MODULE 1

Title: Introduction to Accounting

Time Frame: 6 hours

Introduction/ Rationale:

The study of accounting is crucial for business people because accounting is the language of
business. Most of the information that is used in the business world consists of accounting
information. This information is necessary for informed decision making. Accounting information
directs the attention of decision makers to problems and opportunities, provides the input
necessary to make business decisions concerning those problems and opportunities, and then
provides feedback on the success or failure.

Of all the business knowledge you have learned or will learn, the study of accounting will
probably be the most useful. Your financial and economic decision as a student and consumer
involves accounting information. Understanding the discipline of accounting will also influence
many of your future professional decisions.

Accounting provides information that is intended to be useful- information that people can
use in making decisions. When we understand how accounting information is used, we will be able
to understand why accounting procedures are performed in the ways that they are.

In order to appreciate and understand the financial reports of the business, one should have
an understanding of how data are gathered and recorded. All these understanding are gained in the
study of accounting. The study of accounting should not be limited to students majoring in
accounting or to business students. Everyone who engages in economic activity- which means
everyone- will benefit from understanding the nature, significance, and limitations of accounting
information.

Specific Objectives:

At the end of the topic, the students should be able to:

 Define accounting and explain its role in business
 Explain the nature, purpose, and uses of accounting
 Enumerate and describe the specialized fields of accounting
 Trace the history of accounting
 Identify the role of the accountants in providing useful information to different users.
 Identify and distinguish the different forms of business organization and their activities.
 Enumerate and describe the basic accounting concepts and principles.
 Define and classify the elements of the financial statements and give examples of each.

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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 Terminology Bulletin No. 1, “Review and
Resume,”1953. (New York: American Institute of Certified Public Accountants), p. 9.]

 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. [Statement of Financial Accounting Standards No. 1, “Basic Concepts and
Accounting Principles Underlying Financial Statements of Business Enterprises,” 1983
(Accounting Standards Council), par. 1]

 Accounting is the process of identifying, measuring and communicating economic information

to permit informed judgment and decision by users of the information. (Statement of Basic
Accounting Theory. American Accounting Association.)

The important points made in these definitions are:

1. Accounting is about quantitative information;
2. The information is likely to be financial and
3. The information should be useful in decision making.

The definition that has stood the test of time is the definition given by the American Accounting
Association. This definition states the very purpose of accounting, that is, to provide quantitative
information for the making of economic decision. The definition also states that accounting has a
number of components, namely:

1. Identifying. This is the analytical component. This accounting process is the recognition or
nonrecognition of business activities as “accountable events.” An event is accountable or
quantifiable when it has an effect on assets, liabilities and equity. In other words, the subject
matter of accounting is economic activity or the measurement of economic resources and
economic obligations. Only economic activities are emphasized and recognized in financial
accounting.

Economic activities of an enterprise are referred to as transactions which maybe classified

as external or internal.

External transactions or exchange transactions are those economic events involving one
enterprise and another enterprise.

Internal transactions are economic events involving the enterprise only. These are the
economic activities that take place entirely within the enterprise. Production and casualty
loss are examples of internal transactions.

Production is the process by which resources are transformed into products. Casualty is any
sudden and unanticipated loss from fire, flood, earthquake and other event ordinarily
termed as act of God.

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2. Measuring. This is the technical component. This accounting process is the assigning of
peso amounts to the accountable economic transactions and events. The amounts used in
measuring financial transactions are historical cost, current replacement cost, current
selling price and present or discounted value.

3. Communicating. This is the formal component. This is the process of preparing and
distributing accounting reports to potential users of accounting information. It is for this
reason that accounting has been called the “language of business.”

Aspects of accounting implicit in the communication process:

a. Recording or journalizing- the process of systematically committing to writing

business transactions and events after they have been identified and measured , in
books of account in a systematic and chronological manner according to accounting
rules and regulation.

b. Classifying- is the sorting or grouping of similar and interrelated economic

transactions after they have been identified and measured. It is accomplished by

posting to the ledger. The ledger is a group of “accounts” which are

systematically categorized into asset accounts, liability accounts, equity accounts,
revenue accounts and expense accounts.

c. Summarizing- is the preparation of financial statements which include the

Statement of financial position, the statement of comprehensive income, the statement
of cash flows, the statement of changes in equity and the notes to financial statement.

Accounting as a science and art

 Accounting is a social science with a body of knowledge which has been

systematically gathered, classified, and organized. It is influenced by, and interacts
with, economic, social and political environments.
 Accounting is a practical art which requires the use of creative skill and judgment.

Accounting as an information system

 Accounting identifies and measures economic activities , processes information into
financial reports and communicates these reports to decision makers.

History and Evolution of Accounting

Why study about the history of accounting?

 A glimpse back into this period helps illuminate our past generally, which led to where the
accountancy profession is, at the current time.
 To help explain the phenomenal growth that the profession of accountancy has enjoyed
worldwide.

Financial Accounting and Reporting

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Accounting has been around since the beginning of history.

 Ancient South Africa

Blombos Cave in South Africa, were found markings that may have been used to count
or store information that are almost 76,000 years old. A close-up look shows that the
markings are clearly organized.

 Ancient Iran- (between 4th millennium BC and 3rd millennium)- Cylindrical tokens were
found which were used for bookkeeping on clay scripts.
 Accounting in Mesopotamia, circa 3500 B.C.

Produced some of the oldest known records of commerce, 5,000 years before the
appearance of double entry.

 Accounting in Ancient Egypt, China, Greece and Rome

Eqypt: Extensive records were kept for government accounting (for ‘in kind” tax
payments). In its thousand of years of existence these records showed simple list-
making only.

China: used accounting as a means of evaluating the efficiency of governmental

programs.

Greece: 5th century B.C., legislation on financial matters included control of receipts and
expenditures of public monies through the oversight of 10 state or “public accountants”
chosen by lot.

The Roman Empire (25 BC- 20 BC)

 Historians say that early Romans had the following records:

 A rationarium (account) which listed public revenues,
 An aerarium (treasury) which listed amounts of cash in the provincial
fisci (tax officials and in the hands of the publican (public contractors
which included the names of freed men and slaves
 Records of cash, commodities, and transactions were kept scrupulously
by military personnel of the Roman army.
 Christian Bible- Book of Mathew (New Testament- Simple accounting is mentioned in
the Parable of Talents.)
 Medieval Europe (13th century)

The introduction of double-entry bookkeeping: Historical origin of the use of the words
‘debit’ and ‘credit’ dates back to the days of single-entry bookkeeping. The chief
objective was to keep tract of amounts owed by customers (debtors) and amounts owed
to creditors. ‘Debit’ is Latin for ‘he owes’ and ‘credit’ is Latin for ‘he trusts’.

 Luca Pacioli and Double-entry bookkeeping system

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Evolvement of Double-Entry Bookkeeping

 The early history of the double entry booking cannot be traced with much accuracy. The
earliest known examples of this technique was the mercantile of Feris Bonis of
Montauban, dated 1339 . However, the evolution of the double entry bookkeeping has
an Italian influence in the 13th to 15th century.

 The book of Massari (Treasury Officials), ledgers of Commune of Genoa written or if

expanded is called Ledger in 1340. These books were known as a perfect double entry
form because separate pages were used for debit and credit. Presently known as
simplified T account

 In Florence, there were double entry records wherein debits were written over
credits. It is also in Florence that manuscripts of Partnership and Association Contracts
reflecting how partners’ capital, division of profit and losses, and dissolution of
partnership were computed.

 In the present system, the Florentine method is observed in Journal entries.

 Venice of Northern Italy had key influence in the use of the double entry system
in1400s.

 Luca Pacioli’s "Summa de Arithmetica, Geometria, Proportioni et Proportionalità"

(English: "Review of Arithmetic, Geometry, Ratio and Proportion") was first printed and
published in Venice in 1494. It included a 27-page treaties on bookkeeping, "Particularis
de Computis et Scripturis" (Italian) : "Details of Calculation and Recording"). It was
written primarily for, and sold mainly to, merchants who used the book as a reference
text, as a source of pleasure from the mathematical puzzles it contained, and to aid the
education of their sons. It represents the first known printed treaties on bookkeeping;
and it is widely believed to be the forerunner of modern bookkeeping practice. In
Summa Arithmetica, Pacioli introduced symbols for plus and minus for the first time in
a printed book, symbols that became standard notation in Italian Renaissance
mathematics. Summa Arithmetica was also the first known book printed in Italy to
contain algebra .In this book, Pacioli introduced three important books of records:
a. Memorandum Books - for the recording , in chronological order, for all information
on a transaction;
b. Journal Book – the book of original entry;
c. Ledger Book - the book for final entry

 For this reason Pacioli is known as the Father of Accounting, though he was neither an
accountant nor a merchant

SAVARY COMMERCIAL CODE (Historical Cost Method of Accounting )

 Jacques Savary, (1622-1690) belong to a noble French Family devoted to trade and to
publication of works on commercial matters. He was known as the chief architect of the
Commercial Code of France in 1673 (called Code of Savary) which generally uses historical
cost as the basis of valuation

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NAPOLEON COMMERCIAL CODE (Fair Value Method in accounting )
 Napoleon Bonaparte· introduced the codification of the Frances Civil Law named Code of
Napoleon which was enforced on March 21,1804. Three years later (1807), the Code of
Commerce was enacted as supplement to Code of Napoleon. It regulated commercial
transactions, laws of business, bankruptcies and the courts jurisdiction and procedures
dealing with this subjects.

 The Code of Commerce does not provide for any rule of valuation but gives in notes and
examples of inventory in which it is said that assets must be carried at their market value on
the day of inventory and not on the basis of historical cost

BOOKKEEPING IS THE RECORDING OF FINANCIAL TRANSACTIONS. TRANSACTIONS INCLUDE

SALES, PURCHASES, INCOME, AND PAYMENTS BY AN INDIVIDUAL OR ORGANIZATION.

 The common bookkeeping systems used by businesses and other organizations are the
single- entry bookkeeping system and the double- entry bookkeeping system. SINGLE-
ENTRY BOOKKEEPING uses only income and expense accounts, recorded primarily in a
revenue and expense journal. Single-entry bookkeeping is adequate for many small
businesses.

 DOUBLE ENTRY BOOKKEEPING requires posting (recording) each transaction twice, using
debits and credits

 The primary bookkeeping record in single-entry bookkeeping is THE CASHBOOK, which

is similar to a checking account register but allocates the income and expenses to various
income and expense accounts. Separate account records are maintained for petty cash,
accounts payable and receivable, and other relevant transactions such as inventory and
travel expenses.

 The double -entry bookkeeping system was codified in the15th century and refers to a
set of rules for recording financial information in a financial accounting system in which
every transaction or event changes at least two different accounts. In modern accounting
this is done using debits and credits within the accounting equation: Equity = Assets -
Liabilities. The accounting equation serves as a kind of error-detection system: if at any
point the sum of debits does not equal the corresponding sum of credits, an error has
occurred

Florentine vs Venetian Approach

 In the14th Century, Amatino Manucci, the inventor of double entry bookkeeping and
partner of a merchant partnership called Giovanni Farolfe & Company in Florence,
introduced the Florentine Approach (known as Journal entries). This method records each
transaction twice in at least one account being debited and at least one account credited,
with the total debits of the transaction equal to total credits

 The Venetian approach ( known as the ledger posting ), where accounts are recorded in
bilateral forms, with debits recorded on the left side of the page across form credits. It

Financial Accounting and Reporting

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First Semester, SY 2025-2026 Page 6
points to highly evolved system using several books carefully cross indexed and
coordinated to form a coherent whole. This was introduced by merchant Andrea
Bargarigo (1418-1449).

Although the basic principles have not changed substantially since Pacioli’s time, the scope and
methodology of accounting are in a constant state of evolution.

Schmalenbach and the chart of accounts

The idea of a uniform system of accounts was first developed in the 1920s. One of its first
advocates was the German economist and accounting theorist Eugen Schmalenbach. The idea was
further developed and applied in various other countries, including France, Sweden and the United
States, along two rather different lines. Uniform systems of accounts may by either macro-or micro-
orientated: that is, they may be designed with a view to national income accounting, economic
planning, taxation and other governmental concerns; or they may seek to serve the accounting
needs of individual business firms. They may also include a bookkeeping structure for recording
accounting data (input) as well as a uniform set of financial statements (output), or may be confined
to the latter. They may be tailored to the needs of individual industries, or be more general. While in
principle uniform systems of accounts (especially those with an industry orientation) might be
international in scope, in practice this is unusual.

Accounting Variations among Countries

Although accounting standards and practices are the same across the board in their origin, the
accounting and taxation structures of different countries around the world makes them vary
between countries. Different countries apply different accounting practices. This accounting
diversity is the reason that one company may seem profitable while another seems to be operating
at a loss, in extreme cases. The disparity between global accounting practices can lead to poor
business decision-making, difficulties in raising capital in different or foreign markets, and difficulty
in monitoring competitive factors across firms, industries, and nations. Their accounting practices
are linked to the objectives of the parties who will use the financial information, including people
like investors, lenders, and governments.

The differences in accounting principles between countries could really cause inconsistencies
between international operations. Maybe if an international standard were set for all countries,
there would be less quarreling and more agreement in accounting between countries. That way
there would be less discrepancy in the accounting principles and the balance sheets for each
country.

Types of Business Organizations

A business maybe classified based on its primary activities. The most common types of
business as to its nature or main activities are;

1. Service Concern- renders service to a customer or client on a fee basis.

2. Merchandising / Trading Concern- buys goods and sells the same (without further
processing) at a price higher than its acquisition cost.

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3. Manufacturing Concern- deals with the acquisition of raw materials and the conversion of
these raw materials into finished products through the application of necessary labor.

4. Hybrid companies- are those involved in more than one type of activity ( manufacturing,
merchandising, service)

Forms 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:

1. Sole Proprietorship. This is the simplest and the most common form of ownership and is
found mostly in such businesses as small retail stores, service stations, repair shops and
doctors’ practices. The owner, or proprietor is the only person in control and makes the
management decisions. If the business is successful, the owner enjoys the profits; if the
business fails, he suffers the loss. Thus the owner has a strong incentive to the best he can.

2. Partnership. The ownership is divided between two or more person who agree to pool their
resources and skills in order to establish and operate a business. Like the single
proprietorship, the partnership is simple to organize and well suited to small businesses. A
partnership agreement, either oral or written is made to indicate what each partner will
contribute in terms of money and skills, what responsibilities each will have, and how
profits and losses will be divided.

3. Corporation. It is an artificial being created by operations of law. It has its own name, in
which it can buy, own and sell property; make contracts, borrow money; and take court
action. Ownership is divided into shares of stock as evidenced by stock certificates.

Basic Purpose of Accounting: To provide quantitative information about economic entities

intended to be useful in making economic decisions.
 Financial accounting communicates information about the economic effects of accounting
transactions and events of an economic entity to different groups of external users.
 Types of information provided by accounting
1. Quantitative information- expressed in numbers, quantities or units
2. Qualitative information- expressed in words or descriptive form
3. Financial information- expressed in terms of money
 Financial reporting is the process of communicating financial accounting information about
a company to external users. The primary medium of communication is the general-purpose
financial statements.

“Accounting identifies, measures and communicates information about entities for use in making
informed judgment and decision.”

An accountant’s primary task therefore is to supply financial information to statement users so that
they could make informed judgment and better decision.

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Advantages of Accounting in Business

1. Aid to management. It provides financial information to the management to do its daily

work properly and efficiently. The financial information helps the management in planning,
organizing, evaluating, controlling or correcting various business activities.

2. Reference. It removes the limitation of memory by recording business transactions

chronologically. It serves as future reference and facilitates comparative study of business
financial status. It helps in assessing the value of the business at the time of sale.

3. Basis for tax assessment. It helps in assessing the tax liability of the organization regarding
income taxes, sales taxes and other business taxes.

4. Evidential matter. It serves as good evidence in the court of law or legal investigation.

5. Tool to evaluate management performance. It helps businessmen know the true status of
the business in terms of the results obtained and the financial condition of the business.

Basic Accounting Concepts

Nature of Accounting Concepts

The accounting reports prepared by accountants assist economic decision makers by

providing useful information about the economic status and performance of the business
enterprise. Accordingly, the users of financial reports should be able to understand the information
in order to draw sound, consistent and profitable economic decisions

Proper understanding of financial statements is possible only when a user has a basic
knowledge of (a) concepts, (b) conventions and (c) principles which serve as guidelines in the
practice of accountancy.

Accounting concepts are important assumptions or ideas which accountants observe on

how to record business transactions in the books of accounts. It may refer to an assumption, or an
abstract idea that governs accounting practice.

Accounting conventions are accounting practices that practitioners accept because of their
long use and existence. A good example of accounting convention is the use of “debit and credit” or
the “dual aspect concept”. Accountants observe such practice long time ago based on the idea that
in every business transaction, a value received has a corresponding value given.

Accounting principles are those that have first importance, which define broadly the
actions that will best accomplish the objectives of accounting. It refers to a doctrine, which is the
basis of all other rules, procedures and methods used in accounting practice.

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Accordingly, accounting principles are distinguished from accounting procedures, rules and
methods because the latter comprise the large body of practices that prescribe definitely how
transactions and other events should be recorded, classified, summarized and presented. They are
the means of implementing accounting principles.

Accounting principles are developed to meet organized needs for financial and other
information about business enterprises in a more useful manner. They are continually evolving and
developing to meet changing needs and conditions. They are influenced by changes in economic
conditions and business practices, by the needs of users of financial statements, by practical
necessity and by the reasoning and experience of accountants.

Accounting concepts, conventions, principles, rules, assumptions, doctrines and postulates-

these terms are not exactly the same in meaning, but over several years, accountants have used
them interchangeably.

The Basic Accounting Assumptions

Accounting assumptions are the basic notions or fundamental premises on which the accounting
process is based. They serve as the foundation or bedrock of accounting in order to avoid
misunderstanding but rather enhance the understanding and usefulness of the financial statements.
Accounting assumptions are also known as postulates.

Underlying assumption:

1. Going Concern Assumption- this assumes that the business has a continuous life of existence
unless there is a specific evidence to the contrary. Since the business is presumed to
continue indefinitely, it values its assets at cost ( or as a going concern), with provisions for
depreciation. The main implications of this concept are the following;
a) The assets of the business is recorded at historical cost and not at their liquidating
or disposable value.
b) Fluctuations in market rates can be ignored.
c) Owners of the business are not interested in stopping and selling the business.

To illustrate, assume the following data: Yssa Laundry Shop acquired a washing machine at
a cost of P30,000 two years ago. The related accumulated depreciation is P6,000. If the
washing machine is disposed, second hand buyers are willing to pay P10,000. The current
replacement cost of a brand new washing machine with the same capacity is P50,000.

As a going concern business, Yssa shall continue to reflect in its books of accounts the
acquisition cost of P30,000 ignoring the disposable value and the current market value.

The valuation adapted in the going concern assumption is based on the accounting
conventions of “objectivity” and “historical cost”.

Objectivity Principle states that accounting records and statements should be based on
reliable data. Reliable data can be confirmed by any independent observer and are therefore
reliable. The objectivity principle also known as reliability principle, also states that

Financial Accounting and Reporting

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accounting records should not be based on whims and opinions that can be subjected to
dispute.

Cost Principle means that assets and services should be recorded based on the actual price
paid.

Implicit assumptions:

2. Accrual Basis- this assumes that the recording of income and expense follow the accrual
basis of accounting. Under the accrual basis, income is recognized when earned regardless
of when received and expense is recognized when incurred regardless of when paid.

In contrast, cash basis of accounting recognizes income only when actual cash is received
and recognizes expenses only when actual cash is paid.

For example, if Dada Welding Shop received an end-of-month telephone bill of P2,000 from
GLOBE, such bill, even if not yet paid, shall be included as part of Dada’s operating expenses
during the period because it has been incurred. Accordingly, the appropriate liability must
also be recorded. On the part of GLOBE, a revenue of P2,000 shall be recognized and the
related receivable must be recorded during the period even if not yet received because of
the fact that the related service has been rendered.

The concept of accrual accounting is established in the revenue and expense recognition
principle.

3. Accounting Entity Assumption- this assumes that the business has a personality that is
separate and distinct from the owner. In practice, therefore, a business must keep its own
record from the point of view of a business and not to be merged with the personal
transactions of the owners.

For instance, Mr. Villanueva owns a trading business. It will be very confusing if all the
information about his personal expenses on food, clothing and holidays are mixed up with
the expenses of running the business. In this case, the accountant will certainly sort out all
of his affairs and show the assets, liabilities and profits of the trading business.

The main purpose of observing the separate entity concept is to properly account the real
transactions of the business in order to report the true and fair picture of the business
financial affairs. The personal transaction of the owner(s) should not be allowed to distort
the financial reports of the business. Hence, it should be observed that economic
transactions engaged into by different entities should be separately accounted for.

Other terms to describe this concept are separate entity concept, entity concept and business
entity concept.

The accounting entity assumption adheres not only to the objectivity convention, but also to
the long accounting convention called “dual aspect” concept, which separates the entity’s
resources from the contribution of creditors and business owners. The dual aspect is also

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known as the “debit-credit aspect”. The accounting equation that is emerged by the
dual=concept is;

Debit Credit
Assets = Liabilities + Capital

A = L + C

The dual-aspect concept is the basic foundation of accounting double entry system, which is
generally used by accountants in recording business transactions and events. Every change
in economic transaction maybe viewed as having two-sided effect to the extent of the same
amount as recorded in accounting books.

4. Monetary Unit Assumption- this includes the assumptions on quantifiability and peso
stability.

Under quantifiability assumption, accountants use a common unit of measurement, i.e.,

money. They use the currency unit of the country they are working in.

If the company has foreign currencies on hand at the time when financial statement is
prepared, the foreign currency should be converted into Philippine peso based on the
prevailing exchange rate at the date of the balance sheet.

Under the peso stability assumption, accountants assume that the monetary unit retains its
purchasing power regardless of fluctuation in money value. In other words, the money used
is stable or constant in value regardless of inflation. Hence, changes in money purchasing
power are generally not accounted for.

This assumption is supported by the application of the principles of historical cost and going
concern concept of accounting.

In line with the International Accounting Standards, however, an exception to the peso
stability assumption is stated in the appraisal accounting for plant assets subject to certain
accounting criteria. The objective of appraisal accounting is to effect relevance.

5. Time –Period Assumption- this states that accountants divide the economic life of the
business into relatively short periods of time normally of equal lengths such as quarterly,
semi-annually or annually to facilitate comparisons of the business’ economic standing and
performance.

It is important to divide the entire economic life of the business into several time periods
because users of financial information need to make decisions at many points in the life of
the business. Thus, when financial report is prepared, it is important to indicate the date
when it was prepared and the time period it covers.

A time period is usually called an “accounting period” which is classified as either (a)
calendar year, (b) fiscal year and (c) interim period.

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A calendar year is a twelve-month period which starts on January 1 and ends on
December 31.

A fiscal year is also composed of twelve months but starts from any month other than
January. Consequently, fiscal year does not end in December of the accounting period.

An interim period is a business period within an accounting period. When financial

statements are prepared even if the twelve-month period is not yet due, the reports are
called interim reports because they are prepared within an interim period. Examples of
interim period are weekly, monthly, quarterly or semi-annual.

Basic Financial Statements

Financial statements are the means by which the information accumulated and processed
in financial accounting is periodically communicated to the users. In other words, the financial
statements are the end product or main output of the financial accounting process

The basic financial statements are:

1. Statement of Financial Position- a formal statement showing the financial position of an

entity as of a particular date. The balance sheet presents the three elements of financial
position, namely assets, liabilities and equity.

2. Income Statement/ Statement of Comprehensive Income- a formal statement showing the

performance of the entity for a given period of time. The performance of the entity is
primarily measured in terms of the level of income earned by the entity through the
effective and efficient utilization of its resources. This income performance used to be
known as the results of operations of the entity.

3. Statement of Changes in Equity- a required basic statement that shows the movements in the
elements or components of the shareholders’ equity

4. Cash Flow Statement -this statement explains the changes of cash and cash equivalents
during an accounting period.

5. Notes to Financial Statements- are used to report information that does not fit into the body
of the statements in order to enhance the understandability of the statements. They provide
additional information and help clarify the items presented in the financial statements.

Elements of Financial Statements

The elements of financial statements refer to the quantitative information shown in the
balance sheet and income statement. They are the means of identifying or classifying the items
affected by transactions and events. The elements directly related to the measurement of financial
position are assets, liabilities and equity. The elements directly related to the measurement of
performance are revenue and expenses.

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1. Assets. Assets are economic resources owned by the business. They include properties and
other things of value the ownership title of which is in the name of the business. Assets can
be grouped into current assets and noncurrent assets.

a. Current assets are those assets which can be reasonably converted into cash within a
short period of time, usually within one accounting period or within the regular
operation of the business or normal operating cycle of business. Regular operation of
the business or normal operating cycle of the business is the period between the
render of service, incase of service concern, to the receipt of cash, and the period
between the acquisition of materials to their conversion into cash, in case of
merchandising and manufacturing concern. The following illustrations show this
process;

Service Concern

Cash

Service rendered Accounts Receivable Cash

Notes Receivable Cash (upon maturity)

Merchandising Concern

Purchase or Selling of goods Cash

Acquisition of Selling of goods AR Cash

Goods or Merchandise Selling of goods NR Cash

Manufacturing Concern

Purchase or Acquisition Manufacturing

of Raw Materials Finished Goods

Selling of FG Cash

Finished Goods Selling of FG AR Cash

Selling of FG NR Cash

The above illustration shows that assets such as Accounts Receivable, Notes Receivable and
Merchandise are considered current assets because they are eventually converted into cash within
the normal operating cycle of the business. Current assets are also used to liquidate current
liabilities. Included here are cash, accounts receivable and notes receivable which are expected to

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First Semester, SY 2025-2026 Page 14
be realized into cash, merchandise inventory which are expected to be sold, and prepaid expenses
which are expected to be used or consumed.

b. Noncurrent assets are those assets which are permanent in nature. Permanent in
such a way that their useful life to the business exceeds beyond one year. These are
used in the operation of the business and not intended for sale. Examples are
building, equipment, furniture and fixtures.

2. Liabilities are debts or obligations of the business to a party other than its owner. There are
two classifications of liabilities: current and noncurrent liabilities.

a. Current liabilities are those which are due for payment within a short period of time
or within one year from the balance sheet date. These obligations require a current
asset for payment. Included here are accounts payable, notes payable, accrued
expenses and unearned income.

b. Noncurrent liabilities are those which mature beyond one year from the balance
sheet date. Examples are mortgage payable, bonds payable and notes payable due
beyond one year.

3. Equity is the “residual interest in the assets of the enterprise after deducting all its
liabilities.” Other terms which can be used synonymously are Capital and Proprietorship.

4. Revenue is the “gross inflow of economic benefit during the period arising in the course of
ordinary activities of an enterprise when those inflows result in increase in equity other
than those relating to contributions from owners.” Simply stated, revenues are inflows of
future economic benefits that increase equity, other than contributions or investments by
owners.

5. Expenses are the “gross outflow of economic benefits during the period in the course of
ordinary activities when those outflows result in decreases in equity, other than those
relating to distribution to owners.” Simply stated, expenses are consumption or outflows of
future economic benefits that decrease equity, other than distributions or dividends paid to
owners.

ASEAN

The Association of Southeast Asian Nations (ASEAN) is a regional grouping that promotes
economic, political, and security cooperation among its ten members: Brunei, Cambodia, Indonesia,
Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam.

The ASEAN Declaration states that the aims and purposes of the Association are: (1) to accelerate
the economic growth, social progress and cultural development in the region through joint
endeavors in the spirit of equality and partnership in order to strengthen the foundation for a
prosperous and peaceful community

THE ACCOUNTANCY PROFESSION

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First Semester, SY 2025-2026 Page 15
At present, Republic Act No. 9298 is the law regulating the practice of accountancy in the
Philippines. This law is known as the Philippine Accountancy Act 2004.

The Board of Accountancy is the body authorized by law to promulgate rules and regulations
affecting the practice of the accountancy profession in the Philippines and responsible for
preparing and grading the Licensure Examination for CPAs.

ACCOUNTING STANDARDS IN THE PHILIPPINES

Accounting has evolved through time changing with the needs of society. As new types of
transactions occur in trade and commerce, accountants develop rules and procedures for recording
them. These accounting rules, procedures and practices came to be known as generally accepted
accounting standards or simply GAAP. The principles have developed on the basis of experience,
reason, custom, usage and practical necessity.

GAAP represent the rules, procedures, practice and standards followed in the preparation and
presentation of financial statements. They are like laws that must be followed in financial reporting.

The overall purpose of accounting standards is to identify proper accounting practices for the
preparation and presentation of financial statements.

In the Philippines, the development of GAAP is formalized initially through the creation of the
Accounting Standards Council or ASC. The Financial Reporting Standards Council or FRSC
now replaces the Accounting Standards Council.

The FRSC is the accounting standard setting body created by the Professional Regulation
Commission upon recommendation of the BOA to assist the BOA in carrying out its powers and
functions provided under R.A. No. 9298.

The approved statements of the FRSC are known as Philippine Accounting Standards or PAS and
Philippine Financial Reporting Standards or FRSC

Ethical Considerations in Accounting and Business

Accounting ethics in the field of accounting refers to the guidelines (consisting of judgments and
moral values) that a professional needs to follow while practicing accounting. Just like the
professionals in the field of medicine or law, an accounting professional also needs to strictly
adhere to the ethics that have become a norm in accounting. The people who receive the services of
an accounting professional not only rely on his skill and ability, but also on his professional
integrity. People using the service of accounting professionals rely on their professional
competency to take decisions and in the process also relies on the ethics followed by them.

The practice of a profession is guided by a set of ethical standards.

Ethics is a term that refers to a code or moral system that provides criteria for evaluating right or
wrong. The Philippine Institute of Accountants has maintained a position encouraging

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First Semester, SY 2025-2026 Page 16
practitioners to perform with professional competence and in conformance with ethical standards.
The reliability of the financial statements rests on the credibility of the one preparing it. His
credibility depends on his personal characteristics such as competency, integrity, objectivity and
independence.

Competency requires one to have adequate knowledge, skills and experience in the practice of his
profession. Integrity is a highly professional characteristic which requires one to be honest and
trustworthy. Objectivity requires one to be fair, to avoid bias and always maintain an impartial
attitude in all matters. Independence in mental attitude requires a practitioner to avoid
compromising relationships that may impair his objectivity. Confidentiality of records is another
ethical consideration which a practitioner should adopt. Social responsibility requires a
practitioner not to engage in activities that will be hazardous to the environment and to the welfare
of the citizens as well.

Specialized Accounting Fields

1. Public Accounting- is composed of individual practitioners, accounting firms and large

multinational organizations that render independent and expert financial services to the
public on a professional fee basis.

a. Auditing- has traditionally been the primary service offered by most public
accounting practitioners. It is an independent verification and examination that
assures fairness of presentation of accounting reports released or submitted to
interested users.

b. Taxation Services- includes the preparation of annual income tax returns and
determination of tax consequences of certain proposed business endeavors.

c. Management Accounting (or MAS)- the accumulation and communication of

information for use by internal parties or management . This includes services to
clients on matters of accounting, finance, business policies, organization procedures,
product costs, distribution and many other phases of business conduct and
operations.

2. Private Accounting- composed of individuals employed in business enterprises on salary

basis to assist management in planning and controlling the enterprise’s operations. This
will include maintaining the records, producing the financial reports, preparing the budgets
and controlling and allocating the costs of the business.

a. Cost Accounting- this helps the management control the expenses and guides the
business in setting up correct prices for the products.

b. Financial Accounting/General Accounting- this deals with the preparation and

interpretation of financial information as reflected in the financial statements.

c. Budgeting- planning business activities in financial terms before they occur.

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First Semester, SY 2025-2026 Page 17
d. Accounting Systems- this deals with the installation of accounting procedures for the
accumulation of financial data: includes designing of accounting forms to be used in
data-gathering.

e. Accounting Education- composed of CPAs who are professors of accounting in

various colleges and universities. Their task is to prepare entrants into the
Accountancy Profession.

3. Government Accounting- composed of accountants employed in the different branches of

government, particularly, the Bureau of Internal Revenue, Commission on Audit, Securities
and Exchange Commission, etc. The focus of government accounting is the custody and
administration of public funds.

Accounting Related to Other Fields

Accounting vs. Auditing

In a broad sense, accounting embraces auditing. Auditing is one of the areas of accounting
specialization. In a limited sense, accounting is essentially constructive in nature. Accounting ceases
when financial statements are already prepared.

On the other hand, auditing is analytical. The work of an auditor begins when the work of an
accountant ends. After the financial statements are prepared, the auditor will begin to perform his
task.

Accounting vs. Bookkeeping

Bookkeeping is the recording, posting, and proving of the financial data. Accounting is the
establishing and maintaining of the entire accounting system, the interpreting of the results of the
recorded data, and the assisting in the management or decision- making aspects of the organization.
Thus, bookkeeping must be completed before accounting can take place

Accounting vs. Accountancy

Broadly speaking, the two terms are synonymous because they both refer to the entire field
of accounting theory and practice.

Technically speaking, however, accountancy refers to the profession of accounting practice

while accounting is used in reference only to a particular field of accountancy such as public
accounting, private accounting and government accounting.

Financial Accounting vs. Managerial Accounting

Financial accounting is primarily concerned with the recording of business transactions and
the eventual preparation of financial statements. Financial accounting focuses on general purpose
reports known as financial statements. These financial statements are intended for internal and
external users.

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First Semester, SY 2025-2026 Page 18
Managerial accounting is the accumulation and preparation of financial reports for internal
use only.

Accounting Information Users and Their Needs

The basic role of accountants is to provide useful economic information to external and internal
decision makers (users ) as explained below:

a. Primary users. These are the parties to whom general purpose financial reports are
primarily directed which include the following:
1) Existing and potential investors. These are concerned with the risk inherent in and
return provided by their investments. They need information to help them
determine whether they should buy, hold or sell, Stockholders are also interested in
information which enables them to assess the ability of the enterprise to pay
dividends.
2) Lenders and other creditors. They are interested in information which enables them
to determine whether their loans and the interest attaching to them will be paid
when due.

b. Other users. These are the parties that may find the general purpose financial reports useful
but the reports are not directed to them primarily which include the following:
1) Employees. Employees and their representatives 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.

2) Customers. Customers have interest in information about the continuance of an

enterprise especially when they have a long-term involvement with, or are
dependent on, the enterprise.

3) Government and their agencies. Government and their agencies are interested in the
allocation of resources and, therefore, the activities of enterprises. They also
require information in order to regulate the activities of the enterprise, determine
taxation policies and as a basis for national income and similar statistics.

4) Public- Entities affect members of the public in many ways For example, enterprises
make substantial contributions 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.

Financial Accounting and Reporting

Prepared by: Elnora V. Adalem, CPA
First Semester, SY 2025-2026 Page 19
Exercises:

1. Forms of Business Organizations

Direction: Check the appropriate box that would identify whether the statement/business
refers to single proprietorship, partnership or corporation.

Single
Proprietorship Partnership Corporation
1. The owner assumes all the risk of
loss.
2. Contribution to a common fund.
3. Owners are called shareholders
4. Professional organizations.
5. Easy transferability of ownership.
6. Ownership is represented by
shares of stocks.
7. One owner but managed by one or
more persons.
̷8. Simplicity and ease of formation.
9. No sharing of profits
10. Profits are divided according to
agreement
11. Complex or more expensive to
organize.
12. Subject to strict government
monitoring.
13. Can be in oral or written
agreement.
14. Stability of existence.
15. Profits are in the form of
dividends
16. Proprietor/proprietress
17. Organization is on the basis of
trust
18. Often difficult to dissolve ̷
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First Semester, SY 2025-2026 Page 20
19. Greater capital ̷
20. Owners have limited liability. ̷

2. Types of Business Organizations

Direction: Cross out the appropriate column that would identify whether the statement/
business refers to service, merchandising, or manufacturing.

Service Merchandising Manufacturing

1. Raw materials converted to
finished products.
2. Boutiques
3. Professional fees
4. Production concern
5. Universities, schools and colleges
6. Shoe-making
7. Absence of inventory
8. Sports club
9. Trading concern
10. Buy and sell
11. Accounting firms
12. Dealers
13. Consultancy firms
14. Driving schools
15. Restaurants, hotels and movie
houses
16. Medical and dental clinics
17. Day care centers
18. Sari-sari stores
19. Printing press
20. Del Monte Philippines, Inc.
21. Shoemart
22. Pharmaceutical Laboratories
23. Service fare
24. Further process
25. Producers/manufacturers

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First Semester, SY 2025-2026 Page 21
3. Presented below is a list of items relating to the concepts discussed in this module, followed by
definitions and examples of those items in scrambled order. Identify the concept described below.

a. Assets d. Revenues
b. Liabilities e. Expenses
c. Equity

1. Debits of the company.

2. Receipts from sale of merchandise.
3. Probable future economic benefits.
4. Inflows of assets from delivering or producing goods, rendering services or other activities.
5. “Things” of value a company has.
6. The residual interest in the assets of an entity that remains after deducting its liabilities.
7. Probable future sacrifices of economic benefits.
8. Outflows or other using up of assets from delivering or producing goods, rendering
services, or carrying out other activities.
9. Costs that have no future value.
10. What the company owes.
11. What the company has less what it owes.
12. The owner’s interest in the company.

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First Semester, SY 2025-2026 Page 22
MODULE II
Analyzing Business Transactions
Time Frame: 3 Hours

Introduction/Rationale

In accounting, the business is always assumed to be distinct and separate from its owner or
owners. Which means that the personal properties of the owner are different from the assets of the
business, liabilities of the business are different from his personal obligations, and the expense incurred
by the business are also different from his personal expenses. The transactions therefore entered into by
the owner in behalf of the business should be recorded in the books of the firm. The data that we record in
the accounting books are called transactions. As stated in Module I, not all transactions are given
accounting recognition. Only those transactions that are quantifiable or can be stated in terms of money
receive accounting recognition.

Specific Objectives

At the end of the topic, the students should be able to:

 Interpret the transaction equation.
 Identify the value received and the value parted with in every transaction

The business operations give rise to business transactions. A business transaction is defined as an
exchange of values. One value is received in return for another value parted with. The term value, as used
in the definition, refers to a thing desirable with money’s worth. The thing of value maybe a form of
property (like land, building, a car, pencil, bond paper, ball pen, etc.) or a right and protection (such as
right to collect, franchise, copyright, etc.)

Transaction Equation: Value Received = Value Parted With

There are two values which must be considered in the analysis of a business transaction. These
two values reciprocate each other in terms of money measurement.

Summary of Service Transactions Analysis

1. Investment- transfer of anything personal to the business

Value received: Name of asset

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First Semester, SY 2025-2026 Page 23
Value given away: Right of ownership

2. Cash receipts- cash coming into the business

a. From a new client
Value received: Money
Value given away: Service rendered

b. From a client previously billed

Value received: Money
Value given away: Right to collect

3. Cash payment- cash going out of the business

a. For the purchase of an asset
Value received: Name of the asset
Value given away: Money

b. For various services

Value received: Name of service received
Value given away Money

c. Old bill previously received

Value received: Promise to pay, oral or verbal
Value given away Money

4. Sale of services
a. For cash
Value received: Money
Value given away Service rendered

b. On credit/ account
Value received: Right to collect
Value given away: Service rendered

5. Purchase of services/ asset

a. For cash
Value received: Name of asset/service
Value given away: Money

b. On credit/account
Value received: Name of asset/service
Value given away: Promise to pay, oral or verbal

6. Withdrawal- anything business taken out for personal reasons, including the rendition of free
services for personal reasons.
Value received: Right of ownership
Value given away Name of asset given away or service
rendered

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First Semester, SY 2025-2026 Page 24
Exercises:

1. The following transactions were completed by a business. Write Yes on the space provided therefore to
indicate if the reciprocal values are to be regarded, or write No if no reciprocal values are to be
considered.

a. Bought for cash a new car, P250,000 from the united Car Company to be used in
the business. _____
b. Hired the services of a stenographer at a monthly salary of P7,000._____
c. Sold for cash the old display cases used in the store, P1,000. _____
d. The proprietor promised to a friend that he would give a special discount to him
if he would buy all his household necessities from our store. _____
e. Paid the office and store payrolls, for the first half of the month, P50,000.
f. Engaged the services of Atty. Diana Villanueva to handle the case against a
delinquent customer for a fee of P3,000.____

g. Purchased for cash stationery and supplies, P920 from Jhamas Marketing._____
h. Received cash, P5,000 from a new tenant on the fourth floor of our building in
payment of three months’ rentals in advance.______
i. The business entered into a contract with the Bayombong Land Development
Co. to rent its building in Solano for use as a warehouse at a monthly
rental of P10,000_____
j. Received cash, P30,000, from the proprietor as additional capital._____

2. Indicate the value received and the value parted for each transaction below:

TRANSACTIONS VALUE RECEIVED VALUE PARTED WITH

1. The owner invested cash to start the
business.
2. Bought tables and chairs for cash.
3. Purchase repair supplies on credit.
4. Paid monthly rental for office space.
5. Borrowed money from the bank.
6. Issued a promissory note to creditor for
supplies bought .
7. Rendered services to various customers

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Prepared by: Elnora V. Adalem, CPA
First Semester, SY 2025-2026 Page 25
on account.
8. Collected the account in No. 7.
9. Received miscellaneous bills.
10. Received cash from various customers
for services rendered to them.
11. Paid the account in No. 3.
12. Received promissory note from a
customer for service rendered to him.
13. Paid salary of employees.
14. The owner withdrew cash from the
business for personal use.
15. Returned defective supplies originally
bought for cash.

3. Give the value received and the value parted with in the following transactions completed by Colette
Cruz, owner of the Cruz Machine Shop, during the month of November, last year by using the following
format illustrated herein below;

Transaction Value Received Value Parted

With
1. Purchased for cash one machinery from Manila
Industrial Machinery Corporation, P200,000.
2. Paid the rent for the month, P6,000.
3. Received cash, P3,000 from Tim Makder as
payment for renting our forklift.

4. Bought on account one welding machine, P12,000.

from Asian Engineering Company,

5. Sold on account one old adding machine, P6,000,

which is used in the business to Kim Tan.

6. Received a bill, P950 from Golden Taxicab Co. for

the use of their taxi-cabs during the first week of
the month by our salesmen which we promised to
pay on the 15th
7. Paid in full our account with Asian Engineering
Company, P12,000.

8. Received cash, P12,500 from Mikko Buen in full

payment of his account with us.

9. Sent our bill, P5,000 to Atlas Consolidated Mining

and Development Company for the repair of one
of their machines, which they promised to pay on
the 20th.

10. Paid in full our account with Golden Taxicab Co.

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First Semester, SY 2025-2026 Page 26
11. Received cash, P3,800 from Colgate-Palmolive
(Philippines), Inc. for repairing their machine.

12. Paid the office and machine shop payrolls for the
first half of the month, P31,000.

13. Purchased supplies, P2,600 from Allison Supply

Co., which we promised to pay next week.

14. Collected in full the account of Atlas Consolidated

Mining and Development Company, P5,000.

15. Purchased for cash gasoline, oils and greases,

P750, used by our delivery truck.

16. Received a jeep, P90,000, from Collette Cruz as

payment for the cost of overhauling our service
truck.

17. Paid cash, P5,000, to Mac Auto Repair Shop as

payment for the cost of overhauling our service
truck.

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First Semester, SY 2025-2026 Page 27