BICOL UNIVERSITY

COLLEGE OF BUSINESS, ECONOMICS and MANAGEMENT

Department of Accountancy

ABM MODULE 1
I. Introduction to Accounting
I. INTRODUCTION TO ACCOUNTING
Study Objectives
At the end of this section, the learners shall be able to:
1. Explain what accounting is.
2. Identify the users and uses of accounting.
3. Explain the meaning of generally accepted accounting principles
and its contents.
4. State the basic accounting equation and explain the meaning of
assets, liabilities, and owner’s equity.
5. Analyze the effect of business transactions on the basic
accounting equation.
6. Understand what the four financial statements are and how they
are prepared.
Definition of Accounting
Definition of Accounting

...the process of IDENTIFYING,

RECORDING, and COMMUNICATING
economic events of an organization
to interested users.” (Weygandt, J. et. al)
Definition of Accounting
IDENTIFYING – this involves selecting economic events that
are relevant to a particular business transaction. The
economic events of an organization are referred to as
transactions.

Examples of economic events or transactions in a barbershop

business:
 purchases of shop supplies such as scissors, razors,
rubbing alcohol, powder, hair tonic
 rendering of services to customers
 purchases of shop equipment such as air conditioning
units, barbershop chairs, mirrors
Definition of Accounting
RECORDING – this involves keeping a chronological record of
events that are measured in pesos. The record referred to in
the definition are the journals and ledgers which will be
discussed in later sections.

COMMUNICATING – pertains to the preparation and

distribution of financial and other accounting reports.
Definition of Accounting
 Accounting is a service activity. Accounting provides assistance to
decision makers by providing them financial reports that will guide
them in coming up with sound decisions.
 Accounting is identified as a process, as it performs the specific task
of collecting, processing and communicating financial information. In
doing so, it follows some definite steps like the collection, recording,
classification, summarization, finalization, and reporting of financial
data.
 Accounting is both an art and a discipline. Accounting is the art of
recording, classifying, summarizing and finalizing financial data. The
word ‘art’ refers to the way something is performed. It is behavioral
knowledge involving a certain creativity and skill to help us attain
some specific objectives. Accounting is a systematic method
consisting of definite techniques and its proper application requires
skill and expertise. So by nature, accounting is an art. And because it
follows certain standards and professional ethics, it is also a
discipline.
Definition of Accounting
 Accounting deals with financial information and transactions:
Accounting records financial transactions and data, classifies these
and finalize their results given for a specified period of time, as
needed by their users. At every stage, from start to finish, accounting
deals with financial information and financial information only. It
does not deal with non-monetary or non-financial aspects of such
information
 Accounting is an information system: Accounting is recognized and
characterized as a storehouse of information. As a service function, it
collects processes and communicates financial information of any
entity. This discipline of knowledge has evolved to meet the need for
financial information as required by various interested groups.
Users of Accounting
Users of Accounting
Being that the last step in accounting is communication of
information, accounting is used by a variety of stakeholders.

INTERNAL USERS of accounting information are managers

who plan, organize, and run a business. These include
marketing managers, production supervisors, finance
directors, and company officers.

EXTERNAL USERS include investors, creditors, taxing

authorities, regulatory agencies, labor unions, customers,
and economic planners outside the business.
Users of Accounting
These stakeholders use accounting information in their
decision-making process. Examples of questions that may be
answered by accounting are:
1. How much is my business earning? (Business owners and
investors)
2. What price for our product will maximize company profits?
(Managers)
3. Will the company be able to pay its loans on time?
(Creditors)
4. Could we expect to receive a bonus this year? (Employees)
5. Does the company pay its taxes correctly? (Government)
Branches of Accounting
Branches of Accounting

Financial Management
Accounting Accounting

Tax
Accounting

Government
Auditing
Accounting
Branches of Accounting
FINANCIAL ACCOUNTING
… primarily concerned with the recognition, measurement
and communication of economic activities. This
information is communicated in a complete set of financial
statements. Financial accounting conforms with accounting
standards developed by standard-setting bodies. Financial
accounting is primarily concerned with processing historical
data. Although financial accounting generally meets the
needs of external users, internal users of accounting
information also use this information for their decision-
making needs.
Branches of Accounting
MANAGEMENT ACCOUNTING
emphasizes the preparation and analysis of accounting
information within the organization. The objective of
managerial accounting is to provide timely and relevant
information for those internal users of accounting
information, such as the managers and employees in their
decision-making needs. Oftentimes, these are sensitive
information and is not distributed to those outside the
business - for example, prices, plans to open up branches,
customer list, etc. Managerial accounting involves financial
analysis, budgeting and forecasting, cost analysis, evaluation
of business decisions, and similar areas.
Branches of Accounting
GOVERNMENT ACCOUNTING
the process of recording, analyzing, classifying,
summarizing, communicating and interpreting financial
information about the government in aggregate and in
detail reflecting transactions and other economic events
involving the receipt, spending, transfer, usability and
disposition of assets and liabilities. This branch of accounting
deals with how the funds of the government are recorded
and reported.
Branches of Accounting
AUDITING
There are two types of auditing: external and internal
auditing.

External auditing refers to the examination of financial

statements by an independent CPA (Certified Public
Accountant) with the purpose of expressing an opinion as to
fairness of presentation and compliance with the generally
accepted accounting principles (GAAP). The audit does not
cover 100% of the accounting records but the CPA reviews a
selected sample of these records and issues an audit report.
Branches of Accounting

Internal auditing deals with determining the operational

efficiency of the company regarding the protection of the
company’s assets, accuracy and reliability of the accounting
data, and adherence to certain management policies. It
focuses on evaluating the adequacy of a company's
internal control structure by testing segregation of duties,
policies and procedures, degrees of authorization, and other
controls implemented by management.
Branches of Accounting

TAX ACCOUNTING

pertains to services of an accountant that help clients

follow rules set by tax authorities. It includes tax planning
and preparation of tax returns. It also involves determination
of income tax and other taxes, tax advisory services such as
ways to minimize taxes legally, evaluation of the
consequences of tax decisions, and other tax-related
matters.
Forms and Classification of
Business
Forms and Classification of Business

A business entity may be classified based on its

ownership structure:
1. Sole Proprietorship
2. Partnership
3. Corporation
Forms and Classification of Business

Sole Proprietorship

a business owned by one person. It is the most

common form for small service-type businesses. The
owner (sole proprietor) receives all the profits,
suffers any loss, and is personally liable for all debts
of the business.
Forms and Classification of Business

Partnership

a business owned by two or more persons

associated as partners. It is often the form of retail
and service-type businesses. Generally, the partners
are both personally liable for all debts of the
business. The partnership is documented in a
partnership agreement.
Forms and Classification of Business

Corporation

a business organized as a separate legal entity

under state corporation law with ownership
divided into transferable shares of stock. Owners of
the corporation are called shareholders, and only
have limited liability for the debts of the business.
Forms and Classification of Business

A business entity may also be classified based

on its activities and how it earns money:
1. Service
2. Merchandising
3. Manufacturing
4. Mixed
Forms and Classification of Business
 Service – This type of business offers professional
skills, advice and consultations.

 Merchandising – This type of business buys at

wholesale and later sells the products at retail.
They make a profit by selling the merchandise or
products at prices that are higher than their
purchase costs. This type of business is also known
as "buy and sell" or “retail”.
Forms and Classification of Business
 Manufacturing – This type of business buys
raw materials and uses them in making a new
product, therefore combining raw materials,
labour and expenses into a product for sale
later on.

 Mixed – an entity that is involved in any

combination of the three activities
mentioned.
Generally Accepted Accounting
Principles (GAAP) and Conceptual
Framework
Generally Accepted Accounting Principles
(GAAP) and Conceptual Framework
 Generally accepted accounting principles (GAAP) are a
common set of guidelines (standards) used by accountants
in reporting economic events. By observing GAAP,
accountants ensure that information contained in the
financial statements will meet the needs of the various
users of financial information.

 The Securities and Exchange Commission (SEC) is an

independent regulatory agency of the government. The
SEC has the legal power to enforce the form and content
of financial statements of corporations that wish to sell
securities to the public.
Generally Accepted Accounting Principles
(GAAP) and Conceptual Framework
 The Philippine Financial Reporting Standard Council
(PFRSC) has been granted the power from the R.A. 9298
thru Philippine Professional Regulation Commission (PRC)
Board of Accountancy (BOA) to establish GAAP.

 The Conceptual Framework is a statement of the

generally accepted accounting principles which form the
frame of reference for financial reporting. It also serves as
the basis for the development of new accounting
standards and the evaluation existing standards.
Generally Accepted Accounting Principles
(GAAP) and Conceptual Framework

The framework is subdivided into three parts:

QUALITATIVE
CHARACTERISTICS AND
OBJECTIVE (Level I) ELEMENTS OF
FINANCIAL
STATEMENTS (Level II)

RECOGNITION,
MEASUREMENT AND
DISCLOSURE CONCEPTS
(Level III)
Generally Accepted Accounting Principles
(GAAP) and Conceptual Framework

Objective

it answers the “why” or the purpose of accounting.

The objective is to provide information about the
business that is useful to present and potential users
of financial information.
Generally Accepted Accounting Principles
(GAAP) and Conceptual Framework

Qualitative Characteristics and Elements of

Financial Statements
it answers the “what” or the expected output of accounting.

Qualitative characteristics can be classified into two:

(1) Fundamental and (2) Enhancing.
Generally Accepted Accounting Principles
(GAAP) and Conceptual Framework
The fundamental characteristics are RELEVANCE and
FAITHFUL REPRESENTATION.
Relevance pertains to the extent that financial information
is related to an economic decision. In order to be relevant,
information must have:
 Predictive value – helps users in predicting future
outcomes
 Confirmatory Value – enables users to check and confirm
earlier predictions or evaluations
 Materiality – information is material if it is significant
enough to influence the decision of users
Generally Accepted Accounting Principles
(GAAP) and Conceptual Framework

Faithful representation requires that information must

represent what it purports to represent. In order to have
faithful representation, information must be:
 Complete – there is adequate and full disclosure of all
necessary information
 Neutrality – there is fairness and freedom from bias
 Free from error – there are no inaccuracies and omissions
Generally Accepted Accounting Principles
(GAAP) and Conceptual Framework
The enhancing qualitative characteristics are:
 Comparability – information enables comparisons within
the entity and across entities
 Consistency – accounting principles are applied on a
consistent basis to permit valid comparisons between
different periods
 Verifiability – information is backed up by evidence,
reproducible, and can be checked by independent parties
Generally Accepted Accounting Principles
(GAAP) and Conceptual Framework

 Timeliness – information must be provided to decision

makers in time to be capable of influencing their decisions
 Understandability - information should be presented in
such a way that a person with a reasonable knowledge of
business and finance, and the willingness to study the
information, should be able to comprehend it
Generally Accepted Accounting Principles
(GAAP) and Conceptual Framework

Recognition, Measurement and Disclosure

concepts

it answers the “how” or the implementation

of accounting. It discusses the assumptions,
principles, and constraints of financial
reporting.
Generally Accepted Accounting Principles
(GAAP) and Conceptual Framework
Assumptions
 Economic entity – a business enterprise is separate and
distinct from its owner or investor.
 Going concern – business is expected to continue
indefinitely.
 Time period / Periodicity – financial statements are to be
divided into specific time intervals.
 Monetary unit – only transaction data that can be
expressed in terms of money be included in the
accounting records and amounts are stated into a single
monetary unit (i.e. Philippine Peso)
Generally Accepted Accounting Principles
(GAAP) and Conceptual Framework
Principles
 Cost principle – accounts should be recorded initially at
cost, that is, the value exchanged at the time something
is acquired.
 Revenue Recognition Principle – revenue should be
recognized when earned regardless of collection and
expenses should be recognized when incurred regardless
of payment. This is also known as the “Accrual Basis of
Accounting”. On the other hand, the cash basis principle
in which revenue is recorded when collected and expenses
should be recorded when paid. Cash basis is not the
generally accepted principle today.
Generally Accepted Accounting Principles
(GAAP) and Conceptual Framework

 Matching principle – cost should be matched with the

revenue generated.
 Disclosure principle – all relevant and material
information should be reported.
Generally Accepted Accounting Principles
(GAAP) and Conceptual Framework

Constraints
 Conservatism principle – in case of doubt, assets and
income should not be overstated while liabilities and
expenses should not be understated.
 Materiality principle – inclusion and disclosure of financial
transactions in the financial statements depend on their
size and effect on the business and decision-making
capabilities of the users
The Elements of Financial
Statements and the Basic Accounting
Equation
The Elements of Financial Statements
and the Basic Accounting Equation

ASSETS = LIABILITIES + OWNER’S EQUITY

The Elements of Financial Statements
and the Basic Accounting Equation
The basic accounting equation applies to ALL
economic entities regardless of size, nature of
activities, or form of organization. It shows that a
business’ total assets should at all times be equal to
the total of its liabilities and equity.
The Elements of Financial Statements
and the Basic Accounting Equation
Assets are resources controlled as a result of a past events
and from which future economic benefits are expected to
flow to the entity. Examples are cash, inventories for sale,
equipment used in manufacturing goods.
Liabilities are present obligations of the entity arising from
past events, the settlement of which is expected to result in
an outflow from the entity of resources embodying economic
benefits. Examples are payables to suppliers, utilities not yet
paid, loans from a bank.
The Elements of Financial Statements
and the Basic Accounting Equation
Owner’s Equity is the residual interest in the assets of the
entity after deducting all its liabilities. This is sometimes
called “Owner’s Capital”. For proprietorships, there are four
components of owner’s equity:

 Investments by Owner are the assets put in the business

by the owner.
 Revenues are the gross increases in owner's equity
resulting from business activities entered into for the
purpose of earning income.
 Drawings are withdrawals of cash or other assets by the
owner for personal use.
The Elements of Financial Statements
and the Basic Accounting Equation
 Expenses are the cost of assets consumed or services used
in the process of earning revenue.

Revenues and expenses determine the results of the entity’s

operations for a given period of time.
 If Revenues > Expenses, there is net income
 If Revenues < Expenses, there is net loss
The Elements of Financial Statements
and the Basic Accounting Equation
Transactions are the economic events of the enterprise.
Each transaction must be analyzed in terms of its effect on
the elements of the basic accounting equation. In the
analysis, the specific items affected and the amount of
change in each item must be identified. An event or
transaction must be recorded ONLY if it caused a change in
the amounts of the enterprise’s assets/liabilities/owner’s
equity.
Class Exercise!!!

Did it have an
effect on the What items were Do we record
Event entity’s assets / affected by the the
liabilities/ owner’s event? transaction?
equity?
The company buys An asset was
office chairs and paid reduced (cash) but
the store in cash. Yes another asset Yes
increased (office
furniture)
An asset increased
The company obtains
(cash) and a
a loan from a local Yes Yes
liability increased
bank.
(loan)
An employee was
No None No
promoted to manager
The Elements of Financial Statements
and the Basic Accounting Equation
For every transaction that occurs, the accounting equation
must be maintained.
Therefore, each transaction will have a dual effect on the
equation. The following are examples of a transaction’s
effect on the accounting equation:
 An asset increases, another asset decreases
 An asset increases, a liability also increases
 An asset increases, owner’s equity also increases
 A liability decreases, an asset also decreases
The Financial Statements
The Financial Statements
There are four general financial statements that can be prepared from
summarized accounting data:

Statement
Statement of
of Changes
Financial
Performance in Owner’s
Equity

Statement Statement
of
Financial of Cash
Position Flows
The Financial Statements

Statement of Financial Performance (Income

Statement)

presents the revenues and expenses and resulting net income

(or net loss) for a specific period of time (i.e. for the year
ended 2018)
The Financial Statements

Statement of Changes in Owner’s Equity

summarizes the increases and decreases in owner’s

equity for a specific period of time.
The Financial Statements

Statement of Financial Position (Balance Sheet)

reports the assets, liabilities, and owner’s equity at

a specific point in time or at a specific date (i.e. as
of December 31, 2018)
The Financial Statements

Statement of Cash Flows

summarizes information concerning the cash inflows

(receipts) and cash outflows (payments) for a
specific period of time.
The Financial Statements
The financial statements are interrelated because:
 Net income (or net loss) shown on the income statement is
added (subtracted) to (from) the beginning balance of
owner's capital in the owner's equity statement.
 Owner's capital at the end of the reporting period shown
in the owner's equity statement is reported in the balance
sheet.
 The amount of cash shown on the balance sheet is
reported on the statement of cash flows.
END of PRESENTATION
for ABM1

Thank you!