Accounting Principles and Standards Quiz

Brief History of Accounting

• Luca Pacioli, a Franciscan monk, introduced accounting practices.
• In 1494, in Venice, Luca Pacioli published a book titled Summa de Arithmetica, Geometria, Proportioni et Proportionalita.
• This book contained primary mathematics principles and accounting procedures.

Philippine Standards Council (ASC)

• The Accounting Standards Council (ASC) was created by the PICPA on November 18, 1981.
• The ASC is a standard-setting body responsible for establishing and improving Generally Accepted Accounting Principles (GAAP).
• Approved statements and interpretations issued by the ASC are known as Statements of Financial Accounting Standards (SFAS).
• SFAS are effective upon approval by the PRC and are not retroactive.

ASC Composition

• The ASC consists of eight members with a two-year term.
• PICPA has 4 members.
• SEC has 1 member.
• BSP has 1 member.
• PRC/BOA has 1 member.
• FINEX has 1 member.

ASC Replacement

• The ASC was replaced by the Philippine Financial Reporting Standards Council (PFRSC) in 2004, under the Philippine Accountancy Act.
• The PFRSC was created by the PRC upon recommendation from the Board of Accountancy.
• The accounting statements are now known as Philippine Accounting Standards (PAS).

PFRSC Composition

• The PFRSC is composed of 15 members.
• Composition details include: 1 Chairman, 1 BOA, 1 SEC, 1 BSP, 1 BIR, 1 COA, 2 major organizations of preparers and users of Financial Statements, 2 Accredited National Organizations (CPAs: Public Practice), 2 Commerce & Industry, 2 Academe, and 2 Government

International Accounting Standards Council (IASC)

• The IASC was founded in 1973 as a standard-setting body to achieve uniformity in accounting principles.
• Approved IASC statements were known as International Accounting Standards (IAS).
• The IASC was later replaced by the IASB, whose reporting standards are called International Financial Reporting Standards (IFRS).
• The IASB does not have legal authority to impose standards, but many countries support them.

Definition of Accounting

• Accounting Standard Council (ASC) defined accounting as a service activity that provides primarily financial information about economic entities to aid in economic decision-making.
• American Accounting Association (AAA) defined accounting as the process of identifying, measuring, and communicating economic information to enable informed judgments and decisions by users of the information.
• The American Institute of Certified Public Accountants (AICPA) defined accounting as the art of recording, classifying, summarizing, in a significant manner, and in monetary terms, transactions and events of a financial nature and interpreting the results thereof.

Accounting Cycle

• The accounting cycle refers to the various steps in the accounting process that are performed repeatedly in a systematic manner in each accounting period.

Phases of Accounting

• The accounting process consists of recording, classifying, summarizing, and interpreting phases.
• Recording: This includes identifying transactions and events, documenting them in source documents, and recording them in the journal.
• Classifying: This involves sorting similar and related transactions into specific categories. This step involves posting transactions to the ledger.
• Summarizing: This involves preparing the financial statements and other accounting requirements.
• Interpreting: This involves analyzing and communicating the financial information to stakeholders for decision-making purposes. Further analysis of accounting information to help business management in sound decision making

Generally Accepted Accounting Principles (GAAP)

• GAAP are a set of accounting rules, procedures, practices, and standards used to prepare financial statements.
• GAAP ensures uniformity in financial statements preparation.

Requirements for GAAP Acceptance

• Accounting principles must be established by a standard-setting body and gain universal acceptance among practitioners.
• These principles must have substantial authoritative support from accounting bodies.

Cost, Objectivity, Materiality Principles

• Cost Principle: Assets are recorded at their original cost.
• Objectivity Principle: Accounting records must be based on verifiable data as evidence of transactions.
• Materiality Principle: Accounting principles should rule over practice when determining valuation

Matching, Consistency, Adequate Disclosure Principles

• Matching Principle: A combined concept of revenue and expense recognition.
• Consistency Principle: Accounting methods and procedures must be uniform.
• Adequate Disclosure Principle: Financial statements must be free from any material misstatement.

Basic Accounting Assumptions

• Accounting Entity: A business is treated as separate from its owners.
• Going Concern: A business is assumed to continue in operation indefinitely.
• Time-Period: The life of a business is divided into periods for financial statement reporting.
  • Calendar Year: Begins January 1 and ends December 31.
  • Fiscal Year: Starts on any day of the year except January and ends in the 12th month of that year.
  • Natural Business Year: Ends in the month when the business is at its lowest or slack season.
• Unit of Measurement: The peso is used as the unit of measurement and its purchasing power is assumed constant.
• Accrual Basis: Income is recognized when earned and expenses are recognized when incurred, regardless of when cash is received or paid.

Basic Financial Statements

• Balance Sheet: Shows the financial position of an enterprise at a specific point in time.
• Income Statement: Shows the performance of an enterprise over a period of time.
• Statement of Changes in Owner's Equity: Shows the changes in equity during a period.

Elements of Financial Statements

• Assets: Resources controlled by an enterprise that are expected to provide future economic benefits.
• Liabilities: Present obligations of an enterprise from past transactions or events that are expected to result in an outflow of resources embodying economic benefits.
• Owner's Equity: The residual interest in the assets of an enterprise after deducting liabilities.
• Income/Revenue: The gross inflow of economic benefits from ordinary activities.
• Expenses: The gross outflow of economic benefits during a period arising from ordinary activities.

Steps of the Accounting Process

1. Journalizing: Recording transactions in the journal.
2. Posting: Transferring journal entries to the ledger.
3. Trial Balance: A list of balances in the ledger accounts.
4. Adjusting Entries: Making necessary adjustments for accruals, deferrals, etc.
5. Worksheet (Optional): A working paper that facilitates financial statement preparation.
6. Financial Statements: Preparing the basic financial statements (Balance Sheet, Income Statement, Statement of Changes in Equity, Statement of Cash Flows).
7. Closing Entries: Closing nominal accounts.
8. Post-Closing Trial Balance: Trial balance showing only real accounts.
9. Reversing Entries: Used to reverse some adjusting entries at the beginning of the next accounting period.

Qualities of Financial Statements

• Understandability: Financial statements should be easily understood by users.
• Reliability: Information should be dependable and free from material error.
• Relevance: Useful for decision-making (predictive and feedback value, timeliness).
• Comparability: Comparable across companies.
• Consistency: Methods or practices should be uniform.

Users of Financial Statements

• Investors
• Employees
• Lenders
• Suppliers
• Customers
• Government
• Public

Forms of Business Organizations

• Sole Proprietorship
• Partnership
• Corporation
• Cooperatives

Classification of Businesses

• Service Concern
• Merchandising
• Manufacturing
• Agriculture
• Hybrid Companies