement of
accountancy profession to meet the demands of
time
CAREER OPPORTUNITIES
A. PUBLIC PRACTICE
// those who render services on a fee basis and staff
accountants employed by them
// public accountants, individuals or members of
public accounting firms, must be certified public
accountant
// they offer professional services to the public
// WORK: auditing, taxation, management advisory
services
// some work in a single firm simply called CPA firms:
small proprietorship or large partnerships
++Sycip Gorres Velayo & Co.

++Enrst & Young Global

++ Punongbayan & Araullo
++ Laya Mananghaya & Co.
++ C.L. Manabat & Co.
++ Isla
++ Lipana & Co.
++ Constantino
++ Guadalquiver & Co.
++ Carlos J. Valdex & Co.
++ Alba Romeo & Co.
++ Diaz Murillo Dalupan & Co.
++ Reyes Tacandong &Co.
// SAMPLE ENTRY LEVEL JOBS: Audit Staff, Tax Staff,
Management Services/Consulting
// MIDDLE LEVEL: Audit Manager, Tax Manager,
Consulting Manager
//
ADVANCED:
Partner,
Senior
Partner,
Consultant/Financial Advisor
B. COMMERCE AND INDUSTRY
// vary widely in their scope of activities and
responsibilities
// ENTRY LEVEL: Financial Acctg. And Reporting Staff,
Mgmt. Acctg. Staff, Tax Acctg. Staff, Internal Audit
Staff, Financial Analyst, Budget Analyst, Credit
Analyst, Cost Accountant
// MIDDLE LEVEL: Comptroller, Senior Information
Systems Auditor, Senior Fraud Examiner, Senior
Forensic Auditor
// ADVANCED: Chief Financial Officer, Chief
Information Officer
C. GOVERNMENT SERVICE
// may be hired by Congress of the PH, Commission
on Audit, Bureau of Internal Revenue, Dept. of
Finance, Dept. of Budget and Management, Bangko
Sentral ng Pilipinas, and LGU
// ENTRY LEVEL: State Acctg. Examiner, State
Accountant, LGU Accountant, Revenue Officer,
Budget Analyst, Financial Services Specialist
// MIDDLE LEVEL: State Accountant V, Director III and
IV, Govt Accountancy and Audit, Financial Services
Manager, Audit Services Manager, Senior Auditor
// ADVANCED: Natl Treasurer, VP for Finance/CFO,
Commissioners,
Assoc.
Commissioner,
Asst.
Commissioner
D. EDUCATION/ACADEME
// guarantees the continued devt of the profession
by endeavoring to clarify and address emerging
issues through research and sharing results obtained
// modern day heroes make others understand the
body of acctg. Knowledge
// prepares candidates for tough CPA exams
// focuses on accounting education from the transfer
of knowledge approach to more effective learning to
learn approach
// ENTRY LEVEL: Junior Acctg. Instructor
// MIDDLE LEVEL: Senior Faculty Acctg. Dept. Chair
// ADVANCED: Academic Affairs, Dean

-o0oBRANCHES OF ACCOUNTING
It was expected that accounting would be taken over
by newer and scientifically-based discipline however
it never happened, because:

1. Financial information supplied to external

users still has a dominant influence on
internal management information
2. Other information specialists have been
reluctant to become involved in detailed
accounting matters
3. Accountants have been quick to absorb new
methods and techniques into their work
MAIN BRANCHES
1. AUDITING
// most significant service to the public
{ external audit }
// independent examination
// ensures fairness and reliability of reports
submitted to users outside the business entity
// results are embodied in independent auditors
report
// financial statements prepared by the management
are evaluated in order to ensure they do not present
a distorted picture.
{ external auditors }
// appointed from outside the org
// protects the interests of the users of the financial
statements
// go in for much more selective testing
{ internal auditors }
// employees of the company
// appointed by and answer to the companys
management
// work independently of the accounting and other
depts.
// ensure the accuracy of business records
// uncover internal control problems
// identify operational difficulties
// perform routine tasks
// undertake detailed checking of companys acctg.
procedures
2. BOOKKEEPING
// mechanical task involving the collection of basic
financial data
// data are entered in the accounting records or
books of accounts extracted, classified, and
summarized in the form of income statement,
balance sheet, and cash flow statements = ONCE A
MONTH
{ income statement sheet }
// shows whether the business has made a profit or
loss
{ balance sheet }
// lists what the entity owns (assets) and what it
owes (liabilities)
{ cash flow statements }
// presents the cash inflows and outflows of the
business
// bookkeeping procedures end when basic data
have been entered in the books of accounts
accuracy of each have been tested ACCOUNTING
FUNCTION takes over
{ Accounting }
// covers anything to do with collection and use of
basic financial data
// properly applied to use to which the data are put
once they have been extracted from the book of
accounts
// REQUIRES the ability to examine a problem using
both financial and non-financialdata

{ Bookkeeping }
// ROUTINE operation
3. COST BOOKKEEPING, COSTING, AND COST
ACCOUNTING
{ Cost Bookkeeping }
// recording of cost data in books of accounts
// similar to bookkeeping however data are recorded
in very much greater detail
{ Cost Accounting }
// makes use of those data once they have been
extract from the cost books provides information
for managerial planning and control
{ cost accounting system }
// more data once summarized, more information
available
// collection, allocation, and control of the cost
producing specific goods and services
// accumulation and explanation of actual and
prospective cost data is important to control current
operations and plan for the future
// sub-branches of management accounting
4. FINANCIAL ACCOUNTING
// recording of business transactions
// periodic preparation of reports on financial
position + results of operations
// more specific term applied to the preparation and
subsequent publication of highly summarized
financial information information is for benefit of
the owners + planning and control purposes +
interest to other parties (employees and creditors)
{ Financial accountants }
// record importance to GAAP
5. FINANCIAL MANAGEMENT
// new branch of acctg. that grew rapidly over 30
years
{ Financial managers }
// responsible for setting financial objectives
// making plans based on the objectives
// obtaining the finance needed to achieve plains
// safeguards financial resources
// heavily involved in the management of the entity
// draws on a much wider range of discipline (econ
and math)
// relies more extensively on non-financial data
6. MANAGEMENT ACCOUNTING
// incorporates cost accounting data and adapts
them for specific decisions which management may
be called upon to make
// incorporates all type of financial and non-financial
information
7. TAXATION
// includes the preparation of tax returns
// includes consideration of tax consequences of
proposed business transactions or alternative
courses
// computing the amount of tax payable by both
business entities and individuals
// aim to comply with existing tax statues
// in constant legal search for ways to minimize tax
payments

{ tax avoidance }
// reducing their clients tax strictly in accordance
with the law
{ tax evasion }
// non-declaration of sources of income on which tax
might be due

8. GOVERNMENT ACCOUNTING
// identification of the sources and uses of resources
consistent with provisions of laws
// proper custody and disposition of funds
-o0oOBJECTIVE OF GENERAL PURPOSE FINANCIAL
REPORTING
// provide financial information about the reporting
entity useful to present + potential investors,
lenders, and creditors who use that information to
make decisions about buying, selling, or holding
equity or debt instruments + providing or settling
loans
A. PRIMARY USERS
// need information about resources and claims
against the resources of the entity
Asses an entitys prospects for future net
cash
Shows how effectively and efficiently
management
has
discnarged
their
responsibilities to use resources
// general purpose financial reports cannot provide
all information needed consideration of pertinent
information from other sources (general economic
conditions and expectations, political events and
climate, industry, company outlooks)
{ management of a reporting entity }
// interested in financial information about the entity
// able to obtain financial information it needs
internally need not rely on general purpose
financial reports
{ prudential and market regulators }
// may find general purpose financial reports useful
may not be consistent regulators are not
primary users
{ general purpose financial reports}
// provide information about financial position of a
reporting entity
// provide information about effects of transactions
that change a reporting entitys economic resources
and claims
{ economic resources and claims }
// information about the nature and amounts of a
reporting entitys economic resources and claims
assists users to assess the entitys financial
strengths and weaknesses
ability to obtain financing + assessment of the
liquidity and solvency
// information on this assists users to predict how
future cash flows will be distributed among those
with a claim
// reported in the statement of financial position
// changes on these result from that entitys
performance and from other events or transactions

issuing debt or equity instruments reported in

statement of comprehensive income
FINANCIAL PERFORMANCE REFLECTED BY ACCRUAL
ACCOUNTING
{ accrual accounting }
// depicts the effects of transactions and other
events on a reporting entitys economic resources
and claims in the periods
{ information about a reporting entitys financial
information representing changes in economic
resources and claims }
// useful in assessing the entitys past and future
ability to generate net cash inflow
FINANCIAL PERFORMANCE
CASH INFLOWS

REFLECTED

BY

PAST

++ Information about a reporting entitys cash flows

assists users to assess the entitys ability to
generate future net cash inflows
// indicates how the entity obtains and spends cash
(borrowing and repayment of debt, cash dividends
to shareholders)
- Changes are presented in that statement of
cash flows
CHANGES IN ECONOMIC RESOURCES AND CLAIMS
NOT RESULTING FROM FINANCIAL PERFORMANCE
++ information about changes in an entitys
economic resources resulting from events other than
financial performance such as the issue of equity
instruments or distributions of cash or other assets
to shareholders to complete the picture of the total
change in the entitys economic resources and
claims
Presented in the statement of changes in
equity
B. OTHER USERS
1. Employees (paid wages and salaries and
provided with other benefits)
// information about stability and profitability of
employers
// information that enables them to assess the ability
of enterprise to provide remuneration, retirement
benefits, and employment opportunities
2. Customers (buy products and services sold
by business)
// information about the continuance of an
enterprise, especially when there is a long term
involvement
3. Government and agencies (regulate and
collect taxes from business)
// interested in the allocation of resources and
activities of the enterprise
// information in order to regulate the activities of
the enterprise, determine taxation policies as basis
for national income and similar statistics
4. Public (Vendors, Banks, Individuals who
invest)
// enterprises makes a substantial contribution to
local economy

{ EXTERNAL USERS }
// current or potential financial interest in the
reporting entity
// not involved in daily operations

// information need is diverse so that only primary

and general purpose f.s. are provided
// owners, stockholders, creditors, investors,
suppliers, customers, labor unions, govt agencies,
trade associations and public FINANCIAL
ACCOUNTING
{ INTERNAL USERS }
// board of directors, chief executive officers, chief
financial officers, vice presidents, business unit
managers, plant managers, supervisors
// employees with specific goals for an entity to
attain its overall strategies and mission
// management accountants design and use an
information system planning and control
decicions
-o0oQUALITATIVE
CHARACTERISTICS
OF
USEFUL
FINANCIAL INFORMATION
// identifies the types of information useful to users
in making decisions about a reporting entity
// apply equality to financial information in general
purpose financial reports
{ financial information }
// useful when it is relevant and represents faithfully
FUNDAMENTAL QUALITATIVE CHARACTERISTICS
A. RELEVANCE
// capable of making a difference in decisions
// has predictive value and confirmatory value
1. Predictive value
// helps evaluate the past, present and future events
// confirming and correcting past evaluations
// information on financial position and past
performance is used as predicting future financial
positions
// make predictions of future cash flows or income
2. Confirmatory value
// confirms or corrects the decision makers earlier
expectations
// analysis of how well management has performed
comparison of achievements with expectations
++ Materiality is an entity specific aspect of
relevance based on nature or magnitude of items to
which information relates in the context
B. FAITHFUL REPRESENTATION
1. Completeness
// complete depiction: all necessary for a user to
understand a phenomenon (descriptions and
explanations)
2. Neutrality
// free from bias
// not slanted, weighted, emphasized, deemphasised to manipulate or increase the
probability that information would be favorable or
not to a user.

3. Freedom from error

// no errors or omissions
phenomenon

in

description

of

ENHANCING QUALITATIVE CHARACTERISTICS

1. Comparability
// information is useful when it can be compared
with similar information
// enables user to identify and understand
similarities and differences
Consistency
// use of same methods for same terms
Comparability: goal; consistency: helps achieve
2. Verifiability
// assure users that information
represented
// different knowledgeable and
observers could reach consensus

is

faithfully

independent

3. Timeliness
// information is available to decision makers in time
to affect decisions
4. Understandability
// classifying, characterizing, and presenting
information clearly and concise
// some phenomena are complex thus including such
would make reports incomplete
// f. reports are for those who have a reasonable
knowledge of business and who review and analyze
info with diligence
APPLYING THE ENHANCING QUALITATIVE CHARAC.
// maximized to the extent
// cannot render information useful if information is
irrelevant and unfaithfully represented
COST
CONSTRAINT
ON
USEFUL
FINANCIAL
REPORTING
{ cost }
// pervasive constraint on the information can be
provided by general purpose financial reporting
// reporting those should be justified by benefits of
reporting that informations
// IASB assesses those
-o0oUNDERLYING ASSUMPTIONS
Going concern
// f.s. are normally prepared on the assumption that
an enterprise is going conern and will continue
// has no intention to liquidate or curtail materially
the scale of operations
// depreciation of asses over their useful lives