Overview of Accounting

Learning Objectives
• Define accounting and state its basic purpose.
• Explain the basic concepts applied in accounting.
• State the branches of accounting and the sectors in the
practice of accountancy.
• Explain the importance of a uniform set of financial
reporting standards.

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 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)

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 Three important activities

1. Identifying - the process of analyzing events and transactions to

determine whether or not they will be recognized. Only
accountable events are recognized.
2. Measuring - involves assigning numbers, normally in monetary
terms, to the economic transactions and events.
3. Communicating - the process of transforming economic data
into useful accounting information, such as financial statements
and other accounting reports, for dissemination to users.

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 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.

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 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.

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 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.

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 Basic purpose of accounting

• The basic purpose of accounting is to provide

information about economic activities intended to be
useful in making economic decisions.

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 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.

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 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.
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 Basic Accounting Concepts - Continuation
• 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.

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 Basic Accounting Concepts - Continuation
• 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.

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 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.

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 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.

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 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

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 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.

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 APPLICATION OF
CONCEPTS
PROBLEM 4: FOR CLASSROOM DISCUSSION

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  QUESTIONS????
 REACTIONS!!!!!

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 END
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