ACCOUNTING is considered by many as a thoroughly systematic profession which can only

be understood by accountants. The world of accounting, just like other professions, is

continuously evolving in order to cope with the changing times. The ever increasing need for
relevant financial information in the decision-making process relies partly on what accounting
has to offer. As a result of the changing and more complex demands of business and society,
new concepts and techniques have been developed to meet the varying needs of the
business industry.

In reality, people practice accounting in the course of their daily living, whether they be the
students trying to budget their allowance, the housewives allocating the budget for the
household expenses, or the heads of the family balancing their checkbook, or estimating
their income and expenses. Accounting is always involved in these processes.

Accounting has always been used in the business environment. It is the systematic process
of measuring and reporting relevant financial information about the activities of an economic
organization or unit. As such, it is called the “language of business.”

The development of nations towards an advance economy led to the opening of interrelated
markets. As businesses continue to expand from the international level to the multinational
level surpassing national boundaries, the world market has become a melting pot of races
transacting business. From the acquisition of raw materials to the production of finished
goods as well as from the procurement of funds to the marketing of products, the world
market is always a preferred showroom of these events. With companies following this trend,
business transactions are becoming more complicated. Hence, on the financial aspect, more
is expected from the accountants. They will have to widen their horizon to cope with the
global trend.

Along with globalization is technological development. Computers have tremendously

increased productivity, efficiency, data collection, storage, and analysis. It has brought many
changes in the field of accounting. Thus, the accountants of the 21st century cannot just sit
down and be left behind. They must go with the flow of globalization unless they want to
stagnate.

Business students must be well equipped. They are expected to meet the demands of the
industry once they graduate. As future managers, they must be able to interpret financial
information and make sound and timely decisions.

To prepare for this huge responsibility, one must be well versed in the business language. It
is for this reason that the module was written. For the students enrolled in the
business/accountancy course, this will serve as their introduction to the world of accounting.

This module aims to give the students a solid foundation in the fundamentals of accounting,
which is an essential foundation in the higher subjects of the course.
 MODULE 1: ACCOUNTING AND ITS ENVIRONMENT

LESSON 1: DEFINITION, IMPORTANCE, PURPOSE AND NATURE OF

ACCOUNTING

DEFINITIONS OF ACCOUNTING

Accounting is a service activity. Its function is to provide quantitative information,

primarily financial in nature, about economic entities that is intended to be useful in
making economic decisions. (Statement of Financial Accounting Standards No. 1, “Basic
Concepts and Accounting Principles, Underlying Financial Statements of Business
Enterprises”)

Accounting is the process of identifying, measuring and communicating economic

information to permit informed judgments and decisions by users of the information.
(American Accounting Association)

Accounting is the art of recording, classifying and summarizing in a significant manner

in terms of money, transactions and events which are, in part at least, of a financial
character, and interpreting the results thereof. (American Institute of Certified Public
Accountants)

Accounting is an information system that measures, processes and communicates

financial information about an identifiable economic entity. (Statement of Financial
Accounting Concepts No. 1, Objectives of Financial Reporting by Business Enterprises”)

Accounting is an information system that measures, processes, and communicates

financial information about a business.

IFAC, 2021 Definition

Accounting is a technical, social and moral practice concerned with the sustainable
utilization of resources and proper accountability to stakeholders to enable flourishing of
organizations, people and nature.” (Carnegie, et. Al, 2020)

Accountants focus on the needs for financial information, whether the decision makers
are inside or outside a business or other economic entity. An economic entity is a unit
that exists independently, such as a business, hospital, or a governmental body.
Accountants supply the information decision makers need to make “reasoned choices
among alternative uses of scarce resources in the conduct of business and economic
activities.” As shown in Exhibit 1, accounting is a link between business activities and
decision makers.
 Accounting measures business activities by recording data about them for
future use.
 The data are stored until needed and then processed to become
useful information.
 The information is communicated through reports to decision makers.
 Based on information from accounting, decision makers take actions that affect
 subsequent business activities

IMPORTANCE OF ACCOUNTING

Why is accounting so important to companies? The answer is that we live in an information

age in which accounting information impacts us all.

Accounting is an information and measurement system that identifies, records, and

communicates an organization’s business activities. Exhibit 1 shows these accounting
functions

Exhibit 1
Accounting Functions

Our most common contact with accounting is through credit checks, checking accounts,
tax forms, and payroll. These experiences focus on recordkeeping, or bookkeeping, which
is the recording of transactions and events. This is just one part of accounting. Accounting
also includes analysis and interpretation of information.

Technology plays a major role in accounting. Technology reduces the time, effort, and cost
of recordkeeping while improving accuracy. As technology makes more information
available, the demand for accounting knowledge increases. Consulting, planning, and
other financial services are closely linked to accounting.

PURPOSE AND PHASES OF ACCOUNTING

The accounting function is part of the broader business system, and does not operate in
isolation. It handles the financial operations of the business but also provides information
and advice to other departments. Business transactions are the economic activities of a
business. Recording these historical events is a significant function of accounting.
Accounts are produced to aid management in planning, control and decision-making and
comply with regulations.
Before the effects of transactions can be recorded, they must be measured. In order that
accounting information will be useful, it must be expressed in terms of a common financial
denominator—money. Money serves as both a medium of exchange and a measure of
value.

To measure a business transaction, the accountant must decide when the transaction
occurred, what value to place on the transaction and how the components of the
transaction should be classified.

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

Summarization of financial data is achieved through the preparation of financial statements

or financial reports. These usually summarize the effects of all business transactions that
occurred during some period. After going through the preceding phases, it is imperative
that the result of the summarization phase be interpreted or analyzed to evaluate the
liquidity, profitability and solvency of the business organization. Accounting provides the
decision-makers with information to make reasoned choices among alternative uses of
scarce resources in the conduct of business and economic activities.

LESSON 2 FORMS OF BUSINESS ORGANIZATION

FORMS OF BUSINESS ORGANIZATIONS

To start a business, a potential owner must have a sufficient amount of capital and must
choose an appropriate form of business organization.

A business assumes one of the three forms of organization. The accounting procedures
depend on which form the organization takes.

SOLE PROPRIETORSHIP

Sole means “single” or “one.” Proprietor means “owner.” A sole proprietorship, therefore, is
a business owned by one person. It is sometimes simply called a proprietorship.

Being a sole proprietor does not mean working alone. Based on the operation’s size and
scope, a sole proprietorship may have many managers and employees. The oldest and
most common form of business organization, the sole proprietorship is the easiest
business form to start. Little or no legal paperwork (forms and documents) is required. The
success or failure of the business depends heavily on the efforts and talent of the owner.

Sole proprietorships tend to be small service-type (e.g. physicians, lawyers and

accountants) businesses and retail establishments.

The owner receives all profits, absorbs all losses and is solely responsible for all debts of
the business. From the accounting viewpoint, the sole proprietorship is distinct from its
proprietor. Thus, the accounting records of the sole proprietorship do not include the
proprietor's personal financial records.
The advantages and disadvantages of organizing as a sole proprietorship are shown in
Figure 1-1

ADVANTAGES DISADVANTAGES

• Easy to set up • Limited expertise

• All profits go to owner • Hard to raise money

• Owner has total control • Owner has all the risks

• Few regulations to follow • Hard to attract talented employees

Figure 1-1

PARTNERSHIP

A partnership is a business owned by two or more persons, called partners, who agree to
operate the business as co-owners.

A partnership is 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. Business partners usually enter into a written,
legal agreement.

This agreement specifies each partner’s investment in money or property, responsibilities,

and percent of profits and losses. Partnerships are often formed when a business needs
more capital than one person can invest.

Each partner is personally liable for any debt incurred by the partnership. Accounting
considers the partnership as a separate organization, distinct from the personal affairs of
each partner.

Partnerships are not always small. For example, partnerships like the large accounting firm
KPMG may have as many as 1,600 partners and more than 18,000 employees.

Figure 1-2 lists some of partnership advantages and disadvantages.

ADVANTAGES DISADVANTAGES

• Easy start up • Risk of partner conflict

• Pooled skills and talents • Shared profits

• More money available • Shared risks

Figure 1-2

CORPORATION
A corporation is 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 debts. The corporation is a
separate legal entity

A corporation is a business recognized by law to have a life of its own. Unlike a sole
proprietorship and a partnership, a corporation must get permission from the government
to operate.

This legal permission, called a charter, gives a corporation certain rights and privileges. It
also spells out the rules under which the corporation is to operate.

Corporations often start as sole proprietorships or partnerships. The business owner(s)

may “incorporate” to obtain money needed to expand.

To raise this money, organizers sell shares of stock to hundreds or even thousands of
people. These shareholders, or stockholders, are the corporation’s legal owners.

Figure 1-3 outlines a few advantages and disadvantages of the corporate form of
organization.

ADVANTAGES DISADVANTAGES

• Easier to raise money • More costs to start

• Easy to expand • More complex to organize

• Easy to transfer ownership • More regulations

• Losses limited to investment • Higher taxes

Figure 1-3

Regardless of their form as a sole proprietorship, partnership, or corporation, all

businesses share common financial characteristics and methods for recording and
reporting financial changes.

PURPOSE OF BUSINESS ORGANIZATIONS or TYPE OF ACTIVITIES PERFORMED

BY A BUSINESS ORGANIZATION

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

SERVICE BUSINESSES

A service company provides a needed service for a fee or perform services for a fee.
Service businesses include travel agencies, salons like Fantastic Sam’s, repair shops, law
firms, accounting and audit firms, stock brokerage, beauty salons, recruitment agencies
and medical centers.
MERCHANDISING BUSINESSES

A merchandising business buys finished products and resells them to individuals or other
businesses. Merchandising companies purchase goods that are ready for sale and then
sell these to customers. Examples are 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).

LESSON 3: FUNDAMENTAL ACCOUNTING CONCEPTS AND PRINCIPLES

FUNDAMENTAL CONCEPTS

Several fundamental concepts underlie the accounting process. In recording business

actions, accountants should consider the following:

1. 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. For accounting purposes, a business organization is a separate
entity, distinct not only from its creditors and customers but also from its owners. It should
have its own set of financial records, and its records and reports should refer only to its
own affairs.

For example, Just Because Flowers Company should have a bank account separate from
the account of Molly, the owner. Molly may own a home, a car, and other property, and she
may have personal debts; but these are not the resources or debts of Just Because
Flowers. Molly may own another business, say a stationery shop. If she does, she should
have a completely separate set of records for each business.

2. Periodicity Concept. An entity's life can be meaningfully subdivided into equal time
periods for reporting purposes. The life of a company can be divided into time periods,
such as months and years, and useful reports can be prepared for those periods. It will be
aimless to wait for the actual last day of operations to perfectly measure the entity's profit.
This concept allows the users to obtain timely information to serve as a basis on making
decisions about future activities.

For the purpose of reporting to outsiders, one year is the usual accounting period.
3. Stable Monetary Unit Concept. The Philippine peso is a reasonable unit of measure
and that its purchasing power is relatively stable. It allows accountants to add and subtract
peso amounts as though each peso has the same purchasing power as any other peso at
any time. This is the basis for ignoring the effects of inflation in the accounting records.

4. Going Concern. Financial statements are normally prepared on the assumption that
the reporting entity is a going concern and will continue in operation for the foreseeable
future. Accounting information presumes that the business will continue operating instead
of being closed or sold. This means, for example, that property is reported at cost instead
of liquidation value. Hence, it is assumed that the entity has neither the intention nor the
need to enter liquidation or to cease trading. This assumption underlies the depreciation of
assets over their useful lives.

CRITERIA FOR GENERAL ACCEPTANCE OF AN ACCOUNTING PRINCIPLE

To ensure that financial statements are understandable to their users, a set of generally
accepted accounting principles (GAAP) has been developed to provide guidelines for
financial accounting. “Generally accepted accounting principles encompass the
conventions, rules, and procedures necessary to define accepted accounting practice at a
particular time.” In other words, GAAP arises from wide agreement on the theory and
practice of accounting at a particular time. These “principles” evolve to meet the needs of
decision makers, and they change as circumstances change or as better methods are
developed.

Accounting principles are established by humans. Unlike the principles of physics,

chemistry, and the other natural sciences, accounting principles were not deduced from
basic axioms, nor can they be verified by observation and experiment. Instead, they have
evolved. This evolutionary process is going on constantly; accounting principles are not
eternal truths. The general acceptance of an accounting principle usually depends on how
well it meets three criteria: relevance, objectivity and feasibility.

A principle has relevance to the extent that it results in information that is meaningful and
useful to those who need to know something about a certain organization.

A principle has objectivity to the extent that the resulting information is not influenced by
the personal bias or judgment of those who furnish it. Objectivity connotes reliability and
trustworthiness. It also connotes verifiability, which means that there is some way of finding
out whether the information is correct.

A principle has feasibility to the extent that it can be implemented without undue
complexity or cost. These criteria often conflict with one another. In some cases, the most
relevant solution may be the least objective and the least feasible.

BASIC PRINCIPLES

In order to generate information that is useful to the users of financial statements,

accountants rely upon the following principles:
1. 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. Ideally,
accounting records are based on information that flows from activities documented by
objective evidence. Without this principle, accounting records would be based on whims
and opinions and is therefore subject to disputes.

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

The cost principle (or historical cost principle) dictates that companies record assets at
their cost. This is true not only at the time the asset is purchased, but also over the time
the asset is held. For example, if Ayala Land purchases land for ₽30,000,000 the company
initially reports it in its accounting records at ₽30,000,000. But what does Ayala Land do if,
by the end of the next year, the land has increased in value to ₽40,000,000? Under the
cost principle it continues to report the land at ₽30,000,000.

3. Revenue Recognition Principle. Revenue is to be recognized in the accounting period

when goods are delivered or services are rendered or performed.

Revenue is recognized (1) when goods or services are provided to customers and (2) at
the amount expected to be received from the customer. Revenue (sales) is the amount
received from selling products and services. The amount received is usually in cash, but it
also can be a customer’s promise to pay at a future date, called credit sales. (To recognize
means to record it.)

4. 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. A company records the expenses it incurred to
generate the revenue reported. An example is rent costs of office space.

5. 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. A company reports the details behind financial statements that would impact
users’ decisions. Those disclosures are often in notes to the statements.

6. 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. In deciding whether an item
or an aggregate of items is material, the nature and size of the item are evaluated
together. Depending on the circumstances, either the nature or the size of the item could
be determining factor.
7. 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.

LESSON 4: ROLE OF ETHICS IN BUSINESS AND ETHICAL FINANCIAL REPORTING

ROLE OF ETHICS IN BUSINESS

Ethics is concerned with right and wrong and how conduct should be judged to be good or
bad. It is about how we should live our lives and, in particular, how we should behave
towards other people. It is therefore relevant to all forms of human activity.

Business ethics tells what is right or wrong in a business situation, while professional
ethics tells the same thing regarding a profession. Ethical conflicts can arise, however,
when what might be best for the company is wrong morally or professionally.

Sometimes professional or personal ethics may conflict with business ethics. From the
business standpoint, staffs are paid to further their employer's interests. But the staff also
has professional and personal ethics to uphold. Here are some difficult sample situations:

 To remain competitive, a company decided to use cheaper lumber in the ladders it

sells; although this may, in some instances, cause injury.
 A staff is asked to take part in an underground investigation of the personal life of an
employee.
 A superior directs a subordinate not to hire a qualified individual because he is "not his
(superior's) type".
 A human resource manager must lay off a staff that desperately needs the income and
the staff is without any good alternative job option.
 Having privileged or insider information which can surely help the trusted staff earn a
significant amount of money from the stock market.

ETHICAL FINANCIAL REPORTING

For information to be useful, it must be trusted. This demands ethics in accounting. Ethics
are beliefs that separate right from wrong. They are accepted standards of good and bad
behavior. Accountants face ethical choices as they prepare financial reports. These
choices can affect the salaries and bonuses paid to workers. They even can affect the
success of products and services. Misleading information can lead to a bad decision that
harms workers and the business.

There is an old saying: Good ethics are good business.

Ethics is a code of conduct that applies to everyday life. It addresses the question of
whether actions are right or wrong. Actions—whether ethical or unethical, right or wrong—
are the product of individual decisions. Thus, when an organization uses false advertising,
cheats customers, pollutes the environment, or treats employees unfairly, the management
and other employees have made a conscious decision to act in this manner.

Ethics is especially important in preparing financial reports because users of these reports
must depend on the good faith of the people involved in their preparation. Users have no
other assurance that the reports are accurate and fully disclose all relevant facts.
The intentional preparation of misleading financial statements is called fraudulent
financial reporting. It can result from:

 Distortion of records (e.g., the manipulation of inventory records)

 Falsified transactions (e.g., fictitious sales)

 Misapplication of various accounting principles

There are a number of motives for fraudulent reporting—for instance, to cover up financial
weakness to obtain a higher price when a company is sold; to meet the expectations of
investors, owners, and financial analysts; or to obtain a loan. The incentive can also be
personal gain, such as additional compensation, promotion, or avoidance of penalties for
poor performance.

Whatever the motive for fraudulent financial reporting, it can have dire consequences, as
the accounting scandals at Enron Corporation and WorldCom in 2001 and 2002,
respectively, attest. Unethical financial reporting and accounting practices at those two
major corporations caused thousands of people to lose their jobs, their investment
incomes, and their pensions. They also resulted in prison sentences and fines for the
corporate executives who were involved. In response to these scandals, the Sarbanes-
Oxley Act of 2002 regulates financial reporting of public companies and their auditors.
This legislation requires chief executives and chief financial officers of all publicly traded
companies to swear that, based on their knowledge, their quarterly statements and annual
reports filed with the Securities and Exchange Commission (SEC) are accurate and
complete. Violation can result in criminal penalties. Management expresses its duty to
ensure that financial reports are not false or misleading in the management report that
appears in the company’s annual report.

For example, in its management report, Target Corporation makes the following statement:
Management is responsible for the consistency, integrity, and presentation of the
information in the Annual Report.

However, it is accountants, not management, who physically prepare and audit financial
reports. They must apply accounting concepts in such a way as to present a fair view of a
company’s operations and financial position and to avoid misleading the readers of their
reports. Accountants have a responsibility—not only to the profession but also to
employers, clients, and society as a whole—to ensure that their reports provide accurate,
reliable information. The historically high regard for the accounting profession is evidence
that most accountants have upheld the ethics of the profession.

Committing fraud is certainly an illegal act usually perpetrated by senior management. It

shows that the people involved in these acts had a serious lack of ethical awareness and
ethical conscience. New laws, regulations and standards were passed to address the
problems. Ethics and corporate governance suddenly became the big thing. Business
schools immediately faced the challenges squarely by revising and including business
ethics and governance in their curriculum.

Sarbanes-Oxley Act

In the United States of America, the Sarbanes-Oxley Act (or SOX), passed on July 30,
2002 is the most far-reaching attempt to protect investors since President Franklin Delano
Roosevelt's 1933 Securities Act following the Great Depression. The law applies to all
companies that are required to file periodic reports with the US SEC. This Act is significant
because of its international dimension. Around 1,500 non-US companies, including many
of the world's largest, list their shares in the US.

SOX is a legislation which resulted from the widespread disillusionment about corporate
integrity. The law shifts responsibility for financial probity and accuracy to the board's audit
committee. It also requires appointment of independent directors, increased financial
statement disclosures, an internal code of ethics, among others.

Code of Corporate Governance

On April 5, 2002, the Securities and Exchange Commission of the Philippines issued
Memorandum Circular No. 2 otherwise known as the Code of Corporate Governance. The
Code of Ethics for Professional Accountants in the Philippines was recently adopted from
the revised Code of Ethics for Professional Accountants developed by International
Federation of Accountants (IFAC) and will be effective June 30, 2020. These events usher
in a new era in the relationship among business, government, the investing public and
other users of financial information.

LESSON 5: BRANCHES OF ACCOUNTING

The main branches of accounting and their brief descriptions are discussed as follows:

1) AUDITING

Auditing is the accountancy profession’s most significant serve to the public. An external
audit is the independent examination that ensures the fairness and reliability of the reports
that management submits to users outside the business entity. The result of the
examinations is embodied in the independent auditor’s report. Once the required financial
statements have been prepared by management, they have to be evaluated in order to
ensure that they do not present a distorted picture.

External auditors are appointed from outside the organization. The external auditor’s job is
to protect the interests of the users of the financial statements. By contrast, internal
auditors are employees of the company. They are appointed by, and answer to, the
company’s management though they work independently of the accounting and other
departments. They ensure the accuracy of business records, uncover internal control
problems and identify operational difficulties.

2) BOOKKEEPING

Bookkeeping is a mechanical task involving the collection of basic financial data. The data
are first entered in the accounting records or the books of accounts and then extracted,
classified and summarized in the form of income statement, balance sheet and cash flows
statement. This process normally takes place once a month.

The bookkeeping procedures usually end when the basic data have been entered in the
books of accounts and the accuracy of each entry has been tested. At that stage, the
accounting function takes over. Accounting tends to be used as a generic term covering
almost anything to do with the collection and use of basic financial data.

Bookkeeping is a routine operation, while accounting requires the ability to examine a

problem using both financial and non-financial data.

3) COST BOOKEEPING, COSTING AND COST ACCOUNTING

Cost bookkeeping is the process that involves the recording of cost data in books of
accounts. It is, therefore, similar to bookkeeping except that data are recorded in very
much great detail. Cost accounting makes used of those data once they have been
extracted from the cost books in providing information for managerial planning and control.
The difference between bookkeeping per se and cost accounting is largely one of the
degree of detail. A cost accounting system contains a great deal more data, and this once
the data are summarized there is much more information available to the management of
the company. Cost accounting deals with the collection, allocation and control of the cost
of producing specific goods and services. This accumulation and explanation of actual and
prospective cost data is important to control current operations and to plan for the future.
Cost accounting now forms one of the main sub- branches of management accounting.

4) FINANCIAL ACCOUNTING

Financial accounting is focused on the recording of business transactions and the periodic
preparation of reports on financial position and results of operations. Financial accounting
is the more specific term applied to the preparation and subsequent publication of highly
summarized financial information. The information supplied is usually for the benefit of the
owners of an entity, but it can also be used by management for planning and control
purposes. It will also be of interest to other parties, e.g. employees and creditors.

5) FINANCIAL MANAGEMENT

Financial management is a relatively new branch of accounting that has grown rapidly over
the last 30 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.

6) MANAGEMENT ACCOUNTING

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.

7) TAXATION

Tax accounting includes the preparation of tax returns and the consideration of the tax
consequences of proposed business transactions or alternative courses of action. As
typically known, accountants involved in tax work are responsible for computing the
amount of tax payable by both business entities and individuals but their work is really
more complex.

Accountants with this specialization aim to comply with existing tax statues but are also in
constant legal search for ways to minimize tax payments. It is not necessary for either
companies or individuals to pay more tax than is lawfully due. If tax experts attempt to
reduce their clients’ tax laibilites strictly in accordance with the law, this known as “tax
avoidance”. Tax avoidance is a perfectly legitimate exercise, but tax evasion (the non-
declaration of sources of income on which tax might be due) is a very serious offense.

8) GOVERNMENT ACCOUNTING

It is concerned with the identification of the sources and uses of resources consistent with
the provisions of city, municipal, provincial or national laws. The government collects and
spends huge amount of public funds annually so it is necessary that there is proper
custody and disposition of these funds.

Learning Activities/Tasks

Activity 1: Discussion/Self-Evaluation Questions (use Short Bond Paper)

1. What is accounting?

2. Why is accounting often referred to as the language of business?

3. To you mind, why is business ethics important?Cite some ethical dilemmas.

4. What are the three forms of business organizatio?Define each briefly

5. What are the types of business? Distinguish them.

6. What does the term generally accepted accounting principle.

7. Discuss the criteria for general acceptance of an accounting principle.

8. What is materiality?

9. What is the periodicity concept? Why is it important for business entities to

provide periodic information?

10. What are the branches of accounting?

Activity 2: TRUE OR FALSE

Instructions: Write TRUE if the statement is correct and write FALSE if the statement is
incorrect.

1. A business transaction is the occurrence of an event or a condition that must

be recorded.

2. The terms bookkeeping and accounting are synonymous.

 3. The liability of corporate stockholders is limited to the amount of their
investment.

4. A partnership is always owned by two individuals.

5. The personal liability of a partner is limited to the amount of his

investment.

6. Accounting is often characterized as the “language of business”.

7. For accounting purposes, a business and its owner are considered one and
the same.

8. The entity concept states that the transactions of different entities should
not be accounted for together.

9. An audit is the independent examination that ensures fairness and

reliability of the reports that management submits to users outside the business entity.

10. The Philippine accountant considers peso as the common unit of measure
for all business transactions.

Activity 3: Identifying Types of activities that may be performed by a business organization

Instructions: Indicate whether each of the following businesses is a service business (SB),
a merchandising business (MEB), or a manufacturing business (MAB).

1. David Salon

2. Accounting & Tax Consulting

3. De Vera Hospital

4. Avis Rent A Car System

5. Ford Motor Company

6. MetroBank

7. Ace Hardware Stores

8. Savemore Stores

9. Furniture Shop

10. Sari-Sari Store

Activity 4: Categorizing Forms of Business Organizations

Instructions Match the letter next to each form of business with the appropriate items in the
following list of advantages and disadvantages. You may use a letter more than once.
A. Sole Proprietorship B. Partnership C. Corporation

1. Easier to raise money

2. Limited expertise

3. Higher start-up costs

4. Owner has total control

5. Shared profits

6. Higher taxes

7. Fewer regulations to follow

8. Easy transfer of ownership

9. Risk of conflict between owners

10. Easy to expand

MODULE 2: THE ACCOUNTING EQUATION AND THE DOUBLE ENTRY SYSTEM

LESSON 1 ELEMENTS OF FINANCIAL STATEMENTS

ELEMENTS OF FINANCIAL STATEMENTS

The elements of financial statements defined in the March 2018 Conceptual Framework for
Financial Reporting (2018 Conceptual Framework) are: Assets, liabilities, and equity – which
relate to a reporting entity’s financial position; and Income and expenses – which relate to a
reporting entity’s financial performance.

In summary, the elements of financial statements are defined as follows:

Asset - A present economic resource controlled by the entity as a result of past events. An
economic resource is a right that has the potential to produce
economic benefits.

Liability – A present obligation of the entity to the transfer an economic resource as a result
of past events.

Equity - The residual interest in the assets of the entity after deducting all its liabilities.

Income - Increases assets, or decreases in liabilities, that result in increases in equity, other
than those relating to contributions from holders of equity claims.

Expenses - Decreases assets, or increases in liabilities, that result in decreases in equity,

other than those relating to contributions from holders of equity claims.
FINANCIAL POSITION

Asset
Per March 2018 Conceptual Framework for Financial Reporting Conceptual Framework),
asset is a present economic resource controlled by the entity as a result of past events. An
economic resource is a right that has the potential to produce economic benefits.

These are three aspects to these definitions: “right”; “potential to produce economic benefits”;
and “control”.
 Rights that have the potential to produce economic benefits take many forms,
including:
a) Rights that correspond to an obligation of another property, for example:
i. Rights to receive cash.
ii. Rights to receive goods or services.
iii. Rights to exchange economic resources with another party on favorable terms. Such
rights include, for example, a forward contract to buy an economic resource on terms that are
currently favorable or an option to buy an economic resource.
iv. Rights to benefit from an obligation of another party to transfer an economic resource
if a specified uncertain future event occurs.
b) Rights that do not correspond to an obligation of another property, for example:
i. Rights over physical objects, such as property, plant and equipment or inventories.
Examples of such rights are a right to use a physical object or a right to benefit from the
residual value of a leased object.
ii. Rights to use intellectual property.

 An economic resource could produce economic benefits for an entity by entitling or

enabling it to do, for example, one or more of the following:
a) Receive contractual cash flows or another economic resource;
b) Exchange economic resources with another party on favorable terms;
c) Produce cash inflows or avoid cash outflows by, for example:
i. Using the economic resource either individually or in combination with other
economic resources to produce goods or provide services;
ii. Using the economic resource to enhance the value of other economic resources; or
iii. Leasing the economic resource to another party
d) Receive cash or other economic resources by selling the economic resource; or
e) Extinguish liabilities by transferring the economic resource.

 An entity controls an economic resource if it has the present ability to direct the use
of the economic resource and obtain the economic benefits that may flow from it. Control
includes the present ability to prevent other parties from directing the use of the economic
resource and from obtaining the economic benefits that may flow from it. It follows that, if one
party controls and economic resource, no other party controls that resource.

Liability
A liability is a present obligation of the entity to transfer an economic resource as a result of
past events. For a liability to exist, three criteria must all be satisfied:
1) The entity has an obligation;
2) The obligation is to transfer an economic resource; and
3) The obligation is a present obligation that exists as a result of past events
 An obligation is a duty or responsibility that an entity has no practical ability to avoid.
An obligation is always owed to another party (or parties). The other party (or parties) could
be a person or another entity, a group of people or other entities, or society at large. It is not
necessary to know the identity of the party (or parties) to whom the obligation is owed. If one
party has one obligation to transfer an economic resource, it follows that another party (or
parties) has a right to receive that economic resource.

 Obligations to transfer an economic resource include, for example:

a) Obligations to pay cash
b) Obligations to deliver goods or provide services
c) Obligations to exchange economic resources with another party on unfavorable
terms. Such obligations include, or example, a forward contract to sell an economic resource
on terms that are currently unfavorable or an option that entitles another party to buy an
economic resource from the entity.
d) Obligations to transfer an economic resource if a specified uncertain future event
occurs.

e) Obligations to issue a financial instrument if that financial instrument will oblige the
entity to transfer an economic resource.

 A present obligation exists as a result of past events only if:

a) The entity has already obtained economic benefits or taken an action; and
b) As a consequence, the entity will or may have to transfer an economic resource that
it would not otherwise have had to transfer.

Equity
Equity is the residual interest in the assets of the enterprise after deducting all its liabilities. In
other words, they are claims against the entity that do not meet the definition of a liability.

Equity may pertain to any of the following depending on the form of business organization:
 In a sole proprietorship, there is only one owner’s equity account because there is
only one owner.
 In a partnership, an owner’s equity account exists for each partner.
 In a corporation, owner’s equity or stockholder’s equity consists of share capital,
retained earnings and reserves representing appropriations of retained earnings among
others.

FINANCIAL PERFORMANCE

Income is increases in assets or decreases in liabilities, that result in increases in equity,

other than those relating to contributions from holders of equity claims.

Expenses are decreases in assets or increases in liabilities, that result in decreases in

equity, other than those relating to contributions from holders of equity claims.
LESSON 2 : THE ACCOUNT

THE ACCOUNT

The basic summary device of accounting is the account. Accounts are the basic storage units
for accounting data and are used to accumulate amounts from similar transactions. An
accounting system has a separate account for each asset, each liability, and each
component of owner’s equity, including revenues and expenses. Managers must be able to
refer to accounts so that they can study their company’s financial history and plan for the
future. A very small company may need only a few dozen accounts; a multinational
corporation may need thousands.

An account title should describe what is recorded in the account. However, account titles can
be rather confusing. For example, Wages Expense and Salaries Expense are both titles for
labor expenses. Moreover, many account titles change over time as preferences and
practices change.

A separate account is maintained for each element that appears in the balance sheet
(assets, liabilities and equity) and in the income statement (income and expenses). Thus, an
account may be defined as a detailed record of the increases, decreases and balance of
each element that appears in an entity's financial statements.

The T account is a good place to begin the study of the double-entry system. Such an
account has the following three parts:
 a title, which identifies the asset, liability, or owner’s equity account
 a left side, which is called the debit side
 a right side, which is called the credit side

The T account, so called because it resembles the letter T, is a tool used to analyze
transactions and is not part of the accounting records. It looks like this:

Account Title
Left side or Right side or
Debit side Credit side

Any entry made on the left side of the account is a debit, and any entry made on the right
side is a credit. The terms debit (abbreviated Dr., from the Latin debere) and credit
(abbreviated Cr., from the Latin credere) are simply the accountant’s words for “left” and
“right” (not for “increase” or “decrease”).