I.

Basic Accounting Concepts

Definition of Accounting
Accounting is the art of recording, classifying and summarizing in a
significant manner and in terms of money transactions and events which
are, in part at least, of a financial character, and interpreting the result
thereof.
Four Phases of Accounting
1. Recording writing business transactions and events on the books of
accounts in a chronological sequence in accordance with established
accounting rules and procedures.
2. Classifying involves sorting or grouping of similar and interrelated
transactions and events into their respective classes.
Ledger a group of accounts which are systematically
categorized into asset accounts, liabilities accounts, capital
accounts, revenue accounts and expense accounts.
Account the most important accounting device in the
classification of recorded transactions and events.
3. Summarizing refers to the preparation of financial statements or
reports.
4. Interpreting the analytical phase of accounting. It is this function that
makes accounting the language of business.
a. Profitability the ability to increase capital not from additional
investment, but from the results of operation.
b. Stability the ability to pay long-term obligations
c. Solvency the ability to pay current obligations
d. Liquidity synonymous to cash

II.NATURE OF ACCOUNTING
Accounting is a service activity
- Its function is to provide quantitative information primarily financial in
nature, about economic activities, that is intended to be useful in making
economic decisions.
USERS OF FINANCIAL INFORMATION
CLASSIFICATION:
A. DIRECT USERS- The groups directly interested in the financial activities of
a business firm are:
1. Stockholders- They are interested to know whether to maintain,
increase, decrease or dispose of completely their investment;
whether they are getting a fair return on their investment.
2. Prospective Stockholder- This group is interested in the financial
statement to determine whether to acquire an ownership interest in
the business firm.
3. Management- To the management, the financial statement serves
as a measure of their effectiveness; the financial statements are
also used in making future financial decisions.
4. Creditors- They use financial statements in a basis for ascertaining
whether to grant loans or not.

5. Employees- This group is interested in two things , security of

employment and satisfactory compensation.
6. Taxing Authorities- The Bureau of Internal Revenue requires
financial data for proper computation of taxes and for future
investigation and audit.
7. Customers- This group requires financial data in order to anticipate
price changes and if necessary seeks alternative source of supply.
B. INDIRECT USERS- groups which are indirectly interested in a business.
1. Regulatory or Registration Authorities- Securities and
Exchange Commission (SEC) and the Board of Energy need
financial statement for statistical purposes and in making important
decisions affecting public interest.
2. Labor Unions- financial statement are read to determine whether
their demand for higher wages and additional benefits is warranted.
3. Stock Exchanges- For the purpose of accepting and cancelling listing
of securities in the stock market.
4. Trade Associations- This group will compile industry statistics, make
comparisons, and analyze industry results , so that entities belonging
to the industry can make relevant economic decisions.
5. Lawyers- This group is consulted for the purpose of determining
whether contractual promisions are fulfilled.
ACCOUNTING THEORY
- Defined as the system of ideas that provides accounting practice with a
logical and systematic basis.
- Consists of the many explanations, reasons, and justification, why
accounting is what it is and why it is not otherwise.
ACCOUNTING STANDARDS COUNCIL (ASC)
- Created by PICPA to formalize the accounting standard function in the
Philippines
- 8 members:
FUNCTION OF ASC
- To establish and improve accounting standards that will be generally
accepted in the Philippines.
ACCOUNTING OBJECTIVES
- The basic purpose of financial accounting and financial statements in
communications to provide relevant information to decision makers.
CLASSIFICATIONS:
A. General or Quantitative Objectives
-determine the appropriate content of the financial accounting information
1. To provide reliable information about the financial position of the
business.

2. To provide reliable information about the results of operations of the

business.
3. To provide information about other financial activities creating changes
in the assets and
liabilities of the business.
4. To provide financial information that assists in estimating earning
potential of the business.
5. To provide information about significant accounting policies which are
relevant to the users.
*With respect to the general objectives of financial accounting, here are
four concepts normally considered, namely:
1. ENTITY THEORY
-The major accounting effort is geared toward proper income
determination. Proper matching of costs against revenues is always the
primary objective.
This concept is expressed in the accounting equation:
Assets=Liabilities + Capital
2. PROPRIETARY THEORY
-The major accounting effort is directed toward proper valuation of
assets rather than income determination.
Assets Liabilities = Capital
3. RESIDUAL EQUITY THEORY
-This concepts is the same as propriety theory the accounting objective
is also proper valuation of assets.
4 FUND THEORY
-The assets are viewed as funds committed to specific purposes. The
accounting
objective is neither proper income determination nor
proper valuation of assets but the
administration of the assets and
the uses to which they are committed.
B. QUALITATIVE OBJECTIVES
-indicate the qualities that make financial accounting information useful.
1.Relevance- the primary qualitative objective because beneficial
accounting is the basis of an informed economic decision.
-requires that the financial information should be related or pertinent.
2. Understandability- requires that the financial information must be
comprehended or
intelligible if it is to be useful.
3. Verifiability- requires that the financial information must be
substantially duplicated
by independent measures using the
same measurement method.
4.Neutrality- dictates that the financial information should not favor one
group to the
detriment of another.
5.Timeless-requires that the accounting information must be available
or communicated
early enough when decisions is to be made.
6.Comparability- means the ability to bring together for the purpose of
nothing point of
likeness and difference.

7.Consistency- requires that the accounting procedures should be

applied on a uniform basis
from period to period
3 TYPES OF CONSISTENCY
A. Vertical Consistency- consistency within the financial statement.
B. Horizontal Consistency- consistency from period to period or year to
year consistency.
C. Dimensional Consistency- consistency between firm or Industry to
industry consistency.
8.Diversity or Industry Percularities
- may warrant certain exceptions to accounting principles and
practices
-business entities can adopt methods and practices best suited to their
purposes if only
to present as fairly as possible their financial and operating results.
9.Completeness
-requires that information should be presented in a way that facilitates
understanding and avoid erroneous implications.
-the result of the adequate disclosure standard or the principle of
disclosure.
10.Full Disclosure
-dictates that all disclosure that all significant information leading to
the preparation of
financial statements should be clearly reported
-synonymous with completeness of financial statement.
CONTIGENCIES AND SUBSEQUENT EVENTS
CONTINGENCY- an existing condition, situation, or set of circumstances involving a
possible gain or loss to an enterprise, the ultimate outcome of which depends in the
occurrence or nonoccurrence of uncertain future events.
A. Loss Contingency shall be accrued (debited to expense and credited to
liability) if two conditions are
1. Information available prior to the issuance of financial statements
indicates that it is probable that an asset has been impaired and that an
liability has been in cured at the data of the financial statements.
2. The amount of lost can be reasonably estimated.
SUBSEQUENT EVENTS- refer to an occurrence taking place after the balance sheet
date but prior to the issuance of financial statement which have material effect on
the statement and therefore require adjustment or disclosure.
BASIC ELEMENTS OF FINANCIAL ACCOUNTING
1.
2.
3.
4.

ASSETS- economic resources of an enterprise

LIABILITIES- economic obligation of an enterprise
OWNERS EQUITY- the interest of the owner in an enterprise
REVENUE- gross increases in assets or gross decrease in liabilities recognized

5. EXPENSES- gross decreases in assets or gross increases in liabilities

recognized
6. NET INCOME or NET LOSS
NET INCOME- the excess of revenue over expenses
NET LOSS- the excess of expenses over revenue

BASIC FEATURES Or BASIC ASSUMPTION Of FINANCIAL ACCOUTING

1.Accounting Entity- the business firm is separate from other entities and
from the owners, managers, and employees who constitute the firm.
2.Going Concern- assumes that unless there is specific evidence to the
contrary, the business firm shall continue to operate indefinitely.
3.Monetary Unit or Monetary Measurement
TWO ASPECTS
1.Quantifiability Aspects- means that the assets, liabilities, capital, income
and expenses should be stated in terms of a unit of measures (peso)
2.Stability of the Peso concepts- means that the purchasing power of the
peso is stable or constant and that its instability is insignificant and therefore
may be ignored.