ACCOUNTING

- The process of identifying, measuring, and

communicating economic information to
TYPES OF EVENTS/TRANSACTION
permit informed judgements and decisions
by users of the information. EXTERNAL EVENTS
ACTIVITIES IN ACCOUNTING - Exchange (reciprocal transfer)
- sale, purchase, payment of liabilities,
IDENTIFYING (economic activity)
receipt of notes receivable
- analyzing events and transactions - Non-reciprocal transfer – (one-way
(recognized) transactions)
a. Accountable events / economic - donations, gifts or charitable contributions,
activity– affects the assets, liabilities, payment of taxes, imposition of fines,
equity, income, or expenses theft, provision of capital by owners.
b. Non-accountable events – disclosed - External event other than transfer –
only in the notes (memorandum entry) Examples: changes in fair values and price
levels, obsolescence, technical changes,
MEASURING
vandalism and the likes.
- assigning numbers in monetary terms
INTERNAL EVENTS
a. Historical value (Initial cost)
b. Fair Value - Production – Examples: conversion of
o Market value raw materials into finished products,
c. Present value production of farm products, and the like
o Recognition of time - Casualty – Examples: loss from fire, and
d. Realizable Value other catastrophes
o estimated selling price of an asset
TYPES OF INFORMATION PROVIDED BY
in the ordinary course of business,
ACCOUNTING
minus any costs to complete and
sell the asset 1. Quantities
e. Current cost - Numbers, quantities, units
f. Replacement Cost 2. Qualitative
g. Inflation-adjusted cost - Word/descriptive form
h. Valuation by fact or opinion 3. Financial information (money)
o When measurement is affected by
ESTIMATES, items’ value is said to
be valued by opinion. TYPES OF ACCOUNTING INFORMATION
o When measurement is unaffected CLASSIFIED AS TO USERS’ NEEDS
by estimates, the items’ value is
said to be measured by fact. 1. General Purposes
o Estimates of uncollectible amounts o GAAP, PFRS
of receivables o Common needs of most statement
o Depreciation and amortization users.
expenses (useful life and residual 2. Special Purposes
value) o Managerial Accounting, Tax basis
o Estimated liabilities (provisions) acc.
o Retained earnings (income and o Specific needs of particular
expenses) statement users.
o Ordinary share capital valued at ACCOUNTING CONCEPTS
par value
o Land stated at acquisition cost - Accounting assumptions/ Accounting
o Cash measured at face amount Postulates
o Fundamental concept or principles
COMMUNICATING and basic notions that provide the
foundation of the accounting
- useful accounting information (financial
process.
statements).
- Accounting Theory
- Transforming economic date into useful
o Logical reasoning in the form of a
accounting information (FS & Accounting
Reports) for dissemination to users. set of broad principles that:
o Provide general frame of reference
BASIC PURPOSE OF ACCOUNTING by which accounting practice cane
be evaluated.
- Provide information about economic
o Guide the development of new
activities intended to be useful in making
practices and procedures
economic decisions.
 o Organize set of concepts and 20. Matching concept – (Direct association
related principles (conceptual of costs and revenues)
frameworks; PFRS, accounting 21.Systematic and rational allocation
standards) 22.Immediate recognition

EXAMPLES OF ACCOUNTING CONCEPTS:

1. Double-entry system – Debit and Credit

2. Going concern assumption –carry
operation for an indefinite period of time.
3. Separate entity – (Accounting entity /
Business entity concepts /Entity concept)
4. Stable monetary unit (monetary unit COMMON BRANCHES OF ACCOUNITNG
assumption) – common unit of measure 1. Financial accounting – general purpose
5. Time period (Periodicity / Accounting financial statements. External users
period)
o Calendar year – January 1 to
December 31
o Fiscal period – 12 months (starts
on a date other than January 1)
6. Materiality concepts – professional
judgement (based on the size and nature
of the item)
7. Cost-benefit (Cost constraint /
2. Management accounting – internal
Reasonable Assurance) – cost should not
users or management. Special purpose.
exceed the benefits
3. Cost accounting – M,L,OH. Production
8. Accrual basis of accounting – income is
4. Auditing
recognized when earned rather than
5. Tax accounting
o when cash is collected and expense
6. Government accounting – public funds
are recognized when incurred
7. Fiduciary accounting - court accounting.
rather than when cash is paid.
a comprehensive report of the activity
9. Historical cost concept – (cost principle)
within a trust, estate, guardianship or
– acquisition cost
conservatorship during a specific period.
10. Concept of articulation – all
8. Estate accounting - amount of property
components of a complete set of financial
left by the decedent at the time of death
statements are interrelated.
9. Social accounting- (social and
11. Full disclosure principle
environmental accounting or social
12. Consistency concept - financial
responsibility reporting)
statements are prepared based on
10.Institutional accounting
accounting policies which are applied
11. Accounting systems - accounting
consistently from one period to the next.
processes with integrated procedures and
13. Matching – cost is recognized as
controls
expenses when the related revenue is
12. Accounting research
recognized.
14. Entity theory – proper income Four Sectors in the Practice of Accountancy
determination ( R.A. 9298 “ Philippine Accountancy Act 0f
15. Proprietary theory - treats a business 2004”
and its owner as inseparable for financial
reporting purposes 1. Practice of Public Accountancy
16. Residual equity theory - applicable - Rendering of audit or accounting related
when there are two classes of shares services to more than 1 client of fee basis
issued, ordinary and preferred. The
equation is "Assets - Liabilities - Preferred 2. Practice in Commerce and Industry
Shareholders' Equity = Ordinary
- Private sector, decision making, and
Shareholders' Equity.
requires professional knowledge in science
17. Fund theory – cash flows. Custody and
accounting. CPA
administration of funds.
18. Realization – converting non-cash assets 3. Practice in Education/Academe
into cash
19. Prudence – (Conservatism) – assets or - Teaching accounting
income are not overstated / liabilities and 4. Practice in the Government
expenses are not understated
 - Government owned and controlled Scope of the Conceptual Framework –
corporations. (General purpose financial reporting)

1. The objective of financial reporting

2. Qualitative characteristics of useful
financial information
3. Financial statements and the reporting
entity
4. The elements of financial statements
5. Recognition and derecognition
6. Measurement
7. Presentation and disclosure
8. Concepts of capital and capital
maintenance

Accounting Standard Setting Bodies and

other Relevant Organizations

1. FSRSC – Financial and Sustainability Reporting

Standards Council Objective of Financial Reporting

2. PIC – Philippine Interpretations Committee - Provide financial information about the

reporting entity that is useful to existing
3. BOA – Board of Accountancy
and potential investors, lenders and other
4. SEC – Securities and Exchange Commission creditors in making decisions about
providing resources to the entity
5. BIR – Bureau of Internal Revenue
Fundamental Qualitative Characteristics of
6. BSP – Bangko Sentral nf Pilipinas Useful Financial Information
7. CDA – Cooperative Development Authority a. Relevance
o Predictive value
8. IFRIC – International Financial Reporting
Interpretations Committee o Confirmatory value (feedback
value)
9. IFRS Advisory Council b. Materiality
c. Faithful representation
10. IFAC – International Federation of
o Completeness
Accountants
o Neutrality
11. IOSCO – International Organization of o Free from error
Securities Commissions d. Enhancing qualitative characteristics
o Comparability
o Verifiability
o Timeliness
CONCEPTUAL FRAMEWORK FOR FINANCIAL o Understandability
REPORTING
Financial Statement and The Reporting
PURPOSE OF CONCEPTUAL FRAMEWORK Entity

(General Purpose Financial Reporting) a. Statement of Financial position

b. Statement of Financial Performance
a. Assist the International Accounting c. Other statements and notes
Standards Board (IASB) in developing
standards Elements of Financial Statements
b. Assist preparer in developing consistent
- Assets
accounting policies when no standard
- Liabilities
applies to a particular transaction or when
- Equity
a standard allows a choice of accounting
- Income
policy.
- Expenses
c. Assist all parties in understanding and
interpreting the standards. Measurement Bases

(Development of Standards) 1. Historical cost

2. Current value
a. Promote transparency
o Fair value
b. Strengthen accountability
o Value in use and fulfilment value
c. Contribute to economic efficiency
 o Current cost o because the inventory is stated at
cost and the increase in value is
not recognized
2. NRV < Cost = Inventory @ NRV
3. The write-down of inventory to NRV is
accounted for using the allowance
method.

INVENTORY WRITE DOWN:

Total Cost
9,000,000
LCNRV
8,500,500
INV WRITE DOWN
500,000
Journal Entries:
1. to record the inventory on Dec 31,
2024
Inventory, Dec 31, 2024 9,000,000
Income Summary
9,000,000

2. to record the inventory, write down

Loss on inventory write down 500,000
Allowance for inventory write down
Philippine Accounting Standards:2
500,000
INVENTORIES
The loss on inventory write down is
Examples of Inventories: included in the computation of cost of
goods sold as deduction from the
- Merchandise purchased by a trading entity inventory.
and held for resale.
Inventory – Dec 31, 2024, at cost
- Land and other property held for sale in
9,000,000
the ordinary course of business. Allowance for inventory write down
- Finished goods, goods undergoing ( 500,000)
production, and raw materials and Net realizable value
supplies awaiting use in the production 8,500,000
process by a manufacturing entity

COST OF INVENTORY

1. Purchase Cost Inventory data on December 31, 2024

o includes the purchase price:
o net of trade discounts
o and other rebates,
o import duties,
o nonrefundable or non-recoverable
purchase taxes
o transportation
o handling and
o other costs directly attributable to
the acquisition of the inventory.
2. Conversion Cost
o direct labor costs, and factory /
manufacturing overhead COST FORMULAS
3. Other Cost
o costs necessary in bringing the a. First in, First out - FIFO
inventories to their present location b. Weighted average
and condition. c. Specific identification

MEASUREMENT OF INVENTORIES

- Inventories are measured at the lower of ASSUME THE ENDING INVENTORY IS 700
cost and net realizable value. LCNRV UNITS

Accounting for LCNRV:

1. Cost < NRV = NO PROBLEM

 CLASSIFICATION OF CASH FLOWS:

1. OPERATING ACTIVITIES - revenue

producing activities.
a. . Cash receipts from sale of goods
b. Cash receipts from royalties, rental fees,
commissions and other revenue
c. Cash payments to suppliers for goods
purchased
d. Cash payments for selling, administrative
FIFO and other expenses
e. Cash receipts and payments for securities
held for trading
f. Cash payment or refund of income taxes
unless can be identified specifically with
financing and investing activities

2. INVESTING ACTIVITIES - – acquisition

and disposal of noncurrent assets and
other investments not included in cash
equivalent. (non-operating assets)
WEIGHTED AVERAGE
a. Cash payments to acquire property, plant
and equipment, intangible asset and other
long-term asset.
b. Cash receipts from sale of property, plant
and equipment, intangible asset, and
other long-term asset.
c. Cash payments to acquire equity or debt
instruments of other entities (current and
long-term investments)
d. Cash receipts from sale of equity or debt
instruments of other entities
e. Cash advances and loans to other parties
other than advances and loans made by
financial institutions
f. Cash receipts from repayment of advances
and loans made to other parties

PAS: 7 STATEMENT OF CASHFLOW 3. FINANCING ACTIVITIES - – derived from

the equity capital and borrowings of the
STATEMENT OF CASHFLOW
entity
- Provides information about the sources (cash flows that result from equity
and utilization of cash and cash financing and debt financing)
equivalents during the period. a. Cash receipts from issuance of
ordinary and preference shares
CASH COMPRISES THE FOLLOWING: b. Cash payments to acquire treasury
1. Cash on hand and cash in bank shares
2. Cash equivalents c. Cash receipts from issuing bonds,
o short term loans, notes, mortgages and other
o highly liquid investments that are short- or long-term borrowings
d. Cash payments for amounts borrowed
readily convertible to cash. (debt
e. Cash payments by a lessee for the
instruments acquired within 3
reduction of the outstanding principal
months or less)
lease liability
a. 1-year treasury bill acquired 3 months
before maturity date NON-CASH TRANSACTIONS: (disclose in the
b. 90-day money market instrument or notes to financial statements)
commercial paper
c. 3-month time deposit a. Acquisition of asset by issuing share
capital
b. Acquisition of asset by issuing bonds
payable
 c. Conversion of bonds payable into share - Equipment used in the production of
capital goods
d. Conversion of preference shares into - Equipment held for environmental and
ordinary shares safety reasons
- Equipment held for rentals
PRESENTATION
- Major spare parts and long-lived stand-by
DIRECT METHOD equipment
- Furniture and fixture
- shows each major class of gross cash - Bearer plants
receipts and gross cash payments
INITIAL MEASUREMENT: @Cost

A. Purchase price
o including import duties,
o nonrefundable purchase taxes, less
trade discounts and rebates
B. Direct costs of bringing the asset to the
location and condition necessary for it to
be used in the manner intended by
management
C. Initial estimate of dismantlement, removal
and site restoration costs for which the
entity incurs an obligation by acquiring or
using the asset other than to produce
inventories

INDIRECT METHOD Illustration: Entity A acquires equipment on

January 1, 20X1. Information on costs is as
- profit or loss is adjusted for the effects of follows:
non-cash items and changes in operating
assets and liabilities

MEASUREMENT:

1. ACQUISITION ON CASH BASIS

o cash paid plus directly attributable
costs such as freight, installation
cost and other necessary in
bringing the asset to the location
PAS 16: PROPERTY, PLANT AND EQUIPMENT and condition for the intended use.
PPE

a. Tangible assets 2. ACQUISITION ON ACCOUNT

o have physical substance o invoice price minus the discount,
b. Used in business regardless of whether the discount
o used in the production or supply of is taken or not.
goods or services, for rental, or for 3. ACQUISITION ON INSTALLMENT BASIS
administrative purposes o cost of the PPE is the cash price
c. Long-term in nature equivalent. The excess of the
o expected to be used for more than installment price over the cash
one period price is treated as an interest to be
EXAMPLE OF PPE amortized over the credit period.
4. ISSUANCE OF SHARE CAPITAL
- Land used in business o PPE is measured by the fair value
- Land held for future plant site of the consideration received in
- Building used in business order or priority:
  Fair value of the property
received
 Fair value of the share
capital
 Par value or stated value of
the share capital
5. ISSUANCE OF BONDS PAYABLE (In
order of priority)
o Fair value of bonds payable
o Fair value of asset received
o Face amount of bonds payable Illustration: Sum of years digit
6. EXCHANGE method
o PPE acquired in exchange for a
non-monetary or a combination of
monetary and non-monetary is
measured at fair value of the
asset given in exchange plus
any cash payment.
o However, the exchange is
recognized at carrying amount
of the asset given in exchange
plus any cash payment if the
exchange transaction lacks
commercial substance.
o Commercial substance is the Illustration: Double-declining balance
event or transaction causing the method
cash flows of the entity to change
significantly by reason of
exchange.

DEPRECIATION

- systematic allocation of the depreciable

amount of an asset over the useful life.
- is a matter of cost allocation

DEPRECIATION PERIOD

1. depreciable amount
2. residual value
3. useful life

DEPRECIATION METHOD

1. straight line
2. production method
3. diminishing balance or accelerated
methods – sum of year’s digits method
and double declining balance method

Illustration: Straight-line method of

depreciation On January 1, 20x1,
entity A acquires equipment for a
total cost of P1,000,000. the
equipment is estimated to have a
useful life of 5 years and a residual
value of P50,000.