CHAPTER 1

Purpose and Phases of Accounting:

 Accounting is not separate from other business operations, and does not operate in isolation. It
provides aid and advices to other departments of the business as well.
 Business Transactions are the ECONOMIC ACTIVITIES of a business.
 To identify the transactions, they record it.
 But before recording, they measure first the usefulness of the transaction to the business by
adhering to the common financial denominator which is MONEY.
 Second is to classify and summarize the transactions. Classifying is when we reduce the
transactions into useful groups and categories. Summarizing can be done with the aid of
financial statements. (Summarizes effects of business transactions)
 Lastly, information is interpreted to evaluate the profitability and liquidity of the business, which
enables entities to make sound economic decisions.

Father of Accounting: Fra. Luca Pacioli

Pacioli tells us that demand of accounting information is from 2 sources:

1. Owners, who wants to know how the business is doing from time to time
2. Managers, who needs to know information to plan and control the operations

With this, there were 2 main specializations born:

1. Financial Accounting – focuses on supplying information to owners

2. Management Accounting – focuses on supplying information to managers

Fundamental Concepts of Accounting:

Entity Concept – states that the entity’s affairs must be separated from other organizations and owners’
personal affairs. Separate legal entity. What’s outside of the business’ concern must not be recorded as
part of it

Periodicity Concept – entity’s life is subdivided into equal time measurements to help obtain timely
information to assess the position and performance of the entity

Stable Monetary Concept – states that the PHILIPPINE PESO is a reasonable unit of measurement and its
purchasing power is stable- allows accountants to subtract and add amounts while ignoring the effects
of inflation

Going Concern Concept – assumes that the entity’s operation will continue up until the foreseeable
future. It assumes that a business has no intention to enter liquidation or stopping.

Generally Accepted Accounting Principles (GAAP) – encompasses or involves conventions, rules, and
procedures necessary to define the accepted accounting principles at a particular time.
Principles must be:

1. Relevant – bring meaningful effects and usefulness to the results

2. Objective – free from personal biases and influences
3. Feasible – free from complexity and cost that may harm the entity. In conflict with other
principles

Basic Principles of Accounting:

Objectivity Principle – states that accounting and financial records of a business must be based on
reliable and objective information to be accurate. Typically, it must be together with objective evidence
(receipts)

Historical Cost – record the purchase of assets at its ACTUAL COST and not what a manager thinks it is at
a period of time

Revenue Recognition Principle – revenue is recorded when service is rendered and performed, or
products are sold, not when payment is received

Expense Recognition Principle – expense is recorded when expense is exactly incurred, and not when it
is paid for.

Adequate Disclosure – all significant information and data that would affect a user’s understanding must
be disclosed at all times

Materiality – financial reports are only concerned with information that is significant enough to affect
evaluations. Nature and size of an item are determining factors

Consistency Principle – states that an entity must only use or stick to one accounting procedure from
one period to another to maintain consistency and comparability.

Accountancy in the Philippines

Board of Accountancy (1 Chairman, 6 members at present)

- Regulates, Controls, Supervise the professional practice of Accountancy in the Philippines. They
conduct the CPALE, and regulate the standards of accountancy from time to time.

Professional Regulation Commission (PRC)

- Aids the Board of Accountancy

Philippine Institute of Certified Public Accountants

- Bona fide professional organization that represents CPAs in the country (assigned by the board)

Accountancy Act of 2004 or Republic Act no. 9298

- Signed on May 13, 2004 by then President, Gloria Macapagal Arroyo

Practice of Accountancy includes but is not limited in:

Practice of Public Accountancy –

Practice in Ecommerce and Industry

Practice in Education

Practice in Government

Qualifications of Applicants for Examinations

1. A Filipino Citizen
2. Has Good Moral Character
3. Degree Holder of Bachelor of Science in Accountancy
4. Has not been convicted to any criminal Offenses

Requirements

1. Birth Certificate
2. NBI Clearance
3. Wedding Certificate for Married Women Examinees
4. College Diploma with date of graduation
5. Baccalaureate Transcripts
6. Other documents issued by the Board

Accounting Standards Council (ASC) was created by PICPA to establish and improve accounting
standards that will be generally accepted in the Philippines.

Core Competencies Framework for Accountants

1. Knowledge
a. General Knowledge – involves proficiency in the English Language, conforming to globally
accepted accounting guidelines, understanding different cultures of the world, adaptability
to western accounting practices
b. Organizational and Business Knowledge – accountants must have organizational and
business knowledge in relation to different areas of business such as economics, finance,
marketing and handling business organizations. Must have an understanding on how global
business works
c. Information Technology Knowledge – have sufficient knowledge in utilizing technology in
the use of profession. By using it to secure and produce information needed
d. Accounting Knowledge – have enough knowledge on different fields/ subjects of accounting.
Proficiency in global accounting standards, latest concepts, theories, lessons.
2. Skills
a. Intellectual Skills – skills involving critical thinking and analyzing of information
 b. Interpersonal Skills – skills that allow one to be a team player and a leader, can work in the
workplace to satisfy clients’ needs, knows how to adapt in different working environment
c. Communication Skills – know how to actively listen and communicate with others. Proficient
in transcribing and interpreting information to other people.
3. Values
a. Moral Ethics – know the difference between right and wrong.
b. Professional Ethics – includes objectivity, integrity, and honesty. Conforming to highest
accountancy ethical standards.

Ethics – differentiate between good and bad. Judging right and wrong

Ethical Dilemma – situation when there is no OBVIOUS right or wrong answer

Different Ethical Dilemmas:

1. White Collar Crimes – extremely common in business organizations. Includes fraud,

embezzlement, corruption, bribery, and anything that involves illegal acquisition of money
2. Whistle- Blowing – a person/s that reveals an entity’s wrong doing. They are regarded as
squealers, and heroes for some
3. Conflict of Interest – when a person has two conflicting roles that may affect unbiased decision
making.
4. Fiduciary Responsibilities – professionals have the responsibility to put their client’s interest first
before their own, because the former trusted them
5. Sexual Harassment
6. Discrimination – in anything! Color, status, Education, Sex, Racial Discrimination must be
avoided in all times.

The Accountancy Profession conforms to the belief that he/she must act on the public interest and not
just for him/herself or for the interest of one person or individual.

Fundamental Principles of an Accountant

Integrity – transparency, honesty in reporting information. Straightforward to all business relationships

Objectivity – no personal bias and influence that may affect the profession or business

Professional Competence and Due Care – continuous training and studying to be updated in the latest
accountancy concepts, guidelines.

Confidentiality – should not disclose any business information to others who have no right to know. w/o
proper authority and instructions

Professional Behavior – must comply with all regulations and law. Actions must be well mannered so as
to not discredit the credibility of the profession.
The Accountancy Profession

Characteristics of Accountancy

1. ALL members of the Accountancy Profession are CPA’s. They have a degree in BSA and passed
CPALE
2. Have own set of terminologies that are particular to the profession
3. Adhere to the Code of Ethics
4. Members of National and International Organizations, designed to supervise, improve, and
regulate the generally accepted accounting principles in PH.

Career Opportunities

Public Accounting – they render their service for the public. Commonly the most traveled path because
of its wide opportunities for professional growth. Can work individually or in groups/firms

Commerce and Industry – vary widely on its activities and responsibilities

Government Service – employed by government organizations such as BSP and Commission on Audit

Education/ Academe – train and teaches aspiring CPAs. Prepare candidates for exam and share their
knowledge in the profession

Branches of Accounting

Auditing – most significant service rendered to the public

External Auditors -outside of a business organization that tests and validates the credibility of the
information being provided by an entity to an outside organization. Works independently

Internal Auditors – closely related to the latter but are employees of the same entity. Though they work
in separation to other departments and are there to analyze, correct, and study the accuracy of financial
statements and records

Bookkeeping – mechanical tasks involving recording and collecting of basic financial data. Involves the
input of data into several financial statements

Sole Proprietorship – single owner, unlimited liability, has income and debt all for himself.

Partnership – 2 or more owners, unlimited liability for each, divides profit and investments among
themselves.

Corporation – own by stockholders, operated by law, company’s debt does not hold them liable, debt is
limited to their investment to the company
 CHAPTER 2

Accounting Information System – set of procedures, personnel, records that an entity uses to meet the
need of producing financial information.

Elements of Financial Statements:

Financial Position – Assets, Liabilities, Owner’s Equity

Financial Performance – Income, Expenses

Financial Position

 Assets – present economic resource that an entity owns as a result of past events. It is a RIGHT
that has the potential to produce economic benefits for the entity
 Liabilities – a present obligation, typically to another entity/entities (creditors, sources) as a
result of past events. which needs to be satisfied. Not to be avoided.
 Owner’s Equity – residual of assets and liabilities.

Financial Performance

 Income – increase in assets/decrease in liabilities = increase in owner’s equity

 Expenses – decrease in assets/increase in liabilities = decrease in owner’s equity

Account – Basic Summary Device

Left Side – Debit

Right Side – Credit

The Accounting Equation: Assets = Liabilities – Owner’s Equity

Normal Debit Normal Credit

 Assets  Liabilities
 Expenses  Owner’s Equity
 Withdrawals  Income

Double Entry System – each transaction has a “dual effect” to the accounts. Each debit entry must have
a corresponding credit entry. (Note: number of accounts to be debited/credited can be unequal)

Normal Balance of an Account – normal side of the account where “increases” are recorded. Assets
usually increase when debited so its normal balance is DEBITS.

Accounting Event – economic occurrences that results to changes in ALOE.

Transaction – exchange/transfer of value between two entities

Business Transaction – occurrence of event that affects financial position accounts / economic activities

Account Titles Used

Assets

1. Current – within 12 mos

2. Non Current – exceeds 12 mos

Liabilities

1. Current
2. Non Current

Owner’s Equity

Capital, Withdrawals, Income Summary

Income

Expense

Types of Transactions

Source of Assets – increase in assets, increase in claims (L, OE)

Exchange of Assets – decrease in assets, increase in another asset

Use of Assets - decrease in assets, decrease in claims

Exchange of Claims - decrease in claim, decrease in another claim

 CHAPTER 3

(Recording Business Transactions)

10 Step Cycle (Focus on first 4 steps)

 Analyzing Transactions
 Journaling Entries
 Posting to Ledger
 Preparation of T-Balance

1. Transaction Analysis
- Uses source documents (proof of purchases, receipts, bank deposits etc. Helps in analyzing how
it will affect the business’ financial positions and performances.
2. Transactions are Journalized

Journal – chronological record of all transactions that shows the effects of a business transaction
through debits and credits. Also called Book of Original Entry.

General Journal – Simplest form of Journal.

Format of Journal

1. Date. Year, Month, Day

2. Account Titles and Explanations. Skip one row for next journal entry
3. Posting Reference – only filled when posting to ledger
4. Debits- first line
5. Credits – below credits and is indented

2 Kinds of Entries

Simple Entry – one entry each for debit and credit account

Compound Entry – 2 or more debit and credit accounts

NOTE: Following the rule of the double entry system, we know that two or more accounts are affected
in each transaction, sum of debits must equal sum of credits, equality of equation is maintained.

3. Posting to Ledger – transferring of amounts from journal to ledger

Ledger – organizes information by ACCOUNTS. Grouping of entity’s accounts. Also called Book of Final
Entry

General Ledger – “reference book”

Chart of Accounts – listing of Accounts and their account numbers. Arranged by Assets, Liabilities, OE,
Income, Expenses.

Indexing -

Cross Referencing – utilizing PR and JR column in both journal and ledger books
Footing – adding of all debit and all credit

4. Preparation of Trial Balance – list of all accounts with respective debit and credit balances.
- Help minimize accounting errors
- Not because debit and credit is equal, there were no errors made.

Locating Errors:

Transposition – if discrepancy is divisible by 9

Slide – incorrect placing of decimal point

Matching Principle – states that an expense should be recorded in the same accounting period as the
corresponding revenue is earned
 CHAPTER 4

Accrual Basis – income and expenses are recorded when they occurred, and not when it is paid

Cash Basis – income and expenses are recorded when cash is paid.

From the 2, accrual basis of accounting is highly suggested or used by entities to record transactions

Periodicity concept – economic life of an entity is subdivided into equal time period to assess the
business’ performance and position. It can be a year, month, or quarter of a year

Fiscal Year – any point in the year as the start and ends exactly at the 12 th month

Calendar Year – Jan 1 – December 31

Natural Business Year – starts whenever the business sales/profit is at its peak. (12 months) ends at its
lowest level.

Interim Period – time periods that are less than a year

Recognition – process of including accounts that are categorized or define as A L OE I E

Derecognition – removing of a then recognized asset or liability from the balance sheet

Carrying Amount -amount in which an A L OE is recognized in the balance sheet

Transaction Price – amount of consideration that an entity expects to be entitled in exchange of

providing goods/ services to customers

Adjustments are recorded to reflect the accounts that occurred but were not recorded.

Rule of Adjustments: income is recorded when it is earned, expenses when it is incurred.

Each adjusting entry affects at least 1 balance sheet and 1 income statement account

2 General Types of Adjustments

Deferrals – postponement of recognition (advance payment of expenses that are not yet incurred or
advance collection of income not yet rendered)

Effect: decrease of one balance sheet account, increase of one income statement account

Accruals – recognition of an expense already incurred, but not yet paid & income earned but still
uncollected

Effect: increase in both balance sheet and income statement account

Adjustments for Deferrals (expenses paid not yet incurred, payment collected not yet earned)

 If Prepaid Expenses are not adjusted – assets will be overstated, expenses will be understated

Depreciation for Property and Equipment

 Straight Line Method: cost – salvage value =? – Estimated Life = Book Value
 One asset account, One contra asset account (Depreciation Expense, Accumulated Depreciation)

Unearned Revenues/ Deferred Revenues (Liabilities)

 Unearned Revenue is debited, Revenue is Credited

Adjustments for Accrual (expenses incurred not yet paid, revenue earned not yet collected)

 Accrued Expenses (Accrued Salaries)

 Accrued Revenues
 Uncollectible Accounts

Type of Adjustment Accounts balances BEFORE Adjusting Entry

Adjusting

Balance Sheet Income Account Account

Account Statement Debited Credited
Account
Prepaid Expenses
Asset Method Asset Expense Expense Prepaid
overstated understated Expense

Expense Method Asset Expense Prepaid Expense

Understated Overstated Expense
Depreciation Asset Expense Depreciation Contra Asset
overstated Understated Expense Account
Unearned Revenue
Liability Method Liabilities Income Unearned Rev Rev
Overstated Understated

Income Method Liabilities Income Rev Unearned Rev

Understated Overstated
Accrued Expenses Expenses Income
overstated overstated
Accrued Revenues Assets Income Receivable Revenue
understated understated
When there is no direct connection between rev and cost, the costs are systematically allocated among
the periods benefited – TRUE

Mixed Accounts – half balance sheet half income statement account

 CHAPTER 5

Worksheet – helps transfer data from unadjusted trial balance to the financial statements

- Not necessarily required, but it could be of help

- Not part of a ledger, journal, financial statement
- Just a summary device

Cross footing – computing/ combining amounts line by line, horizontally

Format Title:

Name of Business, Financial Statement used, For the Month Ended

Essence of Financial Statements – Financial Statements are provided at least ANNUALY. It has relevant
information that are communicated to outside users to assess how the business is doing and make
sound economic decisions.

1. Statement of Financial Performance (Income Statement)

- Includes income and expenses
- Format: Business Name, Statement of Financial Performance, For the Month Ended

2. Statement of Changes in Equity

- Focuses on OE and Investments and Withdrawals
- Gets info DIRECTLY FROM WORKSHEET
- Format: Business Name, Statement of Changes in Equity, For the Month Ended

3. Statement of Financial Position (Balance Sheet)

- Assets, Liabilities, Owner’s Equity
- Has two formats: Report Format (listed vertically with A L OE I E sequence) Account Format
(assets is on the left, L OE on the right)
- Format: Business Name, Statement of Financial Position, Month Only

4. Statement of Cash Flows

- Cash inflows and outflows of the business
- Cash flows on operating, investing, and financing activities
- Format: Business Title, Statement of Cash Flows, For the Month Ended

Operating Activities

- Focused on producing, selling, and delivering of services

- Cash Inflow (receipts of sales of goods etc.) Cash Outflow (payments to suppliers, expenses,
taxes, interest)
 Investing Activities

- Acquiring loans, disposing of investments, acquisition and selling of non-current assets.

- Cash Inflow (receipt for sale of property, equipment, collection of notes payable) Cash Outflow
(payment to acquire these)

Financial Activities

- Obtaining resources from creditors and owners

- Cash Inflow (receipt of investments, issuance of notes payable) Cash Outflow (payment of
owners of withdrawals, payment to settle notes payable)