Accounting Principles

ACCO 20213

UNIVERSITY OF THE PHILIPPINES

DILIMAN
Paul John Japson
SCHOOL OF Capote, LPT, MST-Math
STATISTICS
Instructor I

Polytechnic University of the Philippines—Parañaque City Campus

 Chapter Outline
I. Introduction to Accounting
1. Need for Accounting
2. Why study Accounting
3. Definition of Accounting
4. Four Phases of Accounting
5. Fields of Accounting
6. Business Organizations
7. Business as an Accounting Entity
8. Transaction
9. Accounting Elements or Values

ACCO 20213—Accounting Principles

 Need for Accounting
❑ Everyday transactions cannot be retained in the human brain for a quite period
of time without confusions and complications. To avoid these, transactions and
other important events should be recorded.

❖ Owner. “Has the business improved?”

❖ Management. “What are the resources of the business?”
❖ Prospect Investors. “Will my money grow in this business?”
❖ Creditors. “Can the business meet its obligation?”
❖ Employees. “Can we ask for more financial assistance?”
❖ Government. “Is this firm reporting the correct amount of
income?”
ACCO 20213—Accounting Principles
 Why study Accounting?

❑ One should have an understanding of HOW data are gathered and

recorded in order to appreciate and understand the financial
reports of the business.

ACCO 20213—Accounting Principles

 Definition of Accounting
According to Accounting Standards Council:
❑ Accounting is a service activity. The accounting function is to provide quantitative information,
primarily financial in nature, about economic entities, that is intended to be useful in making
economic decision.
According to the Committee on Accounting Technology of the American Institute
of Certified Public Accountants:
❑ Accounting is 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 a financial character and
interpreting the results thereof.
According to the American Accounting Association:
❑ Accounting is the process of identifying, measuring and communicating economic information
to permit informed judgment and decision by users of the information.

ACCO 20213—Accounting Principles

 Four Phases of Accounting
❑ Recording. This is technically called the bookkeeping. In this phase, business
transactions are recorded systematically and chronologically in the proper
accounting books.
❑ Classifying. In this phase, items are sorted and grouped. They may be classified
as asset accounts, liability accounts, capital accounts, revenue accounts and
expense accounts.
❑ Summarizing. After each accounting period, data recorded are summarized
through financial statements.
❑ Interpreting. Due to the technicality of accounting reports, the accountant’s
interpretation is needed. In this case, analysis reports are submitted together
with the financial statements.

ACCO 20213—Accounting Principles

 Fields of Accounting
❑ Public Accounting

❖ Auditing. This is the principal service that a public accountant offers. In

making an audit, he carefully examines, tests, and checks the accuracy of
the reports and the financial data from which these reports were taken.

❖ Management Advisory Services. This includes the design, installation, and

improvement of the firm’s general accounting system and other system
deemed necessary for controlling and distributing manufacturing costs.

❖ Tax Services. This includes preparation and filing of income tax returns.

ACCO 20213—Accounting Principles

 Fields of Accounting
❑ Private Accounting
❖ General Accounting. This includes the recording transactions and
preparing financial reports for the use of the management, owners,
creditors, governmental units, and other interested parties.
❖ Cost Accounting. This has to do with the controlling, determining, and
controlling costs particularly those costs in producing a product or service.
❖ Budgeting. This provides management a plan for future operations and
after this plan has been applied, summaries and reports comparing the
actual accomplishments with the plan are provided.
❖ Internal Auditing. Internal auditors see to it that the established
accounting procedures are being followed throughout the year.

ACCO 20213—Accounting Principles

 Fields of Accounting
❑ Private Accounting
❖ Government Accounting. Accountants in private business firms also check and
audit the income, payroll, and tax returns submitted to the government.
❖ Accounting Education. Faculty members in Accounting in various colleges and
universities are Certified Public Accountants.
❖ Internal Accounting. This is concerned with the transactions and special
problems of multinational business organizations in their dealings in the
international trade.
❖ Internal Auditing. Internal auditors see to it that the established accounting
procedures are being followed throughout the year.
❖ Social Accounting. This involves the measurement of social costs and benefits
such as the measurement of traffic patterns for the most efficient use of traffic
funds
ACCO 20213—Accounting Principles
 Business Organizations
❑ Ownership
❖ Single or Sole Proprietorship. Owned only by one person. Usually the owner is
also the manager of the business. He usually supplies the capital or borrow
funds from the banks or other lending institutions.
❖ Partnership. Owned by two or more owners. The owners, called partners,
agree on the capital contributions, management or the firm, distribution or
profits and losses, and other matters pertaining to the operation of the firm.
❖ Corporation. This is a business organization of not less than five persons. It is
organized by operation of law.

ACCO 20213—Accounting Principles

 Business Organizations
❑ Nature of Business
❖ Service Concern. Deals with the rendering of services to the customers such as
tailoring shops, beauty shops, firms of CPAs, lawyers, doctors, and others.

❖ Trading or Merchandising. Deals with the buying of goods and selling the
same goods in the same form for profit such as sari-sari stores, department
stores, grocery stores, etc.
❖ Manufacturing Concern. Involves purchase of raw materials and converting
these raw materials into finished products such as textile manufacturing firms,
candy manufacturing firms, etc.

ACCO 20213—Accounting Principles

 Business as an Accounting Entity
❖ Under this assumption, the entity is separate from the owners,
managers and employees who constitute the entity.
❖ The personal transactions of the owners shall not be allowed to
distort the financial statements of the entity.
❖ The shareholder is not the corporation and the corporation is not
the shareholder.

ACCO 20213—Accounting Principles

 Transactions
❖ Are the data that we record in the accounting books.
❖ These are economic activities of the firm.

❖ External transactions (activities that involve one enterprise and another

enterprise); internal transactions (activities within the enterprise)
❖ In every transaction, there is always a value received and a value parted with
(like money, property, or services).
Transactions Value Received Value Parted With
1. Purchase tools for cash Tools Money
2. Purchased supplies on credit Office supplies Obligation or Debt
3. Paid the monthly telephone Services Money
bill

ACCO 20213—Accounting Principles

 Accounting Elements or Values
❑ Elements directly related to the measurement of financial position

❖ Asset. A resource controlled by the entity as a result of past events and

from which future economic benefits are expected to flow to the entity.
▪ Current Asset. (PAS 1; Par. 66) The asset is cash or cash equivalent unless the asset
is restricted to settle a liability for more than twelve months after the reporting
period. The entity holds the asset primarily for the purpose of trading. The entity
expects to realize the asset within twelve months after the reporting period. The
entity expects to realize the asset or intends to sell or consume it within the entity’s
normal operating cycle.

▪ Noncurrent Asset. (PAS 1; Par. 66) Simply states that “an entity shall classify all
other assets not classified as current as noncurrent”.

ACCO 20213—Accounting Principles

 Accounting Elements or Values
❑ Elements directly related to the measurement of financial position

❖ Liability. A present obligation arising from past events the settlement of

which is expected to result in an outflow from the entity of resources
embodying economic benefits.
▪ Current Liability. (PAS 1; Par. 69) The entity expects to settle the liability within the
entity’s normal operating cycle. The entity holds the liability primarily for the
purpose of trading. The liability is due to be settled within twelve months after the
reporting period. The entity doe not have an unconditional right to defer
settlement of the liability for at least twelve months after the reporting period.

▪ Noncurrent Liability. (PAS 1; Par. 69) provides that all liabilities not classified as
current are classified as noncurrent.

ACCO 20213—Accounting Principles

 Accounting Elements or Values
❑ Elements directly related to the measurement of financial position

❖ Equity. Is the residual interest in the assets of the entity after deducting
all of the liabilities.
▪ Owner’s Equity in a proprietorship
▪ Partner’s Equity in a partnership
▪ Stockholders’ Equity or Shareholders’ Equity in a corporation
❖ Under PAS 1, paragraph 7, the holders of instruments classified as equity
are simply known as owners.

ACCO 20213—Accounting Principles

 Accounting Elements or Values
❑ Elements directly related to the measurement of financial
performance
❖ Income. Increase in economic benefit during the accounting period in the
form of inflow or increase in asset or decrease in liability that results in
increase in equity, other than contribution from equity participants.

❖ Expense. Decrease in economic benefit during the accounting period in

the form of an outflow or decrease in asset or increase in liability that
results in decrease in equity, other than distribution to equity participants.

ACCO 20213—Accounting Principles