Fundamentals of Accountancy, Business and Management 1

Lesson 1: Introduction to
AccountingAccounting Four Phases of Accounting
The Committee on Terminology of the
Recording
American Institute of Accountants define
This is technically called bookkeeping. Some
accounting as, “the art of recording,
people confuse bookkeeping and accounting
classifying, summarizing in a significant
as one and the same. However, bookkeeping
manner and in terms of money, transactions
is only a part of accounting – the recording
and events which are in part, at least, of a
phase. In this phase, business transactions
financial character and interpreting the
are recorded systematically and
results thereof.”
chronologically in the proper accounting
books. There are two kinds of bookkeeping:
According to the American Institute of Certified
the single-entry bookkeeping and the double
Public Accountants (AICPA):
entry bookkeeping. Single entry bookkeeping
Accounting is a service activity. Its function
does not show the two-fold effects of
is to provide quantitative information,
business transactions. It shows only the debit
primarily financial in nature, about economic
or the credit of each transaction. The double
entities that is intended to be useful in
entry bookkeeping, however, reflects the
making economic decisions, in making
two-fold effects of business transactions. It
reasoned choices among alternative courses
has a debit and a credit.
of action.

As per American Accounting Association (AAA): Classifying

Accounting is the process of identifying, In this phase, items are sorted and grouped.
measuring and communicating economic Similar items are classified under the same
information to permit informed judgment name. They may be classified as asset
and decision by users of the information accounts, liability accounts, capital accounts,
revenue accounts and expense accounts. This
classification is useful to the needs of the
management.
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 Summarizing Accounting is a means not an end
After each accounting period, data recorded It finds out the financial results and position
are summarized through the financial of an entity and at the same time, it
statements. These reports are submitted to communicates this information to its users.
the management at the end of each The users then take their own decisions on
accounting period or as the need arises. the basis of such information. Accounting is
not an objective as it helps attaining a
Interpreting specific objective.
Usually, due to the technicality of accounting
reports, the accountant’s interpretation on Accounting deals with financial
the financial statement is needed. In this information and transactions
case, analysis reports are submitted It records the financial transactions and
together with the financial statements. date after classifying the same and finalizes
their result for a definite period for
conveying them to their users. It is
Nature of Accounting quantitative in nature and does not deal with
Accounting is a process non-monetary information of non-financial
It performs the specific task of collecting, aspect.
processing and communicating financial
information and in doing so, it follows some Accounting is an information system
definite steps like collection of data As a service function, it collects, processes and
communicates financial information of any entity. This
recording, classification, summarization,
discipline of knowledge has been evolved out to meet the
interpretation including reporting. need of financial information required by different
interested groups.
Accounting is an art and a science
It is an art of recording, classifying, summarizing and Functions of Accounting
interpreting the financial data. It is a behavioral
knowledge involving certain creativity and skill that may in Business
help us to attain some specific objectives. It is also a Accounting is a service activity and has been
systematic method consisting of definite techniques and
called the “language of business.” Accounting terms
its proper application requires applied skill and expertise,
making accounting an art by nature. On the other hand, and concepts are used in statements and reports
it is also a science in a way that there are accounting submitted to interested users such as the owners,
principles that serve as guide in accomplishing data and investors, creditors, government and the business
preparing reports. analysts.
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Through the accounting data prepared, the Accounting Revolution
business communicates to the different interested When medieval Europe moved toward a
parties the results of its operation and its monetary economy in the 13th century,
financial condition. Aside from this, the merchants depended on bookkeeping to
accountant’s opinion and estimation are needed in oversee multiple simultaneous transactions
preparing accounting data and reports. financed by bank loans.
In 1458 Benedetto Cotrugli invented the
Summarizing some of its most double-entry accounting system, which
notable functions follows: revolutionized accounting. Double-entry
1. To maintain full and systematic records of accounting is defined as any bookkeeping
business transactions. system that involves a debit and/or credit
2. To ascertain profit or loss of the business. entry for transactions. Benedetto Cotrugli
3. To depict financial position of the business. wrote Delia Mercatura et del Mercante
4. To serve as an information system that Perfetto (Of Trading and the Perfect
provides reports to users and other Trader), which included a brief chapter which
interested parties about the economic described many of the features of double
activities and condition of a business. entry.
5. To supply information that can be used in
accomplishing data, for managerial reports, Father of Accounting
financial statements, strategic planning and Born in 1445 in Tuscany, Luca Bartolomes
decision-making. Pacioli is known today as the father of
accounting and bookkeeping. He wrote Summa
History of Accounting de Arithmetica, Geometria, Proportioni et
Proportionalita ("The Collected Knowledge of
Early History Arithmetic, Geometry, Proportion, and
The early development of accounting dates to Proportionality") in 1494, which included a 27-
ancient Mesopotamia, and is closely related to page treatise on bookkeeping. His book was
developments in writing, counting and money and one of the first published using the historical
early auditing systems by the ancient Egyptians Gutenberg press, and the included treatise was
and Babylonians dating back as early as 3300 the first known published work on the topic of
to 2000 BC. By the time of the Roman Empire, double-entry bookkeeping. He is an Italian
the government had access to detailed financial mathematician and Franciscan monk who
information. However, modern accounting as a invented a system of record keeping that used
profession has only been around since the early a memorandum, journal, and ledger, wrote
19th century. many books on accounting.
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One chapter of his book, "Particularis de Chartered Accountants
Computis et Scripturis" ("Details of The first professional organizations for
Calculation and Recording"), on the topic of accountants were established in Scotland in
record keeping and double-entry accounting, 1854, starting with the Edinburgh Society of
became the reference text and teaching tool Accountants and the Glasgow Institute of
on those subjects for the next several Accountants and Actuaries. The organizations
hundred years. The chapter educated were each granted a royal charter. Members
readers about the use of journals and of such organizations could call themselves
ledgers; accounting for assets, receivables, "chartered accountants." By 1880, the modern
inventories, liabilities, capital, income and profession of accounting was fully formed and
expenses; and keeping a balance sheet and recognized by the Institute of Chartered
an income statement. Accountants in England and Wales. This
Artist and inventor Leonardo da Vinci were institute created many of the systems by
one of Pacioli's students. Da Vinci illustrated which accountants practice today. The
Pacioli's manuscript De Divina Proportione formation of the institute occurred in large
("Of Divine Proportion"), and Pacioli taught part due to the Industrial Revolution.
da Vinci the mathematics of perspective and As companies proliferated, the demand for
proportionality. reliable accountancy shot up, and the
profession rapidly became an integral part of
the business and financial system.
Organizations for chartered accountants now
have been formed all over the world. In the
U.S., the American Institute of Certified Public
Accountants was established in 1887. In the
Philippines, the professional accountancy body
is called the Philippine Institute of Certified
Public Accounts (PICPA) which was formed in
1929.

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 Fundamentals of Accountancy, Business and Management 1

Lesson 2: The Branches of

Accounting
Financial Accounting Auditing
This involves the systematic recording of
business transactions, governed by a body of External Auditing
Generally Accepted Accounting Principles External auditing refers to the examination
(GAAP) leading to the preparation and of financial statements by an independent
presentation of financial statements for the party with the purpose of expressing an
use of various interested parties, internal as opinion as to fairness of presentation and
well as external. Financial accounting is compliance with GAAP. This is the principal
primarily concerned in processing historical service that a public accountant offers. This
data. General accounting functions are involves carefully examining, testing, and
included here. checking the accuracy of the reports of the
financial data from which these reports
Management Accounting were taken then an opinion will be expressed
on the fairness of the audited reports.
Managerial or management accounting focuses
on providing information for use by internal Internal Auditing
users, the management. This branch deals with
Internal auditing focuses on evaluating the
the needs of the management rather than
adequacy of a company's internal control
strict compliance with generally accepted
structure by testing segregation of duties,
accounting principles. Likewise, it is concerned
policies and procedures, degrees of
with providing financial information to persons
authorization, and other controls
within the organization to enable them to make
informed judgments and effective decisions
implemented by management. This area helps
which further the organization’s goals. This a business zero in on fraud, mismanagement
includes the design, installation, and and waste or identify and control any
improvements of the firm’s general accounting potential weaknesses in its policies or
system. In addition, improving financial planning, procedures.
budgeting, forecasting, cost-analysis, and
inventory control and similar items are included.
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 Tax Accounting Accounting Education
Tax accounting helps clients follow rules set Accounting education can be considered as
by tax authorities. It includes tax planning experience, as practice in learning to learn,
and preparation and filing of tax returns. It and as part of education for business. The
also involves determination of income tax and aim of accounting education is to help
other taxes, tax advisory services such as students learn to become professional
ways to minimize taxes legally, evaluation of accountants. Faculty members of accounting
the consequences of tax decisions, and other in various colleges and universities are
tax-related matters. Certified Public Accountants.

Government Accounting Accounting Research

Government accounting refers to the Accounting research examines how
process of recording and the management of accounting is used by individuals,
all financial transactions incurred by the organizations and government as well as the
government which includes its income and consequences that these practices have.
expenditures. Various governmental Starting from the assumption that
accounting systems are used by various accounting both measures and makes visible
public sector entities to determine how certain economic events, accounting research
resources are being allocated to various has studied the roles of accounting in
projects. organizations and society and the
consequences that these practices have for
Cost Accounting individuals, organizations, governments and
Often times considered as a subset of capital markets.
management accounting, cost accounting
refers to the recording, presentation, and Forensic Accounting
analysis of manufacturing costs. Cost Forensic accounting involves court and litigation
accounting is very useful in manufacturing cases, fraud investigation, claims and dispute
resolution, and other areas that involve legal
businesses since they have the most
matters. This is one of the popular trends in
complicated costing process. Cost
accounting today. Forensic accountants need to
accountants also analyze actual costs versus reconstruct financial data when the records aren’t
budgets or standards to help determine complete. This could be to decode fraudulent data or
future courses of action regarding the convert a cash accounting system to accrual
company's cost management. accounting. Forensic accountants are usually
consultants who work on a project basis.
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 Social Accounting Private Accounting
Social accounting is the process of It is an accounting job done in private
communicating the social and environmental business enterprises and is also known s
effects of organizations' economic actions to Commerce and Industry. The number of
particular interest groups within society and accountants in the firm depends upon the
to society at large. It emphasizes the notion size and the needs of the business. Small
of corporate social accountability. D. business firms may employ only a few
Crowther defines social accounting in this accountants and large business enterprises
sense as "an approach to reporting a firm’s may have a hundred of accountants.
activities which stresses the need for the Accountants in private firms may or may
identification of socially relevant behaviour, not be a Certified Public Accountant.
the determination of those to whom the However, the controller or the head of the
company is accountable for its social department is usually a CPA. Normally
performance and the development of included under this category are Financial
appropriate measures and reporting and General Accounting, Cost Accounting,
techniques. Internal Auditing, Social Accounting and
Research.
Fields of Accounting
Academe
Public Accounting See Accounting Education
It is a professional service rendered by a
Certified Public Accountant and his
employees to the public for a fee. The most
common services offered by a public
accountant includes Auditing, Management
Advisory Services, Tax Services and Financial
Accounting including Bookkeeping Services.

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 Fundamentals of Accountancy, Business and Management 1

Lesson 3: Users of Accounting

Information Accounting information helps owners to
The Different Users of
decide if they should invest any further in
Accounting Information the business or if they should use their
Internal Users financial resources elsewhere in more
Internal users are people within a business promising business ventures. Further, the
organization who use financial information. owners are interested to know whether they
Internal users are the primary users of are getting a fair return of their
accounting. Accounting supplies managers investment.
and owners with significant financial data
that is useful for decision making. This type Managers/Management
of accounting is generally referred to as Managers need accounting information to
managerial accounting. plan, monitor and make business decisions. To
the management, financial information
3 types of internal users and their serves as a measure for making future
information needs: financial decisions and a measure of its
Owners effectiveness.
Management requires accounting
Owners need to assess how well their
information to monitor the performance of
business is performing. Financial statements
business by comparison against past
provide information to owners about the
performance, competitor analysis, key
profitability of the overall business as well as
performance indicators and industry
individual products and geographic segments.
benchmarks.
Owners are also interested in knowing how
Managers rely on accounting data to form
risky their business is. Accounting
their business decisions such as investment,
information helps owners in assessing the
financing and pricing decisions, budgeting,
level of stability in business over the years
forecasting, analysis & take important
and to what extent have changes in
financial decisions, compliance with all
economic factors affected the bottom line of
statutory, regulatory, and any other external
the business.
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body.
 Employees General-purpose financial statements provide
For the employees operating in the finance much of the information needed by external
department, using accounting information is users of financial accounting. These financial
usually part of their job description. This statements are formal reports providing
includes for example preparing and reviewing information on a company’s financial position,
various financial reports such as financial cash inflows and outflows, and the results of
statements. operations.
Employees are interested in knowing how
External users of the accounting information and
well a company is performing as it could its relevance to each are the following:
have implications for their job security and
income. Financial information enables them Creditors or Lenders
to assess the ability of their company to Creditors or lenders use the accounting
provide remuneration and other benefits. information to assess the credit worthiness
Many employees review accounting or find out the ability of the borrower to
information in the annual report just to get repay the loan, the number of assets and
a better understanding of the company’s liabilities of the borrower, evidence of income,
business. economic position, etc. before he or she lends
Moreover, potential employees are also the money to the economic entity.
interested to learn about the financial health Lenders offer loans and other credit
of the organization they aspire to join in the facilities on terms that are based on the
future. assessment of financial health of borrowers.
Good financial health is indicated by the
External Users borrower’s ability to pay its liabilities on time,
External users are people outside the high profitability, substantial securable
business entity who use accounting assets and liquidity, while poor liquidity, low
information. They are also the secondary profitability, lack of assets that can be
users of accounting which may either have a secured and an inability to pay liabilities on
direct or indirect interest in accounting time demonstrate poor financial health of
information. borrowers.
Financial accounting which is the preparation
of the financial reports of the enterprise is
important to the external users of
accounting information.

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 Investors Suppliers
Investors need to know how well their Suppliers need accounting information to
investment is performing. Investors primarily assess the credit-worthiness of its
rely on the financial statements published by customers before offering goods and
companies to assess the profitability, services on credit. Suppliers need accounting
valuation and risk of their investment. information of its key customers to assess
Investors use accounting information to whether their business is in good health
determine whether an investment is a good which is necessary for sustainable business
fit for their portfolio and whether they growth.
should hold, increase or decrease their
investment. Government and other Regulatory Bodies
Investors are the capital providers of a Government defines and monitors accounting
business. Before investing, an investor sees thresholds such as sales revenue and net
the financial report for figuring out the profit to determine the size of each business
possibilities of the business in the future. for the purpose of ensuring that it complies
Financial information is important for an with the relevant employee, consumer and
investor for making sure that the safety regulations.
investment is secure. Government agencies that track and use
taxes are interested in the financial story of
Customers a business. They want to know whether the
Industrial consumers need accounting business is paying taxes according to current
information about its suppliers in order to tax laws. Tax authorities determine whether
assess whether they have the required a business declared the correct amount of
resources that are necessary for a steady tax in its tax returns. Occasionally, tax
supply of goods or services in the future. authorities conduct audits of the tax returns
Continuity in supply of quality inputs is filed by businesses in order to verify the
essential for any business. information with the underlying accounting
Customers are also interested whether the records. (Eg. Bureau of Internal Revenue or
business they are dealing with is viable and BIR).
has a good track record in terms of financial Government ensures that a company’s disclosure
capacity and performance. of accounting information is in accordance with
the regulations that are in place to protect the
interest of various stakeholders who rely on
such information in forming their decisions (Eg.
Securities and Exchange Commission or SEC).
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 Auditors General Public
External auditors examine the financial The general public is also among users of
statements and the underlying accounting accounting information. They are keen to
record of businesses in order to form an know the financial health of a business to
audit opinion. Investors and other get a fair idea of the firm’s niche market,
stakeholders rely on the independent opinion business environment, and economic
of external auditors on the accuracy of atmosphere of the country.
financial statements. Accounting information is also needed in
research and other studies.

Fundamentals of Accountancy, Business and Management 1

Lesson 4: Forms of Business

Organization
The different forms of business Advantages
organizations as to ownership Easiest, simplest, and least costly
business entity to form and operate
Sole
Proprietorship Complete control and flexibility
Easy to form and can begin conducting
Cooperative Business Partnership
Ownership business after registration
All income accrues to the owner
Corporation
Relative freedom from government
control
Sole/Single Proprietorship No income tax on business only on
A form of business organization initiated, owner
organized, owned or capitalized and managed Disadvantages
by a single person. Usually, the owner is also The owner has unlimited liability for all
the manager of the business who usually business debts.
supplies the capital or borrow funds from If the business is sued, the owner is
the banks or other lending institutions. personally liable.
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 The business terminates when the Corporation
owner dies. It is created by operation of law, having the
There is only one owner who is in rights of succession, with rights, powers,
control and in-charge of all attributes authorized by law or incident to
transactions. its existence (Corp code of the Phils. Sec. 3).
Advantages
Partnership
With unlimited life span or a perpetual
It is formed when two or more persons bind
existence (formerly 50 years and is
themselves to contribute money, property or
renewable)
industry to a common fund with the
Owners are protected from personal
intention of dividing the profits among
liability from the company’s obligations
themselves. The owners, called partners,
and debts
agree on the capital contributions,
Has wider options in raising funds
management of the firm, distribution of
Preferred business entity for public
profits and losses, and other matters
companies
pertaining to the operation of the firm.
A corporation can now have just one
Advantages
incorporator (up to a maximum of 15
Easy to maintain as it does not require an
incorporators), creating a new type of
annual or regular meeting
corporate entity which is called One
No income tax on partnership itself and is
Person Corporation (OPC).
not subject to corporate taxes, tax goes to
the individual partners.
Continuity is unaffected by the death
Partners’ rights and duties are defined by of stockholder or transfer of shares.
the partnership agreement. Disadvantages
There are more opportunities to raise More taxation requirements from the
capital viewpoint of both the national income
Disadvantages tax and the local government tax rules.
Individual partner may bear the liability for Formation is more expensive and time
the actions of other partners. consuming than other business entities.
There should be at least 1 partner who must Has a lot of statutory and compliance
have unlimited liability for the debts of the requirements and is highly regulated
firm. which can be costly and burdensome
One of the partners can bind others when (governing bodies, ownership, capital
acting within scope of the business. requirements, free-port zone
There is a possibility of dispute and costly
restrictions, etc.)
litigation for vague partnership contracts.
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 It is not easy to dissolve. Advantages
Limited liability may discourage Open and voluntary membership
creditors. Democratic control
Limited interest on capital
Cooperatives Division of net surplus
A duly registered association of persons, with Tax benefits
a common bond of interest, who have Disadvantages
voluntarily joined together to achieve a lawful Inequality of profits distribution
common social or economic end making Limited capital and flexibility
equitable contributions to the capital Limited profitability
required and accepting a fair share of the
risks and benefits of the understanding in
accordance with universally accepted
cooperative principles.

Fundamentals of Accountancy, Business and Management 1

Lesson 5: Types of Business

According to Activities
The different forms of business Advantages
There is no inventory and no need to
organizations as to nature or activity
manufacture products to sell.
Service Business Skills can be improved and can produce better
service when developed.
This deals with the rendering of services to the
Lower startup cost
customers for a fee and providing intangible Disadvantages
products with no physical form. Service type Services are harder to value or difficult
firms offer professional skills, expertise, advice valuation as service business is harder to value
and other similar products. Examples of service than a manufacturing or retail company.
businesses are tailoring shops, salons, repair There is less demand during economic downturn as
shops, laundry, schools, banks, accounting firms, consumers usually cut back on services and focus
clinics, law firms, BPO (call centers), and others. more on goods manufactured during difficult times.
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Merchandising (or Trading) Business convert them into products, and then sell the
This type of business deals with the buying products to other companies or to the final
of goods and selling the same goods in the consumers. Unlike a merchandising business, a
same form for profit. This type of business manufacturing business buys products with the
buys products at wholesale price and sells intention of using them as materials in making a
the same at retail price. They are known as new product. Thus, there is a transformation of
"buy and sell" businesses. They make profit the products purchased. A manufacturing business
by selling the products at prices higher than combines raw materials, labor, and overhead costs
their purchase costs. A merchandising in its production process. The manufactured goods
business sells a product without changing its will then be sold to customers.
form. Examples of manufacturing companies
Examples are sari-sari stores, department include textile manufacturing firms, steel
stores, groceries, clothing stores, mills, auto manufacturers, clothing
supermarkets, distributors, convenience manufacturers, factories, sardines, shoe-
stores, auto dealerships, online buy and sell making business, cell phone manufacturing
business and other resellers. companies, etc.
Advantages Advantages
Good merchandising attracts There is a continuous demand on
customers. manufactured goods.
It is flexible to changes. Level of inventory for sale can be
More chances of higher profits with planned based on demand and
higher merchandise items to sell production.
Disadvantages Disadvantages
It demands more work and workers. There is a continuous demand on
It needs to manage customer’s manufactured goods. 2. Level of
expectations. inventory for sale can be planned based
It needs to budget expenses for on demand and production.
occasional improvements within the The cost of the manufacturing
store. products highly depends on the price
and availability of the raw materials.
Manufacturing Business It is more costly to operate.
This involves purchase of raw materials and
converting these materials into finished
products. Manufacturers buy materials,
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 Fundamentals of Accountancy, Business and Management 1

Lesson 6: Accounting
Concepts and Principles
What are Accounting Principles? Why are generally accepted accounting
principles needed?
Accounting principles are the general rules
and guidelines that companies are required GAAP aims to regulate and standardize
to follow when reporting all accounts and accountancy practices by providing a
financial data. framework to ensure companies and
organizations are transparent and honest in
Why are accounting principles important? their financial reporting. Accounting
The purpose of having - and following - principles serve as a doctrine for
accounting principles is to be able to accountants’ theory and procedures, in doing
communicate economic information in a their accounting systems.
language that is acceptable and Accounting principles ensure that companies
understandable from one business to follow certain standards of recording how
another. Companies that release their economic events should be recognized,
financial information to the public are recorded, and presented. External
required to follow these principles in stakeholders (for example investors, banks,
preparation of their statements. agencies etc.) rely on these principles to
Depending on the characteristics of a trust that a company is providing accurate
company or entity, the company law and and relevant information in their financial
other regulations determine which accounting statements.
principles they are required to apply. The In the Philippines, the body that sets the
standard accounting principles are accounting standards is the Financial
collectively known as Generally Accepted Reporting Standards Council (FRSC). It was
Accounting Principles (GAAP). GAAP provides established by the Board of Accountancy in
the framework foundation of accounting 2006 by virtue of the Implementing Rules
standards, concepts, objectives and and Regulations of RA 9298 or the Philippine
conventions for companies, serving as a guide Accountancy Act of 2004. FRSC issued the
of how to prepare and present financial accounting standards referred to in the
statements. Philippines today as the generally accepted
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 What are International Financial Reporting The PFRS include all of the following:
Standards (IFRS) and Philippine Financial 1. Philippine Financial Reporting Standards
Reporting Standards (PFRS)? (PFRS) which corresponds to International
Financial Reporting Standards (IFRS)
International Financial Reporting
2. Philippine Accounting Standards (PAS) which
Standards (IFRS)
corresponds to International Accounting
The International Financial Reporting
Standards (IAS)
Standards (IFRS) are pronouncements issued
3. Interpretations of accounting standards
by the International Accounting Standards
issued by the Philippine Interpretations
Board (IASB) that intend to enhance the
Committee in accordance with
comparability of the financial statements of
interpretations of the International Financial
all companies around the world. In light of
Reporting Interpretations Committee (IFRIC)
globalization, the IFRS will provide a way for
and the Standing Interpretations Committee.
users of accounting information to easily
understand the results of operations of
Examples of Accounting Principles:
companies all around the globe.
In the past, the function of the IASB is Accrual Accounting (or Revenue
performed by the International Accounting Recognition Principle)
Standards Committee (IASC). The The fundamental idea of accrual accounting can
pronouncements of the IASC are called be stated as follows: “The effects of business
International Accounting Standards (IAS). Up transactions should be recognized in the period
to this day, the IASB still adheres to the IAS in which they occurred. Income should be
in addition to their own pronouncements— recognized in the period when it is earned
the IFRS. regardless of when the payment is received.
Expenses should be recognized in the period
Philippine Financial Reporting Standards when it is incurred regardless of when the
(PFRS) expenses are paid.”
In accrual accounting, an accountant does not
In the Philippines, the development of accounting
have to wait for cash to be received or for cash
standards being used in the country consider
to be paid before he or she records a business
the pronouncements issued by the USA Financial
transaction. Because of accrual accounting, use
Accounting Standards Board (FASB) and the
of accounts such as accounts receivable,
IASB. We have the Philippine Financial
accounts payable, prepaid expenses, accrued
Reporting Standards Council (FRSC) who issues
expenses, deferred income, and accrued income
standards to be used in the Philippines in the
are possible.
form of Philippine Financial Reporting Standards
(PFRS).
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 Accrual accounting also results in financial But there are items that should also be included
statements that are more accurate and in the Financial Statements which have no exact
more reliable in terms of assessing the past cost for the meantime such as warranties,
performance of the company. Since income doubtful accounts, and cost of litigations. Thus,
is recognized when earned and expenses are these items require the use of accounting
recognized when incurred, financial estimates.
statements for a particular period properly However, the use of accounting estimates
reflect the financial transactions pertaining cannot be abused by an entity by purposely
to that period. overestimating expenses. Some companies
overestimate expenses to decrease net
Matching Principle income and decrease the taxes payable.
The matching principle is closely related to Judgment used in making accounting
accrual accounting. Under the matching estimates should be backed up by a
principle, expenses are recognized in the same reasonable basis. It is more desirable to use
period as the related revenue. Revenues of a less judgment in the accounting process
business always come with expenses. No because the use of judgment leads to more
business can generate revenues without subjective financial statements.
incurring expenses. The matching principle
states that related revenues and expenses Conservatism Principle
should always go together. In other words, if the
Some financial transactions are sometimes
revenues are recorded in January, the related
uncertain (like the warranty expense in the
expenses should also be recorded in January.
previous example) when they will occur.
Nevertheless, we still need to report these
Use of Judgement and Estimates transactions if they pertain to a specific period.
Accounting estimates are approximations made In reporting these transactions, an accountant
by accountants or the management in the needs to apply the concept of conservatism.
preparation of financial statements. The use of When applying the concept of conservatism, an
reasonable estimates is an essential part of the accountant makes sure that income and assets
preparation of financial statements and does are not overstated and liabilities and expenses
not undermine their reliability. Some items in a are not overstated.
company’s accounting records such as cash; In situations where there are two acceptable
property, plant, and equipment (PPE); and solutions for reporting an item, the accountant
accounts payable can be measured precisely. For should ‘play it safe’ by choosing the less
these items that can be measured with favourable outcome. This concept allows
precision, the use of estimates is not required. accountants to anticipate future losses, rather
than future gains.
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 Substance over Form Accounting Entity Assumption (or
Information presented in the financial
Economic Entity Principle)
statements of a company should truthfully and According to the accounting entity assumption,
faithfully represent the financial condition and the business (which can be a sole proprietorship,
financial performance of the company. For this partnership, or corporation) is separate from
to be possible, an accountant should look at the the owners, managers, and employees operating
substance of every financial transaction rather the business. Likewise, if a person owns multiple
than its legal form. businesses, each business is distinct from all the
others. This means that if a person has three
Going Concern Assumption businesses, then each business will keep its own
accounting records. The assets and liabilities of
The going concern assumption states that the
the three businesses should not be mixed with
operations of a business will continue indefinitely
one another.
into the future. This means that the operations
The main purpose of the accounting entity
of a business will not stop in the near future
assumption is for the fair presentation of the
and it will not be forced to liquidate its assets
financial statements of the company. If the
to pay off its liabilities. This allows a business to
personal transactions of owners, managers, and
defer some prepaid expenses (accrued) to future
employees are recognized in the accounting
accounting periods, rather than recognize them
records of the business, the financial
all at once.
statements will not accurately represent the
However, if there is substantial doubt about the
results of operations of the business.
ability of a company to continue as a going
concern, the company can abandon this
Time Period Assumption
assumption. The following items are evidences
that a company is not a going concern: The time period assumption states that the
1. The results of operations consistently show indefinite life of a company can be divided into
losses. periods of equal length for the preparation of
2. Inability to pay the obligations of the company financial reports. Normally, the periods span for
in time one year. Every year, most businesses produce
3. Loan defaults financial reports for the benefit of the users of
4. Suppliers do not sell on credit to the company. accounting information. Still, there are
5. Legal proceedings against the company businesses that produce financial reports on
periods less than or in excess of one year. The
frequency of financial reporting also depends on
the normal operating cycle of a business.

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 The accounting period of a business may be a Materiality principle
calendar year or a fiscal year. A calendar year
An item is considered ‘material’ if it would
is a 12- month period that ends on December 31.
affect or influence the decision of a
A fiscal year is a 12-month period that ends on
any month of the year. Some companies use the reasonable individual reading the company's
fiscal year since the peak of their operations financial statements. This concept states
does not occur in December. that accountants must be sure to include
and report all material items in the financial
Other Accounting Principles statement.

being used:
Monetary unit principle
Consistency principle Businesses should only record transactions
that can be expressed in terms of a stable
The consistency principle states that once
unit of currency.
you decide on an accounting method or
principle to use in your business, you need to
stick with and follow this method throughout Reliability principle
your accounting periods. The reliability principle is used as a guideline
in determining which financial information
Cost principle should be presented in the accounts of a
A business should record their assets, business
liabilities and equity at the original cost at
which they were bought or sold. The real
value may change over time (e.g. depreciation
of assets/inflation) but this is not reflected
for reporting purposes.

Full disclosure principle

Any important information that may impact
the reader’s understanding of a business’s
financial statements should be disclosed or
included alongside to the statement.

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