Fundamentals of Accounting I

(Basic Accounting)
RA 9298 The Philippine Accountancy Act of 2004
Board of Directors body authorized by law to promulgate rules and regulations affecting
the practice of accountancy in the Philippines. They are responsible for preparing and
grading the Philippine CPA examination.
Public accounting
a. Auditing
b. Taxation service
c. Management advisory services
Private accounting
Government accounting
Accounting VS Auditing
Accounting is constructive. Auditing is analytical.
Accounting VS Bookkeeping
Accounting is the why, Bookkeeping is the how
IFRS = PFRS; IAS = PAS;
Accounting according to:
A) Accounting Theory of the American Accounting Association
a. The process of identifying, measuring, and communicating economic
information to permit informed judgements and decisions by users of the
information.
B) American institute of Certified Public Accountants (AICPA)
a. 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 financial character and interpreting the results thereof.
C) According to the Accounting Standards Council
a. 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 decision.
Three functions:
a) Main function :
To provide quantitative information, primarily financial in nature,
about economic activities, that is intended to be useful in making economic
decisions
b) Basic function:
business.

To record and report accurately the economic reality of the

c) Audit function:

To test the truthfulness of financial reports

Identifying recognition and nonrecognition of business activities..

Measuring assigning of peso amounts. (historical cost, current cost, realizable value, and
present value)
Communicating preparing and distributing accounting reports
UNDERLYING ASSUMPTIONS
These are basic notions or fundamental premises which the accounting process is
based.

Fundamentals of Accounting I
(Basic Accounting)
A) Going concern: in absence of evidence to contrary, he accounting entity is viewed
as continuing in operation indefinitely.
Other inherent:
a. Accounting entity the entity is separate from those who constitute the
entity (owner, esp.)
b. Time period indefinite life of an entity is subdivided into time periods or
accounting periods which are usually of equal length for the purpose of
preparing financial reports on financial position, financial performance and
cash flows.
c. Monetary unit quantifiability and stability of peso.
QUALITATIVE CHARACTERISTICS
A) Fundamental Qualitative Characteristics
a. Relevance capacity of the information to influence a decision
i. Confirmatory value
ii. Predictive value
b. Faithful Representation actual effects of the transactions shall be
properly accounted for and reported in the financial statements.
i. Completeness relevant information shall be presented in a way
that facilitates understanding and avoids erroneous implication.
ii. Free from error there are no errors or omissions
iii. Neutrality without bias, fair,
B) Enhancing Qualitative Characteristics
a. Verifiability different knowledgeable and independent observers could
reach consensus
b. Comparability ability to bring together for the purpose of noting points of
likeness and difference (within entity = horizontal or intracomparability ;
across entities = dimensional or intercomparability)
c. Understandability financial information must be comprehensible or
intelligible if it is to be most useful. (presenting information clearly and
concisely)
d. Timeliness FI must be available or communicated early enough when a
decision is to be made.
FINANCIAL STATEMENTS
1. Statement of Financial Position
2. Income Statement
3. Statement of Comprehensive Income
4. Statements of Changes in Equity
5. Statement of Cash Flows
6. Notes to Financial Statements

(A = L + E)
(R E)

Counterbalancing Errors
1. Accrued Income
2. Prepayments (under expense method)
3. Precollections (under income method)
4. Merchandise Inventory
5. Unrecorded purchases on account paid next year
6. Unrecorded sales on account collected next year
Perpetual Accounting Errors
1. Unrecorded transactions
2. Depreciation

Fundamentals of Accounting I
(Basic Accounting)

ADJUSTING ENTRIES
Accruals & Deferrals
ACCRUAL
a. Accrued expense
Expense account
Payable account
b. Accrued income
Receivable account
Income account

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DEFERRALS
Expense Method & Asset Method
A. Expense Method
@Transaction
Expense account
Cash
@Year end
Asset account
Expense account

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B Asset Method
@Transaction
Asset account
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Cash
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@Year end
Expense account
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Asset account
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Income Method & Liability Method
A. Income Method
@Transaction
Cash
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Revenue
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@Year end
Revenue
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Unearned Income
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B. Liability Method
@Transaction
Cash

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Fundamentals of Accounting I
(Basic Accounting)
Unearned Income
@Year end
Unearned Income
Revenue

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