Introduction to Fundamentals of Accounting 1 PDF

7-1 INTRODUCTION TO FUNDAMENTALS OF ACCOUNTING 1 1 HISTORY OF ACCOUNTING v Accounting is said to be the “oldest profession”. In fact, since prehistoric time, families had to account for...

7-1 INTRODUCTION TO FUNDAMENTALS OF ACCOUNTING 1 1 HISTORY OF ACCOUNTING v Accounting is said to be the “oldest profession”. In fact, since prehistoric time, families had to account for their food and clothing to face the cold season. v Later, as man began to trade, they established the concept of value and developed a monetary system. Evidence of accounting records can be found in the Babylonian Empire (4500 B.C.), in pharaohs' Egypt and in the Code of Hammurabi (2250 B.C.) through “clay tablets” which accounts for commercial transactions. v Eventually, with the advent of taxation, record keeping became a necessity for governments to sustain social orders. Tithing to ruling theocratic class were also faithfully recorded. 2  7-2 HISTORY OF ACCOUNTING v The Italian Renaissance brought the artistic accomplishments of man to new heights. At this time, Venice was the business cradle of Europe, and it was here among merchants that “DOUBLE ENTRY SYSTEM” of accounting was invented and practised. v During this period Fra Luca Pacioli, an Italian monk, wrote his "Summa" dealing with record keeping and double-entry accounting. v In this book, Pacioli introduced three important books of records, namely (1) Memorandum Book - for all information on transaction; (2) Journal Book – for the original entry; and (3) Ledger Book – for the final entry. 3 HISTORY OF ACCOUNTING v Pacioli was born during 1445 in Sansepolcro, Tuscany. He was a mathematician and friend of Leonardo da Vinci. He wrote and taught in many fields including mathematics, theology, architecture, games, military strategy and commerce. v In 1494, Pacioli published his famous book "Summa de Arithmetica, Geometria, Proportioni et Proportionalite" (The Collected Knowledge of Arithmetic, Geometry, Proportion and Proportionality. 4  7-3 HISTORY OF ACCOUNTING v One section of this book was dedicated to the description of double-entry accounting. The Summa was one of the first books published on the Gutenberg press, became an instant success and was translated into German, Russian, Dutch, and English. v The Summa made Pacioli a celebrity and insured him a place in history, as "The Father of Accounting”. 5 OTHER EVIDENCE OF DEVELOPMENTS OF ACCOUNTING 1. FLORENTINE and VENETIAN APPROACH FLORENTINE APPROACH Under this method, each transaction resulting in at least one account being debited and at least one account being credited, with total debits equal to the total credits. This is known as journal entries. VENETIAN APPROACH Under this method, accounts are recorded in bilateral form, where debits are recorded on the left side of the page with credits on the right side. This is known as ledger postings. 6  7-4 OTHER EVIDENCE OF DEVELOPMENTS OF ACCOUNTING SAVARY COMMERCIAL CODE JACQUES SAVARY (1622-1690), known as the Chief Architect of the Commercial Code of France in 1673 (called the Code of Savary) introduced the use of “historical cost” as the basis of valuation. NAPOLEONIC COMMERCIAL CODE Napoleon Bonaparte initiated the codification of France’s Civil Law which was named after him, the “Code of Napoleon” in March 21, 1804. Three years later, during 1807, the Code de Commerce amended and supplemented the Code of Napoleon. This law dictates that “assets must be carried at their market value on the day of inventory” and not on the basis of historical cost. 7 OTHER EVIDENCE OF DEVELOPMENTS OF ACCOUNTING SCHMALENBACH EUGEN SCHMALENBACH (1873-1955), a writer and professor, introduced the use of “Chart of Accounts” in Poland since the World War II. He believed that Chart of Accounts contains a simplified listing of all accounts to be used by companies in recording all commercial transactions. 8  7-5 DEFINITION OF ACCOUNTING Accounting is a service activity. Its function is to provide quantitative information, primarily financial in nature, about economic entities, that is intended to be useful in making economic decision. - ASC – Old SFAS 1 (now PAS) (Financial Reporting Standard Council, FRSC) 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. – AICPA Accounting is the process of identifying, measuring and communicating economic information to permit informed judgment and decision by users of the information. - AAA 9 DEFINITION BY AMERICAN ACCOUNTING ASSOCIATION IDENTIFYING - analytical component - the recognition or non-recognition of business activities as “Accountable Events” - An event is accountable or quantifiable when it has effects on Assets, Liabilities and Capital, and is called “Economic Activity”. - Economic Activity maybe: (1) External/Exchange Transaction – involving one enterprise and another (2) Internal Transaction – involving the enterprise only 10  7-6 DEFINITION BY AMERICAN ACCOUNTING ASSOCIATION MEASURING - technical component - assigning of Peso amounts to the accountable economic transactions/events - there must be a common financial denominator - e.g. fair market value, historical cost, current replacement cost, net realizable value, or present or discounted value. 11 DEFINITION BY AMERICAN ACCOUNTING ASSOCIATION COMMUNICATING - formal component - process of preparing and distributing accounting reports to potential users of accounting information - implicit in the communication process are: (a) Recording/Journalizing – systematically maintaining a record of all economic transactions (b) Classifying – sorting/grouping of similar and interrelated economic transactions into classes (c) Summarizing – preparation of Financial Statements 12  7-7 USERS OF FINANCIAL INFORMATIONS Qualities or Attributes that make Financial Accounting Information USEFUL to the users. USERS OF INFORMATION (a) Management/Owners and Officers INTERNAL USERS (b) Employees/Labor Unions (c) Investors (d) Lenders (e) Suppliers and other trade creditors EXTERNAL USERS (f) Customers (g) Government and its agencies (h) Public 13 ACCOUNTING PROFESSION - Regulatory Body, Board of Accountancy - Licensure Examination - Issuance of License - Membership to different organization like PICPA, NACPAE, ACPAPP, etc. 14  7-8 BRANCHES OF ACCOUNTING (a) Public Accounting – external auditing, taxation, management advisory services (b) Private Accounting – as employees in a company doing financial accounting, cost accounting, budgeting, accounting information system, tax accounting, internal auditing SPECIALIZED AREAS like Forensic Accounting, Information Technology Services, Environmental Accounting, International Accounting 15 BRANCHES OF ACCOUNTING (c) Government Accounting – deals with the receipts/disposition of government funds, like the works of provincial, Commission of Audit (COA), Budget Officers of government offices. (d) Accounting Education – becoming member of the academe. As per Commission on Higher Education (CHED), a CPA in accounting education should possess the educational qualifications, professional experience, classroom teaching ability, computer literacy, scholarly research productivity and other attributes that are essential for the successful conduct of a professional accounting program. (CMO NO. 3, SERIES OF 2007) 16  7-9 ACCOUNTING, in comparison (1) Accounting vs. Auditing (2) Accounting vs. Bookkeeping (3) Accounting vs. Accountancy (4) Financial Accounting vs. Managerial Accounting 17 TYPES OF BUSINESS ENTERPRISE (according to nature of activities) SERVICE BUSINESS – renders services to clients for a fee like schools, airlines, restaurants, security and janitorial services, beauty salon, professionals like doctors, lawyers, accountants, etc. MERCHANDISING BUSINESS – one which buys and sells goods without altering their original form. It may be either on a retail or wholesale basis. It maintains INVENTORY which are held for sale in the normal course of business operation. E.g. grocery and drugstores, bookstore, department stores and hardware business. MANUFACTURING BUSINESS – one which buys raw materials, processes the same into finished goods, then sells it at a price higher than cost. The costs normally include the price of raw materials, labor costs, and manufacturing overhead. 18  7-10 TYPES OF BUSINESS ORGANIZATION (according to ownership) (A) SOLE PROPRIETORSHIP A business owned by one person called by proprietor normally applicable for business with small capital. The owner receives any profits, suffers any losses, and is personally liable for all debts of the business. There is no legal distinction bet. the business as an economic unit and the owner, BUT the accounting records of the business activities are kept separate from the personal records and activities of the owner. 19 COMPARISON OF PROS AND CONS ADVANTAGES: -Ease of entry and exit -Full ownership control -All profits go directly to owners/ suffers losses -Tax savings -Few government regulations DISADVANTAGES: -Unlimited liability -Limitations in raising capital -Lack of continuity 20  7-11 FORMATION OF SOLE PROPRIETORSHIP 1. Registration of Business Name with Department of Trade and Industry (DTI) 2. Securing of Barangay Permit (renewal every year) 3. Applying Business Permit with the local City Hall (renewal every year) 4. Registration with the Bureau of Internal Revenue (BIR) every year. 5. Registration with the Social Security System (SSS), Philippine Health Insurance Corporation (PHIC) and Home Development Mutual Fund (HDMF) (Pag-ibig) 21 FORMS OF BUSINESS ORGANIZATION (B) PARTNERSHIP A business owned by two or more persons associated as partners, who agreed to contribute money, property or industry into a common fund with intention of dividing profits/losses. often used to organize service-type businesses including professional practice such as by lawyers, CPAs, doctors and architects. A “Partnership Agreement” is executed by the partners and sets forth such terms as initial investment, duties of each partners, division of net income (loss), and settlement to be made upon death or withdrawal. Each partner has unlimited personal liability for the debts of the partnership. The activities of the partnership must be kept separate from the personal affairs of the partners. 22  7-12 COMPARISON OF PROS AND CONS PARTNERSHIP ADVANTAGES: -Ease of formation -Additional sources of capital -Management base -Tax implications DISADVANTAGES: -Unlimited liability -Difficulty in transferring ownership -Lack of continuity -Limitation in raising capital 23 FORMATION OF PARTNERSHIP 1. Verification and Reservation of Business Name with the Securities and Exchange Commission (SEC) and DTI 2. Filing of Articles of Partnership with SEC 3. Securing of Barangay Permit (renewal every year) 4. Applying Business Permit with the local City Hall (renewal every year) 5. Registration with the Bureau of Internal Revenue (BIR) every year. 6. Registration with the Social Security System (SSS), Philippine Health Insurance Corporation (PHIC) and Home Development Mutual Fund (HDMF) (Pag-ibig) 24  7-13 FORMS OF BUSINESS ORGANIZATION (C) CORPORATION A business organized as a separate legal entity under the law and having ownerships divided into transferable shares of stock. The owners of the shares of the corporation are called the Stockholder (Shareholders). An document known as the “Articles of Incorporation” must be executed by the incorporators and have it approved by the Securities and Exchange Commission (SEC) together the corporation’s Bylaws. Stockholders may transfer all or part of their shares to other investors at any time without dissolving the corporation since it enjoys an unlimited life. 25 COMPARISON OF PROS AND CONS CORPORATION ADVANTAGES: -Limited Liability -Unlimited life -Ease in transferring ownership -Ability to raise capital DISADVANTAGES: -Time and cost in formation -More Regulation -Taxes 26  7-14 FORMATION OF CORPORATION 1. Verification and Reservation of Business Name with the Securities and Exchange Commission (SEC) and DTI 2. Initial subscription payments deposited to preferred bank 3. Filing of Articles of Incorporation and Bylaws with SEC 4. Securing of Barangay Permit (renewal every year) 5. Applying Business Permit with the local City Hall (renewal every year) 6. Registration with the Bureau of Internal Revenue (BIR) every year. 7. Registration with the Social Security System (SSS), Philippine Health Insurance Corporation (PHIC) and Home Development Mutual Fund (HDMF) (Pag-ibig) 27 Revised Corporation Code of the Phils. Republic Act No. 11232 (Signed into law on February 20, 2019) SALIENT FEATURES 1. One-Person Corporations (OPCs). The Revised Code removes the minimum number of incorporators from 5 to 1, thus allowing individual to form a corporation, which is a viable alternative for sole proprietors. 2. Arbitration Agreements Embedded in Articles of Incorporation/Bylaw to deal with disputes between corporation, its stockholders or members or from intra-corporate relations 3. Corporations vested with Public Interest. The Revise Code refers to corporations vested with public interest, which are subject to additional regulatory conditions that do not apply to other corporations. These corporations are required to elect a Compliance Officer upon organization, to submit additional annual reports particularly a compensation report and appraisal or performance report of directors/trustee. Corporations with Public Interest include those listed with an exchange, those with assets of at least P50M and having 200 or more holders of shares, banks and quasi- banks, non-stock savings and loan association, pawnshops, money-service, preneed, trust and insurance, and financial intermediaries. They are required to have at least 20% composition of the board as Independent Directors. 4. Removal of the Amount of Capital Stock to be Subscribed and Paid for the purpose of Incorporation. Stock corporations continue not to be required to have a minimum capital stock unless otherwise provided by special law. However, the 25%-25% rule has been removed as well as the minimum paid-up of not less P5,000, hence, the Treasurer’s Affidavit is no longer required. CPD Seminar Series 28 28  7-15 Revised Corporation Code of the Phils. Republic Act No. 11232 (Signed into law on February 20, 2019) SALIENT FEATURES 5. Indefinite Corporate Life. The new code provides that corporations shall have perpetual existence unless its Articles of Incorporation provides otherwise. 6. Revival of Corporations whose term had already expired. The new Code expressly allows corporation whose term has expired to apply with SEC for the revival of its corporate existence, together with all the rights and privileges under its original certificate of incorporation and subject to all of its duties, debts and liabilities existing prior to its revival. Revival shall not apply to corporations with public interests unless accompanied by a favorable recommendation from the appropriate government agency. 7. Extended Period to Commence Operation. Corporations are now allowed to have 5 years from the date of incorporation to commence their operations. The old Code only allowed 2 years. 8. Filing of Articles of Incorporation and application for amendments in Electronic Form. 9. Delinquent Corporations. These are corporations which had commenced operations but subsequently became inoperative for a period of at least 5 consecutive years, which are now given a period of 2 years to resume operations and comply with all the requirements. CPD Seminar Series 29 29 Revised Corporation Code of the Phils. Republic Act No. 11232 (Signed into law on February 20, 2019) SALIENT FEATURES 10. Lifting the ban on Corporate Donations for political parties and/or candidates. The new Code expressly bans only foreign corporations from giving donations to political parties/candidates. 11. Electronic Notices. The Revised Code allows written notices of regular stockholders meetings to be sent through email or such other manner as the SEC shall permit. Corporations are allowed to specify in their bylaws the means of communications through which notice of meeting would be sent, either for regular or special meetings. 12. Remote Participation. The new Code now allows members of the board to participate in meeting through remote communications such as videoconferencing, teleconferencing or other alternative modes of communications that allow them reasonable opportunities to participate. Stockholders/members may also be allowed to vote through remote communication or in absentia provided that such is stated in the bylaws. 13. Financial Statements of corporations with total assets or liabilities less than P600,000, or such other amount as may be determined appropriate by the DOF, may only be certified under oath by the Treasurer and the President. CPD Seminar Series 30 30  7-16 FORMS OF BUSINESS ORGANIZATION (D) COOPERATIVE A business owned by group of individuals minimum of 15 members serving as benefactors of the business endeavors to which the cooperative was formed, like for credit, electric, education, health, etc. A document known as the “Articles of Cooperation” and Bylaws must be executed by the founding members and have it approved by the Cooperative Development Authority (CDA). Members can become part of the cooperative by purchasing shares. 31 COMPARISON OF PROS AND CONS COOPERATIVE ADVANTAGES: -Unlimited life -Ease in transferring ownership -Ability to raise capital -Democratic organization -Exempt from taxes, generally -Less regulations DISADVANTAGES: -One member one vote policy -Members’ participation may be lacking 32  7-17 FORMATION OF COOPERATIVE 1. Preparation and submission of General Statement, Articles of Cooperation and Bylaws to CDA 2. Attending Seminars required by CDA. 3. Securing bond for accountable officers. 4. Securing of Barangay Permit (renewal every year) 5. Applying Business Permit with the local City Hall (renewal every year) 6. Registration with the Bureau of Internal Revenue (BIR) every year. 7. Registration with the Social Security System (SSS), Philippine Health Insurance Corporation (PHIC) and Home Development Mutual Fund (HDMF) (Pag-ibig) 33 GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP) Encompass the conventions, rules, and procedure necessary to define what is accepted accounting practice. Rules, procedure, practice and standards followed in the preparation and presentation of Financial Statements. Promulgated by the Accounting Standards Council (ASC) and now the Financial Reporting Standard Council (FRSC). 34  7-18 FINANCIAL REPORTING STANDARDS COUNCIL (FRSC) FRSC replaces the now defunct Accounting Standards Council (ASC). The accounting standard setting body created by the PRC upon recommendation by the Board of Accountancy. Function: To establish and improve accounting standards that will be generally accepted in the Philippines. They issue the Philippine Accounting Standards (PAS) and Philippine Financial Reporting Standards (PFRS). 35 Factors Affecting the Adoption by FRSC of IAS/IFRS Ø Support of IASC standards by Philippine organizations, such as Philippine SEC, Board of Accountancy and PICPA; Ø Increasing internationalization of business which has heightened interest in common language for financial reporting; Ø Improvement of IASC standards; Ø Increasing recognition of IASC standards by the World Bank, Asian Development Bank and World Trade Organization. 36  7-19 QUALITATIVE CHARACTERISTICS OF USEFUL FINANCIAL INFORMATION -If Financial Information is to be useful, it must be Relevant and Faithfully Represent what it purports to represent. (Fundamental Qualitative Characteristics) -The usefulness of financial information is enhanced if it is: Comparable, Verifiable, Timely and Understandable. (Enhancing Qualitative Characteristics) 37 FUNDAMENTAL QUALITATIVE CHARACTERISTICS (A) RELEVANCE Relevant financial information is capable of making a difference in the decisions made by users. The capacity of information to influence a decision based on (a) Outcome of past, present and future events; or (b) Confirm/Correct prior expectations INGREDIENTS: (a) Predictive Value – likelihood of accurately predicting/forecasting outcome of events. If financial information can be used as an input to process employed by users to predict future outcomes. (b) Confirmatory Value – users can confirm/correct earlier expectations, provides feedback about (confirms or changes) previous evaluation. (c) Materiality – Information is material if omitting it or misstating it could influence decisions; it is an entity-specific aspect of Relevance based on the nature or magnitude or both, of the items to which the information relates in the context of an individual entity’s financial report 38  7-20 FUNDAMENTAL QUALITATIVE CHARACTERISTICS (B) FAITHFUL REPRESENTATION Financial reports represent economic phenomena in words and numbers. It must not only represent relevant phenomena but must also faithfully represent the substance of the phenomena that it purports to represent. (substance and legal form are the same) Must be complete, neutral and free from error (a) COMPLETE DEPICTION – all information necessary for a user to understand the phenomena being depicted, including all necessary descriptions and explanation. (b) NEUTRAL DEPICTION – without bias in the selection or presentation of financial information and supported by Prudence, the exercise of caution when making judgments under condition of uncertainty, assets and income are not overstated and liabilities and expenses are not understated. (c) FREE FROM ERROR – there are no errors or omissions in the description of the phenomenon, and the process used to produce the financial information has been selected and applied with no errors. 39 ENHANCING QUALITATIVE CHARACTERISTICS (A) COMPARABILITY The ability to bring together for the purpose of noting points of likeness and difference. (a) Comparability within an Enterprise – comparison w/in a single enterprise; horizontal comparability or intracomparability (b) Comparability bet. Enterprises – comparison bet. 2 or more enterprises in the same industry; intercomparability or dimensional comparability Consistency – implicit, that accounting methods and practices must be uniform from period to period. COMPARABILITY IS THE GOAL, CONSISTENCY HELPS ACHIEVE THAT GOAL. (B) VERIFIABILITY It means that different knowledgeable and independent observers could reach consensus, although not necessarily complete agreement, that a particular depiction is a faithful representation. It can be DIRECT (verifying an amount or other representation through direct observation) or INDIRECT (checking the inputs to a model, formula or other technique and recalculating the output using the same methodology) 40  7-21 ENHANCING QUALITATIVE CHARACTERISTICS (C) TIMELINESS Having information available to decision-makers in time to be capable of influencing their decisions. Generally, the older information is the less useful. However, some information may continue to be timely long after the end of a reporting period because for example, some users may need to indentify and assess trends. (D) UNDERSTANDABILITY Classifying, characterizing and presenting information clearly and concisely Must be presented in a form and expressed in terminology that a user may understand Financial reports are prepared for users who have reasonable knowledge of business and economic activities and who review and analyze the information diligently. 41 BASIC ASSUMPTIONS -Also known as “Accounting Postulates” -Basic notions or fundamental premises on which accounting process is based. - Economic Entity, Monetary, Time period (periodicity of income) and Going Concern 42  7-22 BASIC ASSUMPTIONS (A) ECONOMIC ENTITY The entity is separate from the owners, managers, and employees who constitute the company. (B) TIME PERIOD The indefinite life of the entity is subdivided into time periods or accounting periods, which are usually of equal length for the preparation of FS. E.g Calendar or fiscal year (C) MONETARY UNIT Based on Quantifiability and Stability of Peso. -Quantifiability – FS should be stated in a unit of measure, Philippine Peso or Foreign Currency. -Stability of the Peso – purchasing power of Peso is stable/constant and no significant impact on FS in case of instability. 43 BASIC ASSUMPTIONS (D) GOING CONCERN OR CONTINUITY General presumption, the accounting entity is viewed as continuing in operation indefinitely, absence any showing of evidence to the contrary. 44  7-23 BASIC PRINCIPLES FULL DISCLOSURE - Financial reports should show all relevant information bearing on the economic affairs of a business, including subsequent events. REVENUE RECOGNITION - Income must be recognized in the financial statements when earned regardless of when cash is received. MATCHING - Revenue should be offset by all the expenses incurred in producing the revenue. 45 OTHER ACCOUNTING CONCEPTS COST PRINCIPLE - Assets should be recorded at their actual or historical value. 46  7-24 OTHER ACCOUNTING CONCEPTS ACCRUAL - Income is recognized when earned regardless of when received, and Expense is recognized when incurred regardless of when paid. E.g. Account Receivable, Account Payable, prepaid expenses, deferred income etc. CONSERVATISM OR PRUDENCE -Anticipated losses are to be provided and anticipated gains are not to be accounted for unless realized. COST/BENEFIT or COST CONSTRAINT -Reporting financial information imposes costs, and it important that those costs are justified by the benefits of reporting that information. 47 OTHER ACCOUNTING CONCEPTS INDUSTRY PRACTICE - Some industries have unusual tax laws or regulatory requirements and so have developed special accounting principles and procedures for their industry. These practices may not conform completely with GAAP or IFRS Standards and so are not suitable for other industries. OBJECTIVITY - o the business entity should use documents as basis for recording business transactions and so avoids subjectivity when preparing financial statements SUBSTANCE OVER FORM - business transactions should be treated according to the real substance, not the legal position (legal form) 48  7-25 PROFESSIONAL ETHICS (1)INTEGRITY – being straightforward and honest (2) OBJECTIVITY – fair and not bias, avoid conflict of interest (3) COMPETENCE AND DUE CARE – being knowledgeable in latest updates and changes in accounting practice, and exercising diligence (4) CONFIDENTIALITY – not disclosing information to others unless authorized (5) PROFESSIONAL BEHAVIOR – maintaining good reputation and refraining from acts which will discredit the profession. (6) TECHNICAL STANDARDS – compliance with technical and professional standards. 49 EXERCISE 1 – IDENTIFY THE ACCOUNTING CONCEPTS 1. Users of financial information are informed of any facts necessary for the proper interpretation of the statements. 2. Money is used as a unit of measure. 3. Revenue should be offset by all the expenses incurred in producing the revenue. 4. Net income is measured for relatively short accounting periods of equal length. 5. The accounting treatment to be applied must result in a lower net income. 6. It is the policy of recognizing revenue in the accounting records when it is earned. 7. A business should generally use the same accounting methods from one period to the next. 50  7-26 EXERCISE - ACCOUNTING CONCEPTS 8. It is the policy of recognizing expenses when the related goods or services are used. 9. Transactions must be supported by business documents. 10.This concept assumes that the business will continue to operate indefinitely. 51 EXERCISE 2 – IDENTIFY THE ACCOUNTING CONCEPTS 1. Accountants generally choose a method or procedure that will yield a lower amount of income and asset value. 2. It requires that all relevant information affecting the users’ understanding and assessment of the accounting entity be included in the financial statements. 3. Accounting records and statements are based on the most reliable data available in order to make it accurate. 4. This principle states that acquired assets should be recorded at their actual or historical value. 5. It assumes that the business is to continue its operations indefinitely, justifying cost and ignoring liquidation values. 52  7-27 EXERCISE 2 – IDENTIFY THE ACCOUNTING CONCEPTS 6. The firm should use the same accounting method from period to period to achieve comparability over time within a single enterprise. 7. Financial reporting is concerned only with information that is significant enough to affect valuations and decisions. 8. Under this concept, money is used as the unit of measure in preparing the various financial reports of the company. 9. It divides the life of the business into regular intervals (usually one year), at the end of which financial statements are prepared. 10.The business is regarded as having a separate and distinct personality from its owner. 53 EXERCISE 3 – IDENTIFY THE ACCOUNTING CONCEPTS 1. Cash of P1,000 received from a customer for services to be rendered in the next accounting period is not taken up as revenue. 2. Expenses incurred amounting to P10,000 are offset against revenue of P15,000 earned in the same period. 3. The financial performance of a business are measured every end of 12-month period. 4. A statement of account is received from PLDT for communication services. This bill is recorded as expense although payment is to be made the next accounting period. 5. A loss of P2,000 is estimated and is highly probable to occur. This loss is shown in the income statement. 54  7-28 EXERCISE 3 – IDENTIFY THE ACCOUNTING CONCEPTS 6. Method A is used to estimate an expense. This method is used from one accounting period to another. 7. Supplies of P500 are used up in the performance of services. This amount is recorded as expense. 8. Services rendered amounting to P4,000 is taken up as revenue even if this amount is to be collected in the next accounting period. 9. The income statement includes notes to financial statements which show breakdown of aggregated amounts. 10.Method A results in a net income of P12,000 while Method B results in a net income of P11,500. Method B is used. 55 End of Discussion 56