FDNACCT MRS.
TANG-SEE
NOTES / MIDTERMS 05/11
UNIT 1: INTRODUCTION TO ACCOUNTING
HISTORY OF ACCOUNTING
• Process of keeping financial accounts
• Process of investing, announcing these exchanges to oversight the offices, controllers and tax
collections entities
Year Description
Ancient • Used by the rulers of China, Babylonia & Greece used accounting to keep track the
Civilization cost of the labor and materials
o Pre-numerical accounting systems pre-dated the written language
- Clay tokens
- Clay tablets
- The bullare
Ancient Egypt • Audit system were used
[4th Century • Bone labels were attached to bags [5300 B.C]
B.C.] • 450 papyrus were used to record Pharaoh’s assets during the Egyptian period
Ancient Greek • The bankers made use of books to record their transactions and keep track of the
money going around in the banks
Romans • Their records were kept by the head of the family
11th Century • The people were introduced to the Double-Entry System. Jewish merchants in the
early 11th Century as well as Italian merchants and utilized this
13th Century • Amatino Manucci, a Florentine merchant, also used this method under Farolfi
Firm in the late 13th Century
14th Century • Giovanni di Bicci de’ Medici, introduced it to the Medici bank in the 14th Century
1494 • Around 14 Century, Luca Pacioli published the first known description of the
double-entry system entitled “Summa de Aritmetica, Geometrica, Proportion et
Proportionalite” in Venice in November 1494. It was everything about Arithmetic,
Geometry & Proportion.
Industrial • When Industrial Revolution risen up, the pace of accounting development
Revolution increased as the economies of developed countries began to mass-produce goods
• Merchandise was priced based on the managers’ hunched on cost, but increase
competition requires sellers to adopt a more advanced accounting system
Royalty [1854] • In 1854, Queen Victoria of the United Kingdom of great Britain and Ireland,
allowed royal charter to the Institute of Accountants in Glasgow which created the
profession of chartered accountants.
1800s • In the late 1800s, several chartered accountants from Scotland & Britain flew to the
U.S. to audit British investments. Some of which eventually led to the emergence
of accounting firms in America
Great • The stock market crashes in 1929 worked the start of the Great Depression which
Depression lasted until 1939
[1929] • The stock market also became venue for speculation and what they call “glorified
gambling” where participants would manipulate the transactions. It was at this
point when accounting went downhill, due to World War II.
Income Tax • Later on, Accounting supplied the concept of income. The government actually
played a role in leading more development in the field of accounting when it
started using income tax
• In order, the government has required strict accountability in the business
community
PHILIPPINE SETTING
1923 • In 1923, ACT NO. 3105 was approved by the Legislature, Act regulating the practice
of Public Accounting.
1967 • In 1967, the Accountancy Act of 1967 was approved.
1975 • In 1975, PD NO. 692 The Revised Accountancy Law was implemented and under
the stewardship of PRC, BOA discharges it’s mandate with authority and distinction
• In the same year, PRC Accreditation of PICPA as a bona fide professional
organization representing CPA’s to strengthen the profession
ACCOUNTING GAAP
• the process by which financial information • Generally accepted accounting principles
about a business is classified, recorded, (GAAP) are rules that accountants follow to
summarized, interpreted, and communicated record business transactions and prepare
to owners, managers, and other interested financial statements
parties (Price et al., 2021) • Deals with financial information and
• the art of recording, classifying, and transactions
summarizing in a significant manner and in
terms of money, transactions and events Monetary / Money Measurement / Monetary
which are, in part at least of financial unit
character, and interpreting the results thereof
• Assumes that only transactions that can
(AICPA)
be expressed in monetary terms are
• language of the business (backbone) and
recorded
keeping track the money flow
• Assumes that the peso is used to record
Nature transactions and that it is relatively free
• an art from value fluctuations
• a service primarily engaged in providing
Accounting System – designed to accumulate data
financial information to interested users in
about a firm’s financial affairs, classify the data in a
making economic decisions
meaningful way.
Scope Financial Statements – is the summarization of the
accumulated data in periodic reports
• deals with financial information and
transactions
Branches of Accounting
Financial • provides general-purpose financial reports to various external users
Accounting
Auditing • External audit – provided by an independent third party that reviews a company’s
financial statements to assess their fairness and adherence to accounting principles
• Internal audit – provided by internal auditors that evaluate the company's policies
and procedures to identify and weakness, mismanagement, waste, or frau
• Determine fair presentation of financial reports
Cost • accounting and classifying costs and expenses to determine total (product) cost of a
Accounting product/service
• useable/ sensible
• price and product
Managerial • provides internal financial reports, mainly the managers, for decision-making
Accounting • everything about the management that need about number of the company
Government • prepares financial reports for the government and its agencies
Accounting • Bangko Central
Tax • prepares tax returns and ensures tax compliance
Accounting • BIR
Accounting • accounting for the academe and research
Education • Accounting professor
Accounting • a system that a business uses to collect, store, manage, process, retrieve, and report
Information its financial data that are used by various internal users
System
Forensic • focuses on legal affairs such as inquiry into fraud, legal cases, disputes and claims
Accounting resolution
Areas of Accounting
Public Accounting • providing accounting services for other companies
• Auditing – deals with the review of financial statements to assess their
fairness and adherence to accounting principles (The word 'fair' in Accounting
means that a transaction is accounted for in accordance with accepted
accounting rules.) Gets reliable data.
• Tax Accounting – deals with
o Tax compliance – preparation and audit of tax returns
o Tax planning – giving advice to clients on how to structure their
financial affairs in order to reduce tax liability
o The Big 4 Tax firms:
1. Deloitte & Touche
2. Ernst & Young
3. KPMG
4. PricewaterhouseCoopers
• Management advisory services – deals with helping clients to improve their
information system and business performance
Private Accounting • working for a single business entity in a specific industry
Governmental • keeping financial records and preparing financial reports for the national
Accounting government, its various departments, and local government units
Users
Primary Users
• Investors (Individuals, Businesses, Banks, Insurance companies)
o Existing investors – monitor business performance to check return on their investments
o Potential investors – monitor business performance to assess risk and reward of future
investments
• Lenders and other creditors
o Lenders – ensure that the business is capable of repaying a loan and determine the terms of
the loan
o Suppliers / Creditors – assess the ability of the business to pay its bills for extending credit and
setting credit terms and credit limit. Checking if an entity is capable to pay in order to borrow
money.
Other Users
• Internal users
o Owner/s – monitor business performance to check return on their investment
o Managers – evaluate the results of their operations to plan and make decisions for the future
o Employees – ensure that the business can pay salaries and other benefits
• External users
o Tax authorities – collect taxes (E.g., employee tax, sales tax, property tax, business tax, etc.)
o Regulatory agencies – oversee the financial information provided by public companies (E.g.,
The Securities and Exchange Commission (SEC) enforces security laws and protects against
infractions like insider trading, accounting fraud, and companies which provide misleading
information about their financial condition)
o Customers – check to see if they can rely on continued service or supply of goods
o Employee unions – negotiate salary increases, benefits, and profit-sharing
o Trade associations – provide summary reports to assess the business and the industry
o Financial intermediaries
§ Financial analysts – provide summary reports to assess the business and the industry
for investment purposes
§ Stock brokers – assess returns of current and future stock investments
§ Mutual fund companies – monitor business performance to assess risk and reward of
current and future investments
§ Credit-rating agencies – provide summary reports to assess the credit-worthiness of
public
FORMS OF BUSINESS ORGANIZATION
As to ownership
Sole Proprietorship § A business entity owned by an individual trading alone in his/her own name,
or under recognized business name, who solely takes all business profits and
solely assumes all business losses (unlimited liability)
§ It owns by one (1) individual
§ The business life is ends when the owner passes away, unable to carry on
business operation, and decides to close the business
§ Owner is solely libel for all the business debts
Example : Sari-Sari Store, Magtataho etc.
Partnership § A business entity owned by two or more individuals, called partners who
enter into a contract called the partnership agreement, to conduct business
(or practice a profession) and divide profits among themselves
§ It owns by 2 or more owners
§ The business life ends by the termination of the definite term or particular
undertaking of the partnership
§ The express will of any partner, acting in good faith, the death, insolvency,
civil interdiction of any partner, and decree of court under the following
article one of the partners (Article 1830, Civil Code of Philippines)
§ Partners are responsible individually and jointly for the business debts
Corporation § A corporation is an artificial being created by operation of law, having the
right of succession and the powers, attributes and properties expressly
authorized by law or incident to its existence
§ A separate legal entity that has legal right to own property and conduct
business in its own name
§ It can own by one or more individuals
§ The business life can continue and ends only when business goes bankrupt
and when the stockholders vote to liquidate
§ A corporation shall have perpetual existence unless its articles of
incorporation provides otherwise
§ Stockholders are not responsible for the business debts; their liability is
limited to the amount of their individual investment (limited liability)
As to activity
1. Service – a business that provides service [ Cargo, Spa, Salon, PLDT]
2. Merchandising/ Trading – a business that buys and sells goods [Grocery, Clothing Stores, Bookstores)
3. Manufacturing – a business that converts raw materials to finished goods [San Miguel]
Regulated Professions
- Cannot be established as a corporation this will go against public policy by giving practicing
professionals a way to avoid personal liability [ Example: Accountants, Architects, Doctors, Engineers ]
Separate Legal Entity means that
- The business can sue and be sued in itself
- The business can carry out transactions in the business name
- The business needs to pay company tax (corporate tax)
Owners are called stockholders (shareholders) since ownership is divided into number of stocks (shares) and is
evidenced by holding a stock certificate. Stockholders may be directors so they will receive a directors’
remuneration.
FDNACCT MRS. TANG-SEE
NOTES / MIDTERMS 05/15
UNIT 2: ACCOUNTING CONCEPTS AND PRINCIPLES
GENERALLY ACCEPTED ACCOUNTING PRINCIPLE INTERNATIONAL FINANCIAL REPORTING
STANDARDS
§ GAAP § IFRS
§ Procedure-based § Principle-based
§ Issued by the Financial Accounting Standards § Issued by International Accounting Standards
Board (FASB) Board (IASB)
§ A common set of rules, procedures, § A set of principles companies follow when
practices, and standards followed in the they prepare and publish their financial
preparation and presentation of financial statements, providing a standardized way of
statements describing the company’s financial
§ GAAP have evolved over the years for both performance
practical necessity and theoretical reasons.
They have become generally accepted on the The IFRS Foundation aims to develop IFRS Standards
basis of experience, custom, usage, practical that bring transparency, accountability, and
necessity, and industry practice efficiency to financial markets around the world.
Their world serves the public interest by fostering
GAAP are develop through a cooperative effort trust, growth, and long-term financial stability in the
between global economy
§ Private sector (Businesses) – represented by
Financial Accounting Standards Board (FASB) § Transparency – by enhancing the
§ Public Sector (Government) - international comparability and quality of
represented by Securities and Exchange financial information, enabling investors and
Commission (SEC) other market participants to make informed
economic decisions
New principles are written and old ones are revised § Accountability – by reducing the information
because the business environment is constantly gap between the providers of capital and the
changing people to whom they have entrusted their
money. The standards provide information
The standardized preparation of financial statements needed to hold management to account
makes the information to be understandable and § Efficiency – by helping the investors to
reliable and enables comparison from year to year identify opportunities and risks across the
and with other companies for making business world, thus improving capital allocation
decisions. through the use of a single, trusted
accounting language that lowers the cost of
capital and reduces international reporting
cost for businesses
According to IFRS Foundation, high-quality financial
information is the lifeblood of capital markets
GAAP AND IFRS standards do not provide any guarantee that a company’s financial statements are free from
errors or omissions that are intended to mislead investors and other users of financial statements
The need for international accounting standards
- There is a rapid expansion of global; investment, trade, and production
- There are many businesses operating in a number of countries and needing to produce financial
statements which are acceptable to all
- There are some smaller countries that are unable to establish a system of accounting standards of their
own
CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING (IASB)
The purpose of the Conceptual Framework is to
§ Assist the IASB to develop Standards that are based on consistent concepts
§ Assist prepares to develop consistent accounting policies when no standard applies to a particular
transaction or other event, or when a standard allows a choice of accounting policy
§ Assist all parties to understand and interpret the standards
The conceptual Framework isn’t one of the standard. The Conceptual Framework may be revised from time to
time on the basis of the Board’s experience of working with it.
Objective of general-purpose financial reporting
- The objective general-purpose financial reporting is to provide financial information about the
reporting entity that is useful to existing and potential investors, lenders, and other creditors in making
decisions relating to providing resources to the entity.
Fundamental
o Relevance (Quantative)
o Predictive Value
o Confirmatory Value
o Materiality
o Faithful Representation (Qualitative)
o Completeness
o Neutrality
o Free from Error
FUNDAMENTAL QUALITATIVE CHARACTERISTICS
- It is the qualities that make the accounting information useful for decision making by interested users.
If financial information is to be useful, it must be relevant and faithful represent what it purports to
represent
Relevance – relevant financial information is capable of making a difference made by users
1. Predictive value – if it can be used as an input to processes by users to predict future outcomes
2. Confirmatory value – if it provides feedback about (confirms or changes) previous evaluations
o The predictive value and confirmatory value of financial are interrelated
o For example, revenue information for the current year, which can be used as the basis for
predicting revenues in the future years, can also be compared with revenue prediction for the
current year that were made in past years (assumptions confirm)
3. Materiality – if omitting, misstating, or obscuring an information could reasonably be expected to
influence decisions that the primary users of general-purpose financial reports make on the basis of
those reports
o A business entity may depart from the generally accepted principles for recording some
transactions when an information is not significant enough to affect financial decisions (follow
convenience rather than theoretical principles (important)\
Faithfully Representation – financial reports represent economic phenomena in words and numbers. To be
useful, financial information must also faithfully represent the substance of the phenomena that it purports to
represent
1. Completeness – includes all information necessary for a user to understand the phenomenon being
depicted, including all necessary descriptions and explanations. Omitting a portion of that information
can cause it to be false or misleading.
o Assets should have description, nature, numerical, and depiction
o Explanations of significant facts about the quality and nature, and the process used to
determine the numerical depiction
2. Neutrality – without bias in the selection or presentation of financial information
o Neutrality is supported by the exercise of prudence. Prudence is the exercise of caution when
making judgements under conditions of uncertainty (don’t take advantage)
3. Free 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
o For use of estimates, it should be described clearly and accurately as being an estimate, the
nature and limitations of the estimating process are explained, and no errors have been made
in selecting and applying an appropriate process for developing the estimate.
