Definition of Accounting

● Accounting is “the process of identifying, measuring, and communicating

economic information to permit informed judgment and decisions by users of
information.”
Three important activities

1. Identifying - the process of analyzing events and transactions to determine

whether or not they will be recognized. Only accountable events are recognized.
2. Measuring - involves assigning numbers, normally in monetary terms, to the
economic transactions and events.
3. Communicating - the process of transforming economic data into useful
accounting information, such as financial statements and other accounting
reports, for dissemination to users.

1. External events – events that involve an external party.

a. Exchange (reciprocal transfer) – reciprocal giving and receiving

b. Non-reciprocal transfer – “one way” transaction
c. External event other than transfer – an event that involves changes in
the economic resources or obligations of an entity caused by an external party
or external source but does not involve transfers of resources or obligations.

2. Internal events – events that do not involve an external party.

d. Production – the process by which resources are transformed into
finished goods.
e. Casualty – an unanticipated loss from disasters or other similar events.

Measurement
• The several measurement bases used in accounting include, but not limited to, the
following:
1. historical cost,
2. fair value,
3. present value,
4. realizable value,
5. current cost, and
6. sometimes inflation-adjusted costs.
 • The most commonly used is historical cost. This is usually combined with the
other measurement bases. Accordingly, financial statements are said to be
prepared using a mixture of costs and values.

Valuation by fact or opinion

• When measurement is affected by estimates, the items measured are said to be
valued by opinion.
• When measurement is unaffected by estimates, the items measured are said to be
valued by fact
Basic purpose of accounting
• The basic purpose of accounting is to provide information about economic
activities intended to be useful in making economic decisions.

Types of accounting information classified as to users’ needs

• General purpose accounting information - designed to meet the common needs of

most statement users. This information is governed by the Philippine Financial
Reporting Standards (PFRSs).

• Special purpose accounting information - designed to meet the specific needs of

particular statement users. This information is provided by other types of
accounting, e.g., managerial accounting, tax basis accounting, etc.

Basic Accounting Concepts

• Double-entry system – each accountable event is recorded in two parts – debit
and credit.
• Going concern - the entity is assumed to carry on its operations for an indefinite
period of time.
• Separate entity – the entity is treated separately from its owners.
• Stable monetary unit - amounts in the financial statements are stated in terms of
a common unit of measure; changes in purchasing power are ignored.
• Time Period – the life of the business is divided into series of reporting periods.
• Materiality concept – information is material if its omission or misstatement could
influence economic decisions.
 • Cost-benefit – the cost of processing and communicating information should not
exceed the benefits to be derived from it.
• Accrual Basis of accounting – effects of transactions are recognized when they
occur (and not as cash is received or paid) and they are recognized in the
accounting periods to which they relate.
• Historical cost concept – the value of an asset is determined on the basis of
acquisition cost.
• Concept of Articulation – all of the components of a complete set of financial
statements are interrelated.
• Full disclosure principle – financial statements provide sufficient detail to
disclose matters that make a difference to users, yet sufficient condensation to
make the information understandable, keeping in mind the costs of preparing and
using it.
• Consistency concept – financial statements are prepared on the basis of
accounting policies which are applied consistently from one period to the next.
• Matching – costs are recognized as expenses when the related revenue is
recognized.
• Residual equity theory – this theory is applicable where there are two classes of
shares issued, ordinary and preferred. The equation is “Assets – Liabilities –
Preferred Shareholders’ Equity = Ordinary Shareholders’ Equity.”
• Fund theory – the accounting objective is the custody and administration of funds.
• Realization – the process of converting non-cash assets into cash or claims for
cash.
• Prudence (Conservatism) – the inclusion of a degree of caution in the exercise of
the judgments needed in making the estimates required under conditions of
uncertainty , such that assets or income are not overstated and liabilities or
expenses are not understated.

Common branches of accounting

• Financial accounting - focuses on general purpose financial statements.
• Management accounting – focuses on special purpose financial reports for use
by an entity’s management.
• Cost accounting - the systematic recording and analysis of the costs of materials,
labor, and overhead incident to production.
• Auditing - the process of evaluating the correspondence of certain assertions with
established criteria and expressing an opinion thereon.
• Tax accounting - the preparation of tax returns and rendering of tax advice, such
as the determination of tax consequences of certain proposed business
endeavors.
• Government accounting - refers to the accounting for the government and its
instrumentalities, placing emphasis on the custody of public funds, the purposes
for which those funds are committed, and the responsibility and accountability of
the individuals entrusted with those funds.
Four sectors in the practice of accountancy
1. Practice of Public Accountancy - involves the rendering of audit or accounting
related services to more than one client on a fee basis.
2. Practice in Commerce and Industry - refers to employment in the private
sector in a position which involves decision making requiring professional
knowledge in the science of accounting and such position requires that the
holder thereof must be a CPA.
3. Practice in Education/Academe – employment in an educational institution
which involves teaching of accounting, auditing, management advisory services,
finance, business law, taxation, and other technically related subjects.
4. Practice in the Government – employment or appointment to a position in an
accounting professional group in the government or in a government–owned
and/or controlled corporation where decision making requires professional
knowledge in the science of accounting, or where civil service eligibility as a CPA
is a prerequisite.

Accounting standards in the Philippines

• Philippine Financial Reporting Standards (PFRSs) are Standards and
Interpretations adopted by the Financial Reporting Standards Council (FRSC).
They comprise:
1. Philippine Financial Reporting Standards (PFRSs);
2. Philippine Accounting Standards (PASs); and
3. Interpretations

The need for reporting standards

• Entities should follow a uniform set of generally acceptable reporting standards
when preparing and presenting financial statements; otherwise, financial
statements would be misleading.
• The term “generally acceptable” means that either:
a. the standard has been established by an authoritative accounting rule-making
body; or
b. the principle has gained general acceptance due to practice over time and
has been proven to be most useful.
• The process of establishing financial accounting standards is a democratic process
in that a majority of practicing accountants must agree with a standard before it
 • becomes implemented.