ACC 102

Accounting— the language of business

- The system that measures business activities

- Processes information into reports
- Communicates the results to decision-makers.
- Accounting quantifies business communication

Account

- device used in analyzing and recording transactions

- Produced to aid management in planning, control and decision-making

Transactions

- Exchange of goods or services

- Economic activities of a business

Chart of Accounts—list of all accounts used in the business

DEFINITION OF ACCOUNTING

• Accounting — Accounting Standards Council, 1983

- A service activity
- Function is to provide quantitative information about economic entities that is intended to be
useful in making economic decisions

• Accounting — Financial Accounting Standards Board, 1978

- An information that measures, processes and communicates financial information about an

economic entity

• Accounting — American Accounting Association, 1970

- The process of identifying, measuring and communicating economic information to permit

informed judgment and decision by users of the information

• Accounting — American Institute of Certified Public Accountants, 1953

- The art a recording, classifying and summarizing in a significant manner and in terms of a
money, transactions, and events which are of financial character and interpreting the results
thereof

EVOLUTION OF ACCOUNTING

Accounting History

- Study of the evolution in accounting thought, practices and institutions in response to changes
in the environment and societal needs
- Considers the effect that this evolution has work on the environment
 ACC 102
(Short Quiz #1)
https://docs.google.com/forms/d/e/1FAIpQLScH1fT0g9ghNEB8SUQ28WTs83mPKC1q5Pkuv7PsQme1Yw
vcSg/viewform?usp=pp_url

Primitive Accounting

Origin of keeping accounts

- 8500 B.C.
- Clay tokens (cones, disks, spheres, and pellets)
- Mesopotamia (Iraq)

Bullae (Clay Balls)

- The first billings of lading

Code of Hammurabi

- Requires merchants trading goods to give buyers a sealed memorandum containing the agreed
price before it can be considered enforceable

Scribe

- The predecessor of the modern accountant

Clay Tablets (3600 BC in Babylonia) also known as Tablets

- Records payments of wages

- Records who brought in the grain and how much the king took as his share

Accounting Evolution to 1900 (A.C. Littleton) 7 Preconditions

1. Art of Writing - bookkeeping is first of all a record

2. Arithmetic – mechanical aspect of bookkeeping consists of a sequence of simple computations
3. Private Property – bookkeeping is concerned only with recording the facts about property and
property rights
4. Money – bookkeeping is a necessary except as it reduces all transactions in properties are
property rights to this common denominator (i. e., among economy)
5. Credit – there will be little impulse to make any record whatever if all exchanges were
completed on spot (i.e., uncompleted transactions)
6. Commerce – I’m really local trade with never have created enough pressure stimulate meant
coordinate diverse ideas into assistant
7. Capital - without capital commerce would be trivial and credit would be inconceivable

Middle Ages

- The use of credit was prevalent

- A semblance of an international banking system was also functioning

Quipu — Inca Empire, 11th to 14th century

- Knotted cords of different lengths and colors

 ACC 102
- Used to keep accounting records

Oswald Spengler, “The Decline of the West” (1928)

- German Philosopher
- Double-entry bookkeeping is not a discovery of science; it is the outcome of continued efforts to
meet the changing necessities of trade

THE FLORENTINE APPROACH

Renaissance Florentine markets - Account books and double-entry bookkeeping

13th Century—development of accounting in Tuscany, Italy

Emergence of Double Entry

- Ledgers of Renieri Fini & brothers (1296-1305)

- Giovanni Farolfi & Company (1299-1300)

Giovanno Farolfi & Company

- A firm of Florentine merchants

- Head office at Nimes in Languedoc, Kingdom of France
- “Ledger” exclusive related in the branch in Salon, Provence
- Records (1299-1300) are incomplete but showed enough detail of double-entry bookkeeping
- Details of bookkeeping: debits, credits, duality of entries
- Oldest known examples of double-entry bookkeeping

Amatino Manucci

- Inventor of double-entry bookkeeping

- Managed to construct a comprehensive and fully articulated set of double-entry records
- Used 5 books: General Ledger, Two Merchandise Ledger, Expenses Ledger, Cash Book
- He gave importance to the aspect of financial control

THE METHOD OF VENICE

Luca Pacioli

- Father of double-entry bookkeeping

- Franciscan friar and celebrated mathematician
- Associated with the introduction of double-entry bookkeeping
- 1494 – Summa de Arithmetica, Geometria, Proportioni et Proportionalita (Everything about
Arithmetic, Geometry, Proportions and Proportionalita)
- Particularis de Computis et Scripturis (Details of Calculation and Recording)
- Described double-entry bookkeeping (but didn’t invented it)
 ACC 102
- Purpose of bookkeeping: to give the trader without delay information as to his assets and
liabilities

Goethe(German poet and dramatist)- one of the finest discoveries of human intellect

Werner Sombat (economist-sociologist)—double-entry bookkeeping is born of the same spirit as a

system of Galileo and Newton

SAVARY AND NAPOLEONIC COMMERCIAL CODE

- Earliest systematized form of accounting regulation in Europe

- Government introduced the submission of an annual fair value statement of financial position

Short Quiz #2

https://docs.google.com/forms/d/e/1FAIpQLScYEzxqexcmrWwa-LRKwnB-
ZFmMVDwLxN4PTTuaPfDbjRUEGw/viewform?usp=pp_url

ASEAN

- A government-to-government cooperation

TYPES OF BUSINESS

Services

- Selling people's time

- Example: Software Development, Accounting, Legal

Trader

- Buying and selling products

- Example: Wholesaler, Retailer

Manufacture

- Designing products, aggregating components and assembling finished products

- Example: Vehicle Assembly, Construction, Engineering, Electricity, Water, Food and Drink,
Chemicals, Media, Pharmaceuticals

Raw Materials

- Growing or extracting raw materials

- Example: Farming, Mining, Oil

Infrastructure

- Selling the utilization of infrastructure

 ACC 102
- Example: Transport, Hotels, Telecoms, Sports Facilities, Property Management

Financial

- Receiving deposits, lending and investing money

- Example: Bank, Investment House

Insurance

- Pooling premiums of many to meet claims of a few

- Example: Insurance

Short Quiz #3

https://forms.gle/Y4kfpidv36fd8P9j6

FORMS OF BUSINESS ORGANIZATIONS

Sole Proprietorship

- Business organization with single owner

- Owner receives all the profits and absorbs all the losses
- Solely liable for all debts
- Sole-proprietorship is distinct from it’s proprietors

Partnership

- A business owned and operated by two or more person’s

- Intention is to divide the profit among themselves
- Each partner is personally liable for any debt incurred by the partner
- Separate organization, different from personal affairs of each partner
- Unlimited liability

Corporation

- A business owned by stockholders

- It’s a separate legal entity
- Created by operation of law and is authorized by law
- Stockholders are not personally liable for the corporations debt (Limited liability)

Micro, Small and Medium Enterprises

Micro

- With assets, before financing, of 3.0 (before 1.5 million) or less

- Employs not more than nine workers

Small

- With assets, before financing, of above 3.0(before 1.5 million) to 15 million

 ACC 102
- Employs 10-99 workers

Medium

- Have assets, before financing, of above 15 million to 100 million

- Employs 100 to 199 workers

ACTIVITIES IN BUSINESS ORGANIZATIONS

Three types of organizational activities:

- Financing
- Investing
- Operating

Financing Activities

- The methods an organization uses to obtain financial resources from financial markets and how
it manages this resources

Investing Activities

- It involves the selection and management including disposal replacement of long-term

resources that will be used to develop, produce, and sell goods and services
- Efficient - one that provides goods and services at low cost relative to their selling price
- Effective – one that is successful in providing goods and services demanded by the costumers

Operating Activities

- It involves the use of resources to design, produce, distribute, and market goods and services
- Includes researches, production, distribution, marketing and selling, and servicing

PURPOSE AND PHASES OF ACCOUNTING

Accounting Function

- Part of the broader business system

- Does not operate in isolation
- It handles the financial operations of the business but also provides information and advice to
other departments

Measured- common financial denominator: money

Recorded

Classified – reduces the effects of numerous transactions into useful groups or categories

Summarized - achieved through the preparation of financial statements

Interpreted - evaluate the liquidity, profitability and solvency of the business organization
 ACC 102
Recognition Issue - when the transaction occurred

Valuation Issue - what value to place on the transaction

Classification Issue – how the components of the transaction should be classified

FUNCTIONS OF ACCOUNTING

1. Recording
- Journalizing
- Recording the transaction in a chronological order in the books of original entry
- General Journal
- Analyzing and preparing documents
- Special Journals: Sales Journal, Purchases Journal, Cash Receipts Journal, Cash Disbursement
Journal
2. Classifying
- Ledger
- Group of accounts
- General Ledger (Book of final entry)
- Footing — addition by position
- Cross-footing — addition and subtraction by position
3. Summarizing
- Trial balance
4. Interpreting

1. Analyzing
2. Journalizing
3. Posting
4. Trial Balance
5. Adjusting Journal Entry
6. Adjusted Worksheet
7. Preparing Financial Statement
8. Closing Journal Entry
9. Post-Closing Trial Balance
10. Reversing Journal Entry

PACIOLI’S DOUBLE-ENTRY BOOKKEEPING AND ITS EVOLUTION

SUMMA

● Has 36 chapters
● Successful Merchant= sufficient cash or credit, a good bookkeeper and an accounting system.
● Three books in Summa: the memorandum, the journal and the ledger
● Every debet dare (should give) there exists a debet habere (should have or received)

Memorandum
 ACC 102
● The book where all transactions are recorded, in the currency in which they are conducted, at
the time they are conducted
● Prepared in chronological order
● A narrative description of the business' economic events
● Necessary to support transactions

Journal

● The merchant’s private book

● Entries made are in one currency
● In chronological order
● In narrative form

Ledger

● Alphabetical listing of all business accounts

● Running balance of each particular account

PACIOLI

● Advocates an annual balancing to determine the success or failure of the business

● And find errors

Two Main Reasons Why Recording System Lasted Long

● It provides an accurate record of what has happened to a business over a specified period of
time
● Information extracted from the system can help the owner of the manager operate the business
much more effectively

It answers the three basic questions of the owner:

● What profit has the business made?

● How much does the business owe?
● How much is owed to it?

Medieval System - Simple agricultural and trading entities

Modern Systems – complex industrial operations and sophisticated financial arrangements

Two Main Sources

● From owners who wants to know from time to time how the business is doing
● From the managers we need information in order to help plan and control it

Two Main Specialization

● Financial Accounting - concerned with the supply of information to the owners of an entity
 ACC 102
● Management Accounting - concerned with the supply of information to the managers of an
entity

ACCOUNTANCY IN THE PHILIPPINES

Repulbic Act No. 9298 – Philippine Accountancy Act of 2004

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

Scope of Practice

 Practice of Public Accountancy

 Practice of Commerce and Industry
 Practice in Education/Academe
 Practice in Government

Professional Regulatory Board of Accountancy

- Chairman and 6 members

- Vice Chairman – 1 year term

Qualifications

- Must be natural born citizen

- Must be a duly registered certified public accountant at least 10 years of work experience
- Must be of good moral character and not convicted
- Must not have any pecuniary interest directly or indirectly
- Is not be a director or officer of the accredited national professional organization of certified
public accountants is

FUNDAMENTAL CONCEPTS

Entity Concept

● Most basic concept in accounting

● Accounting entity, an organization that stands apart from other organizations and individual as
a separate economic unit
● Transactions of different entities should not be accounted for together
● Each entity should be evaluated separately

Periodicity Concept

● Subdivision of entity life into equal time periods for reporting purposes
● Allows users to obtain timely information to serve as a basis on making decisions
● 1 year is the usual accounting period
 ACC 102
Stable Monetary Unit Concept

● Allows accountants to add and subtract peso amounts as though each peso has the same
purchasing power
● Basis for ignoring the effects of inflation in the accounting records

Going concern

● Assumption that the reporting entity will continue in operation for the foreseeable future
● Assumed that the entity has neither the intention or the need to enter liquidation or disease
trading

CRITERIA FOR GENERAL ACCEPTANCE OF AN ACCOUNTING PRINCIPLE

GAAP – Generally Accepted Accounting Principles

● Encompass the conventions, rules and procedures necessary to define accepted accounting
practice at a particular time
● Established my humans
● They evolve

THREE CRITERIA:

Relevance

● the extent that it results in information that is meaningful and useful to those who need to
know something about the certain organization

Objectivity

● The extent that the resulting information is not influenced by the personal bias or judgment
● Connotes reliability and trustworthiness
● Connotes verifiability - finding out whether the information is incorrect

Feasibility

● The extent that it can be implemented without undue complexity or cost

FUNDAMENTAL QUALITATIVE CHARACTERISTICS OF FINANCIAL INFORMATION

RELEVANCE

● Predictive Value
● Confirmatory or Feedback Value

FAITHFUL REPRESENTATION - there is agreement between the description and economic event it
purports to represent

● Completeness – All and only events that occurred in a specific period or presented
 ACC 102
● Neutrality - free from bias
● Freedom from error – the system that process information or tried-and-tested

ENHANCING QUALITATIVE CHARACTERISTICS

● Comparability - allows comparison of similar information with another entity or with another .
For the same entity
● Consistency - use of the same accounting practice or method from period to period
● Verifiability - supported by documentary evidences
● Timeliness - prompt enough to be useful in decision making
● Understandability - classify and present information clearly and concisely
● Cost and Benefit Analysis of Financial Reporting - different sizes of entities and other factors
justify different reporting requirements in certain situations.

BASIC ACCOUNTING PRINCIPLES

1. Objectivity Principle - accounting records and statements are based on reliable data and
supported by verifiable documentation
2. Historical Cost – acquired assets should be recorded at the actual costs and not at what
management thanks to your worth as at reporting date
3. Revenue Recognition Principle - revenue to be recognized in the accounting period when goods
are delivered or services are rendered or performed.
4. Expense Recognition Principle - expenses should be recognized in the accounting period in
which goods and services are used to produce revenue.
5. Adequate Disclosure - requires all relevant information that would affect the users
understanding and assessment of the accounting entity be disclosed
6. Materiality – dictates that financial reporting should only be concerned with information that is
significant to affect evaluation and decisions
7. Consistency – dictates that firms should use the same accounting method from period to period
to achieve comparability over time within a single enterprise
8. Matching Principle - the costs of doing business or recorded in the same period as the revenue
they help to generate

ACCOUNTANCY IN THE PHILIPPINES

March 17, 1928

● Accountancy profession recognized in the Philippines when Act No. 3105 was approved

Don Vicente Fabella

● First Filipino CPA in the USA

BIG FIVE OF ACCOUNTING

● Arthur Anderson
 ACC 102
● PriceWaterhouseCoopers
● Ernst & Young
● KPMG
● Deloitte Tohmatsu International

BOARD OF ACCOUNTANCY

● Discharges it's mandate of supervising, controlling in regulating the practice of accountancy with
authority and distinction
● Has taken the lead in raising the standards of the profession to a very high level of excellence
● Act No. 3105 (1923) Three Members: President and two members
● Republic Act No. 5166 (1967) Six Members: Chairman and five members
● Presidential Decree No. 692 (1975) Seven Members: Chairman and Six Members
● Republic Act No. 9298 (2004) Seven Members: Chairman and Six members

ACCOUNTANCY ACT OF 2004

● Republic Act No. 9298 Philippine Accountancy Act of 2004

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

PRACTICE OF ACCOUNTANCY

● Practice of Public Accountancy (ACPAPP)

- Rendering professional service a certified public accountant, or offering and rendering, or both,
two more than one client on a fee basis
● Practice in Commerce and Industry (ACPACI)
- Constitute in a person involved in decision-making requiring professional knowledge in the
science of accounting or when such employment or position requires a CPA
● Practice in Education/Academe
- Constitute in a person in an educational institution which involved teaching of accounting and
related subjects
● Practice in Government
- Constitute in a person who holds a position in an accounting professional group and government
or any government owned corporation

PHILIPPINE REGULATORY AGENCIES

● Bureau of Internal Revenue (BIR) - to ensure compliance of national taxes and some license
requirements of all businesses

FUNDAMENTAL PRINCIPLES

Integrity

- To be straightforward and honest in all professional and business relationships

 ACC 102
Objectivity

- Should not allow bias, conflict of interest or undue influence of others to override professional
or business judgments

Professional Competence and Due Care

- Maintain professional knowledge and skill at the level required to ensure that a client or
employer receives competent professional service

Confidentiality

- Confidential information should not be used for the personal advantage of the professional
accountant or third parties

Professional Behavior

- A professional accountant should comply with relevant laws and regulations

- Should avoid any action that discredits the profession

Professional Standards

● Board of Accountancy (BOA) / Professional Regulation Committee (PRC)

● Securities and Exchange Commission (SEC)
● Financial Reporting Standards Council (FRSC)
● Auditing and Assurance Standards Council (AASC)
● Relevant Legislations

THE ACCOUNTANCY PROFESSION

● All members of the accountancy profession are Certified Public Accountants

● CPAs have their own body of language
● CPAs adhere to Code of Ethics (with competence and integrity)

● CPAs are members of a national organization, PICPA, whose role is to ensure the continued
improvement of the accountancy profession to meet the demands of the time

BRANCHES OF ACCOUNTING

1. Auditing
- External Audit - independent examination that ensures the fairness and reliability the reports
that management submits to users outside the business entity
- External Auditors- job is to protect the interests of the users of the financial statement
- Internal Auditors- appointed by the company's management though they work independently of
the accounting and the other departments
- Ensure the accuracy of business records, uncover internal control problems and
identify operational difficulties
 ACC 102
2. Bookkeeping
- Mechanical task involving the collection of basic financial data
- Balance Sheet - lists what the entity owns and what it all as at the end of the period
- Income Statement - shows whether the business has made a profit or loss during the period
- Cash Flows Statement - presents the cash inflows and outflows of the business
- Accounting function takes over when the basic data have been entered in the book of accounts
- Bookkeeping - a routine operation
- Accounting - requires the ability to examine a problem using both financial and non-financial
data

3. Cost Bookkeeping, Costing, and Cost Accounting

● Cost Bookkeeping - process that involves the recording of cost data in books of accounts
● Cost Accounting - makes use of data once they have been extracted from the cost books in
providing information for managerial planning and control
- Deals with collection, allocation, and control of the cost of producing specific goods and
services

4. Financial Accounting
- Focused on the recording of business transactions, periodic preparation of reports and results of
operation
- More specific term applied to the preparation and subsequent publication of highly summarized
financial information

5. Financial Management
- Responsible for setting financial adjectives
- Makes plans based on those objectives
- Obtains the finance needed to achieve the plans
- Generally safeguarding all the financial resources of the entity
- Involved in management
- Relies more 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
- Information may be financial or non-financial

7. Taxation
- Preparation of tax returns and the consideration of the tax consequences of proposed business
transactions
 ACC 102

8. Government Accounting
- Identification of the sources and uses of resources consistent the professions of local and
national laws

ELEMENTS OF FINANCIAL STATEMENTS

● Assets, Liabilities, Equity - relate to a reporting entity's financial position

● Income and Expenses - relate to a reporting entity's financial performance

Assets - a present economic resource controlled by the entity as a result of past events

Liability - a present obligation of the entity to transfer an economic resource as a result of past events

Equity - the residual interest in the assets of the entity after deducting all its liabilities

Income - increases in assets, or decreases in liabilities, that result in increase in equity, other than those
relating to contributions from holders of equity claims

Expenses - decreases in assets, or increases in liabilities, that results in decrease in equity, other than
those relating to distributions to holders of equity claims

Account- basic summary device of accounting

- Device used in analyzing and recording transactions

THE ACCOUNTING EQUATION

Assets = Liabilities + Owner's Equity

 ACC 102

DEBITS AND CREDITS — THE DOUBLE ENTRY

ACCOUNTING EVENTS AND TRANSACTIONS

Accounting Event

- An economic occurrence that causes changes in an enterprise’s assets, liabilities, and/or equity
- Internal actions (i.e. use of equipment for the production of goods or services)
- External event (i.e. purchase of raw materials from a supplier)

Transaction

- Particular kind of event that involves the transfer of something of value between two entities

TYPES AND EFFECTS OF TRANSACTIONS

1. Source of Assets (SA)

- An asset account increases and the corresponding claims account increases

2. Exchange of Assets (EA)

- One asset account increases and another asset account decreases

3. Use of Assets (UA)

 ACC 102
- An asset account decreases and the corresponding claims account decreases

4. Exchange of Claims (EC)

- One claims account increases and another claims account decreases

Nine Types of Effects

Increase in Assets = Increase in Liabilities (SA)

Increase in Assets = Increase in Owner’s Equity (SA)
Increase in one Asset = Decrease in another Asset (EA)
Decrease in Assets = Decrease in Liabilities (UA)
Decrease in Assets = Decrease in Owner’s Equity (UA)
Increase in Liabilities = Decrease in Owner’s Equity (EC)
Increase in Owner’s Equity = Decrease in Liability (EC)
Increase in one Liability = Decrease in another Liability (EC)
Increase in one Owner’s Equity = Decrease in another Owner’s Equity (EC)

ACCOUNTING CYCLE

1. Analyzing
2. Journalizing
3. Posting
4. Trial Balance
5. Adjusting Journal Entry
6. Adjusted Worksheet
7. Preparing Financial Statement
8. Closing Journal Entry
 ACC 102
9. Post-Closing Trial Balance
10. Reversing Journal Entry