Basics of Accounting

• Accounting is identifying, measuring, and communicating economic information to allow informed judgements and decisions

Important Activities in Accounting

• Identifying involves analyzing events and transactions to determine recognition
• Recognition includes effects of an accountable event through journal entry
• Accountable events affect economic activity, such as assets, liabilities, equity, income, or expense
• Non-accountable events don't get recognized as accounting, but if relevant, get recorded in the memorandum entry

Types of Events or Transactions

• External events involve an external party.
• Exchange (reciprocal transfer) involves giving and receiving
• Non-reciprocal transfer involves giving but not receiving, (e.g., donation, tax)
• External events other than transfer are changes in economic resources or obligations with no transfer, (e.g., price levels, technological changes)
• Internal events don't involve an external party
• Production sees resources transformed into finished goods
• Casualty constitutes unanticipated loss

Measuring

• Measuring involves assigning numbers in monetary terms
• Financial statements mix costs and values
• Financial statements are a mix of fact and opinion
• Valuation by opinion - measurement affected by estimates
• Valuation by fact - measurement not affected by estimates

Measurement Bases

• Historical cost refers to the cost of inventory when originally purchased
• Fair value is measuring assets and liabilities at their current market value
• Present value is the current worth of a future sum of money or cash flows, discounted at a specific rate
• Net realizable value is the amount obtainable from selling an asset, minus costs associated with the sale
• Current costs are the cost to replace an asset at present prices
• Replacement costs are recognizing the expense of replacing an asset with a similar one

Communicating

• Communicating is the process of transferring economic data into useful accounting information for dissemination and interpretation
• There are three aspects to the communicating process in accounting
• Recording captures accountable events through journal entries
• Classifying groups similar items into classes through posting in the ledger
• Summarizing expresses information in a condensed form for accounting reports
• Interpreting the processed information involves computing financial statement ratios

Basic Purpose of Accounting

• The basic purpose of accounting is to provide economically useful information
• Economic entity is a combination of people and property using economic resources to achieve goals
• Types of economic entities include not-for-profit and business entities
• Economic activities affect economic resources, obligations, and equity of an economic entity
• Economic activities involve production, exchange, consumption, income distribution, savings, and investments

Accounting Information

• Accounting provides quantitative information, like numbers or units
• Accounting provides qualitative information, words or descriptions usually found in notes
• Accounting provides financial information, which is money

Accounting Information Classified by User Need

• General purpose accounting information is for common needs of most statement users
• Special purpose accounting information serves specific needs of particular users

Accounting Concepts

• Accounting concepts are the principles upon which the accounting process is based
• Accouting concepts can also be called accounting assumptions or accounting theory
• Double-entry system involves debits and credits
• Going Concern Assumption assumes continual operation & not expect to end
• Separate Entity means owners' personal transactions separate from the business
• Stable Monetary Unit expresses accountability in a common unit of measure, assuming stable purchasing power
• Time Period divides the life of a reporting entity into periods, usually 12 months
• Calendar Year starts January 1
• Fiscal Year starts on a date other than January 1
• Materiality Concept says judgment must be based on size and nature
• Cost-benefit says cost must equal benefit
• Accrual Basis means recognizing effects of transactions when they occur, not when cash is received or paid
• Historical Cost Concept (Cost Principle) means asset value is based on acquisition cost
• Concept of Articulation states all components of a complete set of financial statements are interrelated
• Full Disclosure Principle involves including enough details to make information understandable
• Consistency Concept involves using the same accounting principle over different periods
• Matching means recognizing costs as expenses when the related revenue is recognized
• Entity Theory is proper income determination (A=L+C)
• Propriety Theory is proper valuation of assets (A-L=C)
• Residual Equity Theory applies when there are two classes of shares issued [ordinary and preferred] (A-L-Preferred Shareholder's Equity=Ordinary Shareholders Equity)]
• Fund Theory captures custody and administration of funds (cash inflows – cash outflows=funds)
• Realization involves converting non-cash assets into cash or claims for cash
• Prudence (Conservatism) involves using caution when making estimates; doesn't allow deliberate assets' understatement or liabilities' overstatement, choosing least effect on equity

Expense Recognition Principle

• Matching Concept (Direct Association of Costs and Revenues) involves expensing costs directly related to revenue in the same period
• Systematic and Rational Allocation involves costs not directly related to revenue, they are recognized are assets first and are expensed when consumed using allocation, (e.g., depreciation, amortization)
• Immediate Recognition applies when costs do not meet or cease to meet the definition of assets, they are expensed immediately (e.g., casualty and impairment losses)

Branches of Accounting

• Financial Accounting focuses on general purpose financial statements. Governed by PFRS
• Financial Statements (FS) capture an entity's financial position/results and are made available to users
• Financial Report (FS plus other information) helps decision-making and is useful to external users
• Provides information on entity's economic resources, claims, and changes
• Assesses the entity's management stewardship

Accounting Profession

• Philippine Accountancy Act of 2004 (R.A. 9298) covers accounting profession
• Public practice involves rendering service to more than one client on a fee basis
• Commerce and Industry is employment in the private sector
• Education/Academe involves employment in educational institutions
• Government involves employment in government or controlled corporations Note: Commerce/Industry and Government are considered private practice.

Philippine Financial Reporting Standards

• Accounting standards adopted by the Financial and Sustainability Reporting Standards Council (FSRSC), the official accounting standard setting body in the Philippines from the International Financial Reporting Standards (IFRS)
• These consist of
• Philippine Financial Reporting Standards (PFRS)
• Philippine Accounting Standard (PAS)
• Interpretations
• Reporting standards economic decisions allow for comparability, avoid fraudulent reporting, and promote accuracy

Hierarchy of Reporting Standards

• When selecting its accounting policy, an entity considers the following in descending order
• Philippine Financial Reporting Standards
• In the absence of PFRS, management may use judgment to develop and apply an accounting policy

Making Judgements

• Management considers the following in descending order:
• Requirements in PFRS dealing with similar or related issues
• Conceptual framework
• Management may consider the following:
• Pronouncements of other standard setting bodies
• Accounting literature and accepted industry practices

Conceptual Framework for Financial Reporting

• The Conceptual Framework prescribes concepts for general purpose financial reporting
• It assists the IASB in developing standards
• It assists preparers in developing consistent accounting policies when no standard applies
• It assists all parties in understanding and interpreting the standards
• It provides the foundation for the development of standards that involve transparency, accountability, & efficiency
• The framework provides underlying concepts for general purpose financial reporting with regard to objective, qualitative characteristics, financial statements, elements, recognition, measurement, presentation, and capital maintenance

Objective of Financial Reporting

• It is to provide financial information about the reporting entity that is useful to potential investors, lenders, and other creditors (primary users of financial statements) in making decisions about providing resources to the entity

Qualitative Characteristics

• Fundamental Qualitative Characteristics are information useful to users
• To provide relevance, the information needs to
• Have Predictive Value to make predictions of future outcomes
• Have Confirmatory Value to confirm previous decisions
• Materiality says information is material when omitting or misstating would primary users' decision
• To provide faithful representation, the information needs to be
• Complete, must provide all information needed for understanding
• Neutral meaning not manipulated or without bias
• Free from Error meaning accurate but not precise, supported by prudence
• Enhancing Qualitative Characteristics enhance information usefulness
• Comparability identifies similarities/differences in information through intra/inter-comparability
• Verifiability sees that different users should reach a general agreement
• Direct verification can be observed directly (e.g., counting of cash)
• Indirect verification redoes the methodology used by the entity
• Timeliness means available to users on time
• Understandability involves a clear and concise manner

Elements of Financial Statements

• Financial Position elements are:
• Assets - present economic resource controlled by the entity as a result of past events w/ potential to produce economic benefits
• Liabilities - present obligation of the entity to transfer economic resources as a result of past events
• Executory Contract - equally unperformed by both parties or have been partially fulfilled with equal extent
• Executed Contract – fulfilled by other party
• Obligations are either:
• Legal obligations from contract or law
• Constructive obligations from entity's action
• Equity - the residual interest in the assets of the entity after deducting all its liabilities.
• Reserves are amounts set aside to protect entity's creditors/shareholders from losses
• Sole proprietorship is owner's equity
• Partnership is partner's equity
• Corporation is shareholder's equity
• Financial Performance elements are:
• Income - Increase in assets or decrease in liabilities, increasing equity that do not relate to contributions from equity claims
• Expense - Decreases in assets or increases in liabilities that decrease in equity, other than contributions to equity claims

Presentation and Disclosures

• Information about the entity's assets, liabilities, equity, income and expenses is communicated through presentation/disclosure in statements
• To give entities flexibility to faithfully provide relevant information
• To require information to be intra-comparable/inter-comparable

Key Definitions

• Classification = Sorting elements of FS with similar nature, function, and measurement basis
• Offsetting = Combining asset and liability with separate units into a net amount
• Aggregation = Combines dissimilar items
• Assets and liabilities are classified as current or non-current
• Current assets are those expected to be used within 12 months after the reporting period.
• Current liabilities are those to be paid within 12 months after the reporting period

Assets

-Current Assets:

• Realized, sold, or consumed in normal operating cycle
• Held primarily for trading and expecting to be realized within 12 months
• Cash or equivalents unless restricted exchange or liability settlement for 12 months
  • Current Liabilities:
• Settled in normal operating cycle and primarily held for trading
• settled within 12 months
• entity doesn't have right to defer liability settlement for 12 months
• Corporation equity sections classify shares capital, retained earnings, and other components like share premium/treasury
• Income and expenses are classified as recognized in profit or loss/other comprehensive income (OCI)
• Framework mentions two concepts of Capital:
• Financial concept where Capital is invested money/invested purchasing powe
• Physical concept where Capital is the entity's productive capacity

PAS 1 - Presentation of Financial Statements

• PAS 1 prescribes general-purpose financial statements presentation
• PAS 1 states structure guidelines and contents to minimize the need to ensure comparability
• Structured representation of the entity's financial statements are communicated to users
• The reporting process is a periodical occurrence
• General purpose cater to the common needs of users

Financial Statements Objective

• Primary Objective to show info of a entity that is useful to a wide range of users making economic decisions
• Secondary objective to show the results of Stewardship management over the entity's resources

General features of financial statements

• Fair and complying is PFRS
• Reporting the affect of trans/events in definition with the recognition criteria of asstes
• Financial statements are to remain consistent

Unless its misleading, PAS 1 permits the departure of a governing body's Regulatory framework

• Accounting for departure means following a method or approach that results is a fair representation
• Entity is to remain a going concern has to be intended for liquidation
• Not being a going concern involves deciding to cease trade/lack of realist alternative for bankruptcy
• All financial statements should use accrual basis accept for cash flow which uses cash
• Being able to liquify easier comes from the ability to short term obligations

PAS 2 Inventories

• Assets and Liabilites need to be measured at cost

• Inventory isn't always valued at cost or NVR unless:

• produced with agri or forest the inventory has to be measured with its cost with NRV

• Specific identification used for inventories that aren't interchangeable

• FIFO's cost of sales shows cost from earlier purchases while inventory represents end cost

• Weighs average is the TGAS divided by TGAS which results in the over all total

• For Raw materials Replacement cost is the accurate cost

PAS 7 cash flow

• Cash shows information by stating the use with Historical changes
• cash provides to provide quality of a company along with enhancements of inter-comparability
• Operating activity shows the actions that affect profit or loss
• investing shows the acquisition and Disposal of noncurrent assets that are not used
• Financing reflects borrowing from other places
• Direct method shows provide info by having the most useful estimating information
• changes in ownership shows acquisition and dispostions of business
• Cash equivalents are not cash, bank overdafts presented separately in financing
• Interest is split and should not be mixed
• PAS 8 covers the range for disclosure in accounting.
• Reliability is based on the financial records of the statements

PAS 12 Covers reporting policies

Accouting policies involve changes as a treament in accounts

• financial statements follow under the correct accounting

Errors can be avoided by following the PFRS or reliable statements

PAS 10

PAS 10 prescribes statements after the reports

• Events the occur that are unavalible are still counted while being determined PAS 12 covers income and tax which should be determined Asset liabiiity shows all accounts while following the the correct rules.

PAS 16

PAS 16 involves all eixping

• tangible items have substance while used and needed
• PP&E is required to be measured at any cost
• PP&E model used with its fair value PAS 23 borrowed cost for a particular cost
• Borrrowing cost is capitalized with quialitying assessment of costs.
• The costs need to be recognized without the involvement of a qualified assett.

Pas 24 transactions

• The act of knowing a party is related with the ability of knowing their effect on the control
• It helps assess the risks with transparenty

Pas 26 transactiions

• PAS 26 prescribes that accounting has to be fair to all who partipicte
• all plans have to have the correct reporting entity for those in order to make it fair
• A statement is to remain at its current net value

Pas 27 transactions

• The ability to choose is used with what the PAS holds for investments to make things fair.
• the process has to be separate from ones original financial statement

Pas 28 transactions

PAS 28 accounts for investsments in fair manor Significant influence means to partake in decisons

• a regular investent won't have to get as deeply involved