ACCTG 200 Financial Accounting and Reporting 1st Semester 2025-2026

Prepared by: Ms. Ednel D. Gubac, CPA, MBA

Definitions of Accounting

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 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 process of identifying, measuring and communicating economic information to permit
informed judgments and decisions by users of the information.

Accounting is an information system that measures, processes and communicates financial information
about an identifiable economic entity.

Phases of Accounting

The accounting process involves recording, classifying, summarizing, interpreting and communicating
financial information about an economic or social entity.

Business transactions are the economic activities of a business. Recording these historical events is a
significant function 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. Money serves as both a medium of exchange and a measure of value.

By simply measuring and recording transactions, the resulting information will be of limited use. To be
useful in making decisions, the recorded data must be classified and summarized. Classification
reduces the effects of numerous transactions into useful groups of categories.

Summarization of financial data is achieved through the preparation of financial statements or financial
reports. They usually summarize the effects of all business transactions that occurred during some
period. After going through the preceding phases, 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

Decision-makers need information. The more important the decision is, the greater is the need for
reliable information. Virtually all businesses and most individuals keep accounting records to aid them in
making decisions. The users utilize financial statements in order to satisfy some of their different needs
for information.

• 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.

• Customers have an interest in information about the continuance of an enterprise, especially when
they have a long-term involvement with, or a 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. Enterprises affect members of the public in a variety of ways. For example, enterprises may
make a substantial contribution to the local economy in many ways including the number of people
they employ and their patronage of local suppliers. 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.

Types of Business Organizations

Business is any economic activity conducted primarily for profit. To engage in business is to
supply goods and services to earn profit or income. Business could be organized in several forms. The
most common forms of business are:

▪ Sole or single proprietorship – a business entity owned by one person called a sole proprietor who
generally is also the manager. Sole proprietorships tend to be small service-type (e.g. physicians,
lawyers and accountants) businesses and retail establishments.

The owner receives all profits, absorbs all losses and is solely responsible for all debts of the
business. From the accounting viewpoint, the sole proprietorship is distinct from its proprietor. Thus,
the accounting records of the sole proprietorship do not include the proprietor’s personal financial
records.

▪ Partnership – a business entity owned by two or more persons called partners who have agreed to
contribute money, property and industry to a common fund with the intention of dividing the profits
among themselves. Each partner is personally liable for nay debt incurred by the partnership.
Accounting considers the partnership as a separate organization, distinct from the personal affairs of
each partner.

▪ Corporation – a corporation is a business owned by its stockholders. A business registered as an

Types of Business Activities

The forms of business organizations above are classified according to the ownership structure of the
business entity. Entities, however, can also be grouped by the type of business activities they perform.
Any of these types of activities may be performed by the business organization be it a sole proprietorship,
a partnership or a corporation.

Service companies provide services for a fee (e.g. law firms, accounting and audit firms, stock
brokerage, beauty salons, and recruitment agencies).

Merchandising companies purchase goods that are ready for sale and then sell these to customers (e.g.
car dealers, clothing stores and supermarkets).

Manufacturing companies buy raw materials, convert them into products and then sell the products to
other companies or to final consumers (e.g. paper mills, steel mills, car manufacturers and drug
manufacturers).

Financial Statements

The financial statements are the means by which the information accumulated and processed in financial
accounting is periodically communicated to the users. Without accounting information embodied in the
financial statements, users may not be able to arrive at sound economic decisions. The objective of
financial statements is to provide information about the financial position, financial performance, and cash
flows of an entity that is useful to a wide range of users in making economic decisions.

A complete set of financial statements comprises:

1. Income Statement – is a formal statement showing the performance of the enterprise for a given
period of time. It summarizes the revenues earned and expenses incurred for the period. The
excess of revenue over the expenses is called net income or net profit. If the expenses exceed the
revenue, the excess is a net loss.
2. Statement of Owner’s Equity – summarizes the changes that occurred in owner’s equity. In the
case of sole proprietorships, increases in owner’s equity arise from additional investments by the
owner and profit during the period. Decreases result from withdrawals by the owner and from loss for
the period.

3. Balance sheet – is a statement that shows the financial position or condition of an entity as at a
specific date. It shows the assets, liabilities and owner’s equity of the enterprise.

There are two forms of balance sheet: the account form and the report form.

• Account form – it resembles the basic format of the accounting equation, with assets on the left
side and the liabilities and owner’s equity section on the right side.

• Report form – simply lists the assets, followed by liabilities and owner’s equity in vertical
sequence.

Elements of Financial Statements

1. Assets – are properties or resources owned by the entity. These resources are physical items or
rights that have value. These include cash, accounts receivable, notes receivable, supplies, prepaid
expenses, land, buildings, and equipments.

2. Liabilities – are debts owed to outside parties (creditors). Liabilities are often identified on the
balance sheet by titles that include the word payable. Examples of liabilities include accounts
payable, notes payable, wages payable, mortgage payable and other debts of the entity.

3. Owner’s Equity – is the owner’s right to the assets of the business.

4. Revenues – is a result of selling services or products to customers. Examples of revenues include

5. Expenses – these are cost incurred, or services consumed in the process of generating revenues.
Examples of typical expenses include salaries expense, rent expense, utilities expense, supplies
expense and miscellaneous expense.

6. Net Income (Net Loss) – it is the excess of revenue over expenses or the excess of expenses over
revenue.

Accounting Periods

1. Calendar Year – an accounting period that begins January 1 and ends on December 31 of the year.

2. Fiscal Year – an accounting period that begins on the 1st day of any month and ends on the last day
of the twelfth months thereafter

The Accounting Equation

The resources owned by a business are called assets. The rights or claims to the properties are
normally divided into two principal types: (1) the rights of creditors and (2) the rights of owners. The
rights of creditors represent debts of the business and are called liabilities. The rights of the owners are
called owner’s equity. The relationship between the two may be stated in the form of an equation, as
follows:

Assets = Liabilities + Owner’s Equity

This equation is known as the accounting equation. It is usual to place liabilities before owner’s equity
in the accounting equation because creditors have first rights to the assets. The claim of the owners is
sometimes given greater emphasis by transposing liabilities to the other side of the equation, which
yields:

Assets – Liabilities = Owner’s Equity