INTRODUCTION TO ACCOUNTING Solvency – Can the business pay its long-term obligations to

others?
1. DEFINITION
Solvency=NCA/NCL
Accounting StandardCouncil (ASC)
Stability – Can the business sustain its long-term profitability
- “Accounting as a service activity” and cash flow?
- the function of accounting is to provide quantitative
information primarily financial in nature that is Capital Structure – How much borrowed capital and owner’s
intended for decision making (economic decisions) capital are invested in the business?
- as a service activity, accounting intends to supply
financial reports to be used by economic decision Financial Flexibility – Is there excess cash available for
makers investment opportunities and other uncertainties?
- Economic decision making: main reason why
Accounting is also called the “eyes of the business”.
accounting records and reports are prepared.
- in recording of transactions and events, accounting - bookkeeping records as the initial part of accounting
gives importance to the measurement of business activities enable the owner of a business to check on
activities that have monetary value his financial progress

American Institute of Certified Public Accountants (AICPA) accounting records assist the owner to:

- “Accounting as an art”  prepare plans for the future

- it is the art of recording (General Journal), classifying  avoid material mistakes
(General Ledger) and summarizing (Financial  analyze the causes of change
Statements) in a significant manner and in terms of  draw the best choice among economic alternatives
money, transactions and events,
- accounting demands critical thinking and creative Accountants are also economic detectives under the audit
skills function. They
- accountants gather relevant data and convert them
into organized financial reports and draw certain  verify truthfulness of the financial report
economic meanings from them  test the reliability of the financial report
 test fraudulent transactions
American Accounting Association (AAA)  locate accounting errors

- Accounting as a process Purpose

- it is a process of identifying, measuring and
communicating economic information - to help financial users see the true picture of the
- as a process, accounting goes through an accounting business in financial terms
cycle to summarize the repetitive business
In helping financial users make sound economic decisions, it is
transactions into organized and understandable
therefore necessary that the financial reports prepared by the
financial reports
accountants be:
2. NATURE, PURPOSE AND OBJECTIVES
 understandable
Nature  reliable
 relevant
Accounting as the “language of business”.  complete

- it plays an essential role to businessmen. It helps Objectives

them to easily find out needed information anytime to
Overall objective: to provide useful information for economic
answer the following business questions
decision making
Questions about:
Specifically, the objectives are the ff:
Profitability – How much is the increase in capital as a result of
 to ascertain the result of business operation
business operations?
 to ascertain the financial position of the business
Liquidity – Are there available funds to finance the business  to assist financial users in predicting the enterprise’s
operations? financial capacity regarding future cash flows,
financial conditions and results of operation.
Liquidity= CA/CL
3. HISTORY - notable accounting practices were developed such as
mergers, acquisitions and growth of multinational
3600 B.C: Cradle of Civilization corporations

- record-keeping was already common from International Business Transactions & Relationships of
Mesopotamia, China and India to Central and South Government
America
- the oldest evidence of this practice was the “clay - computer-assisted accounting practice and
tablet” - harmonize international accounting and reporting
standard
1339 A.D: Evolvement of Double-Entry System

- the earliest example of this technique are the

Mercantile books of FrerisBonis of Montauban
- the evolution of this accounting system has an Italian
influence in the 13th to 15th century

1340: Massari Ledgers of Commune of Genoa

- the oldest double-entry book entitled “Massari

Ledgers of Commune of Genoa” was written in 1340.
This book was also known as Perfect Double-Entry
Form or the Ledger
- the “Massari Ledgers” are SEPARATE PAGES used
for Debit and Credit

1400’s: Florentine Method or Journal Entries

- the Florentine method double-entry records are

Debits were written OVER Credits

1430’s: Venetian Approach

- the Venetian approach also known as Ledger Posting

of double-entry system in the year 1430’s by Andrea
Barbarigo is perhaps the most famous approach since
merchants that use this method kept their accounts in
bilateral form

1494: Summa de Arithmetica

- Luca Pacioli, an Italian monk and mathematician

wrote Summa de Arithmetica, the first book that was
published containing a detailed chapter of double-
entry bookkeeping
- in this book, Pacioli introduced 3 important books
namely Memorandum Book, Journal Book and Ledger
Book
- through the Venetian method, the double-entry
accounting became known to the world. For this
reason, Luca Pacioli is known as the “Father of
Accounting” even if he’s not an accountant

1950’s: Chart of Accounts

- it contains relevant dynamic information that can be

prepared promptly

1900’s: Global Industrial Economy

 Accounting Process

Phase 1: Analyzing the transaction (IDENTIFYING)

Accountants gather information from source  Payroll sheet- List of salaries paid
documents. Assets equal liabilities plus equity.  Statement of Account- Balances due periodically
given
Economic Activities
Phase Two- JOURNALIZING (Communicating-Recording)
1. Accountable (Monetary)- measurable/transactions with
financial bearing. A journal is a chronological record of transactions as
the “book of original entry.”
2. UnAccountable (Non Monetary) - accounting does not
recognize events that are non financial in nature. It is more efficient to use special journals to record large
number of transaction.
Accountable Classifications
Date Column- Description column- posting reference- Leave 1
• Business transactions- Ordinary business activities blank line between each journal, credit account should be
(Manufacturing) indented.
o Selling
o Purchasing Types of Journal Entries
o Producing
Simple- 1 Debit and 1 Credit elements
Two classifications of Business Transactions
Compound- Two or more elements
External- arm’s length transaction, with
outside party, exchange of resources Accounts- storage units of accounting information and used to
(Payroll, selling service or merchandise, summarize changes in the elements of FS
collection & payment)
Real- (Balance Sheet/Permanent Accounts) Assets,
Internal- takes place within the enterprise.
Liabilities, Equity
(Conversion of raw material to finish goods,
supllies withdrawn, Depreciation)
Nominal-(Income statement/ Temporary Accounts)
• Accounting events- not ordinary/ occasional business
Income and Expense
activities
o Losses due to fortuitous events Classification of Accounts
o Decline in the market value
Operating Cycle- average period of time
Business transactions and accounting events both affect the
basic accounting elements. Current (within the cycle/ actual) Current (working capital)

SOURCE DOCUMENTS- evidence, legal or official papers that  Operating Activities (Current Assets and Liabilities)
supports economic transactions (Documentation)
Non current
Encompasses OBJECTIVITY( free from bias).
VERIFIABILITY (proof)  Investing Activities (Non-current assets)
 Financing Activities (Non-current liabilities)
Examples of Source Documents
Debt Financing and Equity Financing
 Official Receipt- written acknowledgement (proof of
payment) Phase 3 POSTING (Communicating- Classifying)
 Check Voucher- recognize liability and authorize
Check disbursements Posting is transferring data from journal to ledger.
 Petty Cash Voucher- recognize liability authorize (Venetian Approach)
Petty cash fund disbursements.
CONCEPTUAL FRAMEWORK: FINANCIAL REPORTING
 Promissory Note- promise to pay
 Check- negotiable instrument. Payable in demand, Financial Accounting- preparation of financial reports
signed by the maker to payee
 Invoice- itemized statement of merchandise sold. User: Internal and External
 DR/CR Memo- Reduction and Increase of the clients
account. Compliance: Standards
 Deposit Slip- evidence of placing money in the bank (IFRS/GAAP/Conceptual Framework)
 Scope: Business entirely 1. International Financial Reporting Standards (IFRS),
International Accounting Standards (IAS), and IFRS
Period: Historical interpretations originated by the IFRS Interpretations
Committee
Management Accounting- management to plan and evaluates
company’s operations 2. The Conceptual Framework for Financial Reporting;
and
User: Internal only
3. Pronouncements of other standard-setting bodies that
Compliance: no need to comply use a similar conceptual framework (e.g., U.S.
GAAP).
Scope: Detailed and specific
Classification of Users
Period: Future- oriented
Primary- Parties to whom general purpose financial
Conceptual Framework for Financial Reporting- Complete,
reports are primarily directed
Comprehensive and single document promulgated by the
International Accounting Standards Board (IASB). Cannot require reporting entities to provide
information directly to them and therefore musts rely on
An attempt to provide an overall theoretical
general purpose financial reports for the information
foundation for accounting
• Existing and Potential Investors
A summary of the terms and concepts that underlie
the preparation and presentation of financial statements for • Lenders and other Creditors
external users.
Other users- Parties that may find the general purpose
Purposes of Conceptual Framework financial reports useful but the reports are not directed to
them.
The Framework serves as a guide to the FRSC in
developing accounting standards and as a guide to resolving • Employees
accounting issues that are not addressed directly in Philippine
Accounting Standards or Philippine Financial Reporting • Customer
Standards or Interpretations.
• Public
• To assist the FRSC in the development of future
• Supplier
standards and in its review of existing standards
• Government
• To assist the Board in promoting harmonization by
providing a basis for reducing the number of SCOPE OF THE FRAMEWORK
alternative accounting treatments permitted by IFRSs
• The Objective of general purpose financial
• To assist national standard-setting bodies in reporting;
developing national standards such as the PFRS.
• Qualitative characteristics of financial information
• To assist preparers of financial statements in
applying IFRSs • Underlying assumption

• To assist auditors in forming an opinion on whether • The definition, recognition and measurement of
financial statements comply with PFRS the elements of the financial statements

• To assist users of financial statements in interpreting • Concepts of capital and capital maintenance.
the information contained in financial statements
prepared in compliance with IFRSs GENERAL PURPOSE FINANCIAL REPORTS

• To provide those who are interested in the work of  Provide information about the financial position of a
the IASB with information about its approach to the reporting entity,
formulation of IFRSs.  Entity’s economic resources and the claims against
the reporting entity.
This Conceptual Framework is not an IFRS or PFRS and  Provide financial reporting information to users.
hence does not define standards for any particular
measurement or disclosure issue. FINANCIAL REPORTING- the provision of financial
information about an entity to external users that is useful
Review: Authoritative status of Conceptual Framework
 to them in making economic decisions and for To identify the entity’s financial strengths and
assessing the effectiveness of the entity’s management weaknesses

Annual Financial Statements- principal way of providing Help users assess the entity’s
financial information to external users
• Liquidity & Solvency
Minimum times F.S should be prepared- At least
Annually • needs for additional financing

MAJOR FINANCIAL STATEMENTS • How successful it is to be likely to obtain financing

• Statement of financial position, INVESTOR’S PERSPECTIVE

• Statement of comprehensive income 1. All Accounts under Income Statement

2. Equity Amounts & Details
• Statement of cash flows 3. Market Value of Shares
4. Dividend Details
• Statement of changes in equity.
CREDITOR’S PERSPECTIVE
• Notes and Disclosures
• Liability Accounts
OTHER MEANS OF FINANCIAL REPORTING
• Leverage
• Financial highlights
• Asset Accounts
• Supplementary Schedules
METHODS IN ADJUSTING ENTRIES
• Management Forecast
• Assets
• CSR Reports • Liabilities
• Equity
• Government mandated reports • Revenue
• Expenses
OBJECTIVES OF FINANCIAL REPORTING
Accrual Basis- revenues are recognized when earned and
 Provide financial information about the reporting entity
expenses are recognized when incurred
that is useful to existing and potential investors,
lenders and other creditors in making decisions about Cash Basis- revenues are recognized when cash is received
providing resources to the entity. and expenses are recognized when cash is paid
 Why, purpose or goal of accounting
ADJUSTING ENTRIES- To take up accruals, expiration of
LIMITATIONS OF FINANCIAL REPORTING prepayments and deferrals, estimations and other events often
not signaled by new source documents.
• cannot provide all of the information
Adjusting entries are made at the end of each accounting
• not designed to show exact value of a reporting entity period.
– ONLY ESTIMATED
Concepts involved behind adjusting entries
• Users have different needs
ACCRUAL, MATCHING OF COSTS AGAINST
SPECIFIC OBJECTIVES OF FINANCIAL REPORTING REVENUE and ACCOUNTING PERIOD.
• Provide Information useful in making decisions TYPES OF ADJUSTING ENTRIES
about providing resources to the entity
• Deferrals
• Provide Information useful in assessing the cash
flow prospects of the entity • Accruals

• Provide information about entity resources, claims • Estimates

and changes in resources and claims
• Ending Inventory
What is the importance of knowing information about
RESOURCES & CLAIMS? On November 1, 2018. Company A Paid 1-year Insurance for
his building for the amount of ₱ 12,000.00 in cash.
ACCRUAL BASIS (Permanent Account) Income=Understated

Prepayment- Asset Method Net Income= Understated

Prepaid Insurance ₱ 12,000.00

Cash ₱ 12,000.00 CASH BASIS (Nominal)

Adjusting entry: Asset Method (used) Advance Collection- Income Method

Insurance expense ₱ 2,000.00 Cash ₱ 24,000.00

Prepaid Insurance ₱ 2,000.00 Rent Income ₱ 24,000.00

CASH BASIS (Nominal) Adjusting entry: Liability Method (remaining)

Prepayment- Expense Method Rent Income ₱ 18,000.00

Insurance Expense ₱ 12,000.00 Unearned Rent ₱ 18,000.00

Cash ₱ 12,000.00 INCOME METHOD before adjustment

Adjusting Entry; Expense Method (unused) Liabilities=Understated

Prepaid Insurance ₱ 10,000.00 Income=Overstated

Insurance Expense ₱ 10,000.00 Net Income= Overstated

Asset Method before adjustments IFRS/PFRS

Asset = Overstated Two key organizations in development of International

Accounting standards
Expense= Understated
• IOSCO (International Organization of Securities
Net Income= Overstated Commissions)- does not set acc. Standards but
ensures the global markets can operate in an efficient
Expense Method before adjustments and effective manner.
• IASB (International Accounting Standards Board)-
Asset = Understated
develops a single set of International Financial
Expense= Overstated Reporting Standards (IFRS) for general purpose
financial statements. (Mission)
Net Income= Understated
Benefit of a single set of high quality accounting standards
On October 1, 2018. Company A Received Cash of ₱
24,000.00 for a 12 month Rental advance from client. Ensures adequate comparability (Investors make
better decision if they receive financial information comparable
ACCRUAL BASIS (Permanent Account) to international competitor)

Advance Collection- Liability Method INTERNATIONAL STANDARD SETTING STRUCTURE

ORGANIZATIONS
Cash ₱ 24,000.00
1. The IFRS Foundation- appoints member, reviews
Unearned Rent ₱ 24,000.00 effectiveness and helps in the fundraising efforts.
2. The International Accounting Standards Board
Adjusting entry: Liability Method (rendered) 3. The IFRS Advisory Council- provides advice and
counsel to the IASB on major policies and technical
Unearned Rent ₱ 6,000.00 issues.
4. The IFRS Interpretations Committee- assist the IASB
Rent Income ₱ 6,000.00
through the resolution of reporting issues within the
framework of IFRS.
LIABILITY METHOD before adjustment

Liabilities=Overstated
MONITORING BOARD- establish a link between accounting • Soft assets—how to report on intangible assets, such
standard setter and authorities that generally oversee them. as market know-how, market dominance, and well-
Provides legitimacy to overall organization. trained employees.
• Timeliness—how to report more real-time
information.

Philippine Counter Part

1. The Financial Reporting Standards Council (FRSC)
was established by the PRC under the RA 9298 to
Due Process assist the BOA in carrying out its power and function
The IASB due process has the following elements: to promulgate accounting standards in the
(1) an independent standard-setting board overseen by a Philippines.
geographically and professionally diverse body of trustees;
(2) a thorough and systematic process for developing 2. The FRSC’s main function is to establish GAAP in the
standards; Philippines.
(3) engagement with investors, regulators, business leaders,
and the global accountancy profession at every stage of the 3. The FRSC is the successor of the Accounting
process; Standards Council (ASC).
(4) collaborative efforts with the worldwide standard-setting
community. 4. The ASC was created in November 1981 by the
Philippine Institute of Certified Public Accountants
Characteristics of the IASB (PICPA) to establish GAAP in the Philippines.
• Membership- 16 members
• Autonomy.- not part of any organization. 5. The FRSC carries on the decision made by the ASC
• Independence. Full-time IASB members must sever all ties to converge PAS with IAS issued by the International
from their past employer. Accounting Standards Board (IASB).
• Voting- 9 of 16 votes are needed to issue a IFRS. 6. The FRSC monitors the technical activities of the
IASB and invites comments on exposure drafts of
Type of Pronouncements proposed IFRSs as these are issued by the IASB.
The IASB issues three major types of pronouncements: When finalized, these are adopted as Philippine
1. International Financial Reporting Standards. Financial Reporting Standards (PFRSs).
2. Conceptual Framework for Financial Reporting.
3. International Financial Reporting Standards 7. The FRSC similarly monitors issuances of the
Interpretations. International Financial Reporting Interpretations
Committee (IFRIC) of the IASB, which it adopts as
Hierarchy of IFRS Philippine Interpretations–IFRIC.
1. International Financial Reporting Standards (IFRS)
International Accounting Standards(IAS), and IFRS 8. PFRSs and Philippine Interpretations–IFRIC
interpretations originated by the IFRS Interpretations approved for adoption are submitted to the BOA and
Committee PRC for approval.
2. The Conceptual Framework for Financial Reporting; and
3. Pronouncements of other standard-setting bodies that 9. The FRSC formed the Philippine Interpretations
use a similar conceptual framework (e.g., U.S. GAAP). Committee (PIC) in August 2006 to assist the FRSC
in establishing and improving financial reporting
Sources of Pressure
standards in the Philippines. The role of the PIC is
1. Individual companies,
principally to issue implementation guidance on
2. Industry associations,
PFRSs.
3. governmental agencies,
4. practicing accountants,
10. The PIC members are appointed by the FRSC and
5. academicians,
include accountants in public practice, the academe
6. professional accounting organizations, and
and regulatory bodies and users of financial
7. investing public.
statements. The PIC replaced the Interpretations
Challenges of Accounting Profession Committee created by the ASC in 2000.
• Nonfinancial measurement—how to report
significant key performance measurements such as Qualitative Characteristics- qualities or attributes most useful in
customer satisfaction indexes, backlog information making economic decisions
and reject rates on goodspurchased.
Fundamental qualitative characteristics
• Forward-looking information—how to report more
future oriented information. -Content or substance
 1. Relevance- capable of making a difference in the (UNDERSTATEMENT>overstatement)
decisions made by users.
a. Predictive Value- predicting future outcomes Types of Verification
(Dividend, wages, maturing commitment)
b. Confirmatory Value- feedback about 1. Direct- direct observation
previous evaluation 2. Indirect- checking inputs
2. Faithful Representation- represents faithfully what it
Standard of Adequate disclosure
purports to represent
a. Completeness- full disclosure
 All significant and relevant information shall be clearly
b. Neutrality-fairness and freedom from bias
reported.
c. Free from error- no inaccuracies, reduction
 Disclosure and Non disclosure shall not make the
and elimination
financial statement misleading.
Enhancing qualitative characteristics

-Outside form or presentation ACCOUNTANCY LAW

1. Comparability- similarities and differences Republic Act No. 9298-"Philippine Accountancy Act of 2004"
a. Within entity- Horizontal, Intra, Single entity
Section 3. Objectives. - This Act shall provide and govern:
b. Across entity- Dimensional, Inter, two or
more 1. The standardization and regulation of accounting
2. Verifiability- consensus education;
3. Timeliness- providing information in time, available or 2. The examination of registration of certified public
communicated early accountants; and
4. Understandability- comprehensible, presented clearly 3. The supervision, control, and regulation of the
and concisely. practice of accountancy in the Philippines.

Substance over form- Faithful representation INHERENTLY

represents the substance of an economic phenomenon rather
than their legal form. Professional Regulatory Board of Accountancy

ECONOMIC SUBSTANCE>Legal form - under the control of Professional Regulation Commission

Cost constraint- benefit derived from information should Chairman and six (6) members to be appointed by the
exceed the cost. President of the Philippines

BENEFIT>cost The Board shall elect a vice-chairman from among each

members for a term of one (1) year.
Materiality-a.k.a Doctrine of Convenience, practical rule when
items are not significant enough

Factors of Materiality Qualification for PRC

1. Size- total group which item belongs  natural-born citizen and a resident of the Philippines;
2. Nature- inherently material regardless of size  duly registered Certified Public Accountant with at
least ten (10) years of work experience in any scope
Notes to financial statement
of practice of accountancy;
1. Narrative description  good moral character and must not have been
2. Disaggregation of item convicted of crimes involving moral turpitude
3. Other information not qualified for recognition  Must not have any pecuniary interest, directly or
indirectly, in any school, college, university
Financial statement is not

 Slanted
Term of Office- term of three (3) years.
 Weighted
 Emphasized/Deemphasized No person who has served two (2) successive complete terms
 Manipulated shall be eligible for reappointment until the lapse of one (1)
year. Appointment to fill up an expired term is not to be
Conservatism- not part of conceptual framework
considered as a complete term.
-Least effect users prefer
Grounds for Supervision or Removal of Members of the Board-
President

1. Neglect of Duty or incompetence;

2. Violation or tolerance
3. Final judgment of crimes involving moral turpitude;
and
4. Manipulation or rigging of the certified public
accountant's licensure examination results

Scope of Examination
Qualifications of Applicant for Examinations
1. Management Services
1. is a Filipino citizen;
2. Auditing Theory
2. is of good moral character;
3. Theory of Accounts
3. is a holder of the degree of Bachelor of Science in
4. Auditing Problems
Accountancy
5. Business Law and Taxation
4. has not been convicted of any criminal offence
6. Practical Accounting Problem I
involving moral turpitude
7. Practical Accounting Problem II
Candidate must obtain a general average of seventy five
Professional Regulatory Board of Accountancy
percent (75%), with no grade lower than sixty-five percent
(65%) in any given subject. Resolution no. 262, Series of 2015
Any candidate who fails in two (2) complete Certified Public 1. Management Advisory Services
Accountant Board Examinations shall be disqualified from 2. Advanced Financial Accounting and Reporting
taking another set of examinations unless he/she submit 3. Financial Accounting and Reporting
evidence to the satisfaction of the Board that he/she enrolled in 4. Auditing
and completed at least twenty-four (24) units of subject given 5. Regulatory Framework for Business Transaction
in the licensure examination. 6. Taxation
A Professional Identification Card bearing the registration Accounting Assumptions (Postulates)
number date of issuance, expiry date, duly signed by the  Basic notions or fundamental premise on which the
chairperson of the Commission, shall likewise be issued to process is based.
every registrant renewable every three (3) years.  Broad general statements or “rules” and “procedures”
that serve as a guide in the practice of accounting.
Penal Provision. - Any person who shall violate any of the
provisions of this Act or any of its implementing rules and
Objective of Accounting Assumption
regulations as promulgated by the Board subject to the
 Enhance the usefulness of financial statements.
approval of the Commission, shall upon conviction, be
 Serve as the FOUNDATION or BEDROCK
punished by a fine of not less than Fifty Thousand Pesos
(50,000.00) or by imprisonment for a period not exceeding two
Going concern assumptions
(2) years or both.
 Based on this assumption, it is expected that the
Implementing Rules and Regulations. - Within Ninety (90) days business is a continuing concern or that is has an
after the effectivity of this Act, the Board, subject to the indefinite existence.
approval of the Commission and in coordination with the  Assets are recorded as cost.
accredited national professional organization of certified public  Foundation of Cost principle
accountants, shall adopt and promulgate such rules and  ONLY underlying assumption set at the Framework.
regulations to carry out the provisions of this Act and which
shall be effective Fifteen (15) days following their publication in If there is evidence that the entity would experience large
the Official Gazette or in any of the major daily newspaper of losses or subject for termination, GOING CONCERN is
general circulation. ABANDOND.

Effectivity. - This Act shall take effect after Fifteen (15) days INHERENT ASSUMPTIONS OF FINANCIAL STATEMENTS
following its publication in the Official Gazette or in any major Accounting entity assumptions
daily newspaper of general circulation.  A business enterprise is separate and distinct from
the owner or investor/ not be allowed to distort.

Single economic entity- where a parent and subsidiary

relationship exists, there financial statements are
 CONSOLIDATED/ Consolidation- does not eliminate the In the Philippines, the common practice is to present
legal boundary segregating the affiliated entities. current A and L before the non- current. The standard does not
prescribe the order or format.
Time period assumption
 Business life has to be divided into specific time Essential characteristics of assets
intervals called accounting period. 1. The asset provides future economic benefit to the
 ONE YEAR period is traditionally the accounting enterprise for more than one year.
period. 2. The enterprise has the right to obtain and control the
 Calendar Year- 12 months end in Dec. 31 benefit expected from the asset.
 Natural business year- 12 month that ends on any 3. The asset arises from past transactions or event.
month when the business at its lowest or slack 4. The asset is measurable in terms of money.
seasons.
Line Items of the Assets (minimum in the face)
Monetary unit assumption Current Assets- within the operating cycle
 All business transactions are measured and recorded  Cash and cash equivalents
using only one unit of measurement-  Financial asset
MONEY (most practical unit of measuring financial  Trade and other receivables
data), only data measurable in terms of money are  Inventories
recognized and recorded in its books.
 Quantifiability aspect- A, L, E, I, Ex. should be Noncurrent assets- beyond the operating cycle
stated in terms of unit of measure.  Intangible Assets
 Stability of the peso- the purchasing power of the  PPE
peso is stable or constant. Also an amplification of the  Investment Associate (Equity method)
going concern assumptions.  Investment property (Buy for appreciation)
o Exceptions- in today’s economic world,  Biological Asset
stability of the peso is not necessarily valid.  Asset held for sale/ disposal groups

If the entity changes accounting, they should disclose; Essential characteristics of liabilities
 Period covered 1. The liability is the obligation of a particular entity
 Reasons of change 2. The liability is the result of a past transaction or event
 The fact that amounts are not entirely comparable. 3. The liability is the outflows of economic entities
4. The liability can be measured reliably.
Operating Cycle- average period of time required for a
business to make an initial outlay of cash, production of goods, Line Items of Liabilities (minimum in the face)
selling of goods and services. Current Liabilities
 Trade and other payables
Equity- residual interests  Current Tax liabilities
 Deferred Tax (Income Tax)
How to measure wealth- Asset- Liability= Equity (Net Worth)  Provisions (Gift certificate)

Financial statements Noncurrent Liabilities

 These are the end product or main output of the  Financial Liabilities (bonds/ long term)
financial accounting process. Means by which the  Liabilities held for sale
information accumulated and processed in financial  Non controlling interest
accounting.  Share capital reserves (Ordinary/Common &
Preferred Shares)
COMPONENTS OF FINANCIAL STATEMENTS
Statement of Financial position Elements of stockholder’s equity
 Determine the capital structure of the company. A 1. Capital Stock
formal statement showing the financial position or 2. Subscribed capital stock less subscriptions receivable
condition of an enterprise. 3. Additional paid in capital
 Balance Sheet measures Liquidity, Solvency, 4. Revaluation increment in property
Financial Flexibility, Financial Stability 5. Retained earnings
6. Treasury stock
Forms of Statement of Financial Position
1. Report Form- Three major sections in downward Income statement
sequence- ALE  is a formal statement showing the results of
2. Account Form- Assets are shown on the left side operations of an entity for a given period of time.
and the Liabilities and Equity on the right side.  Measures profitability
Forms of Income Statement 
 Functional Presentation- aka Cost of Goods Sold 2. Other Comprehensive Income
Method, classifies expenses according to function:  Items of income and expense not included to
(CGS, DC, AE, OE) profit and loss
 Natural Presentation- aka Nature of Expense  Permitted by the PFRS
Method, expenses are aggregated according to
nature: (Depreciation, Purchase of Raw Materials, Two classifications of OCI
Transportation cost) a) Reclassified to P & L (RA) - debt investments
measured of FVOCI, from derivative contracts of
The Standard (PAS 1) does not prescribe any format cash flow hedge, gains and losses of foreign
operations.
Financial performance of an entity- primarily measured in b) Reclassified to Retained Earnings- used by a
terms of the level of income. corporation (accumulated income or loss)
 Equity investments, revaluation surplus,
Level of Income- earned through effective and efficient re measurement gains and losses,
utilization of its resources. credit risk due to change in fair value
 Results of the operations of an entity (FVPL)
 It is useful in predicting future performance and ability
to generate future cash flows. Usefulness of income statement
 Helps the users to determine the operating
Elements of Financial Performance performance of the business over a period of time.
1. Income- increase economic benefits/ inflow/
appreciation Components of profit and loss
a. Sources of Income 1. Revenue- increases economic benefits
 Sale of Merchandise 2. Expenses- decreases economic benefits
 Rendering of Services 3. Discontinued Operations- operations of a segment of
 Use of Entity Resources a business that has been sold abandoned or
 Disposal of resources other than products otherwise disposed of, is the subject of a formal plan
for disposal.
2. Expense- decrease economic benefits/ outflow/ 4. Extraordinary Items- arise from events of material
depreciation effect that are distinguished by their unusual nature.
a. Components of Expense 5. Cumulative effect of change in accounting principle.
 CGS- direct costs
Period Costs in the Income Statement Two options of presenting comprehensive income
 Distribution cost (Selling, Advertising, and 1. Single statement
delivery of goods to customers) a. Combined statement of P&L and OCI
 Administrative Expense- costs of
administering the business (Bad debts, 2. Two statement
Office salaries, Office supplies used) a. First, Income Statement showing
 Other Expenses- not directly related (Loss components of Profit and Loss
on Investments, Casualty Loss, interest b. Second, Statement of comprehensive
expense) Income beginning with profit and loss +/-
 Income Tax Expense components of OCI

Net Worth- depends on how a person manages their income COGS Manufacturing
BI + COGM – EI
Transaction Approach- concept of deriving financial
performance by recording the income, expenses, gains, losses Cost of Goods Manufactured (COGM)
and net income (loss). TRADITIONAL APPROACH Beg. Raw Materials
Add: Raw Materials Purchased
Comprehensive Income- change in equity during a period ----------------------------------------- DIRECT MATERIAL
from transactions. Raw Material
Deduct: Ending Materials
Parts of CI -----------------------------------------
1. Components of Profit and Loss (Total Income less Raw Materials used in Production
Expense) Direct Labor
 Bottom line in the traditional income Manufacturing Overhead (Indirect Material & Labor)
statement Total Manufacturing Cost
 An entity may use “Net Income” or “Net Add: Beginning Work- in – process
Loss” to describe the profit or loss. Total Cost of Goods in process
 Deduct: Ending Work – in – process
Cost of Goods Manufactured Rights of Assets
 Right to receive cash, goods, or services
(receivables)
COGS Merchandising  Right to exchange economic resources
BI + NP (P+FI+PRA+PD) – EI  Right to benefits from obligation
Within the entity
Beginning Inventory  Right to legal ownership
Add: CGSM  Right to use
-------------------------  Right to sell
Total Goods Available for sale  Right to pledge rights of PPE and Intangible Assets
Less: Ending Inventory
-------------------------- Not all of an entity’s rights are the assets of that entity
Cost of Goods Sold to be assets of the entity; the right must both have the
potential to produce economic benefits.
Manufacturing Costs- costs incurred in the factory or plant
Direct Materials- conveniently traced to a product Probable- change is more likely than less likely
Direct Labor- costs of assembly line workers
Manufacturing Overhead- indirect materials and indirect labor Future economic benefits- do not need to be certain but only
Total Manufacturing Costs- Direct Material + Direct Labor + necessary that the right is existing
MOH
Characteristics of FEB
Distribution cost  Receive contractual cash flows or another economic
 Cost incurred to deliver the product from the resource exchange economic resource with another
production unit to the end user. party on favorable terms
 Produce cash inflows or avoid cash outflows by:
Administrative expenses o Using resource to produce goods
 Costs of operating a business that is not directly o Enhancing the value of assets
attributable to the production of goods or service. o Leasing the assets to other parties
 Can be distributed to owners
Statement of Retained Earnings  Extinguish liabilities by transferring the economic
 Presents net income or net loss as shown in the resource
income statement, and items such as dividends and
adjustments of net income of prior periods. Control- the link of the economic resource to an entity
There is control when;
Statement of Changes in Owners’ Equity o Ability for direct use
 Presents additional investments by owners, o Ability to enforce legal rights
retirement of owners’ interests and other similar o FEB will flow directly or indirectly to the entity
events. (pamana)

Statement of Cash Flows Cost principle- requires that assets should be recorded
 Summarizes the cash receipts and cash payments of initially at original acquisition cost
an enterprise during a period.
Liability recognition principle- can be recognized when:
Recognition- reporting of an asset, liability o Probable
o Measured reliably
4 principles
 Asset recognition principle Obligation- a duty or responsibility that an entity has no
 Liability recognition principle practical ability to avoid
 Income recognition principle
 Expense recognition principle
Three aspects of liability
Assets are recognized 1. Obligation
 It is probable 2. Transfer an economic benefit
 Measures reliably 3. Result of past events

Aspects of Assets Two types of OBLIGATION

 Rights 1. Legal Obligation- legally enforceable as a
 Future Economic Benefits consequence of a binding contract or statutory
 Control requirements
 2. Constructive Obligation- normal business practice
desire to maintain good business relations or act an 3. Dividends- revenue upon declaration (voting rights)
equitable manner.
4. Installation- revenue upon stage of completion
Transfer of an economic resource (Settlement of Liability)
 Payment of cash 5. Subscription revenue- straight line basis over the
 Transfer of non cash assets subscription period
 Provision of services
 Replacement of the obligation with another obligation 6. Admission Fees- when the event takes place
 Conversion of obligation to equity
7. Tuition Fees- the period in which the tuition is
Present obligation as a result of past events provided.
 The entity has already obtain economic benefits
 As a consequence, the entity will transfer economic MEASUREMENT- process of determining the monetary
resource amounts at which the elements of financial statements are to
be recognized
Income- increase in economic benefit
MEASUREMENT BASES-
Revenue- arises from ordinary business activities
1. HISTORICAL
Gains- other items that meet the definition of income (selling of  cash or cash equivalent paid or received
noncurrent asset)  Fair value of the consideration given to
acquire the asset “at the time of the
Income recognition principle- income shall be recognized acquisition”.
when earned.  Aka “PAST PURCHASE EXCHANGE
PRICE” and most commonly adopted.
Two conditions for income to be considered earned Note: Historical cost does not change in value
 Probable FEB will flow to the entity EXCEPT: changes related to:
 Can be measured reliably - Impairment of assets
Point of Sale- legal title to the goods passes to the buyer “the - Onerous Liabilities
risk and rewards” of ownership at point of sale. It is usually the
point of delivery= FOB shipping point/ FOB Destination HISTORICAL COST

Asset
Seller delivery Buyer
CONSIDERATION PAID CONSIDERATION RECEIVED
- goods, ownership, risk and rewards
To acquire To incur
To create To take
4 Exceptions Plus Transaction costs Minus Transaction costs
1. Installment- Revenue is recognized at the point of
collection.
a. Revenue= Gross profit rate * collections TRANSACTION COSTS- Costs that is directly attributable to
the acquisition, issue or disposal of an asset or liability.
2. Cost recovery method- collections are applied first
to cost of merchandise sold EXAMPLES: Legal Fees, Finders Fees,
Transportation cost
3. Percentage of completion method- contract
revenue and contract cost associated with the FAIR VALUE- the price that would be received
construction contract shall be recognized as revenue
 To sell an assets
and expenses respectively.
 Transfer a liability
4. Production Method- revenue is recognized at the In an orderly transaction between market participants
point of production (unrenewable resource, at the measurement date
application to agricultural, forest and mineral
products) PFRS 13, paragraph 72 enumerates the FV hierarchy or best
evidence of fair value
Other income recognition
1. Interest revenue- revenue is recognized on a time  Level 1- inputs “Quoted price in an active market for
proportion that takes into account effective yield on identical assets”
the asset. (p * r * i) o Active Market- transactions take place with
sufficient regularity and volume
2. Royalties- accrual based on agreement
  Level 2- observable inputs “Quoted price in an
inactive market for similar assets or identical”
 Level 3- unobservable inputs “Assets developed by
the entity using best available information from
entity’s own data.

2. CURRENT COST
 the amounts of cash or cash equivalent
would have paid if the same was acquired
currently.
 Aka “Current Purchase exchange price”
3. REALIZABLE VALUE
 the amounts of cash or cash equivalent
could be currently obtained by “selling the
asset” in an orderly disposal
 aka “ Current purchase exchange price”

4. PRESENT VALUE
 The discounted value of the future net cash
inflows that the item is expected to generate
in the normal course of business
 Aka “Future exchange price”

“The Framework does not include concepts or principles for

selecting which measurement basis should be used for
particular elements of financial statements or in particular
circumstances.”