FAR (Financial Accounting and 1.

If management sees other resources

(land)
Reporting)
 may decide instead to sell the land
Definition of Accounting
 use the resulting cash to finance business
1. Accounting is an art
operations
2. Accounting is a process
3. Accounting is a service activity 2. Analyzes existing debts/liabilities of the
business
Accounting is an art
 to check if it could still handle additional
 Art of recording, classifying and
debt as a result of borrowing from the bank
summarizing in terms of money, the
financial transactions and events and 3.Analyzes Cash inflows and outflows
interpreting results thereof (Committee
on Accounting Terminology of the to see other possible sources of financing
American Institute of Certified Public  to determine how the business would
Accountants) repay the bank loan if it ever materializes
Accounting is a process
 process of identifying, measuring, and If decided to apply for a loan,
communicating economic information
 bank’s loan officer and lending personnel
 to permit informed judgment and will require the company to submit financial
decisions by users of the information. information
(American Accounting Association)
Financial information
 will be used to determine whether to
Accounting is a service activity approve or reject the loan application
Function
 To provide quantitative information Accounting – The Language of
primarily financial in nature, about Business
economic entities
Accounting
 intended to be useful in making economic
decisions (Accounting Standards Council)  language used to communicate financial
information to interested parties
Basic Purpose of Accounting
 Through accounting, different users of
 to supply financial information to users financial information understand what is
 to help them make informed judgments happening in the business enterprise
and better decisions Business
o For example, a company is considering  organization engaged in the trade of
obtaining a loan from the bank in order to goods, services, or both to consumers
finance the operations of the business (Wikipedia)

Relevant to this decision, accounting Profit-oriented

provides the following information
 administered to earn profit to increase the
 The resources and obligations of the wealth of owners
business  Interest is paid on the current
debt/liabilities of the business. * food manufacturers

Cash inflows and outflows resulting from * gas stations

business operations * bookstores
Non-profit oriented Legal Forms of Business - Business
Ownership Business enterprises may be
 uses surplus revenues to achieve its
organized either as
goals rather than to distribute them as
profit or dividends  sole proprietorship,
Revenue  partnership
 must be retained by the organization for  corporation
its self-preservation, expansion, or plans
*Charitable organizations
A.Sole Proprietorship
*Educational institutions
 has only one owner, the proprietor 
Types of Business Enterprises -
may operate on his/her own
According to Activity
 may employ others as business
According to the nature of their business
operations expand
1. Service Business
 most basic legal form of business
 offers services and typically generates
Examples:
a profit by charging a fee
Mobile phone repair services
 simplest among the three
gravel-and-sand enterprises
Educational Institutions
cottage industries
 charge tuition and miscellaneous fees for
educational services rendered to students Advantages of Sole Proprietorship
over other business forms
Accountants, doctors, lawyers, architects
1. easiest to form
 give professional advice
2. Has less complex business transactions
 earn profit by charging professional fees
3. Has minimal regulatory requirements
2. Merchandising Business
4. With only one owner, decisions can be
 buys goods and sells them without any
made and implemented faster
alteration
5. Proprietor enjoys all the profits earned by
Examples:
the business
*Sari-sari stores,
Disadvantages of Sole Proprietorship
*bookstores over other business forms
* hardware stores (typical merchandising 1. Faces financing problems because of the
businesses) enterprise’s limited ability to raise capital
3. Manufacturing Business 2. Business can only expand in proportion
to the increase in resources contributed by
 buys goods called raw materials, then
the proprietor
converts them into finished products
3. When it expands, the expansion focuses
Most complex
on areas within the expertise of the
 because of the conversion of the raw proprietor.
materials into finished goods
4. Decision-making
*Shoe manufacturing business
 proprietor does not receive the benefit of
a second opinion
5. Bears the risks and losses of the
enterprise
6. Has unlimited personal liability  most complex form of business
organization
 His/her personal property may be used to
satisfy the obligations due to creditors of  may exist for a period not longer than 50
the proprietorship years, subject to renewal
Partnership Corporation Code
 an association of two or more persons  defines a corporation as an artificial being
created by law
 partners bind themselves to contribute
money, property, or industry to a common Stockholder
fund, with the intention of dividing the
 person who invests and becomes an
profits among themselves
owner of the corporation
 governed by the Civil Code of the
Certificate of stock
Philippines Partners agree on
 Issued for every share purchased
1. How the business will be managed
Corporation
2. Amount of capital contributions from
each partner  has standardized procedures for its
creation, organization, management, and
3. Division of profits/losses
liquidation as specified in the Corporation
4. Form and mode of settlement in case of Code
withdrawal by, or death of, any of the
Management
partners
 centralized in the corporation’s board of
Advantages over Corporation
directors
1. Easier to organize compared to a
Has the greatest capacity to raise capital
corporation
 can raise capital by selling shares of
2. Less complex than a corporation
stock to the public as a whole
Advantages over Sole Proprietorship
1. Burden of management is shared among
partners Stockholders
2. More ideas are exchanged and  may transfer shares without the consent
brainstormed, resulting in better decision of other stockholders
making
Major advantage of corporations over other
3. Can raise more capital legal forms of business
Disadvantages over Sole 1.Limited liability of owners
Proprietorship
 liability limited only to the amount of
1.Plurality of owners the stockholder’s investments
 may result in disagreements regarding Disadvantage
ideas and management style
1. Relatively high cost of formation
2.Fragile life of a partnership
2. Subject to greater scrutiny, regulation,
 may be dissolved by mere agreement, control, and supervision by the government
or by the withdrawal of, or the death of, or
incapacity of a partner 3. More complex management of
corporations 4. Has limited powers, as
3.Partners have unlimited personal expressly stated in the Corporation Code of
the Philippines and its own Articles of
C. Corporation
Incorporation
5. Subject to a higher income tax rate
Sole Proprietorships and Partnerships

Advantages Disadvantages
Ease of Formation -Difficult to raise
capital - Unlimited Liability
- Subject to a few - Limited Life
Regulations
- No corporate
income taxes

Corporation

Advantages Disadvantages
- Unlimited life - - Double taxation
Easy transfer of - Cost of set-up and
ownership report filing
- Limited liability
- Ease of raising
capital Users of Accounting
Information/Financial Statements
I. Financial Accounting - External Users
1. Investors
2. Creditors
3. Regulators
4. Customers
5. Competitors

Economic Decisions requires

1. Use of reliable financial information II. Managerial Accounting - Internal Users

2. Great skill and timing 1. Employees (part of the administrative

process)
3. Sound professional judgment
2. Owners
3. Managers
Financial Information
 summary of all the transactions of the
business over a period of time Users of Financial Statements

Accounting 1.Investors

 be viewed as a service function to  providers of risk capital

management  concerned with the risk inherent in and
 basically processes raw data and return provided by their investments
converts them into meaningful information  need the information to help them
that will be useful for decision-making determine whether they should buy, hold,
Accounting — An Information Process or sell their investments
o In the case of corporations, shareholders
are also interested in information, which
enables them to assess the ability of the economy in many ways including the
enterprise to pay dividends. employment and their patronage of local
suppliers
2.Owners
Financial statements
 To determine if the business is profitable
 provides information about the trends
 Whether to continue, improve, or drop it
and developments in the prosperity of the
3.Employees enterprise and the range of its activities

 interested the stability and profitability of The Accountancy Profession

their employers
Accounting is a profession because it has
 Interested in information which enables the attributes required of a profession:
them to assess the ability of the enterprise
1. Mastery of a particular intellectual
to provide remuneration, retirement
skill, acquired by training and
benefits, and employment opportunities
education
4.Lenders/Creditors
 requires to finish a degree in Bachelor
 Determine whether their loans and the of Science in Accountancy
interest will be paid when due
 requires to pass a very rigorous
5. Suppliers and other trade creditors government examination administered
by the Professional Regulatory Board of
 Determine whether amounts owing to Accountancy
them will be paid when due
 Once passed, he/she use the title
Trade creditors “Certified Public Accountant” (CPA)
 likely to be interested in an enterprise 2. Adherence by its members to a
over a shorter period than lenders common code of values and
 unless they are dependent upon the conduct established by its
continuation of the enterprise as a major administrating body, including
customer maintaining an outlook which is
essentially objective.
6. Customers
Code of Ethics
 have interest about continuance of an
enterprise  mandatory for all CPAs

 especially when they have a long-term  provides guidance for CPAs whenever
involvement with, or are dependent on, the they encounter “what is the right thing
enterprise to do” situations

7. Government and their agencies/ 3. Acceptance of a duty to society as

Regulators. interested in the allocation of a whole (usually in return for
resources and, activities of enterprises. restrictions in the use of a title or in the
granting of a qualification)
 require information in order to regulate
the activities of enterprises Accounting

 determine taxation policies 1. Gives sound financial accounting and

reporting
8. Public
2. Enables effective financial management
Enterprises
3. Provides competent advice on a variety
 affect members of the public in a variety of business and taxation matters
of ways
* For example, enterprises may make a
substantial contribution to the local Fields of Accounting Standards
 developed to promote uniformity in the  proper custody, disposition, and
selection and application of accounting accounting for public funds
policies and procedures
6. Accounting and Information
1. Financial accounting Technology
2. Management accounting The advent of Information Technology (I.T.)
revolutionized accounting
3. Cost accounting
 gave it a big boost in terms of efficiency
4. Tax Accounting
and timeliness
5. Government Accounting
Accounting applications
6. Accounting and Information Technology
 have been written to suit different kinds
1. Financial accounting of business organization Computers

 focuses on the preparation and  can take over most of the clerical
presentation of general-purpose financial aspects of accounting
statements
 can never replace the professional
 with the aim of meeting most of the needs judgment of an accountant
of external users
2.Management accounting
Accounting is a dynamic profession.
 concerned primarily with financial
 continues to grow and serve the needs
reporting for internal users, such as
of users of financial information
management Internal users
CPA
 have control over the accounting system
 one of the most sought-after
 can specify precisely the type of reports
professionals in the business world today
needed for use in decision-making
3.Cost accounting
CHAPTER 2: FINANCIAL ACCOUNTING AND
 measures a business’s costs to help
REPORTING OVERVIEW
management in controlling expenses
Generally Accepted Accounting Principles
 guide managers in setting prices for their
products and services to achieve greater  Basic concepts or underlying principles
profits to follow for its proper use
4.Tax Accounting  comprises the conventions, rules,
processes, principles, standards, and
Has two aims
underlying assumptions that are used in
1. Compliance with the tax laws preparing financial statements

2. Minimizing the company’s tax bill  Agreed on by the members of the

through legal means providing tax planning accounting profession
and tax consultancy services
 Accepted on the basis of experience,
5. Government Accounting reason, custom, usage, and practical
necessity
 encompasses the process of analyzing,
classifying, summarizing, and Although the term “principles” is used,
communicating all transactions involving
 GAAP is not rigid or unchanging
the receipt and disposition of government
funds and property and interpreting the Accounting principles
results thereof
o continue to evolve as a response to the Is the Framework part of the Accounting
changes in the financial information needs Standards?
of business stakeholders
 The Framework is not a Philippine
Financial Reporting Standards Council Financial Reporting Standard (PFRS)
(FRSC)
 hence does not define standards for any
 official accounting standard-setting body particular measurement or disclosure
in the Philippines issue
 Upon the recommendation of the Board In case of conflict,
of Accountancy, the Professional
 PFRS prevail over the Framework
Regulation Commission created the FRSC
Scope of the Framework
Primary task of FRSC
Deals with the following matters
 to improve and establish accounting
standards that will be generally accepted 1. The objective of financial statements
in the Philippines
2. Underlying assumptions in the
preparation of financial statements
The Accounting Framework 3. Qualitative characteristics that
determine the usefulness of the
 Framework for the Preparation and
information in financial statements
Presentation of Financial Statements
4. Definition, recognition, and
 sets out the concepts that underlie the
measurement of the elements of the
preparation and presentation of financial
financial statements 5. Concepts of capital
statements for external users Purposes of
and capital maintenance
the Framework
Basic Accounting Concepts
 Assist the FRSC in developing
accounting standards that represent GAAP 1. Business entity principle
in the Philippines
 business is considered distinct and a
 Assist the FRSC in its review and separate accounting entity from the
adoption of existing International Financial owner(s) of the business Personal
Reporting Standards transactions of owners
 Assist preparers for financial statements  not included in the records of the
in applying FRSC Philippine Financial business
Reporting Standards and in dealing with
topics that have yet to form the subject of Accounting entity
an FRSC Statement  an organization accounted for as a
 Assist auditors in forming an opinion as separate economic unit Clear-cut
to whether financial statements conform distinctions
with Philippine GAAP  made between entities to avoid
 Assists users of financial statements in confusion
interpreting the information contained in 2. Dual-effect of business
financial statements prepared in transactions
conformity with Philippine GAAP
For a new business, assets originate from
 Provide those who are interested in the two possible sources:
work of the FRSC with information about
its approach to the formulation of 1. Owners
Philippine Financial Reporting Standards.
2. Creditors who extend loans to the
business
Effects of Transactions
 Must be seen on both sides of the  has neither the intention nor the need to
equation liquidate or curtail materially the scale of
its operations
ASSETS = LIABILITIES + EQUITY
Other accounting concepts
3. Matching principle
7.Cash Basis of Accounting
Profit or loss
 Another method used in accounting
 computed by deducting the expenses
incurred from the income earned  income is recognized when cash is
received  expenses are recognized when
Income recorded and reported in one
cash is paid
accounting period
8. Stable Monetary Unit
 should be matched against the
expenses that directly or indirectly Transaction
contributed to the generation of the
must be expressed in terms of a uniform
income
means of measuremen
4. Accrual Basis
* Philippines, the monetary unit is the
Income recognized when earned Philippine peso
regardless of when cash is received
*For multinational companies, financial
Expenses recognized when incurred statements distributed worldwide are
regardless of when cash is paid usually expressed in U.S. dollars.
5. Periodicity (Time Period Concept)
 Timely financial information must be
made available to make economic
decisions
 operating life of an enterprise may be
conveniently divided into time periods of
equal length
Accounting periods
 Periods of equal length
Periodicity Concept
 allows accounting to provide information
on a timely basis
 enables users to assess the condition
and performance of the business across
time periods
6. Going Concern (Continuity
Assumption)
Financial statements
 normally prepared on the assumption
that an enterprise is a going concern and
will continue in operation for the
foreseeable future
Enterprise