Overview of Accounting

OVERVIEW OF ACCOUNTING
Definition of Accounting
Accounting is the process of identifying, measuring, and communicating

economic information to permit informed judgment and decision by users of
information. (American Association of Accountants)
Three Important Activities included in the definition of accounting

1. Identifying
2. Measuring
3. Communicating
Identifying is the process of analyzing events and transactions to

determine whether or not they will be recognized in the books. Only
accountable events are recognized in the books. Non-accountable events
are not recognized, however when such events have accounting relevance,
they nonetheless disclosed in the areas.
Accountable event is an event that affects assets, liabilities or equity
of an entity and its effect can be measured reliably. This also known
as economic activity.
Types of Events or Transactions

1. External Events- events involving an entity and external party.
Types of External Events

a. Exchange (Reciprocal Transfer) – an event wherein there is a
reciprocal giving and receiving of economic resources and/or
economic obligations between an entity and external party.
Examples: Sales of inventory on account, purchase of
merchandise for cash, borrowing of money, payment of
liabilities, and the like.
b. Non-reciprocal transfer – an event which an entity transfer (or
receives) economic resources to (from) another entity without
directly receiving (or giving) value in exchange. Unlike in
exchange or reciprocal transfer, a non reciprocal transfer is a
“one way” transactions that is , the party giving something
under a non-reciprocal transfer does not receive anything in
return, and the party receiving does not give anything in
exchange.
Examples: provision of capital by owners, distributions to
owners, payment of taxes, gifts and charitable contributions,
donation of assets, imposition of fines, thefts, and the like.
c. External event other than transfer- an event that involves
changes in the economic resources or obligations of an entity
caused by external party or external source but does not
involve transfers of resources or obligations.
Example: vandalism, obsolescence, changes in fair values,
price level changes, technological changes and the like
2. Internal Events – events which do not involve an external party.

Types of Internal Events
a. Production – the process by which resources are transform
into finished goods.
Examples: transformation of raw materials into finished
products, growth, procreation and the like.
b. Casualty – an unanticipated loss from disasters or other
similar events.
Examples: loss from fire loss, flood, earthquake and other
catastrophes.
Measuring is the accounting process of assigning numbers, normally in

monetary terms, to the economic transactions and events. It involves
determining how events affect the entity’s assets, liabilities, and equity.
1. Historical Cost
2. Current cost or replacement cost
3. Realizable (settlement) value
4. Present value
5. Fair value
6. Fair value less cost to sell
7. Revalued (Appraised) value
8. Inflation adjusted costs
Communicating is the process of transforming economic data into useful

accounting information such as financial statements and other accounting
reports for dissemination to users.
The communication process of accounting involves three aspects:
1. Recording- refers to the process of systematically committing to
writing accountable events identified and measured in the books of
account in a systematic and chronological manner according to
accounting rules and regulations. Recording or recognizing is
affected through journal entries.
2. Classifying – involves the grouping of similar and interrelated items
into their respective classes. Classifying is effected through posting in
the ledger.
3. Summarizing – putting together or expressing in condensed or brief
form the recorded and classified transactions and events. This
includes the preparation of financial statements and other accounting
reports.
4. Interpreting – processed information involves the computation of
financial statements ratios.
Basic Purpose of Accounting
Is to provide quantitative financial information about economic activities

intended to be useful in making economic decisions.
Types of Information provided by Accounting

1. Qualitative Information – Information expressed in words or
descriptive form.
2. Quantitative Information – information expressed in numbers,
quantities, or units.
3. Financial Information – Information expressed in money. Financial
information is also quantitative information since monetary amounts
are normally expressed in numbers.
Types of Accounting Information Classified as to Users’ Needs

1. General Purpose – designed to meet the common needs of most
statement users. This is governed by Generally Accepted Accounting
Principles (GAAP).
2. Special Purpose – designed to meet the specific needs of particular
statement users.
Accounting Theory, Concepts and Assumptions
Going Concern Concept – the entity is assumed to carry its operations for
an indefinite period of time.
Business Entity Concept – the entity is treated separately from its owners.
Stable Monetary Units (Monetary Unit)

a. Assets, liabilities, equity, income and expenses should be stated
in terms of a unit of measure which is the peso in the Philippines.
b. The purchasing power of the peso is regarded as stable or
constant and that its instability (uncertainty, unpredictability) is
insignificant and therefore ignored.
Time Period (Periodicity) – the life of the business is divided into series of
reporting periods. Calendar or Fiscal Period.
Materiality Concept – information is material if its omission or misstatement

could influence economic decisions. Materiality of the periods to w is a
matter of professional judgment and is based on an information’s size and
nature.
Accrual Basis of Accounting – the effects of transactions and other events

are recognized when they occur ( and not as cash or its equivalents is
received or paid) and they are recorded in the accounting records and
reported in the financial statements of the periods to which they relate.
Consistency Concept – the financial statements should be prepared on the

basis of accounting principles which are followed consistently from one
period to the next.
Matching – costs are recognized as expenses when the related revenue is

recognized.
Branches of Accounting
1. Financial Accounting ( governed by PFRS)

2. Management Accounting
3. Cost Accounting
4. Auditing
5. Tax Accounting
6. Government Accounting
7. Fiduciary Accounting (the handling of accounts managed by a person
entrusted with the custody and management of property for the
benefit of other.
8. Estate Accounting (the handling of accounts for fiduciaries who wind
up the affairs of a deceased person)
9. Social Accounting ( social and environmental accounting or social
responsibility accounting)- process of communicating the social and
environmental effects of organization’s economic actions to
particular interest groups within society and to society at large.
10. Institutional Accounting ( not-for-profit entities other than
government)
11. Accounting Systems – installation of accounting procedures fro
the accumulation of financial data and designing of accounting froms
to be used in data gathering.

Overview of Accounting

Uploaded by

Copyright:

Available Formats

Overview of Accounting

Uploaded by

Document Information

Original Description:

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Overview of Accounting

Uploaded by

Copyright:

Available Formats

OVERVIEW OF ACCOUNTING

Accounting is the process of identifying, measuring, and communicating

Three Important Activities included in the definition of accounting

Identifying is the process of analyzing events and transactions to

Types of Events or Transactions

Types of External Events

2. Internal Events – events which do not involve an external party.

Measuring is the accounting process of assigning numbers, normally in

Communicating is the process of transforming economic data into useful

Basic Purpose of Accounting

Is to provide quantitative financial information about economic activities

Types of Information provided by Accounting

Types of Accounting Information Classified as to Users’ Needs

Stable Monetary Units (Monetary Unit)

Materiality Concept – information is material if its omission or misstatement

Accrual Basis of Accounting – the effects of transactions and other events

Consistency Concept – the financial statements should be prepared on the

Matching – costs are recognized as expenses when the related revenue is

1. Financial Accounting ( governed by PFRS)

You might also like