Chapter 1

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Account- substitute for an explanation or a report of certain actions or events.

Accounting- language of business
Accountants- scorekeepers of business
Without accounting, business wouldnt know whether its making a profit, and
it wouldnt know its financial situation.
Personal financial planning, education expenses, car amortization, business
loans, income taxes and investments
Definitions:
Is a Service Activity- provide quantitative information useful in making
economic decisions
Is an Information System- communicates financial information about an
economic entity
Process of communicating economic information
Art of recording money, transactions and events
Accounting history is important for it makes it possible to better understand
our present and to forecast our future.
8500 B.C. origin of keeping accounts
EVOLUTION OF ACCOUNTING
PRIMITIVE ACCOUNTING
Tokens were often sealed in clay balls called bullae
Account records date back to the ancient civilizations of China, Babylonia,
Gree and Egypt.
Code of Hammurabi- requires merchants trading goods to give buyers a
sealed memorandum containing the agreed price before it can be considered
enforceable
The agreed-upon transaction was recorded by the Scribe (predecessor of the
modern accountant) on a small mound of clay with the parties affixing their
signatures on it
In Babylonia, clay tablets are recorded payments of wages.
Tax collecting is an activity closely linked to accounting

MIDDLE AGES
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Inca Empire used knotted cords of different lengths and colors called quipu
to keep accounting records
Double-entry bookkeeping- outcome of continued efforts to meet the
changing necessities of trade
Oswald Spengler- wrote in The Decline of the West that the invention of
double-entry bookkeeping was the decisive event in European economic
history.
The FLORENTINE APPROACH
Renaissance Florentine markets- doing business and living life were
extensions of each other.

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Emergence of double entry itself, was first witnessed in the ledgers of

Renieri, Fini & Brothers, and Giovanni Farolfi & Company. (RFG)
Giovanni Farolfi & Company > firm of Florentine merchants whose head office
was at Nimes in Languedoc, in the kingdom of France ; oldest known existing
examples of the double-entry system.
Amatino Manucci- merchant partnership of Giovanni based in Florence;
inventor of double-entry bookkeeping
He used five books- general ledger, two merchandise ledgers, expenses
ledger, and cash book
THE METHOD OF VENICE

Luca Pacioli Franciscan friar and a celebrated mathematician, generally

associated with the introduction of double-entry bookkeeping.
Published: Summa de Arithmetica, Geometria, Proportioni et
Proportionalita/ Everything about Arithmetic, Geometry, Proportions, and
Proportionality
Method of Venice or the Italian Method
Father of double-entry accounting
Purpose of bookkeeping- to give trader without delay information as to his
assets and liabilities
SAVARY AND NAPOLEONIC COMMERCIAL CODE

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Earliest systematized form of accounting regulation

Legal requirement for businesses to keep accounting records was first
introduced in the Ordonnance de Commerce put through by Jean-Baptiste
Colbert
Napoleonic Code/ Code Napoleon French civil code; establishhed under
Napoleon Bonaparte
Jacques Savary- elder in an early accounting text; principal author, the French
Commercial code/ Code Savary
Nicolas Petri- first person to group similar transactions in a separate record
and enter the monthly totals in the journal
Benjamin Workman- published The American Accountant, earliest known
American accounting textbook

SCHMALENBACH AND THE MODEL CHART OF ACCOUNTS

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Eugen Schmalenbach- frustrated repeatedly with his failure to compare

meaningfully the financial data that led him to the publication of his book,
The Model Chart of Accounts (foundation for all subsequent developments in
uniform)
Dynamic balances
IMPOSITION OF INCOME TAX AND CONFLICTS WITH FINANCIAL ACCOUNTING

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XIN DYNASTYS EMPEROR WANG MANG- income tax- rate of 10% of profits for
professionals and skilled labor
Financial Accounting- conservative and its about matching efforts and results

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Tax Accounting- Improving the amount and timing of collections

Taxes- lifeblood of the government

INFORMATION AGE
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Dan Briklin and Bob Frankston- wrote VisiCalc, first electronic spreadsheet,
the most important business application for the personal computer

PACIOLIS DOUBLE-ENTRY BOOKKEEPING

WHY HAS A RECORDING SYSTEM DEVISED IN MEDIEVAL TIMES LASTED FOR SO
LONG?

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Accurate record of what has happened to a business over a time

Information extracted from the system can help the owner/manager
operate business effectively
Entity- any type of organization
Two main specializations:
Financial accounting- supply of info to the owners of an entity
Management accounting- supply of info to the managers of an entity
ASEAN 2015

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Association of Southeast Asian Nations- Aug 8, 1967, Bangkok, Thailand

Founding fathers: Indonesia, Malaysia, Philippines, Singapore, and
Thailand
Three pillars: ASEAN Political-Security Community, ASEAN Economic
community, and ASEAN Socio-cultural Community
ASEAN Economic Community (AEC is the blueprint) has four pillars:
Single market and production base- free flow of goods, services,
investment, capital, skilled labor, priority integration sectors
Competitive economic region- actions on competition policy, consumer
protection, intellectual property rights, infrastracture development,
taxation, e-commerce)
Equitable economic development- SME development, initiative for ASEAN
integration
Integration into global economy- coherent approach towards external
economic relations, enhanced participation in global supply networks
What are the priority integration sectors? Goods and Services.
Mutual recognition arrangements (MRA)- contracts between a National
Accountancy Body (NAB) and/or Professional Regulatory Authority (PRA);
allowing professional service providers registered in signatory countries to be
equally recognized in another signatory country
Professional Accountant- eligible to apply through the Monitoring Committee
of his Country of Origin, to be registered as an ASEAN Charted Professional
Accountant Register (ACPAR)
An ACPA need to apply to become a Registered Foreign Professional
Accountant (RFPA)

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ASEAN Qualifications Reference framework (AQRF)- common reference

framework, device to enable comparisons of qualifications of skilled labor
across ASEAN Member states
Supports the implementation of ASEAN Economic Community Blueprint,
targets to establish national skills frameworks as an incremental approach
towards ASEAN skills
Why you should study accounting?
To make sure that you follow legal requirements.
To help you do a better job.
Accounting has been practiced in the Philippines since the Spanish period and
even before the seeds of Accountancy
Board of Accountancy (BOA)- provide for examination, granting
certificates, and the Registration of Certified Public Accountants (CPAs),
suspension or revocation of certificates
Don Vicente Fabella- founnder of the Jose Rizal University; first Filipino CPA in
the United States
Big Five of the accounting world:
Arthur Andersen
PriceWaterhouseCoopers
Ernst & Young
KPMG
Deloitte Tohmatsu International
SVG & Co.- biggest of the local firms, first to offer services outside the
country
Accountancy qualifies as a profession because it posseses the following
attributes:
All members are CPA, earned a Bachelor Science in Accountancy degree
and have passed the CPA Licensure Examinations
CPAs have their own body language, use terminology peculiar to the
profession (debits and credits)
CPAs adhere to a Code of Ethics
CPAs are members of a national organization, PICPA, ensure the continued
improvement of the accountancy profession

Code of Ethics for Philippine CPAs

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Integrity- sttraightforward and honest in all professional and business

relationships
Objectivity- not allow bias, conflict of interest or undue influence of others

Professional Competence and Due Care

Board of Accountancy (BOA) / Professional Regulation Commission (PRC)

Securities and Exchange Commission (SEC)
Financial Reporting Standards Council (FRSC)
Auditing and Assurance Standards Council (AASC)
Relevant legislation
Two phases of Professional Competence:

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Attainment of professional competence

Maintenance of professional competence- continuing awareness and an
understanding of relevant technical professional and business
developmens
Diligence- encompasses the responsibility to acct in accordance w/ the
requirements of an assignmennt, carefully, thoroughly and on a timely basis
Confidentiality- it should not be used for the personal advantage of the
professional accountannt or third parties
ROLE OF ETHICS

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Ethics- right and wrong; how we should live our lives, how we should behave
towards other people
Ethical Dilemma- no obvious right or wrong decision but rather a right or right
answer
Follow a process of ethical reasoning- look at the info available to us and
draw conclusions
Sleep-test ethics- tell people whether or not they have made a morally
sound decision
Right choice -> can sleep soundly
PICPA created Accounting Standards Council (ASC) establish and improve
accounting standards that will be generally acccepted in the Philippines
SEC and Central Bank of the Philippines (CB)- regulatory agencies where the
financial statements are filed
PRC- supervises CPAs and auditors
Financial Executives Institute of the Philippines (FINEX) largest org of
financial executives responsible for the preparation of the financial
statements
ASC composed of 8 members- four from PICPA; one each from SEC, CB, PRC,
FINEX
FRSC- new accounting standard setting body, replacing ASC. Composed of 15
members and 14 representatives
International Accounting Standards Board (IASB) independence private
sector body; achieve convergence in the accounting principles used by
businesses and other orgs
Accountancy is a profession whose members are enggaged in the collection
of financial data, summary of that data, and then presentation of info in a
form which helps recipients take effective decisions.
Accountancy profession; Accounting- subject
Auditing- checking of accounts and the reporting on them
Auditor- protect the interests of the shareholders; they answer to them and
not to anyone in the entity
Internal auditors- employees of the entity, much less independence
External auditors- have limited independence
Bookkeeping- collection of basic financial data; entered in special records
(books of account), extracted and summarized in the form of a profit and loss
account and a balance sheet
Profit account- shows whether business has made a profit during the year

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Loss account- shows whether business has made a loss during the year
Balance sheet- lists what the entity owns (its assets), and what it owes
(liabilities) as at the end of the year
Cost bookkeeping- recording of cost data in books of account
Cost accounting- main sub-branches of management accounting
Tax avoidance- tax experts reduce their clients tax liabilities
Tax evasion- non-declaration of sources of income on which tax might be due

Chapter 2
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Entity- something that can be recognized as having its own separate identity
such as indicidual, town, university or a business
Accounting entity- organization or a section of an organization that stands
apart from other organizations and individuals as a separate economic unit
Economic entity- business or organization whose major purpose is to produce
a profit for its owners
Social entities- nonprofit organizations, such as cities, public schools, and
public hospital
A business requires investments (purchased w/ the hope that it will generate
income/ appreciate in the future) to enable it to pay for infrastracture,
equipment and personnel.
The business model is built on 5 activities:
Investors provide the required capital for the business. The cash
investment will then be held in a bank account
Cash in the business can be converted into another type of asset that will
be used in the business or spent on operating costs such as salaries,
rentals and utilities
Combinations of business resources -> basis for producing
products/services
Sale of a produce/service generates receivable that will produce a cash
inflow for the business
If theres an existing debt from banks, the cash inflow from collections will
be used to provide the debt providers w/ interest on their loans to the
entity. The rest can be spent back to stage 2
TYPES OF BUSINESS

Type
Services

Activity
Selling peoples
time

Structure
Hiring skilled staff and
selling their time

Trader

Buying and selling

products

Buying a range of raw

materials and
manufactured goods
making them
available for sale

Manufactur
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Designing
products,
gathering
components, and
assembling
finished products

Taking raw materials

and using equipment
and staff to convert
them into finished
goods

Raw
materials

Growing or
extracting raw
materials
Selling the
utilization of
infrastructure

Buying blocks of land

and using them to
provide raw materials
Buying and operating
assets

Receiving
deposits,
Lending and
investing money
Pooling premiums
of many to meet
claims of a few

Accepting cash from

depositors & paying
them interest

Infrastractu
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Financial

Insurance

Collecting cash from

many costumers;
invest the money to
pay losses
experienced by
costumers

THREE MAJOR LEGAL FORMS OF BUSINESS ENTITY

Example
Software
development
Accounting
Legal
Wholesaler (buys
in bulk and sells to
resellers rather
than to
consumers)
Retailer (sells
goods or
commodities in
small quantities
directly to
consumers)
Vehicle Assembly
Construction
Engineering
Electricity
Food and drink
Chemicals
Media
Pharmaceuticals
Water
Farming
Mining
Oil
Transport
Hotels
Telecoms
Sports facilities
Property
management
Bank
Investment house

Insurance

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Sole Proprietorship- has a single owner called the proprietor who generally is
also the manager
self-employed person such as a grocer, plumber, taxi driver, physicians,
lawyers, accountants
receives all profits, absorbs all losses and is solely responsible for all debts
of the business
Partnership- operated by two or more persons
medical partnership, physicians who agree to share an office space or
clinic
Corporation- owned by stockholders
An owner of a corporation will have a stock certificate which provides
evidence of his or her ownership of a corporation's common stock or
preferred stock.
Big business may be the countrys top taxpayers and highest paying
employers
Micro enterprises- those with assets, before financing of P3.0 (before P1.5
million) or less and employ not more than nine workers
Small enterprises- those with assets, before financing of above P3.0 to P15
million and employ 10-99 workers
Medium enterprises- have assets, before financing of above P15 miilion to
P100 million and employ 100-199 workers
Three types of organizational activities:
Financing- methods an organization uses to obtain financial resources
from financial markets and how it manages these resources
Primary sources: owners and creditors, banks and suppliers
Investing- managers use capital from financing activities to acquire other
resources to transform resources from one form to a diff. form which is
more valuable to meet the needs of the people
Efficient business- provides goods and services at low costs relative
to their selling prices
Effective business- successful in providing goods and services
demanded by customers
Business transactions- economic activities of a business
Accounts- aid management in planning, control, and decision-making and to
comply with regulations
Money- serves as both a medium of exchange and a measure of value
The more important the decision is, the greater is the need for reliable
information

USERS AND THEIR INFORMATION NEEDS

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Investors- need information to help them determine whether they should buy,
hold or sell
Employees- interested in information about the stability and profitability of
their employers
Lenders- interested in information that enables them to determine whether
their loans and the related interest will be paid when due

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Suppliers and other trade creditors- interested in information that enables

them to determine whether amounts owing to them will be paid when due
Customers- interest in information about the continuance of an enterprise;
long-term or dependent on
Government and their agencies- interested in the allocation of resources and
activities of the enterprises
Public- providing information about the trends and recent developments
Business entity:
Employees- paid wages and salaries and provided other benefits
Customers- buy products and services sold by business
Government agencies- regulate and collect taxes from the business
Suppliers/vendors of materials
Banks and other financial institutions who lend money to the business on
which interest is paid (source of debt capital)
Individuals and financial institutions who invest money in the business as
owners

Fundamental concepts
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Entity concept- transactions of different entities should not be accounted for

together; each entity should be evaluated separately
Periodicity concept- allows the users to obtain timely information to serve
basis on making decisions about future activities
Stable monetary unit concept- allows accountants to add and subtract peso
amounts as though each peso has the same purchasing power as any other
peso at any time

Criteria for general acceptance of an accounting principle

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Relevance- meaningful and useful to those who need to know something

about a certain organization
Objectivity- information is not influenced by the personal bias or judgment of
those who furnish it
Feasibility- can be implemented without undue complexity or cost

Basic principles
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Objectivity principle- based on the most reliable data available so that they
will be as accurate and as useful as possible
Accounting records documented by objective evidence
Historical cost- acquired assets should be recorded at their actual cost
Revenue recognition principle- goods are delivered or services are rendered
or performed
Expense recognition principle- goods and services are used up to produce
revenue and not when the entity pays for those goods and services

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Adequate disclosure- all relevant information that would affect the users
understanding and assessment of the accounting entity be dislosed
Materiality-depends on the size and nature of the item
Financial reporting- concerned with information that is significant
enough to affect evaluations and decisions
Consistency principle- use the same accounting method from period to period
to achieve comparability over time within a single enterprise; changes are
permitted if justifiable and disclosed in the financial statements

Conceptual framework for financial reporting (IFRS)

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IFRS framework- basic concepts that underlie the preparation and

presentation of financial statements for external users

Financial reporting
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Provide financial information about the reporting entity that is useful to

present and potential investors, lenders and creditors
Primary users- need information about the resources and claims against the
resources of the entity
Stewardship- focused on how the money and the other assets
entrusted to the steward
Steward- one employed by a large household or estate to manage
domestic concerns such as supervision of servants, collection of rents
and keeping of accounts
Stewardship of management- accountability of management for the
resources entrusted to it by the owners
Changes in economic resources and claims

Financial performance reflected by accrual accounting- effects of transactions

and other events and circumstances
o Financial performance reflected by past cash flows- assess the entitys ability
to generate future net cash inflows
o Changes in economic resources and claims not resulting from financial
performance
What makes financial information useful?
Relevance
Relevant financial information- capable of making a difference in the
decisions made by users

 Financial information- capable of making a difference in decisions if it

has predictive value, confirmatory value or both
Confirmatory role- confirm or correct the decision-makers earlier
expectations
Predictive role- make pedictions of, for instance, future cash
flows or income
Materiality- entity- specific aspect relevance based on the nature
or magnitude of the items
What makes information relevant?
Predictive value and confirmatory value
Faithful representation- maximise the underlying characteristics of
completeness, neutrality and freedom from error
Completeness- all information necessary for a user to understand the
phenomenon being depicted.
Neutrality- free from bias
Freedom from error- free from error does not mean perfectly accurate
in all respects
Enhancing qualititive characteristics
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Comparability- enables users to identify and understand similarities in, and

differences among items
Consistency- use of the same items, either from period to period
within a reporting entity or in a single period across entities
Verifiability- assure users that information represents faithfully the economic
phenomena it purports to represent
Timeliness- information is available to decision-makers in time that influence
their decisions
Understandability- classifying, characterising and presenting information
clearly and concisely makes it understandable
Applying the enhancing qualitative characteristics- cannot render information
useful if that information is irrelevant or not represented faithfully
Cost constraint on useful financial reporting
Cost- pervasive constraint on the info that can be provided by
general purpose financia reporting
Underlying assumption

Going concern- underlies the depreciation of assets over their useful lives

Elements of financial statements

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Elements directly related to the measurement of financial position in the

balance sheet are assets, liabilities, and equity
Elements directly related to the measurement of performance in the income
statement are income and expenses

Recognition

Process of incorporating in the balance sheet or income statement an item

that meets the definition of an element and satisfies the criteria for
recognition

Measurement
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Determining the monetary amounts

Historical cost
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Assets are recorded at the amount of cash or cash equivalents paid

Liabilities- recorded at the amount of proceeds received in exchange for
the obligation
Current cost

Cash equivalent that would have to be paid if the same or an equivalent

asset was acquired currently
Liabilities are carried at the undiscounted amount of cash or cash
equivalents that would be required to settle the obligation currently
Realizable (settlement) value
Realizable value assets are carried at the amount of cash that
can be obtained by selling an asset in an orderly disposal
Settlement value- liabilities are carried at the undiscounted
amount of cash expecte to be paid to satisfy the liabilities in the
normal course of business
Present value

Assets are carried at the present discounted value of the future net cash
inflows that the item is expected to generate in the normal course of business
o Liabilities are carried at the present discounted value of the future net cash
outflows that are expected to be required to settle the liabilities in the normal
course of business
Financial concept- invested money or invested purchasing power; capital is
synonymous with the net assets or equity of the enterprise
Profit- earned only if the financial (or money) amount of the net assets at the
end of the period exceeds financial amount of net assets at the beginning of
the period
Earned if physical productive capacity (operating capability) of the
enterprise (or resources/ funds needed to achieve that capacity) at the
end of the period exceeds the physical productive capacity at the
beginning of the period
Principal difference between the two concepts of capital maintenance is the
treatment of the effects of changes in the prices of assets and liabilities of the
enterprise.
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