Accounting Lesson 1to 3

Download as pdf or txt
Download as pdf or txt
You are on page 1of 20
At a glance
Powered by AI
Accounting provides financial information to both internal and external users to help make business decisions. It also tracks financial activities and ensures compliance.

Accounting functions include identifying, measuring, recording, classifying, summarizing, communicating and interpreting financial information.

Concepts discussed include the accounting equation, business entity concept, money measurement concept, going concern concept and others.

COURSE TITLE : ACCOUNTING 100

COURSE DESCRIPTION : Introduces the accounting concepts, principles,


and procedures needed in the bookkeeping and financial presentation of single
proprietorships and corporations engaged in service and merchandising
operations. Emphasis is placed upon the principle s that govern the
construction and operation of accounts, which then allow for periodic
analysis, interpretation, valuation and income determination to take place.

COURSE OUTCOMES :
In this course, you should be able to:
1. Provide a basic understanding of the theories, concepts and practices
used in financial accounting.
2. Analyze business transactions.
3. Produce journal entries to prepare three financial statements.
4. Use information from the financial statements in making managerial
decisions.

MODULE 1 - ACCOUNTING AND ITS ENVIRONMENT

Why do we need to study Accounting? So why do we need accounting? Asking


that question of an accountant is like asking a farmer why we need rain. We
need accounting because it’s the only way for business to grow and flourish.
Accounting is the backbone of the business financial world. After all,
accounting was created in response to the development of trade and commerce
during the medieval times.

Accounting is the conscious of the business world. When handled with


care and with respect, it performs as expected. When abuse occurs, and the
system is circumvented or overridden because of dishonesty and greed, it
doesn’t work correctly. Accounting is much like all other systems in place,
they are only as good as the people using them.

Accounting has evolved, as in the case of medicine and law, in response


to the social and economic needs of society. As business and society become
more complex, accounting develops new concepts and techniques to meet the
ever-increasing needs for financial information. Without such information,
many complex economic developments and social programs may never have been
undertaken.

Module 1 will tour you to the basics of accounting.

Module Learning Outcomes:

1. Define accounting and explain its role to business.


2. Describe the fundamental business model and find how it is applied to
the various types of businesses.
3. Distinguish between the different forms and activities of business
organizations.
4. Explain the importance of the purpose and phases of accounting.
5. Explain the fundamental accounting concepts and principles.
6. Identify the internal and external users of accounting information.
7. Identify and discuss the career opportunities open to accountants.

Lesson 1
Basics of Accounting

I. Leaning Outcomes
The learners should be able to:
1. define accounting;
2. describe the nature of accounting;
3. differentiate Bookkeeping and Accounting;
4. explain the functions of accounting in business;
5. illustrate the fundamental business model;
6. differentiate the types of business organizations; and
7. identify the different types of businesses and the activities they are
engaged in.

II. Pre-Assessment

1. Accounting is a process of identifying, recording and communicating


economic information that is useful in making personal decisions.
a. True b.False
2. Micro Enterprises are those with assets, before financing of 3M to
P15M and employ more than nine workers.
a. True b.False
3. Income distribution is the process of allocating rights to the use of
output among groups in the society only.
b. True b.False
4. Profit is one of the economic activities.
c. True b.False
5. Accounting is not a service activity.
a. True b.False
6. Investment is the process of noncurrent inputs to increase the stock
of resources available for output as opposed to immediately consumable
output.
a. True b.False
7. Operating activities are the secondary activities of the enterprise.
a. True b.False
8. A partnership has only one owner.
a. True b.False
9. Bookkeeping refers to the process of recording the accounts or
transactions of an entity.
a. True b.False
10. Accounting is often referred to as a language of business.
a. True b.False
11. The sale of a product or service generated an asset called payable.
a. True b.False
12. Accounting is an art and a perfect science.
True b.False
13. Service a type of business in engaged in buying and selling products.
True b.False
14. A sole proprietorship has two owners.
a. True b.False
15. Accounting serves as an information system for business purposes.
a. True b.False

III. Lesson Map

Economic information that is useful in making


economic decisions
IV. Core Content

ENGAGE

The Business Partners

Once upon a time, there lived a turtle, a monkey, and a snake. 

Mr. Turtle is diligent and has excellent cooking skills but is very shy
and timid. No wonder Mr. Turtle is still single at age 40.

Mr. Monkey is charismatic, has an outgoing personality and has many


friends but sometimes Mr. Monkey can be very trusting. No wonder many girls have
taken advantage of Mr. Monkey in the past.

Mr. Snake is very intelligent and cunning. But unlike Mr. Turtle and Mr.
Monkey, Mr. Snake is cold as ice and lazy. No wonder Mrs. Snake left him.

One day, Mr. Turtle and Mr. Monkey decided to put up a fast food
restaurant. Mr. Turtle was in-charge of the cooking while Mr. Monkey did the
marketing.

When Mr. Snake heard about this, he offered himself to be the business'
cashier and bookkeeper. With his slyness, he was able to make Mr. Turtle and Mr.
Monkey accept him as co-owner of the business for a very minimal amount of
investment.

As skillful and diligent as he is, Mr. Turtle was able to formulate


recipes that never failed to make customers smile. With Mr. Monkey's marketing
skills, the business' customers and market share continued to grow.

After years of operation, the business has gained considerable growth. The
business even received recognition from various organizations for its excellence;
However, Mr. Turtle and Mr. Monkey, the founders of the business, have never
tasted yet the fruits of their labor in monetary terms. They got frustrated,
which eventually led them to cease their operations and call it quits.

----The End----

Question:
What are the factors that contributed to the closure of the business?

EXPLORE

1. In Surigao City, name at least 5 existing businesses engaged in:

a. Service (5 businesses)
_________________________
_________________________
_________________________
_________________________
_________________________

b. Merchandising (5 businesses)
_________________________
_________________________
_________________________
_________________________
_________________________

c. Manufacturing (5 businesses)
_________________________
_________________________
_________________________
_________________________
_________________________

d. Cooperative (5 businesses)
_________________________
_________________________
_________________________
_________________________
_________________________

2. What are the advantages and disadvantages of the different types of


business organizations?

EXPLAIN

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.

“Language of business”

Accounting as science and art

 Accounting is a social science (Fixed, inflexible, organized and


systematic) 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 (Opinionated, flexible and
subjective) which requires the use of creative skill and judgement.

Accounting as an Information System



Accounting identifies and measures economic activities, processes
information into financial reports and communicates these reports to
decision makers.
Economic Activities and their classification
 Production – the process of converting economic resources into outputs
of goods and services that are intended to have greater utility than the
required inputs.

 Exchange – the process of trading resources or obligations for other


resources or obligation.

 Income distribution - the process of allocating rights to the use of


output among individuals and groups in society.

 Consumption – the process of using the final output of the production


process.

 Investment – the process of using current inputs to increase the stock


of resources available for output as opposed to immediately
consumable output.

 Savings – the process by which individuals and groups set aside rights
to present consumption in exchange for rights to future consumption.

BOOKKEEPING AND ACCOUNTING


Although bookkeeping function is part of accounting, bookkeeping and
accounting are not the same.

 Bookkeeping refers to the process of recording the accounts or


transactions of an entity. Bookkeeping normally ends with preparation
of the trial balance. Unlike accounting, bookkeeping does not require
the interpretation of the significance of the information processed.

 Accounting, on the other hand, covers the whole process of


identifying, recording, and communicating information to interested
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

FUNDAMENTAL BUSINESS MODEL AND THE TYPES OF BUSINESSES

For a business to be successful, it needs to develop a product or


service that customers will pay for and thus create a revenue stream. It can
be a new product or service that meets specific needs. It can also be a
better product or service, or, it can be a product or service that offers a
better value proposition. A business requires investments to enable it to pay
for the infrastructure, equipment and personnel. Only after a skillful
combination of these elements can a business generate a revenue stream.

Figure 2.1 illustrate how a business is structured to provide a customer


proposition. The business model is built on five activities:

1. First, the investors provide the required capital for the business.
The cash investment will then be held in a bank account.

2. The cash in the business can be:


 Converted into another type of business of asset that will be
used in the business (e.g. equipment) or sold (e.g. inventory); or
 Spent on operating costs such as salaries, rentals and utilities.

3. The combination of business resources provides the basis for producing


the products or services.

4. The sale of a product or service generates an asset called a


receivable. This asset once collected will produce a cash inflow for
the business.

5. If there’s an existing debt from banks, the cash inflow from


collections will be used to provide the debt providers with interest on
their loans to the company. The rest of the cash can be sent back to
the cycle by being converted into other assets or spent on operating
costs (back to stage 2). In the normal course of business, this whole
process will earn profits on which tax will have to be paid. Any
profit after tax can continue to be reinvested in the cycle or paid out
to the owner’s as a return on their investment.

The model illustrated the way money flows around a business and provides
the basis of accounting. To manage a business effectively it is important
to know how the cash has been spent and how profitable the products or
services have been to the business. The availability of this historic
information helps management to make judgements on how to improve the
performance of a business.

TYPES OF BUSINESS
Although the fundamental business model does not vary, there are
infinite ways of applying it to provide the range of products and services
that make up the business world. However, the range of products and services
can be summarized in seven broad categories, they are as follows:

Type Activity Structure Examples


Selling people’s Hiring skilled  Software
time staff and selling development
Service
their time  Accounting
 legal
Buying and selling Buying a range of Wholesaler
products raw materials and retailer
manufactured goods
and consolidating
Trading/ them, making them
Merchandising available for sale
in locations near
to their customers
or online for
delivery
Designing products, Taking raw vehicle assembly
aggregating materials and using construction
components and equipment and staff engineering
assembling finished to convert them electricity
Manufacturing products into finished goods food and drink
chemicals
media
pharmaceuticals
water
Growing or Buying blocks of farming
extracting raw land and using them mining
Raw Materials
materials to provide raw oil
materials
Selling the Buying and  transport (airport
utilization of operating assets operator, airlines,
infrastructure (typically large trains, ferries,
assets); selling buses)
Infrastructure
occupancy often in  hotels
combination with  telecoms
services  sports facilities
 property management
Receiving deposits, Accepting cash from bank
lending and depositors and investment house
investing money paying them
interest; using the
money to provide
Financial loans to borrowers,
charging them fees
and a higher rate
of interest than
the depositors
receive
Pooling premiums of Collecting cash insurance
many to meet claims from many
of a few customers;
investing the money
to pay the losses
experienced by few
Insurance
customers. By
understanding the
risk accepted and
the likelihood of a
claim can be earned
than claims paid.

FORMS OF BUSINESS ORGANIZATIONS



Sole Proprietorship. This business organization has a single owner
called the proprietor who generally is also manager. It tends to be
small service-type (e.g. physicians, lawyers and accountants) business
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 do not include proprietor’s
personal financial records.

Partnership. A business owned and operated by two or more persons who
bind themselves to contribute money, property or industry to a common
fund, with the intention of dividing the profits among themselves. Each
partner is personally liable for any debt incurred by the partnership,
except limited partner.

Corporation. A business owned by its stockholders. It is an artificial
being created by operation of law, having the rights of succession and
the powers, attributes and properties expressly authorized by law or
incident to its existence. The stockholders are not personally liable
for the corporation’s debt.

Cooperative. A business owned by members. A cooperative is an autonomous
and duly registered association of persons, with a common bond of
interest, who have voluntarily joined together to achieve their social,
economic, and cultural needs and aspirations by making equitable
contributions to the capital required, patronizing their products and
services and accepting a fair share of the risks and benefits of the
undertaking in accordance with universally accepted cooperative
principles.

OWNERS OF BUSINESS ORGANIZATION

Business Owners Equity Section


Organization
Single Proprietor Owner’s Equity
1
Proprietorship
2 or Partners Partner’s Equity
Partnership
more
Shareholder Shareholder’s
5 or s/ Equity/
Corporation
more Stockholder Stockholder’s
s Equity
15 or Members Member’s Equity
Cooperative
more

PURPOSE OF BUSINESS ORGANIZATIONS



Service companies perform services for a fee (e.g. law firms, accounting
and law 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)

MICRO, SMALL AND MEDIUM ENTERPRISES (MSME)


 Micro Enterprises are those with assets, before financing of P 3 million or less
and employ not more than nine (9) workers.
 Small Enterprises are those with assets, before financing of above P 3 million
to P 15 million and employ 10 to 99 workers.
 Medium Enterprises are those with assets, before financing of above P15 million
to P100 million and employ 100 to 199 workers.

ACTIVITIES IN BUSINESS ORGANIZATIONS



Operating Activities are the principal activities of the enterprise.
They are the transactions and events that enter into the determination
of profit and loss. E.g.:
o Sale of services
o Purchase of supplies
o Payment of various expenses like salaries and other benefits to
employees, utilities, taxes and repairs and maintenance,
insurance, transportation and gasoline expense.

Investing Activities are the acquisition and disposal of long-term assets and
other investments. E.g.:
o Purchase of equipment, furniture, automobile and land o Cost of
developing and constructing office or building o Sale of used fixed
assets
o Loans and advances to other parties
o Investments in equity or debt instruments

Financing Activities are activities that result in charges in the size
and composition of the contributed equity and borrowings of the
enterprise.
E.g.:
o Cash proceeds from issuing shares of stocks by a corporation
o Cash proceeds and repayment of bank loans and other long-term
barrowings.

EXTEND

Differentiate the different types of business organizations as to ownership


and formation/registration.

EVALUATE

1-3 The Activities in Business Organizations.


1. ________________________
2. ________________________
3. ________________________

4-13 Who are the users of Accounting Information?


4. ________________________
5. ________________________
6. ________________________
7. ________________________
8. ________________________
9. ________________________
10. __________________________
11. __________________________
12. __________________________
13. __________________________

14-16 What are the criteria for accountable events?


14. __________________________
15. __________________________
16. __________________________

17-22 What are the economic activities and their classifications.


17. __________________________
18. __________________________
19. __________________________
20. __________________________
21. __________________________
22. __________________________

23-25 What are the types of information provided by accounting.


23. __________________________
24. __________________________
25. __________________________

26-30 Define Accounting. (5 Pts)


_______________________________________________________________________
_______________________________________________________________________
_______________________________________________________________________

30-32 Describe the nature of accounting. (2 Pts)


_______________________________________________________________________
_______________________________________________________________________
_______________________________________________________________________

33.34 Differentiate Bookkeeping and Accounting. (2 Pts)


_______________________________________________________________________
_______________________________________________________________________
_______________________________________________________________________

35.36 Explain the functions of accounting in business. (2 Pts)


_______________________________________________________________________
_______________________________________________________________________
_______________________________________________________________________

37.40 Draw the fundamental business model. (4 Pts)

V. Topic Summary
 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.
 The range of products and services can be summarized in seven broad
categories: Service, Trading/Merchandising, Manufacturing, Raw
Materials, Infrastructure, Financial and Insurance.
 Sole Proprietorship. This business organization has a single owner
called the proprietor who generally is also manager. It tends to be
small service-type (e.g. physicians, lawyers and accountants) business
and retail establishments. The owner receives all profits, absorbs all
losses and is solely responsible for all debts of the business.
 Partnership. A business owned and operated by two or more persons who
bind themselves to contribute money, property or industry to a common
fund, with the intention of dividing the profits among themselves. Each
partner is personally liable for any debt incurred by the partnership,
except limited partner.
 Corporation. A business owned by its stockholders. It is an artificial
being created by operation of law, having the rights of succession and
the powers, attributes and properties expressly authorized by law or
incident to its existence. The stockholders are not personally liable
for the corporation’s debt.
 Cooperative. A business owned by members. A cooperative is an autonomous
and duly registered association of persons, with a common bond of
interest, who have voluntarily joined together to achieve their social,
economic, and cultural needs and aspirations by making equitable
contributions to the capital required, patronizing their products and
services and accepting a fair share of the risks and benefits of the
undertaking in accordance with universally accepted cooperative
principles.

VI. Post-Assessment
I. Multiple Choice:
1. This is a process of identifying, recording and communicating economic
information that is useful in making economic decisions.
a. Accounting c. Auditing
b. Bookkeeping d. Marketing

2. Which of the following is not an appropriate description of accounting?


a. Accounting is an information system.
b. Accounting is an exact science rather than an art
c. Accounting is the language of business
d. Accounting is a service activity
3. Which of the following accounting processes comes first ahead of the
others?
a. Interpreting c. Communicating
b. Recording d. Identifying

4. The types of information provided by accounting is/are


a. Quantitative information c. Financial information
b. Qualitative information d. All of the above
5. This essential element of the definition of accounting is the recognition
or non-recognition of business activities as accountable events.
a. Measuring c. Identifying
b. Communicating d. Reporting
6. It is a facet of business that is responsible for building good rapport
with prospective clients and customers
a. Production c. Marketing
b. Management d. Accounting
7. It is a facet of business that is responsible for providing information
that is useful for making economic decisions.
a. Production c. Marketing
b. Management d. Accounting
8. In business, human resource department are involved with
a. Planning c. Staffing
b. Directing d. Organizing
9. He is considered as the father of modern accounting
a. Devin Pascoli c. Fra Luca Pacioli
b. Amatino Manucci d. Jacques Savary
10. The primary responsible for the financial information of an entity are:
a. Stockholders c. Employees
b. Investors d. Management

II. Case

Professor Rodrigo is opening a publishing company to publish and distribute


textbooks throughout the Philippines. He feels this will be a successful
venture because textbooks will be based upon a revolutionary new format of
accounting education. The textbook is updated, well taught, and
comprehensive. Rodrigo has extended an invitation to all his students,
colleagues, and friends to invest in his new business. He is offering shares
for a mere P1,000 each.

Questions:
1. What form of business is Professor Rodrigo proposing?
_______________________________________________________________________

2. Briefly explain the advantages of doing business in such a form.


_______________________________________________________________________
_______________________________________________________________________
_______________________________________________________________________
_______________________________________________________________________
_______________________________________________________________________
VII. References
Ballada, Win and Susan Ballada. (2018). Basic Accounting Made Easy 21st Edition.
Manila: Domdane Publishers and Made Easy Books.
Ballada, Win and Susan Ballada. (2019). Accounting Fundamentals Made East 2019
Issue- 5th Edition.Manila: Domdane Publishers and Made Easy Books.
Lopez, Rafael M. Jr. (2008). Fundamentals of Accounting Millennial Edition. Davao
City: MS Lopez Printing and Publishing.
Ledesma, Ester L. (2014). Financial Accounting Theory Review Booklets. Manila: CRC-Ace
The Professional CPA Review School.
Rante, Gloria Aradaniel. (2013). Accounting for Service Entities. Mandaluyong City:
Millenium Books, Inc.
Ferrer, Rodiel C. and Millan, Zeus Vernon B. (2017). Fundamentals of Accountancy,
Business and Management Part 1. Baguio City: Bandolin Enterprise.

Lesson 2
Fundamental Concepts and Principles of Accounting

I. Learning Outcomes
The learners should be able to:
1. identify the basic purpose of accounting;
2. differentiate Economic Entity versus Business Entity;
3. identify the functions of accounting and the users of accounting
information;
4. explain the varied accounting concepts and principles;
5. solve exercises on accounting principles as applied in various
cases;

II. Pre-Assessment

Audit is the examination or inspection of various books of accounts by an


auditor followed by physical checking of inventory to make sure that all
departments are following documented system of recording transactions. It is
done to ascertain the accuracy of financial statements provided by the
organization.

Question: Who can conduct an audit within an organization? Justify your


answer.

_____________________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________

III. Lesson Map

PURPOSE

UNDERLYING FUNCTIONS
ASSUMPTIONS

Accounting

PRINCIPLES USERS

FUNDAMENTAL
CONCEPTS

Lesson 2 of Module 1 covers the purpose, functions, the fundamental


concepts, the basic principles and the underlying assumptions of
accounting and also discuss on the external and internal users of
accounting information.

IV. Core Content

ENGAGE

INSTRUCTION: Find the ten (10) words related to accounting. The word read
forward, backward, up, down, diagonally, but always in straight line never
skipping letters. Circle the word you find.
A C C R U A L B E T T E R E A M E N T S
S C Y S T E M A B T I C A M L W A Y S T
H A C P P Y B I R C T H D P A Y T O Y O
E X P O E N S E R E D C O L G N I T I O
N P R I U E N C I P L R E O A D E Q U A
T E B C O N S I S T E N C Y A S I S C H
A C T E R T T I S T I C F E G S C A R E
E R O P P I O I R T U N I E H T I E S Y
C O M M E T A N N U A L R S I J C E A P
N D I N D Y U S T G R Y P U B K L I C E
P R A C T I C E T E O D O C I L O T U R
O A S O C A A T H E A R I N E M P A C I
A T A N G J U N A L M A Y E T A U O Z O
O L E E C O N O M I C O B A G A L A Y D
C E A P R A C T I C E Z A H J A N E P I
A L O M A L I S O N D R A U S T R A I C
T E O D O C I O T U O Z O S G T H O N I
L Y I N T H P R A C T I C E E P H I L T
C O M M E T A N N M A T E R I A L I T Y
P R A C T I C E I P P E N S M Y D E A R

EXPLORE

Question: When reporting to Bureau of Internal Revenue annual income tax


return, what annual reporting will be used, Fiscal Year or Calendar Year?
_____________________________________________________________________________
_____________________________________________________________________________

EXPLAIN

BASIC PURPOSE OF ACCOUNTING: To provide quantitative information about


economic entities intended to be useful in making economic decisions.

ECONOMIC ENTITY VS BUSINESS ENTITY



Economic entity – is a separately identifiable combination of persons
and property that uses or controls economic or scarce resources to
achieve certain goals or objectives. Scarce resources have no
significant characteristics.
o Not-for-profit or non-profit entity is one that carries out some
socially desirable needs of the community or its members whose
activities are not directed towards making profit.
o Business entity is an entity that produces and distributes goods or
services primarily for profit.

FUNCTIONS OF ACCOUNTING
recognition
Identification. The accounting
of business activities as
process of recognition or non-
accountable events or whether has
accounting relevance.

One that is quantifiable and has an effect on assets, liabilities


and equity. This also known as economic activity, which is the
subject matter of accounting.

Criteria for accountable event


1. It must affect a financial element of accounting
(increasing or decreasing asset, liability or equity)
2. It is a result of a past activity
3. Its cost can be measured reliably.

Measurement. The accounting process of assigning of peso amounts or
numbers to the economic transactions and events. The unit of measure of
accounting is money, expressed in prices.

Communication. The accounting process of preparing and distributing
accounting reports to potential users of accounting information and
interpreting the significance of this processed information.

o Recording. 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.
o Classifying. The grouping of similar and interrelated items into
their respective classes.

o Summarizing. Putting together or expressing in condensed or brief


form the recorded and classified statements in financial
statements.

USERS OF ACCOUNTING INFORMATION

 Internal Users are those who make decisions directly affecting the
internal operations of the business.

o Managers are directly involved in operation of the business. They


need accounting data to improve the efficiency and effective of
the organization.

o Employees use financial data to assess whether they are receiving


the right compensation and to check if they bargain for higher
remuneration, retirement benefits and employment opportunities.

o Officers, also called as the company executives who are


interested to know if the company is doing well in its operation
so they can plan for possible expansion or branching out to widen
its geographical and demographic market.

o Internal Auditors, there role is to protect and safeguard the


resources of the company against fraud or irregularities.

Fraud - the act of making money by making people believe something which is not true
True.

 External users are individuals or enterprises that have financial


interest in the business but they are not involved in the day
activities of the organization. These are:

o Investors (The providers of risk capital) are interested in


information which enables them to assess the ability of the
enterprise to pay dividends. They need information on whether
they should buy, hold or sell their shares in.

o Lenders are interested in information that enables them to


determine whether their loans, and their interest attaching to
them will be paid when due.

o Suppliers and other trade creditors are interested in information


that enables them to determine whether amount owing to them will
be paid when due.

o Customers are interested in the quality of goods and services


that they are getting from the entity.

o Government and their agencies require information in order to


regulate the activities of the enterprise, determine taxation
policies and as a basis for national income and similar
activities,

o Public are assisted by information through Financial statements


about the trend and recent developments in the prosperity of the
enterprise and the range of its activities.

FUNDAMENTAL CONCEPTS

Entity Concept
The most basic concept in accounting is the entity concept. An
accounting entity is an organization or a section of an organization that
stands apart from other organizations and individuals as a separate economic
unit. Simply put, the transactions of different entities should not be
accounted for together. Each entity should be evaluated separately.

Periodicity Concept
An entity’s life can be meaningfully subdivided into equal time periods
for reporting purposes.

For the purpose of reporting to outsiders, one year is the usual


accounting period. Luca Pacioli, the first author of an accounting text, wrote
in 1494: “Books should be closed each year, especially in a partnership,
because frequent accounting makes for long friendship.”
Calendar Year – starts in January and ends in December.
Fiscal Year – starts in any month and ends after 12 months.

1. Monthly – the period should always be dated at the end of


the respective month.
 January 31
 February 28
 July 31
 August 31
 September 30

2. Quarterly

Fiscal Year Calendar Year


1st Quarter March to May January to March
2nd Quarter June to August April to June
3rd Quarter September to July to September
November
4th Quarter December to October to
February December

For fiscal year: If the business started on March 1, 2018,


the quarters will start on the month it started.

For Calendar Year: if the business started on March 1, 2018,


the quarters will start on January regardless of when the
business started.

3. Semi-annual – an accounting period composed of 6 months reporting.

For Fiscal year: If the business started on March 1, 2018,


the semi-annual reporting are March to August and September
to February.

For Calendar Year: if the business started on March 1, 2018,


the semi-annual reporting are January to June and July to
December.

4. Annual
Fiscal Year – annual reporting that ends other than December
31

Calendar Year – annual reporting that always ends on


December 31

Stable Monetary Unit Concept


The Philippine Peso is a reasonable unit of measure and that its
purchasing power is relatively stable. This is the basis for ignoring
the effects of inflation in the accounting records.

Inflation – a greater increase in the supply of money or credit than in the production
of goods and services, resulting in higher prices and a fall in the purchasing power of
money.
BASIC PRINCIPLES
Accounting practices follow certain guidelines. The set of guidelines and
procedures that constitute acceptable accounting practice at a given time is
GAAP, which stands for generally accepted accounting principles. In order to
generate information that is useful to the users of financial statements,
accountants rely upon the following principles.
Objectivity Principle. Accounting records and statements are based on the most
reliable data available so that they will be as accurate and as useful as
possible. Reliable data are verifiable when they can be confirmed by
independent observers.

Historical Cost. This principle states that acquired asset should be recorded
at their actual cost and not at what management thinks they are worth as at
reporting date.

Actual Cost – the total cost of producing or buying an item, which may
include, e.g. its price plus the cost of delivery or storage.

Revenue Recognition Principle. Revenue is to be recognized in the


accounting period when goods are delivered or services are rendered or
performed.

Expense Recognition Principle. Expenses should be recognized in the accounting


period in which goods and services are used up to produce revenue and not when
the entity pays for those goods and services.
Adequate Disclosure. Requires that all relevant information that would affect
the user’s understanding and assessment of the accounting entity be disclosed
in the financial statements.

Materiality. Financial reporting is only concerned with information that is


significant enough to affect evaluations and decisions. Materiality depends on
the size and nature of the item judged in the particular circumstances of its
omission.

Consistency Principle. The firms should use the same accounting method from
period to period to achieve comparability over time within a single
enterprise. However, changes are permitted if justifiable and disclosed in the
financial statements.

UNDERLYING ASSUMPTIONS

Accrual Basis
Financial Statements are prepared on the accrual on the accrual basis of
accounting and not as cash or its equivalent is received or paid. Under this
assumption, the effects of transactions and other events are recognized when
they occur and they are recorded in the accounting records and reported in the
financial statements of the periods to why they relate.

In short, transactions are recognized when “Revenue as they earned, even not yet
received and; Expenses as they incurred, even not yet paid.
In cash basis accounting, however, does not record a transaction until cash is
received or paid. Generally, cash receipts are treated as revenues and cash payments
as expenses.

Going Concern
Financial statements are normally prepared on the assumption that an
enterprise is a going concern and will continue in operation for a foreseeable
future. It is assumed therefore that the enterprise has neither the intention
nor the need to liquidate its operations.

CHARACTERISTICS

Accountancy qualifies as a profession because it possesses the following


attributes:

 All members of the accountancy profession are Certified Public


Accountants, which means they have earned a Bachelor of Science in
Accountancy (BSA) degree and have passed the CPA Licensure Examinations.
 CPAs have their own body of language. They use terminology peculiar to
the profession (e.g. debits and credits).
 CPAs adhere to a Code of Ethics. This code upholds the CPA’s
responsibility to serve the public with competence and integrity. The
public, in return, expresses its confidence to CPAs by relying on the
financial statements they audit.
 Like other professions, CPAs are members of a national organization, the
PICPA, whose role is to ensure the continued improvement of the
accountancy profession to meet the demands of the times.

CAREER OPPORTUNITIES
The professional accountant is presented with a myriad of opportunities.
The demand for accounting services has increase with the increase in number,
size and complexity of businesses. The accountant may be engaged in any of
the following areas of competence:

1. Public Practice

Accountants who render services on a fee basis and staff accountants


employed by them are engaged in public practice. Public accountants who
practice individually or as members of public accounting firms, should
be certified public accountants (CPAs). They offer their professional
services to the public. Their work includes auditing, taxation,
bookkeeping, taxation and management advisory services.

2. Commerce and Industry

Accountants employed in this area vary widely in their scope of


activities and responsibilities.

Sample entry jobs: financial accounting and reporting Staff,


management accounting staff, tax accounting staff, internal audit
staff, financial analyst, budget analyst, credit analyst, cost
accountant.

Middle-level jobs: comproteller, senior information system auditor,


senior fraud examinaer, senior forensic auditor.

Advanced positons: chief financial officer, chief information officer.

3. Government Service

Accountants may be hires by the following: Congress of the Philippines,


Commission on Audit (COA), Bureau of Internal Revenue (BIR), Department
of Finance (DoF), Department of Budget and Management (DBM), Bangko
Sentral ng Pilipinas (BSP)and the local government units (e.g.
provincial, city or municipal governments).

4. Education/Academe

This area guarantees the continued development of the profession by


endeavoring to clarify and address emerging issues through research and
sharing the results obtained with their colleagues. Considered as
modern day heroes, they make other understand the body of accounting
knowledge. In addition, they painstakingly prepare candidates for the
tough CPA exams. With the advent of information technology, this
sector is being challenged to focus accounting education from the
“transfer of knowledge” approach to the more effective “learning to
learn” approach.

BRANCHES OF ACCOUNTING/AREA OF SPECIALIZATION

1. Financial Accounting. The recording of transactions, preparation of


financial statements and communication of financial information to
external user groups. Focuses on general purpose reports.

2. Auditing. The examination of financial statements by independent


certified public accountant for the purpose of expressing an opinion on
the fairness of presentation of financial statements.

3. Management Accounting. Incorporates cost accounting data and adapts them


for specific decisions which management may be called upon to make. A
management accounting system incorporates all types of financial and
non-financial information from a wide range of sources.

4. Financial Management. Relatively new branch of accounting that has been


grown rapidly over the last 35 years. Financial managers are responsible
for setting financial objectives, making plans based on those
objectives, obtaining the finance needed to achieve the plans, and
generally safeguarding all the financial resources of the entity.

5. Taxation / Tax accounting. Involves the preparation of tax returns and


rendering of tax advice, such as determination of tax consequences of
certain proposed business endeavors.

6. Government Accounting. Accounting for the national government and its


instrumentalities, focusing attention on the custody of public funds and
the purpose or purposes to which such funds are committed.

7. Fiduciary Accounting. Handling of accounts managed by a person entrusted


with the custody and management of property for the benefit of another.

8. Social Responsibility. Reporting of programs and projects that have to


do with the upliftment of the welfare of the people of a community or of
the nation.

9. Environmental Accounting. The area of accounting that focuses on


programs, activities and projects that are focused care for Mother
Earth.

One example of this is carbon accounting such as “Cap and


Scheme”, which is a process of encouraging reductions in
greenhouse gas emissions.

10. Price-level Accounting. Otherwise known as Accounting for


Hyperinflationary Economies – simply defined, is accounting that
recognizes in the financial statements changes in the purchasing power
of money.

EXTEND

What is the accounting period used by NEMCO?


____________________________________________________________________________

EVALUATE

I. Case: Mr. ABC acquired his business for P3 million. The fair market
value of the business is P5 million. Will it be useful if accounting
records were adjusted corresponding to the fair market value amount of
the business? Justify your answer.

II. Essay

1. What is the basic purpose of accounting.


____________________________________________________________________
____________________________________________________________________

2. Differentiate Economic Entity from Business Entity.


____________________________________________________________________
____________________________________________________________________
____________________________________________________________________
3. List the functions of accounting.
____________________________________________________________________
____________________________________________________________________
____________________________________________________________________

4. Who are the users of accounting information.


____________________________________________________________________
____________________________________________________________________
____________________________________________________________________
____________________________________________________________________
____________________________________________________________________
____________________________________________________________________
____________________________________________________________________
____________________________________________________________________
____________________________________________________________________
____________________________________________________________________

5. Explain the varied accounting concepts and principles.


____________________________________________________________________
____________________________________________________________________
____________________________________________________________________
____________________________________________________________________
____________________________________________________________________
____________________________________________________________________
____________________________________________________________________
____________________________________________________________________
____________________________________________________________________
____________________________________________________________________

V. Topic Summary
 The purpose of accounting is to provide quantitative information
about economic entities intended to be useful in making economic
decisions.
 The users of accounting information are: managers, employees,
officers, internal auditors, investors, lenders, suppliers and other
trade creditors, customers, government and other agencies and
public.
 Accounting concepts and principles (assumptions or postulates) are a
set of logical ideas and procedures that guide the accountants in
recording and communicating economic information.
 The most basic concept of accounting is the entity concept.
 An entity’s life is subdivided into equal time periods for reporting
purposes: Monthly, Quarterly, Semi-annually and Annually.
 In accrual basis of accounting, transactions are recognized when
“revenues are earned even not yet received/collected, and expenses
are incurred even not yet paid”.
 Under the going concern assumption, an entity is viewed as
continuing in business for the foreseeable future. General purpose
financial statements are prepared on a going concern basis, unless
management either intends to liquidate the entity or to cease
operations, or has no realistic alternative but to do so.
 Accountancy qualifies as a profession because it possesses the
following attributes:
 All members of the accountancy profession are Certified Public
Accountants, which means they have earned a Bachelor of Science in
Accountancy (BSA) degree and have passed the CPA Licensure
Examinations.
 CPAs have their own body of language. They use terminology
peculiar to the profession (e.g. debits and credits).
 CPAs adhere to a Code of Ethics. This code upholds the CPA’s
responsibility to serve the public with competence and integrity.
The public, in return, expresses its confidence to CPAs by relying
on the financial statements they audit.
 Like other professions, CPAs are members of a national
organization, the PICPA, whose role is to ensure the continued
improvement of the accountancy profession to meet the demands of
the times.

VI. Post-Assessment
Identify the following statements:
1. This refers to a set of logical ideas and procedures that guide the
accountant in recording and communicating economic information.
2. Under this concept, the business is treated separately from its owners.
Therefore, only the transactions of the business are recorded in the
accounting books.
3. Under this concept, the business is assumed to continue to exist for an
indefinite period of time.
4. Under this concept, assets are initially recorded at their acquisition
cost.
5. Under this concept, some costs are initially recognized as assets and
recognized only as expenses when the related revenue is recognized.
6. This concept is an offshoot of the time period concept.
7. Under this concept, the accountant observes some degree of caution when
exercising judgements needed in making accounting estimates under
conditions of uncertainty.
8. Under this concept, the life of the business is divided into series of
reporting period.
9. This concept guides the accountant when applying accounting principles.
10. This concept is related to both concepts of materiality and cost-
benefit.

VII. References

Ballada, Win and Susan Ballada. (2018). Basic Accounting Made Easy 21st Edition.
Manila: Domdane Publishers and Made Easy Books.
Ballada, Win and Susan Ballada. (2019). Accounting Fundamentals Made East 2019
Issue- 5th Edition.Manila: Domdane Publishers and Made Easy Books.
Lopez, Rafael M. Jr. (2008). Fundamentals of Accounting Millennial Edition. Davao
City: MS Lopez Printing and Publishing.
Ledesma, Ester L. (2014). Financial Accounting Theory Review Booklets. Manila: CRC-Ace
The Professional CPA Review School.
Rante, Gloria Aradaniel. (2013). Accounting for Service Entities. Mandaluyong City:
Millenium Books, Inc.
Ferrer, Rodiel C. and Millan, Zeus Vernon B. (2017). Fundamentals of Accountancy,
Business and Management Part 1. Baguio City: Bandolin Enterprise.

You might also like