CHAPTER 2:

ACCOUNTING PRINCIPLES
AND REPORTING
STANDARDS
 Types of Business
TYPE ACTIVITY STRUCTURE EXAMPLES
Services Selling’s people’s time Hiring skilled staff and selling Software development
their time Accounting Legal
Trader Buying and selling products Buying a range of raw materials Wholesaler or Retailers
and manufactured goods and
consolidating them, making
them available for sale in
locations near to their
customers or online for delivery.
Manufacture Designing products, Taking raw materials and using Vehicle Assembly
aggregating components and equipment and using equipment Construction
assembling finished products. and staff to convert them into Engineering
finished goods. Electricity
Food and Drink
Chemicals
Media
Pharmaceuticals
Water
Raw Growing or extracting raw Buying blocks of land and using Farming
Materials materials them to provide materials. Mining
Oil
 Types of Business
TYPE ACTIVITY STRUCTURE EXAMPLES
Infrastructure Selling the utilization of Buying and operating assets Transport (airport operator,
infrastructure (typically large assets); selling airlines, trains, trains,
occupancy often in combination ferries, buses)
with services. Hotels
Telecoms
Sports facilities
Property management
Financial Receiving deposits, lending and Accepting cash from depositors Bank
investing money and paying them interest; using Investment house
the money to provide loans to
borrowers, charging them fees
and a higher rate of interest than
the depositors receive.
Insurance Pooling premiums of many to Collecting cash from many Insurance
meet claims of a few customers; investing the money
to pay the losses experienced by
few customers.
By understanding the risk
accepted and the likelihood of a
claim, more premium income can
be earned than claims paid.
FORMS OF BUSINESS ORGANIZATIONS

▪ Sole Proprietorship
It has a single owner called the proprietor who generally is also the manager. Sole
proprietorships tend to be small service-type business and retail establishments.
▪ Partnership
It is a business owned and operated by two or more persons who bind themselves to
contribute money, property, or industry to a common fund, with intention of dividing
the profits among themselves.
▪ Corporation
It is a business owned by its stockholders. It is an artificial being created by
operation of law, having the rights of succession and the powers, attributes and
properties expressly authorized by law or incident to its existence.
MICRO, SMALL AND MEDIUM ENTERPRISES

▪ Micro Enterprises
Are those with assets, before financing, of P3.0 (before P1.5million) or less and
employ not more than nine workers.

▪ Small Enterprises
Are those with assets, before financing, of above P3.0 (before P1.5million) to
P15million and employ 10 to 99 workers.

▪ Medium Enterprises
Have assets, before financing, of above P15million to P100million and employ 100 to
199 workers.
ACTIVITIES IN BUSINESS ORGANIZATIONS
Financing Activities
▪ Are the methods an organization uses to obtain financial resources from financial
markets and how it manages these resources. Primary sources of financing for most
businesses are owners and creditors, such as banks and suppliers. Repaying the
creditors and paying a return to the owners are also financing activities.
Investing Activities
▪ Involve the selection and management including disposal and replacement of long-term
resources that will be used to develop, produce, and sell goods and services. Investing
activities include buying land, equipment, buildings and other resources that are needed in
the operation of the business and selling these resources when they are no longer needed.
Operating Activities
▪ Involve the use of resources to design, produce, distribute, and market goods and
services. Operating activities include research and development, design and engineering,
purchasing, human resources, production, distribution, marketing and selling and servicing.
 PURPOSE AND PHASES OF ACCOUNTING

▪ Recording:
Recording is a basic phase of accounting that is also known as bookkeeping. In this
phase, all financial transactions are recorded in a systematical and chronological
manner in the appropriate books or databases

▪ Classifying:
The classifying phase of accounting involves sorting and grouping similar items
under the designated name, category or account. This phase uses systematic
analysis of recorded data in which all transactions are grouped in one place.
 PURPOSE AND PHASES OF ACCOUNTING

▪ Summarizing:
The summarizing phase of accounting involves summarizing the data after each
accounting period, such as a month, quarter or year. The data must be presented in
a manner which is easy to understand and use by both external and internal users of
the accounting statements. Graphs and other visual elements are often used to
complement the test data.

▪ Interpreting:
The interpreting phase of the accounting process in concerned with analyzing
financial data, and is a critical tool for decision making. This final function interprets
the recorded data in a manner which allows end users to make meaningful
judgments regarding the financial conditions of a business or personal account, as
well as the profitability of business operations. This data is then used to prepare
future plans and frame policies to execute financial plans.
 USERS AND THEIR INFORMATION NEEDS
▪ Investors need information to help them determine whether they should buy, hold or sell.
▪ Employees are interested in information about stability and profitability of their employers.
They are also interested in information which enables them to assess the ability of the
enterprise to provide remuneration, retirement benefits and employment opportunities.
▪ Lenders are interested in information that enables them to determine whether their loans
and the related interest will be paid when due.
▪ Suppliers and other trade creditors are interested in information that enables them to
determine whether amounts owing to them will be paid when due.
▪ Customers have an interest in information about the continuance of an enterprise,
especially when they have a long-term involvement with, or are dependent on, the
enterprise.
▪ Government and their agencies are interested in the allocation of resources and
therefore, the activities of the enterprises.
▪ Public. Enterprises affect members of the public in a variety of ways. Financial statements
may assist the public by providing information about the trends and recent developments in
the prosperity of the enterprise and the range of its activities.
 FUNDAMENTAL CONCEPTS
▪ Entity Concept
An accounting entity is an organization or a section of an organization that stands apart
from other organizations and individuals as a separate economic unit.
▪ Periodicity Concept
An entity’s life can be meaningfully subdivided into equal time periods for reporting
purposes. This concept allows the users to obtain timely information to serve as a basis on
making decisions about future activities. For the purpose of reporting to outsiders, one
year is the usual accounting period.
▪ Stable Monetary Concept
The Philippine peso is the reasonable unit of measure and that its purchasing power is
relatively stable. This is the basis for ignoring the effects of inflation in the accounting
records.
▪ Going Concern
The financial statements are normally prepared on the assumptions that an enterprise
is a going concern and will continue in operation for the foreseeable future. Hence, it
is assumed that the enterprise has neither the intention nor the need to liquidate or
curtail materially the scale of its operations.
NEED FOR GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES (GAAP)
Generally Accepted Accounting Principles
The set of guidelines and procedures that constitute acceptable
accounting practice at a given time is GAAP.

▪ Criteria for GAAP:

▪ A principle has relevance to the extent that it results in information that is
meaningful and useful to those who need to know something about a certain
organization.
▪ A principle has objectivity to the extent that the resulting information is not
influenced by the personal bias or judgment of those who furnish it. It connotes
reliability and trustworthiness. It also connotes verifiability, which means that there
is some way of finding out whether the information is correct.
▪ A principle has feasibility to the extent that it can be implemented without undue
complexity or cost.
 Basic Principles

In order to generate information that is useful to the users of

financial statements, accountants rely upon the following
principles:
▪ Objectivity Principle
▪ Historical Cost
▪ Revenue Recognition Principle
▪ Expense Recognition Principle
▪ Adequate Disclosure
▪ Materiality
▪ Consistency Principle
 GENERAL PURPOSE FINANCIAL REPORTING

“The objective of general purpose financial reporting is to

provide financial information about the reporting entity that is
useful to present and potential investors, lenders, and other
creditors, who use that information to make decisions about
buying, selling or holding equity or debt instruments and
providing or settling loans or other forms of credit.”
QUALITATIVE CHARACTERISTICS OF USEFUL
FINANCIAL INFORMATION

The qualitative characteristics of useful financial reporting

identify the types of information are likely to be most useful to
users in making decisions about the reporting entity on the
basis of information in its financial report.
Financial information is useful when it is relevant and
represents faithfully what it purports to represent. The
usefulness of financial information is enhanced if it is
comparable, verifiable, timely and understandable.
 Fundamental Qualitative Characteristics:

RELEVANCE
▪ Financial information is capable of making a difference in the decisions made by users.
Financial information is capable of making a difference in decisions if it has predictive
value, confirmatory value, or both.
Financial information has a:
▪ Confirmatory role when it is used to confirm or correct the decision-makers’
earlier expectations. It is an analysis of the relationship between predictions and
outcomes.
▪ Predictive role when it is used to make predictions of, for instance, future cash
flows or income.
 Fundamental Qualitative Characteristics:
FAITHFUL REPRESENTATION
▪ This fundamental characteristic seeks to maximize the underlying characteristics of
completeness, neutrality and freedom from error.
a) Completeness – A complete depiction includes all information necessary for a user
to understand the phenomenon being depicted.
b) Neutrality – Free from bias. A neutral depiction is not slanted, weighted,
emphasized, de-emphasized or otherwise manipulated to increase the probability
that financial information will be received favorably or unfavorably by users.
c) Freedom from error – No errors or omissions in the description of the phenomenon
and the process used to produce the reported information has been selected and
applied with no errors in the process.
 Enhancing Qualitative Characteristics:

COMPARABILITY
▪ Information about a reporting entity is more useful if it can be compared with similar
information about other entities and with similar information about the same entity for
another period or another date. It enables users to identify and understand similarities
in and differences among items.

VERIFIABILITY
▪ It helps to assure users that information represents faithfully the economic phenomena
it purports to represent. It means that different knowledgeable and independent
observers could reach consensus, although not necessarily complete agreement, that
a particular depiction is a faithful representation.
 Enhancing Qualitative Characteristics:

TIMELINESS
▪ It means that information is available to decision-makers in time to be capable
of influencing their decisions.
UNDERSTANDABILITY
▪ Classifying, characterizing, and presenting information clearly and concisely
makes it understandable. Financial reports are prepared for users who have a
reasonable knowledge of business and economic activities and who review
and analyze the information with diligence.
 Cost Constraint on Useful Financial Reporting

Cost is pervasive constraint on the information that can

be provided by general purpose financial reporting.
Reporting such information imposes costs and those
costs should be justifies by the benefits of reporting
that information.
 END OF PRESENTATION

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and
GOD Bless
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