PROFESSIONAL

ELECTIVE3
PFRS UPDATES
ACCO40023

Course Material No. 1

Overview Accounting

RAMELO C GLORIA, CPA, MBA

2 Overview of Accounting • NU LAGUNA

Overview of Accounting
1
LEARNING OUTCOMES

Here’s what I will teach you in this course material:

LESSON OUTLINE
• Define accounting and state its basic purpose
• Definition of
Accounting • Explain the basic concepts applied in accounting
• State the branches of accounting and the sectors in the practice of
Unit Outline
• Accounting
Concepts accountancy
• Explain the importance of a uniform set of financial reporting standard
• Branches of
Accounting
RESOURCES NEEDED
• Accounting
Standards For this lesson, you would need the following resources:

• Conceptual Framework and Accounting Standard Book

Overview of Accounting • NU LAGUNA 3

TABLE OF CONTENTS

Pretest 3 Questions for Review and

Discussion
Before you start, try answering the following
questions.
4 Accountant’s Word Hunt

1. Define Accounting.

_________________________________________
_________________________________________ 5 Purpose and Scope of the
Framework
_________________________________________

2. What is the basic purpose of Accounting ? 10 Test Yourself

_________________________________________
_________________________________________
_________________________________________ 11 Posttest

3. What are the two types of accounting information?

________________________________________
________________________________________ 13 References
________________________________________

4. Give at least five (5) basic accounting concept s and

explain briefly.

________________________________________

5. What are the four sectors in the practice of

accountancy?

________________________________________
________________________________________
________________________________________
4
Overview of Overview of Accounting • NU LAGUNA

Accounting

This lesson comprises the

backbone of the accounting
practice where the standards were
originally based on. All of the
accounting concepts will
thoroughly enumerated and
explained. Likewise, the different
sectors in the practice of
accountancy is enumerated and
explained

Accountant’s Word Hunt

Identify what is needed and color it according to the designated color
after the questions.

M A T E R I A L I T
Find all the words that
L I A B I L I T Y E
corresponds to elements
S S S S I N C O M E of Financial Statements
S H E H S G P R O Q inside the Box
H C T S G E F I R U
S N S D S Q T A G I
L I A B I I L I T Y

E Y I Q N U P E S T
L O A N S T E Q U I
E Q U I T Y E S A S

S E E X P E N S E S
 Overview of Accounting • NU LAGUNA 5

OVERVIEW OF ACCOUNTING

Hello Class. How is your day? I hope your fine. Today, I will share to you an overview of
Accounting. Of course, we will start by defining it and I summarized it one by one.

a) Accounting is “the process of identifying, measuring, and communicating economic

information to permit informed judgment and decisions by users of information.”

b) Three important activities in Accounting process are:

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.

Class, focusing on Measurement, there are 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.

Next, I will discuss basic purpose of accounting which is to provide information about economic activities
intended to be useful in making economic decisions.

Speaking of accounting information, there are two types of accounting information dependent on the
needs of the users, to wit:

• 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).
6 Overview of Accounting • NU LAGUNA

• 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.

Let’s talk about the basic accounting concepts. They are as follows:

• 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.
Overview of Accounting • NU LAGUNA 7

• 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.

Furthermore, Accounting has several branches and they are as follows:

• 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.

After enumerating the different branches of Accounting, we also have four sectors in the practice of
accountancy, namely:

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.
8 Overview of Accounting • NU LAGUNA

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

Why is there a need for reporting standards?

1. Entities should follow a uniform set of generally acceptable reporting standards when
preparing and presenting financial statements; otherwise, financial statements would be
misleading.

2. 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.

3. 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.
Overview of Accounting • NU LAGUNA 9

Test yourself Matching Type.

Task: The goal of this activity is to make you enhance your theoretical knowledge and your deep
understanding in the subject.

Various accounting assumptions, principles, constraints, and characteristics are listed below. Select those
which best justify the following accounting procedures and indicate the corresponding letter(s) in the
space(s) provided. A letter may be used more than once or not at all.
a. Double-entry system f. Materiality concept k. Matching
b. Going concern assumption g. Cost-benefit l. Entity Theory
c. Separate entity h. Historical cost concept m. Proprietary Theory
d. Stable monetary unit i. Full disclosure principle n. Fund Theory
e. Periodicity j. Consistency concept o. Realization
_____ 1. Entity is assumed to carry on its operations for an indefinite period of time.

_____ 2. Assets, liabilities, equity, income and expenses are stated in terms of a common unit of
measure, this is the peso in the Philippines.

_____ 3. Information is material if its omission or misstatement could influence economic decisions.

_____ 4. The value of an asset is determined on the basis of acquisition cost.

_____ 5. This principle recognizes that the nature and amount of information included in the financial
statements reflect a series of judgmental trade-offs.

_____ 6. The financial statements are prepared on the basis of accounting principles that re applied
consistently from one period to the next.

_____ 7. Costs are recognized as expenses when the related revenue is recognized.

_____ 8. The accounting objective is geared towards proper income determination.

_____ 9. The accounting objective is geared towards the proper valuation of assets.

_____ 10. The accounting objective is focused on the custody and administration of funds.

_____ 11. The process of converting non-cash assets into cash or claims for cash.

_____ 12. Each accountable event is recorded in two parts – debit and credit

_____ 13. The entity is viewed separately from its owners

_____ 14. The life of the entity is divided into series of reporting periods.

_____ 15. The cost of processing and communicating information should not exceed the benefits to be
derived from it.
10 Overview of Accounting • NU LAGUNA

Post Test

Choose the best answer for each of the following questions and enter the identifying letter in the space
provided.

1. It refers to the process of incorporating the effects of an accountable event in the statement of
financial position or the statement of profit or loss and other comprehensive income through a
journal entry.
a. realization
b. derecognition
c. recognition
d. posting

2. All of the following are events considered as exchange or reciprocal transfer, except
a. purchase of investment in equity securities
b. sale of equipment for non-interest bearing note
c. subscription of the entity’s own equity instrument (i.e., contributions by owners)
d. exchange of a note payable for an account payable
e. borrowing of money from a bank

3. All of the following are events considered nonreciprocal transfers, except

a. declaration of cash dividends
b. declaration of stock dividends
c. payment of accounts payable
d. imposition of fines
e. theft

4. These are events involving an entity and another external party.

a. external events
b. internal events
c. transactions
d. life events

5. It is the accounting process of assigning numbers, commonly in monetary terms, to the economic
transactions and events.
a. analyzing c. classifying
b. measuring d. interpreting

6. What is the basic purpose of accounting?

a. To provide quantitative financial information about economic activities.
b. To provide all information that users need in making economic decisions.
c. To provide qualitative financial information about economic activities intended to be useful in
making economic decisions.
Overview of Accounting • NU LAGUNA 11

d. To provide quantitative financial information about economic activities intended to be useful in

making economic decisions.

7. Accounting provides which type of information?

a. quantitative
b. financial information
c. qualitative
d. all of these

8. General purpose financial statements are

a. those statements that cater to the common and specific needs of a wide range of external users.
b. those statements that cater to the common needs of a wide range of external users and internal
users.
c. those statements that cater to the common needs of a limited range of external users.
d. those statements that cater to the common needs of a wide range of external users.

9. External users are those

a. who do have the authority to demand financial reports tailored to their specific needs.
b. who do not have the authority to demand financial reports tailored to their common needs.
c. who do not have the authority to demand financial reports tailored to their specific needs.
d. who belong to countries other than the domicile country of the reporting entity

10. The primary objective of financial reporting is to provide

a. information about economic resources, claims to these resources, and changes in them.
b. information useful for investment and credit decisions.
c. information useful in predicting future cash flows.
d. all of these

11. Which of the following statements is false?

a. Accountable events are those that have an effect in an entity's assets, liabilities, equity, income
or expenses.
b. The term “recognition” as used in accounting refers to the process of incorporating the effects of
an accountable event in the statement of financial position or the statement of profit or loss and
other comprehensive income through a memo entry.
c. External events are those that involve the reporting entity and an external party.
d. The Board of Accountancy consists of a chairperson and six members.

12. Which of the following statements is true?

a. In current practice, accounting provides only quantitative information that is useful in making
economic decisions.
b. External users are those who do not have the authority to demand financial reports tailored to
their specific needs.
c. Under the stable monetary unit assumption, the owners of the business and the business are
viewed as a single reporting entity. Therefore, the personal transactions of the owners are
recorded in the books of accounts.
d. The practice of accountancy in the Philippines is regulated under R.A. 9892.

13. Which of the following statements correctly refer to the accounting process?
I. Measuring is the accounting process of analyzing business activities as to whether or not they will
be recognized in the books.
12 Overview of Accounting • NU LAGUNA

II. Recognition refers to the process of including the effects of an event in the totals of the statement
of financial position or the statement of profit or loss and other comprehensive income through
memo entries.
III. Disclosure of events in the notes to financial statement without including their effect in the totals
of the statement of financial position or statement of profit or loss and other comprehensive
income is not an application of the recognition principle.
IV. An accountable event is an event that has an effect on the assets, liabilities or equity of an entity
and its effect can be measured reliably.
V. Sociological and psychological matters are within the scope of accounting.
a. I, II, III, IV and V
b. I, II, III and IV
c. IV
d. III and IV

14. Which of the following statements is true?

I. Loss from theft is classified as a nonreciprocal transfer.
II. Internal events are changes in economic resources by actions of other entities that do not involve
transfers of resources and obligations.
III. Nonreciprocal transfers involve the transfer of resources in only one direction, either from an
entity to other entities or from other entities to the entity.
IV. Internal events are sudden, substantial, unanticipated reductions in resources not caused by
other entities.
V. Fire, earthquake and flood are examples of accountable events classified as internal events.

a. I, II, III and V

b. I, III and V
c. II, III, IV and V
d. I, III, IV and V

15. Asset measurements in conventional financial statements

a. are confined to historical cost.
b. are confined to historical cost and current cost.
c. reflect several financial attributes.
d. do not reflect output values.

16. During the lifetime of an entity, accountants produce financial statements at arbitrary points in time
in accordance with which basic accounting concept?
a. Cost/benefit constraint
b. Periodicity assumption
c. Conservatism constraint
d. Matching principle

17. What accounting concept justifies the use of accruals and deferrals?
a. Going concern assumption
b. Materiality constraint
c. Consistency characteristic
d. Monetary unit assumption
Overview of Accounting • NU LAGUNA 13

18. The assumption that a business enterprise will not be sold or liquidated in the near future is known as
the
a. economic entity assumption.
b. monetary unit assumption.
c. conservatism assumption.
d. going concern.

19. Valuing assets at their liquidation values rather than their cost is inconsistent with the
a. periodicity assumption.
b. matching principle.
c. materiality constraint.
d. historical cost principle.

20. When products or other assets are exchanged for cash or claims for cash, they are said to be
a. allocated.
b. realized.
c. recognized.
d. earned.
14 Overview of Accounting • NU LAGUNA

Reference

Millan,Zeus Vernon B., 19th Edition Conceptual Framework & Accounting Standards, Bandolin
Enterprise

Valix, Conrado T., 20th Edition Conceptual Framework and Accounting Standards, GIC
Enterprises & Co., Inc

Cabrera, E. and Ocampo Reynaldo Financial Accounting and Reporting Standards and
Applications Volume 3 2014-2015 Edition GIC Enterprises & Co., Inc.