Introduction to

Accounting
BAINTE1L – Integrated Accounting Fundamentals
Fundamentals of
Accounting
 Definitions of Accounting
• Accounting is a service activity. Its function is to provide
quantitative information, primarily financial in nature,
about economic entities that is intended to be useful in
making economic decisions.
• Accounting is the art of recording, classifying and
summarizing in a significant manner and in terms of
money, transactions and events which are, in part at least,
of a financial character, and interpreting the results thereof.
• Accounting is the process of identifying, measuring and
communicating economic information to permit informed
judgments and decisions by users of the information.
 • Luca Pacioli – Father of Accounting, a
Franciscan friar ad a celebrated
mathematician, is generally associated with
the introduction of double-entry
History of bookkeeping.
Accounting • He published his book, Summa Arithmetica,
Geometria, Proportioni et Proportionalita
 Accountancy and Accounting
• Accountancy is a profession whose members are engaged in the
collection of financial data, the summary of that data, and then the
presentation of information in a form which helps recipients take effective
decisions.
 Branches of Accounting
1. Auditing forms a most important branch of accountancy. Once accounts have been prepared, they may
have to be checked in order to ensure that they do not present a distorted picture. The checking of accounts
and the reporting on them is known as auditing. Businesses have their accounts audited as a legal
requirement.
Auditors are usually trained accountants who specialize in checking accounts rather than preparing them.

Two kinds of Auditors:

1. External auditors
2. Internal auditors
 Branches of Accounting
2. Bookkeeping is a mechanical task involving the collection of basic
financial data. The data are first entered in special records known as books
of account, and then extracted and summarized in the form of a profit and
loss account and a balance sheet. This process normally takes place once a
year, but it may occur more frequently. A profit and loss account shows
whether the business has made a profit or loss during the year.
 Branches of Accounting
3. Cost Accounting is the process that involves the recording of cost data in
books of account. It is, therefore, similar to bookkeeping except that data are
recorded in very much greater detail. Cost accounting makes use of those
data once they have been extracted from the cost books in providing
information for managerial planning and control.
 Branches of Accounting
4. Financial Accounting is the more specific term applied to the preparation
and subsequent publication of highly summarized financial information. The
information supplied is usually for the benefit of the owners of an entity, but
it can also be used by management for planning and control purposes. It can
also be of interest to other parties, e.g. employees and creditors.
 Branches of Accounting
5. Management Accounting incorporates cost accounting data and adapts them
for specific decisions which management may be called upon to make.

6. Financial Management is responsible for setting financial objectives,

making plans based on those objectives, obtaining the finance needed to achieve
the plans, and generally safeguarding all the financial resources of the entity.
7. Taxation involves computing the amount of tax payable by both business
entities and individuals.
 Accountancy in the Philippines

Republic Act 9298, known as the Philippine Accountancy Act of 2004, is the law governing the practice of accountancy in the Philippines.
The practice of accountancy shall include:
1. Practice of Public Accountancy
 Shall constitute in a person, be it his/her capacity, or a a partner or as a staff member in an accounting or auditing firm, holding out himself/herself as one skilled in the
knowledge, science and practice of accounting, and as a qualified person to render professional services as a Certified Public Accountant (CPA); or offering or rendering,
or both, to more than one client on a fee basis or otherwise, services such as:
a. the audit verification of financial transaction and accounting records
b. the preparation, signing, or certification for clients of reports of audit, balance sheet, etc.
c. the design, installation, and revision of accounting system
d. the preparation of income tax returns when related to accounting procedures
e. when he/she represents clients before government agencies on tax or other matters related to accounting etc.
 Accountancy in the Philippines

2. Practice in Commerce and Industry

 Shall constitute in a person involved in decision making requiring professional knowledge in the science of accounting, or when such employment or position requires
that the holder thereof must be certified public accountant.

3. Practice in Education/Academe
 Shall constitute a person in an educational institution which involve teaching of accounting, auditing, management advisory services, finance, business law, taxation, and
other technically related subjects.

4. Practice in Government
 Shall constitute in a person who holds, or is appointed to, a position in accounting professional group in government or in a government-owned and/or –controlled
corporation, including those performing proprietary functions, where decision making requires professional knowledge in the science of accounting, or where a civil
service eligibility as certified public accountant.
 • A distinguishing mark of the accountancy
profession is its acceptance of the
responsibility to act in the public interest.
Code of • A professional accountant is defined as “an
individual who holds a valid certificate
Ethics for issued by the Board of Accountancy (i.e.,
Philippine Certified Public Accountant), whether
he/she be in public practice, industry,
CPAs commerce, the public sector or education:.
 • Integrity
 A professional accountant should be straightforward and honest in all
professional business relationships. Integrity also implies fair dealing and
truthfulness.
• Objectivity

Code of  A professional accountant has a continuing duty to maintain professional

knowledge and skill at the level required to ensure that a client or employer
receives competent professional service based on current developments in

Ethics for •
practice, legislation and techniques.
Confidentiality

Philippine  A professional accountant should respect the confidentiality of information

acquired as a result of professional and business relationships and should no
disclose any such information to third parties without proper and specific

CPAs •
authority unless there is a legal or professional right or duty to disclose.
Professional Behavior
 A professional accountant should comply with relevant laws and regulations
and should avoid any action that discredits the profession.
 Accounting Standards in the Philippines
• Accounting standards are authoritative statements of how particular
types of transaction and other events should be reflected in financial
statements.
• Compliance with accounting standards will normally be necessary for the
fair presentation of financial statements.
 Accounting Standards in the Philippines
• Accounting Standards Council (ASC) was created by the Philippine Institute of Certified
Public Accountants (PICPA) to establish and improve accounting standards that will be
generally accepted in the Philippines.
• Financial Reporting Standards Council (FRSC) was created per Section 9(A) of the
Rules and Regulation Implementing R.A. 9298 as the new accounting standard setting
body, thus, replacing the Accounting Standards Council (ASC).
• International Accounting Standards Board (IASB) assumed accounting standard setting
responsibilities from its predecessor body, the International Accounting Standards
Committee (IASC). Its objective is to achieve convergence in the accounting principles that
are used by businesses and other organizations for financial reporting around the world.
Accounting Standards in the Philippines

1973–2001
Statements of International Accounting Standards issued
by the Board of the International Accounting Standards
Committee (1973-2001) are designated “International
Accounting Standards” (IAS).

The International Accounting Standards Board

announced in April 2001 that its accounting standards
would be designated “International Financial Reporting
Standards” (IFRS)

Apr. 2001
 Accounting Standards in the Philippines
• Accounting Standards Council (ASC) considered standards issued by
other standard-setting bodies such as the U.S. Financial Accounting
Standards Board (FASB) and the International Accounting Standards
Committee (IASC), now the IASB.
• In the past years, the ASC based most of the standards it issued on US
accounting standards. However, ASC issued accounting standards that
were based on International Accounting Standards (IAS).
The Conceptual Framework
for Financial Reporting
 INTRODUCTION
• An entity is something that can be recognized as having its own separate
identity, such as an individual. 
• The term economic entity usually refers to a business or organization
whose major purpose is to produce a profit for its owners.
 Fundamental Business Model
• For a business to be successful, it needs to
develop a product or service that customer will
pay for and thus create a revenue stream.
• A business requires investments to enable it to
pay for the infrastructure, equipment and
personnel. Only after a skillful combination of
these elements can a business generate a
revenue stream.
 Fundamental Business Model

The investors provide The cash in the The combination of The sale of product or If there’s an existing
the required capital business can be: business provides the service generates an debts from bank, the
for the business. converted into basis for producing asset called a cash inflow from
another type of asset the products or receivable. This asset collections will be
that will be used in services. once collected will used to provide the
the business (e.g. produce a cash inflow debt providers with
equipment) or sold for the business. interest on their loans
(e.g. inventory); or to the company.
spent on operating
costs such as salaries,
rental and utilities.
 Types of Business
1. Services – Hiring skilled staff and selling their time.
2. Trader – Buying a range of raw materials and manufactured goods and
consolidating them, making them available for sale in locations near to
their customers or online for delivery.
3. Manufacture – Buying blocks of land and using them to provide raw
materials.
 Types of Business
4. Infrastructure – Buying and selling operating assets (typically large assets);
selling occupancy often in combination with services.
5. Financial – Accepting cash from depositors and paying them interest; using the
money to provide loans to borrowers, charging them fees and a higher rate of
interest than the depositors receive.
6. Insurance – Collecting cash from many customers; investing the money to pay
the losses experienced by a few customers. By understanding the risk accepted
and the likelihood of a claim, more premium income can be earned than claims
paid.
Forms of Business Organizations

Sole Proprietorship – This business organization has a single owner called the proprietor who generally is
also the manager.

Partnership – is a business owned and operated by two or more persons who bind themselves to contribute
money, property, or industry to a common fund, with the intention of dividing the profits among themselves.

Corporation – is a business owned by its stockholders.

 Purpose and Phases of Accounting
• The accounting function is part of the broader business
system and does not operate in isolation.
• It handles the financial operations of the business but also
provides information and advice to other departments.
• Business transactions are the economic activities of a
business. Recording these historical events is a significant
function of accounting.
• Accounts are produced to aid management in planning,
control and decision-making and to comply with
regulations.
 Purpose and Phases of Accounting
• Before the effects of transactions can be recorded, they must be measured. In order that
accounting information will be useful, it must be expressed in terms of a common
financial denominator—money.
• To be useful in making decision making, the recorded data must be classified and
summarized.
• It is imperative that the result of the summarization phase be interpreted or analyzed to
evaluate the liquidity, profitability and solvency of the business organization. Accounting
provides the decision-makers with information to make reasoned choices among
alternative uses of scarce resources in the conduct of business and economic activities.
 Users and Their Information Needs
• Investors need information to help them determine whether they should buy, hold or sell.
• Employees are interested in information about the stability and profitability of their
employers. They are also interested in information which enables them to assess the
ability of the enterprise to provide remuneration, retirement benefits and employment
opportunities.
• Lenders are interested in information that enables them to determine whether their loans
and the related interest will be paid when due.
• Suppliers and other trade creditors are interested in information that enables them to
determine whether amounts owing to them will be paid when due.
 Users and Their Information Needs
• Customers have an interest in information about the continuance of an enterprise,
especially when they have a long-term involvement with, or are dependent on, the
enterprise.
• Government and their agencies are interested in the allocation of resources and,
therefore, the activities of the enterprises. They also require information in order to
regulate the activities of the enterprises, determine taxation policies and as the basis for
national income and similar statistics.
• Public. Financial statements may assist the public by providing information about the
trends and recent developments in the prosperity of the enterprise and the range of its
activities.
 Fundamental Concepts in Accounting
• Entity Concept – An accounting entity is an organization or a section of an organization
that stands apart from other organizations and individuals as a separate economic entity.
The transactions of different entities should not be accounted for together. Each entity
should be evaluated separately.
• Periodicity Concept – An entity’s life can be meaningfully subdivided into equal time
periods for reporting purposes.
• Stable Monetary Unit Concept – The Philippine peso is a reasonable unit of measure and
that its purchasing power is relatively stable. It allows accountants to add and subtract peso
amounts as though each peso has the same purchasing power as any other peso at any time.
 Generally Accepted Accounting Principles
(GAAP)
• Generally Accepted Accounting Principles make financial statement
meaningful and useful, regardless of the type of business organization.
• Business and the environment in which they operate are constantly
changing (i.e. economy, technology, and laws). Therefore, financial
information and the methods of presenting that information must change
to meet the needs of the people who use the information.
• GAAPs are changed and refined as accountants respond to the changing
environment.
 Criteria for GAAP
• A principle has relevance to the extent that it results in information that is
meaningful and useful to those who need to know something about a
certain organization.
• A principle ha objectivity to the extent that the resulting information is
not influenced by the personal bias or judgment of those who furnish it.
• A principle has feasibility to the extent that it can be implemented without
undue complexity or cost.
 Basic Principles
• Objectivity Principle – Accounting records and statements are based on the most
reliable data available so that they will be as accurate and as useful as possible.
• Historical Cost – The principle states that acquired assets should be recorded at their
actual cost and not at what management thinks they are worth as at reporting date.
• Revenue Recognition Principle – Revenue is to be recognized in the accounting
period when goods are delivered or services are rendered or performed.
• Expense Recognition Principle – Expenses should be recognized in the accounting
period in which goods and services are used up to produce revenue and not when the
entity pays for the goods and services.
 Basic Principles
• Adequate Disclosure – Requires all relevant information that would affect the
user’s understanding and assessment of the accounting entity be disclosed in the
financial statements.
• Materiality – Financial reporting is only concerned with information that is
significant enough to affect evaluations and decisions.
• Consistency Principle – The firms should use the same accounting method from
period to period achieve comparability over time within a single enterprise.
However, changes are permitted if justifiable and disclosed in the financial
statements.
 Conceptual Framework for Financial Reporting
(IFRS Framework)
• The IFRS Framework describes the basic concepts that underlie the
preparation and presentation of financial statements for external users.
• The framework deals with the objective of financial statements; the
qualitative characteristics that determine the usefulness to present and
potential investors, lenders and other creditors, who use that information
to make decisions about buying, selling or holding equity or debt
instruments and providing or settling loans or other forms of credit.
 Objective of General-Purpose Financial
Reporting
• The objective of general-purpose financial reporting is to provide financial
information about the reporting entity that is useful to present and potential
investors, lenders and other creditors, who use that information to make
decisions about buying, selling or holding equity or debt instruments and
providing or settling loans or other forms of credit.
• The primary users need information about the resources and claims against the
resources of the entity not only to assess an entity’s prospects for future net cash
inflows but also how effectively and efficiently management has discharged their
responsibilities to use the entity’s existing resources (i.e. stewardship).
 Economic Resources and Claims
• Information about the nature and amounts of a reporting entity’s economic
resources and claims assists user to assess the entity’s financial strengths and
weaknesses; to assess liquidity and solvency, and its need and ability to
obtain financing.
• Information about the claims and payment requirements assists user to predict
how future cash flows will be distributed among those with a claim on the
reporting entity.
• A reporting entity’s economic resources and claims are reported in the statement
of financial position.
Changes in Economic Resources and Claims

• Changes in a reporting entity’s economic resources and claims result from

the entity’s performance and from other events or transactions such as
issuing debt and equity instruments.
• Users need to be able to distinguish between both of these changes.
Changes in Economic Resources and Claims

Financial Performance Reflected by Accrual Accounting

• Accrual accounting depicts the effects of transactions and other events and
circumstances on a reporting entity’s economic resources and claims in
the periods in which those effects occur, even if the resulting cash receipts
and payments occur in a different period.
Changes in Economic Resources and Claims

Financial Performance Reflected By Past Cash Flows

• Information about a reporting entity’s cash flows during the reporting
period also assists users to assess the entity’s ability to generate future net
cash inflows.
• This information indicates how the entity obtains and spend cash,
including information about its borrowing and repayment of debt, cash
dividends to shareholders, etc. The changes in the entity’s cash flows are
presented in the statement of cash flows.
Changes in Economic Resources and Claims

Changes in Economic Resources And Claims Not Resulting From Financial

Performance
• Information about changes in an entity’s economic resources and claims
resulting from events and transactions other than financial performance,
such as the issue of equity instruments or distributions of cash or other
assets to shareholders is necessary and claims.
• The changes in an entity’s economic resources and claims not resulting from
financial performance is presented in the statement of changes in equity.
Qualitative Characteristics of
Useful Financial Information
 Fundamental Qualitative Characteristics
• Relevance and faithful representation are the fundamental qualitative
characteristics of useful financial information.
• Information must be both relevant and faithfully represented if it is to be
useful.
• Neither a faithful representation of an irrelevant phenomenon nor an
unfaithful representation of a relevant phenomenon help users make good
decisions.
 Fundamental Qualitative Characteristics
Relevance
• Relevant financial information is capable of making a difference in the decisions made
by users.
• Relevant information influences the economic decisions of users by helping them
evaluate past, present, or future events, or confirming, or correcting, their past
evaluations.
• Financial information has a confirmatory role when it is used to confirm or correct the
decision-maker’s earlier expectations.
• Financial information has a predictive role when it is used to make predictions of, for
instance, future cash flows or income.
 Fundamental Qualitative Characteristics
Faithful Representation
• General purpose financial reports represent economic phenomena in
words and numbers.
• To be useful, financial information must not only be relevant, it must also
represent faithfully the phenomena it purports to represent.
• This fundamental characteristic seeks to maximize the underlying
characteristics of completeness, neutrality and freedom from error.
 Fundamental Qualitative Characteristics
Completeness
• A complete depiction includes all information necessary for a user to understand the
phenomenon being predicted, including all necessary descriptions and explanations.

Neutrality
• Free from bias. A neutral depiction is not slanted, weighted, emphasized, de-emphasized
or otherwise manipulated to increase the probability that financial information will be
received favorably or unfavorably by users.
 Fundamental Qualitative Characteristics
Freedom from Error
• No errors or omissions in the description of the phenomenon, and the
process used to produce the reported information has been selected and
applied with no errors in the process.
• Free from error does not mean perfectly accurate in all respects.
 Enhancing Qualitative Characteristics
Comparability
• Information about a reporting entity is more useful if it can be compared
with similar information about other entities and with similar information
about the same entity for another period or another date.
• Comparability enables users to identify and understand similarities in, and
differences among, items.
 Enhancing Qualitative Characteristics
Verifiability
• Verifiability helps to assure users that information represents faithfully the
economic phenomena it purports to represent.
• Verifiability means that different knowledgeable and independent
observers could reach consensus, although not necessarily complete
agreement, that a particular depiction is a faithful representation.
 Enhancing Qualitative Characteristics
Timeliness
• Timeliness means that the information is available to decision makers in
time to be capable of influencing their decisions.

Understandability
• Classifying, characterizing and presenting information clearly and
concisely makes it understandable.
 Enhancing Qualitative Characteristics
Applying the Enhancing Qualitative Characteristics
• Enhancing qualitative characteristics should be maximized to the extent
necessary.
• However, enhancing qualitative characteristics cannot render information
useful if that information is irrelevant or not represented faithfully.
 Underlying Assumptions
Going Concern
• The financial statements are normally prepared on the assumption that an
enterprise is a going concern and will continue in operation for the
foreseeable future.
• It is assumed that the enterprise has neither the intention nor the need to
liquidate or curtail materially the scale of its operations.
 Elements of Financial Statements
• Balance sheet
• Assets
• Liabilities
• Equity
• Income Statement
• Income
• Expense
 Recognition of the Elements of Financial
Statements
An item that meets the definition of an element should be recognized if:
• it is probable that any future economic benefit associated with the item will flow to
or from the enterprise; and
• the item has a cost or value that can be measured with reliability.
 Measurement of the Elements of Financial
Statements
Measurement is the process of determining the monetary amounts of which the elements of
the financial statements are to be recognized and carried in the balance sheet and income
statement.
• Historical Cost – Assets are recorded at the amount of cash or cash equivalents paid or
the fair value pf the considerations given to acquire at the time of their acquisition.
• Current Cost – Assets are carried at the amount of cash or cash equivalents that would
have to be paid if the same or an equivalent asset was acquired currently.
• Present Value - Assets are carried at the present discounted value of the future net cash
inflows that the item is expected to generate in the normal course of business.
 Measurement of the Elements of Financial
Statements
• Realizable (Settlement) Value
• Realizable Value – Assets are carried at the amount of cash or cash equivalents that
could currently be obtained by selling an asset in an orderly disposal.
• Settlement Value – Liabilities are carried at the undiscounted amounts of cash or
cash equivalents expected to be paid to satisfy the liabilities in the normal course of
business.
 Concepts of Capital and Capital
Maintenance

Financial concept of capital, such as invested money or invested

purchasing power, capital is synonymous with the net assets or
equity of the enterprise.

Physical concept of capital, such as operating capability, capital is

regarded as the productive capacity of the enterprise based on, for
example, units of output per day.