MODULE 1

Definition of Accounting
Accounting is “the process of identifying, measuring, and communicating economic
information to permit informed judgment and decisions by users of information.”
(American Association of Accountants)
Three important activities
1. Identifying
2. Measuring
3. Communicating - the process of transforming economic data into useful accounting
information, such as financial statements and other accounting reports, for dissemination
to users.

Identifying - the process of analyzing events and transactions to determine whether or not they
will be recognized. Only accountable events are recognized.
Types of Events
1. External events – events that involve an external party.
a. Exchange (reciprocal transfer) – reciprocal giving and receiving
b. Non-reciprocal transfer – “one way” transaction
c. External event other than transfer – an event that involves changes in the
economic resources or obligations of an entity caused by an external party or
external source but does not involve transfers of resources or obligations.
2. Internal events – events that do not involve an external party.
a. Production – the process by which resources are transformed into finished goods.
b. Casualty – an unanticipated loss from disasters or other similar events

Measuring - involves assigning numbers, normally in monetary terms, to the economic

transactions and events.

Measurement
 • The several measurement bases used in accounting include, but not limited to, the
following:
1. historical cost,
2. fair value,
3. present value,
4. realizable value,
5. current cost, and
6. sometimes inflation-adjusted costs.
• The most commonly used is historical cost. This is usually combined with the other
measurement bases. Accordingly, financial statements are said to be prepared using a
mixture of costs and values.

Valuation by fact or opinion

• When measurement is affected by estimates, the items measured are said to be valued by
opinion. 
• When measurement is unaffected by estimates, the items measured are said to be valued
by fact.

Communicating - the process of transforming economic data into useful accounting

information, such as financial statements and other accounting reports, for dissemination to
users.
Three Aspects:
1. Recording
2. Classifying
3. Summarizing

Basic purpose of accounting

 • The basic purpose of accounting is to provide information about economic activities
intended to be useful in making economic decisions.
Types of accounting information classified as to users’ needs
• General purpose accounting information - designed to meet the common needs of most
statement users. This information is governed by the Philippine Financial Reporting
Standards (PFRSs).
• Special purpose accounting information - designed to meet the specific needs of
particular statement users. This information is provided by other types of accounting,
e.g., managerial accounting, tax basis accounting, etc.

Basic Accounting Concepts

• Double-entry system – each accountable event is recorded in two parts – debit and
credit.
• Going concern - the entity is assumed to carry on its operations for an indefinite period
of time.
• Separate entity – the entity is treated separately from its owners.
• Stable monetary unit - amounts in the financial statements are stated in terms of a
common unit of measure; changes in purchasing power are ignored.
• Time Period – the life of the business is divided into series of reporting periods.
• Materiality concept – information is material if its omission or misstatement could
influence economic decisions.
• Cost-benefit – the cost of processing and communicating information should not exceed
the benefits to be derived from it. 
• Accrual Basis of accounting – effects of transactions are recognized when they occur
(and not as cash is received or paid) and they are recognized in the accounting periods to
which they relate.
•  Historical cost concept – the value of an asset is determined on the basis of acquisition
cost.
• Concept of Articulation – all of the components of a complete set of financial
statements are interrelated.
• Full disclosure principle – financial statements provide sufficient detail to disclose
matters that make a difference to users, yet sufficient condensation to make the
information understandable, keeping in mind the costs of preparing and using it.
 • Consistency concept – financial statements are prepared on the basis of accounting
policies which are applied consistently from one period to the next.
• Matching – costs are recognized as expenses when the related revenue is recognized.
• Residual equity theory – this theory is applicable where there are two classes of shares
issued, ordinary and preferred. The equation is “Assets – Liabilities – Preferred
Shareholders’ Equity = Ordinary Shareholders’ Equity.”
• Fund theory – the accounting objective is the custody and administration of funds.
• Realization – the process of converting non-cash assets into cash or claims for cash.
• Prudence (Conservatism) – the inclusion of a degree of caution in the exercise of the
judgments needed in making the estimates required under conditions of uncertainty , such
that assets or income are not overstated and liabilities or expenses are not understated.

Common branches of accounting

• Financial accounting - focuses on general purpose financial statements.
• Management accounting – focuses on special purpose financial reports for use by an
entity’s management.
• Cost accounting - the systematic recording and analysis of the costs of materials, labor,
and overhead incident to production.
• Auditing - the process of evaluating the correspondence of certain assertions with
established criteria and expressing an opinion thereon.
• Tax accounting - the preparation of tax returns and rendering of tax advice, such as the
determination of tax consequences of certain proposed business endeavors.
• Government accounting - refers to the accounting for the government and its
instrumentalities, placing emphasis on the custody of public funds, the purposes for
which those funds are committed, and the responsibility and accountability of the
individuals entrusted with those funds.
Four sectors in the practice of accountancy
1. Practice of Public Accountancy - involves the rendering of audit or accounting related
services to more than one client on a fee basis.
2. Practice in Commerce and Industry - refers to employment in the private sector in a
position which involves decision making requiring professional knowledge in the science
of accounting and such position requires that the holder thereof must be a CPA.
 3. Practice in Education/Academe – employment in an educational institution which
involves teaching of accounting, auditing, management advisory services, finance,
business law, taxation, and other technically related subjects.
4. Practice in the Government – employment or appointment to a position in an
accounting professional group in the government or in a government–owned and/or
controlled corporation where decision making requires professional knowledge in the
science of accounting, or where civil service eligibility as a CPA is a prerequisite.
Accounting standards in the Philippines
• Philippine Financial Reporting Standards (PFRSs) are Standards and Interpretations
adopted by the Financial Reporting Standards Council (FRSC). They comprise:
1. Philippine Financial Reporting Standards (PFRSs);
2. Philippine Accounting Standards (PASs); and
3. Interpretations

The need for reporting standards

• Entities should follow a uniform set of generally acceptable reporting standards when
preparing and presenting financial statements; otherwise, financial statements would be
misleading.
• The term “generally acceptable” means that either:
a. the standard has been established by an authoritative accounting rule-making
body; or
b. the principle has gained general acceptance due to practice over time and has been
proven to be most useful.
• The process of establishing financial accounting standards is a democratic process in that
a majority of practicing accountants must agree with a standard before it becomes
implemented.