Introduction to Accounting PDF

Introduction to Accounting Financial Flexibility – “Is there excess cash available for Definition of Accounting opportunities and uncertainties? Accounting Standards Council Accounting - Eyes of...

Introduction to Accounting Financial Flexibility – “Is there excess cash available for Definition of Accounting opportunities and uncertainties? Accounting Standards Council Accounting - Eyes of the Business (ASC) – A Service Activity. The accounting function is to provide Accounting helps owners to: financial information primarily Check on their financial progress quantitative in nature, about economic Prepare plans to the future entities, intended to be useful in Avoid material mistakes making economic decision. Analyze causes of changes Choose the best amongst American Institute of Certified economic alternatives Public Accountant (AICPA) - An Art Accounting are economic detectives Accounting is an art of recording, using the audit function by verifying classifying and summarizing in a the truthfulness of financial reports. significant manner, in terms of money, transactions and events which are part History of Accounting of a financial character and interpreting 3600 BC (approx.) - Record keeping the results thereof. already common from Mesopotamia, China, India to Central & South American Accounting Association America. The oldest evidence of this (AAA) - A Process practice was the “clay tablet” Accounting is the process of identifying, measuring and 13th to 15th century (approx.) communicating economic information 1339 - earliest recorded history of the to permit informed judgment and “double-entry bookkeeping” (DEB) decision by users of the information. accounting system “Massari Ledgers of Commune of Accounting- Language of Business Genoa” – The oldest DEB because of separate pages were used for debit Accounting is the medium of and credit (T-Account or Ledger or communication in which financial Venetian Method) reports are furnished to intended users Florence Italy – DEB records wherein for decision making. debits were written over credits (Florentine Method or Journal Entries) Profitability – How much is the increase in capital as a result of 1494 – Luca Pacioli, an Italian monk business operations? and mathematician, wrote “Summa de Liquidity - Are there available funds to Arithmetica Geometria, Proportioni et finance the business operations? Proportionalita” the first book that was Solvency – “Can the business pay its published containing a detailed long-term obligations to others? chapter of Stability - Can business sustain its long-term profitability and cash flow? Pacioli introduced three (3) important Capital Structure – “How much record books; investments are from Capital or Memorandum Book – for all borrowed from Creditors? information on a transaction Journal Book - Book of Original Entry Ledger Book - Book of Final Entry 1700s – French Revolution Financial Accounting – the recording Thorough study of accounting and and classifying of business transactions development of accounting theory culminating in the preparation of 1760 – 1830 – Industrial Revolution general-purpose financial statements Mass production and great Internal Auditing – determining the importance of Fixed Asset operational efficiency of the company 1900s – Global Industrial Economy regarding protection of the company’s Developing changes in accounting assets, accuracy and reliability of the practice such as mergers, accounting data. Tax Accounting – the preparation of acquisitions and reporting systems various tax returns and tax planning 2000s – Technological necessary to minimize the impact of Advancements & Global Trade taxes on the entity. Computer-assisted accounting Cost Accounting – determination of practice and reporting were inventory costs and/or product costs of developed rapidly the manufactured goods. Data from cost Globalization of business and accounting are used by the diverse accounting practice has management for planning, budgeting been standardized in an and controlling purposes. international accounting setting Not-for Profit Accounting – Special accounting for charitable organizations, Sectors of the Accounting Practice philanthropic foundations, religious groups, governmental agencies, 1. PUBLIC ACCOUNTING schools and cooperatives. - offer professional services for a fee Socio-economic Accounting – and who engages NOT as an concerns the measurement of the employee of the company impact of a business or governmental agency’s decision on the public sector. External Auditing – centers on the Accounting Systems Design – the critical examination of financial evaluation of the company’s control statements by an independent CPA system to find out area for improvement – express an opinion regarding the fairness of the contents of the 3. GOVERNMENT ACCOUNTING financial statements. – focuses on the proper custody of Tax Services – deals with the government funds and their purposes. accountant’s preparation of the Several agencies are: client’s income tax returns, business Bureau of Internal Revenue (BIR) and transfer taxes. Commission on Audit (COA) Managerial Advisory Services – Department of Finance (DOF) Department of Budget and provide assistance and advice to the Management (DBM) management to their clients Banko Sentral ng Pilipinas (BSP) regarding finance, budgeting, business policies, and other 4. ACCOUNTING EDUCATION business activities. – teaching and preparation of curriculums in high schools, colleges, 2. PRIVATE ACCOUNTING universities or review centers of the – Accountants that engages as an following subjects: employee of a private enterprise or Financial Accounting non-profit organization Management Accounting Taxation Other business-related subjects  Forms of Business Organization The Accounting Process and Activities – also called the "accounting cycle", – a series of repetitive activities of Forms of Business Organization recording, summarizing and reporting Business – is any economic activity economic transactions from the conducted primarily for profit. beginning to the end of the accounting Most common forms of business: period. 1. Sole or Single Proprietorship – A Aspects of the Accounting Process business entity owned by one person 1) Identifying - includes recognizing called a sole proprietor business transaction or events that 2. Partnership – A business entity are reportable owned by two (2) or more persons 2) Measuring - This assigns called partners who have agreed to monetary amounts to the accountable contribute money, property and economic transactions and events. industry to a common fund with the intention of dividing the profits among 3) Communicating - This constitute them. the preparation and distribution of accounting reports to potential users 3. Corporation – A business of accounting information registered as an artificial person under the operation of law. Its existence is Steps in the Accounting Cycle evidenced by its Articles of Incorporation and Corporate By-Laws There are nine (9) basic steps in the registered with the Securities and accounting cycle, which includes Exchange Commission (SEC) phases on recording, classifying, and summarizing. Business Activities The common types of businesses as to RECORDING PHASE their nature or main activities are: 1. Analyzing the transaction (business 1. Servicing – This Activity earns document) through rendering a service in 2. Journalizing exchange for a fee CLASSIFYING PHASE 3. Posting 2. Merchandising – engages in the buying and selling of goods. It earns SUMMARIZING PHASE primarily by marking up the cost from 4. Preparing the unadjusted trial purchased goods that it sells to balance customers. 5. Preparing adjusting entries 6. Preparing the financial statements 3. Manufacturing – This business 7. Preparing the closing entries converts raw materials into finished 8. Preparing the post-closing trial goods that are to be sold at selling balance price. 9. Preparing reversing entries  1. Analyzing Business Transaction 2. Journalizing – where the accountant gathers – the process of recording the information from source documents transactions in the appropriate and determines the impact of the journals. A journal is a chronological transaction on the financial position as record of transactions also known as represented by the equation “assets the book of original entry. Although all equals liabilities plus equity”. transactions could be recorded in the general journal , it is more efficient to Impact of the transaction use special journals in recording a To determine if a transaction has an large number of like transactions. impact to the financial position, look if Special journals usually use are: Sales Journal – Only sales of merchandise on account Cash receipts journal – All types of cash receipts Purchase journal – Used to record all purchases on account (merchandise, Accountable Events equipment and supplies). 1) Business Transactions - ordinary Cash disbursement journal – All business activities of an entity. payments of cash for any purpose External Business Transaction – are arm's length transactions Type of journal entries acc. to form: with an outside party in exchange Simple journal entry – contains a of resources. Ex: Selling of Service single debit and a single credit or Merchandise, Collection & Compound journal entry – has two Payment or more elements and often Internal Business Transaction – representing two or more transactions that takes place within the enterprise such as Accounts are the storage units of Conversion of raw materials to accounting information and used to Finished Goods, Supplies summarize changes in assets, Withdrawn or transfer of supplies liabilities and equity including income to another department and expenses. Classification of kinds of accounts: 2) Accounting Events - involve the occasional or non-ordinary business Real account – Statement of financial activities of an entity such as Losses position or so-called permanent due to Fortuitous Events(these are accounts; are NOT CLOSED and unforeseeable events or acts of God), carryover to the next accounting ex. theft, earthquake, etc), and Decline period. (ex. Cash, AR) in Market Value Nominal account – Income statement or temporary capital Source Documents - documentation accounts. These accounts are of the transaction. CLOSED at the end of the accounting - enhances the verifiability of a period. (ex. sales and expenses) transaction because they are forms, Mixed account – A combination of evidence, legal or official paper that real and nominal accounts. (ex. supports the economic transactions Prepaid expenses) Clearing account – Holds temporarily 4. Preparing the unadjusted certain information pending transfer to trial balance other ledger accounts. Controlling account – The general ledger account that summarizes the – A list of general ledger accounts with detailed information in a subsidiary their respective debit or credit Suspense account – Is an account that balance. holds temporarily certain information – to provide evidence that the total pending for disposition. debits in the general ledger equal the Reciprocal account – Has a total credits and prepares the counterpart in another book within the accounts for adjustments. entity or in another ledger or another Principal account – An account that is Before a trial balance is made, independent or can stand alone. amounts on each side of the accounts Auxiliary account – An account that from the General Ledger are totaled or cannot stand alone and are technically FOOTED. neither assets, liabilities nor income A closed or zero-balance account is 3. Posting when the ending balance of the – It is the process of transferring data accounts's debit is equal to its credit from the journal to the appropriate An Open accounts is when either accounts in the general ledger and debit or credit is higher than the other; subsidiary ledger. This process Debit balance = Debit > Credit classifies all accounts that were Credit balance = Debit < Credit recorded in the journals Kinds of ledgers It Does NOT Guarantee the General ledger – Includes all the correctness of the bookkeeping accounts appearing on the financial records. It is possible to have a Subsidiary ledgers – Affords balanced unadjusted trial balance, but additional detail in support of certain may contain errors general ledger Chart of Accounts - a listing of the Types of Errors names of the accounts that a company Incorrect usage of accounts has identified and made available for Double Entry or Posting recording transactions in its general Omission of a journal entry ledger Why Debit and Credits is not equal Within the chart of accounts you will Posting an Item to the wrong side of the account find that the accounts are typically Erroneous copying of transferring a listed in the following order: balance Omission of posting of a journal entry either debit or credit Posting the same account twice Wrong calculation of account balances  How to Locate Errors? 4. Ending inventory - An adjustment Step 1: Calculate the Difference to set up the year-end physical count between Debits and Credits of the inventory. Only applies if the If the difference is; PERIODIC INVENTORY SYSTEM is Transposition Error - 9/ Multiple of 9 used. Example: ₱ 52 is Written as ₱ 25 Error of Commission - 2 / divisible 6. Preparing the financial by 2. Example: Posting in the wrong statements column of the Trial Balance – The most important part of the Misplacement or Slide - Divisible by summarizing phase 9 or 99. Example: Wrong placement of – this is where the processed Decimal Point, ₱2 instead of ₱20 information is communicated to external users Step 2: Workback from Trial balance to Journals It can also be called the REPORTING 1. Check the Trial Balance Phase wherein Intended users can 1.1 Verify Totals make an informed judgement and 1.2 Check each accounts in the Trial sound decision. balance back to the Ledger 2. Check the Ledger Basic financial statements: 2.1 Verify Footings 1. Statement of financial position 2.2 Check Posting from Journals 2. Income statement or a statement of comprehensive income 5. Preparing the adjusting entries 3. Statement of changes in equity 4. Statement of cash flows Adjusting entries – made at the end 5. Notes and disclosures of each accounting period. The concepts involved behind adjusting entries are ACCRUAL, MATCHING 7. Preparing the closing entries OF COSTS AGAINST REVENUE and Closes all nominal/temporary ACCOUNTING accounts to the income summary Net income/loss is then closed to Typical Adjusting Entries classified capital or retained earnings according to timing of cash flow. Open Accts. (revenue and expense) 1.Prepayments and Deferrals – The is closed to the CAPITAL ACCOUNT cash flow first precedes (before) the revenue or the expense recognition. Income summary is used as another 2. Accruals – Income or expense recognition first before the cash temporary account to determine whether the business operations Accrued Income – Income results in income or loss. earned but not yet received. Accrued expenses – Expenses Permanent vs Temporary incurred but not yet paid. Accounts 3. Estimates – Adjusting entries that Real - Permanent Account do not involve cash B.Sheet –Assets , Liabilities, Equity Doubtful accounts – The expense to Carry forward the balances be matched against credit Depreciation - Allocation of the cost Nominal - Temporary Account of fixed assets as expense over its Income S. - Income & Expenses useful life Used in 1 acc period; not carried forward  8. Preparing the post-closing 3. Competence and Due Care trial balance Competence – To maintain professional knowledge and skill at – A listing of general ledger accounts the level required, to ensure that a and their balances after closing entries client or employer receives competent have been made. professional service based on current – same with the year-end statement of practices, and legislations. financial position, the only difference is that valuation accounts like allowances Due care – To act diligently and in for assets are found in the credit side accordance with applicable technical instead of being deducted from the and professional standards. related asset Competent professional service – requires the exercise of sound CODE OF PROFESSIONAL judgment in applying professional ETHICS FOR ACCOUNTANTS knowledge and skill in the performance of such service. A distinguishing mark of the Professional competence may be accountancy profession is its divided into two separate phases: acceptance of the responsibility to act Attainment of professional competence in the public interest. Therefore, a Maintenance of professional competence professional accountant’s responsibility is not exclusively to 4. Professional Behavior – To satisfy the needs of an individual client comply with relevant laws and or employer. regulations and avoid any action that In acting in the public interest, a discredits the profession. professional accountant shall observe Professional accountants must not and comply with the following “Code bring the profession into disrepute of Professional Ethics”; when marketing their work Professional accountants shall be FUNDAMENTAL PRINCIPLES honest and truthful and not: - Exaggerate claims for the 1. Integrity – To be straightforward services they offer, qualifications and honest in all professional and they possess, or experience they business relationships & implies fair have gained; or dealing and truthfulness. - Make disparaging references or A professional accountant must not be unsubstantiated comparisons to associated with information that is the work of others. materially false, misleading, recklessly furnished, or omits details that could 5. Confidentiality – To respect the mislead. Needs to be correct and free confidentiality of information acquired from error as a result of professional and business relationships 2. Objectivity – To not allow bias, – To not disclose any information to conflict of interest or undue influence third parties without proper authority, of others to override professional or unless legally obligated, nor use it for business judgments. personal use. No relationship bias influences the – Confidentiality must be maintained accountant’s professional judgment even after the professional with respect to a service. relationship with a client or employer ends.  Exceptions to the Confidentiality Scope of Practice Rule: Practice of Public Accountancy Disclosure is permitted by law and is Practice in Commerce and Industry authorized by the client or the Practice in Education/Academe employer; Practice in Government Disclosure is required by law, for example: The Professional Regulatory ○ Production of documents or other Board of Accountancy (BOA) provision of evidence in the course and its Composition of legal proceedings – composed of a chairman and six ○ Disclosure to the appropriate public (6) members authorities of infringements of the to be appointed by the President of law that come to light the Philippines from a list of three (3) There is a duty or right to disclose, recommendees for each position and when not prohibited by law: ranked by the Commission ○ To comply with the quality review of from: a list of five (5) nominees for a member or professional body; each position submitted by the ○ To respond to an inquiry or accredited national professional investigation by a member body or organization of CPAs regulatory body; – BOA shall elect a vice-chairman ○ To protect the professional interests from its members for a one year term. of a professional accountant in legal proceedings Qualifications of Members ○ To comply with technical standards Must be a natural-born citizen and and ethics requirements. a resident of the Philippines; Must be a registered CPA with at THE ACCOUNTANCY least ten (10) years of work experience in ANY scope of practice LAW (RA 9298) of accountancy. PHILIPPINE ACCOUNTANCY Must be of good moral character and ACT OF 2004 (RA 9298) must not have been convicted of The Philippine Accountancy Act of crimes involving moral turpitude; 2004 also known as R.A. 9298 is Must not have any relation, in any divided into 5 rules: school or institution or offering review classes for licensure exams, nor be a Declaration of Policy, Objectives & Scope faculty or administration member at of Practice, The Professional Regulatory Board of Accountancy Examination, the time of appointment. Regulation and Licensure Practice of Accountancy, Penal and Final Provisions Term of Office – A term of three (3) years- for the Objectives Chairman and members of the Board The standardization and regulation – Vacancies during a term are filled of accounting education; only for the unexpired portion. The examination for registration of – No person may serve two certified public accountants; and successive complete terms and must The supervision, control, and wait one year for reappointment. regulation of accountancy in the – Appointments to fill unexpired terms Philippines. DO NOT count as complete terms.  The Certified Public Accountant FINANCIAL REPORTING Examinations STANDARDS (adjusted for BOA Resolution 114 International Financial Reporting Series of 2016) Standards (IFRS) All applicants for registration for the practice of accountancy shall be – set common rules so that financial required to undergo a licensure statements can be consistent, examination to be given by the Board transparent and comparable around the world. Qualifications of Applicants for IFRS are issued by the International Examinations. Accounting Standards Board (IASB). is a Filipino citizen is of good moral character; Two key organizations in the is a holder of the degree of BS in development of IAS Accountancy conferred by a school, International Organization of college, academy or institute duly Securities Commissions – IOSCO recognized and/or accredited by the - does not set accounting standards, CHED or other authorized but ensures that the global markets government offices can operate in an efficient and has not been convicted of any effective manner. criminal offense involving moral International Accounting turpitude Standards Board - IASB - develops, in the public interest, a To pass the licensure examination for single set of high-quality, enforceable, accountants, a candidate must: and global international financial reporting standards for general- Obtain a general average of 75%, purpose financial statements. with no grades lower than 65% in any given subject. Benefit of a single set of high-quality accounting standards If a candidate obtains the rating of 75% Ensures adequate comparability. and above in at least a Investors can make better decisions majority of subjects (4), he/she shall with financial information from a receive a conditional credit for the Philippine company that is comparable subjects passed: Provided, The to international company. candidate must retake the remaining Promotes efficiency subjects within two years from the Transactions in Beijing should be previous examination. reported similarly in the Philippines, Paris or London, not needing different If a candidate fails to achieve a 75% sets of financial statements. average and at least 65% in each reexamined subject, they are International standard-setting considered failed and must complete structure organizations refresher courses within two years. The IFRS Foundation The International Accounting Standards Board (IASB) The IFRS Advisory Council The IFRS Interpretations Committee  Characteristics of the IASB The FRSC’s main function is to Membership - 16 members from establish GAAP in the Philippines. different countries The FRSC is the successor of the - are well-paid and appointed for five- Accounting Standards Council (ASC). year renewable terms. Autonomy - The IASB is not part of any The ASC was created in November other professional organization. 1981 by the Philippine Institute of - It is appointed by and answerable Certified Public Accountants (PICPA) only to the IFRS Foundation. to establish GAAP in the Philippines. Independence - Full-time IASB members must sever all ties from their The FRSC established the Philippine past employer. Interpretations Committee (PIC) in - The members are selected for their August 2006 to enhance financial expertise in standard-setting rather reporting standards in the Philippines. than to represent a given country. – The PIC's primary role is to issue Voting - Nine (9) of 16 votes are implementation guidance on PFRSs. needed to issue a new IFRS. – Members are appointed by the FRSC and include accountants from 3 Major Types of Pronouncement public practice, academia, regulatory of the IASB bodies, and users of financial International Financial Reporting statements. Standards IFRS – The PIC replaced the Interpretations Conceptual Framework for Financial Committee created by the ASC in Reporting. CFRS 2000. International Financial Reporting Standards Interpretations IFRS-I Major challenges facing the accounting profession Nonfinancial measurement—how to report significant key performance measurements such as customer satisfaction indexes, and reject rates on goods purchased. Conceptual Framework Forward-looking information—how For Financial Reporting to report future oriented information. Soft assets — how to report intangible CONCEPTUAL FRAMEWORK assets: market know-how, and well - – a set of principles and concepts trained employees. that guide the development and Timeliness—how to report more real- application of Accounting standards time information. – Purpose: provide coherent consistent foundation for Philippine Financial Reporting development of AS; help resolve Standards (PFRS) acctng. issues not covered by AS The Financial Reporting Standards – broader in scope Council (FRSC) - established by the – Not legally binding PRC under the RA 9298 to assist the – reference point for new standards BOA in carrying out its power and Internal User: HR, Finance, function to promulgate accounting marketing standards in the Philippines. External Users: Investors, bank, BIR The Conceptual Framework has the SCOPE OF REVISED highest level of authority when there is CONCEPTUAL FRAMEWORK no standard or interpretation related 1. Objective of Financial Reporting to the reporting issues under consideration. – forms the foundation of the Conceptual Framework. In case of conflict between the Conceptual Framework and a Overall objective- provide financial standard or interpretation, the information about the reporting entity standard overrides the Conceptual that is useful to users in making Framework. decisions about providing resources to the entity. Nothing in Conceptual Framework - the ‘why’ purpose/goal of accounting overrides any accounting standard. Specific Objectives of Financial FOUNDATION C.F. PROVIDES Reporting TO STANDARDS The Conceptual Framework places Transparency - is about providing more emphasis on the importance of clear and accessible information. providing information needed to – refers to the openness and clarity assess the management stewardship with which an organization or entity of the entity's economic resources, shares information. tracking the business performance – involves making relevant information and understanding financial healths. readily accessible, clear, and understandable to stakeholders. To provide information useful in making decisions about providing – is about ensuring that stakeholders resources to the entity. have access to all necessary data and To provide information useful in reports to make informed decisions. assessing the cash flow prospects of the entity. Accountability – is responsibility for To provide information about entity actions and their outcomes. resources, claims and changes in – refers to the obligation of an resources and claims. organization or individual to take responsibility for their actions, Limitations of Financial Reporting decisions, and outcomes. General purpose financial reports… – involves being answerable to – DO NOT AND CANNOT provide all stakeholders for performance and of the information that existing and justifying actions taken. potential users need. – ensures that entities provide – are NOT designed to show the value information and take responsibility for of an entity but the reports give the consequences of their actions. information to help the primary users estimate the entity’s value. Economic Efficiency - implies that – are intended to provide common financial information presents the information to users and cannot economic state in which every accommodate every request for resource is optimally allocated or used information. to serve each individual or entity in the – To a large extent, are based on best way while minimizing waste and estimate and judgment rather than inefficiency. exact depiction.  2. Qualitative characteristics 3. Elements of Financial Statements – Refers to the quantitative FUNDAMENTAL CHARACTERISTICS information reported in the statement Relevance – can make a difference of f.position and income statement in the decision of users “Building Blocks” from which FS are ○ Predictive Value - helps predict constructed future outcomes FINANCIAL POSITION ○ Confirmatory Value – gives Assets - resources controlled by feedback about past evaluations entity as a result of past events; will ○ Materiality - omitting can bring future economic benefits. influence decisions Faithful Representation – Current asset if: information should show what it (a) asset will be realized, sold, or claims to depict. To be useful, it consumed in normal operating cycle. (b) asset is held primarily for trading. must present economic (c) asset is expected to be realized phenomena it aims to convey within 12 months after the reporting ○ Completeness - all necessary period. info are provided (d) asset is cash or cash equivalent ○ Neutrality - free from bias and (as per IAS 7) unless restricted for at not manipulated to an outcome least 12 months. ○ Free from error - no errors or An entity shall classify all other omissions assets as non-current. ENHANCING CHARACTERISTICS Normal Operating Cycle - period Verifiability – can reach a from acquiring assets to consensus / confirmed by others converting them into cash/cash- Timeliness – info is available when equivalents. If cycle isn't clear, it needed; older = less useful is assumed to last twelve months. Understandability – info is clear Liabilities - present obligation and concise yet not excluding from past events; will result in complex info; comprehensible outflow. Comparability - allows financial Equity - residual interest in the info to be compared across period assets of the entity after deducting and entities. all liabilities I. Contributed (Paid-In/Invested) Cost constraint on useful financial Capital: - the money owners put reporting into the business. It includes: Cost is a pervasive constraint on the Capital Share – The amount owners information that can be provided by pay for shares, either based on a set value or for no-par shares. financial reporting. Share Premium – Extra money paid Reporting financial information above the share's set value, plus imposes costs, and it is important that gains from share deals and other those costs are justified by the benefits equity items not part of earnings or of reporting that information. comprehensive income. II. Retained Earnings - Accumulated profits and losses that have not been declared as dividends.  Forms of Statement of Financial Types of Financial Statements Position Consolidated Financial Statement- 1. Report Form - set forth the three prepares when the reporting entity major sections in Downward form of comprises both the parent and its Assets, Liabilities and Equity subsidiaries. 2. Account Form - Assets shown on Unconsolidated/Separate Financial the Left side and the liabilities and Statements – prepared when the equity on the Right reporting entity is the parent alone. Must present all income and expenses Combined Financial Statements- for a period in one of two ways: prepared when the reporting entity (a) In a single statement of comprises two or more entities that comprehensive income, or are not linked by a parent and (b) In two statements: one showing subsidiary relationship. profit or loss (income statement) and REPORTING ENTITY another starting with profit or loss – an entity that is required or chooses and showing other comprehensive to prepare financial statements. income (statement of – can be a single entity or a portion of comprehensive income). an entity or can comprise more than one entity. FINANCIAL PERFORMANCE Income - Increases in economic A reporting entity is not necessarily a benefits during the period through legal entity. inflows, asset enhancements, or liability decreases, leading to higher Accordingly, the following can be equity, excluding equity contributions. considered a reporting entity: Expenses - Decreases in economic Individual corporation, partnership benefits through outflows, asset or proprietorship depletions, or liability increases, The parent alone reducing equity, excluding distributions The parent and its subsidiaries as to equity participants. single reporting entity Two or more entities without parent Profit and Loss - Income minus and subsidiary relationship as a Expenses including Tax expense and single reporting entity. any Income or Loss from Discontinued A reportable business segment of Operations. an entity. 4. Financial Statements and REPORTING PERIOD Reporting Entity – is the period when financial FINANCIAL STATEMENTS – provide statements are prepared for general information about economic resources purpose financial reporting. of the reporting entity(assets), claims May be prepared on an interim basis, against the entity (liabilities) and for example, three months, six months changes in the economic resources or nine months. and claims, useful to users of financial Interim financial statements are not statements in: required but optional. Assessing future cash flows to the reporting entity. However, financial statements must Assessing management be prepared on an annual basis or stewardship of the entity's a period of twelve months. economic resources.  5. Recognition and Derecognition 3. Control RECOGNITION OF THE ELEMENTS There is control when; of the FS - is the Reporting of an Ability for DIRECT USE asset, liability, income or expense on Ability to enforce LEGAL RIGHTS the face of the financial statements of Future Economic Benefits will flow an entity directly or indirectly to the entity RECOGNITION PRINCIPLES Liability Recognition Principle Recognition is the process of including in the financial statements an A liability is recognized on the item that meets the definition of an statement of financial position when element and satisfies specific it's probable that settling a present recognition criteria as follows: obligation will lead to an outflow of It is probable that any future resources with economic benefits, economic benefit associated with and the settlement amount can be the item will flow to or from the reliably measured. enterprise The item's cost or value can be Three (3) aspects on the Definition of measured with reliability. Liabilities 1. Present Obligation - a duty or ASSET RECOGNITION PRINCIPLE responsibility that an entity has no An asset is recognized in the practical ability to avoid. < statement of financial position when it TYPES OF OBLIGATION is probable that the future economic Legal Obligation - Can be legally benefits will flow to the enterprise and enforced due to a binding contract or the asset has a cost or value that can statutory requirements. be measured reliably. Constructive Obligation - Arises from normal business practices, 3 aspects on Definition of Assets customs, and the desire to maintain 1. Rights - good business relations or act fairly. 2. Transfer an economic resource - Another term for Settlement of Liability WAYS TO SETTLE LIABILITY Payment of Cash NOTE: Not all of an entity’s rights are Transfer of Non-Cash Assets assets of that entity— To be assets of the Provision of Services entity, the rights must also have the Replacement of the obligation potential to produce for the entity economic with another obligation benefits Conversion of Obligation to Equity 2. Future Economic Benefit - It is probable that future economic benefits 3. Result of Past Event - A present will flow to the entity obligation exists as a result of past *Probable = Change is MORE LIKELY events only if; than less likely The entity has already obtained *Future economic benefit does not need to economic benefits and as a result, be certain but only necessary that the right it will transfer economic resources. already exists even if probability is low.  Income Recognition Principle 4. Production Method Income is recognized when there is an Revenue is recognized at the point of increase in future economic benefits production related to an increase in an asset or a Applicable to Agricultural, forest decrease in a liability that can be and mineral products reliably measured. – occurs at the same time as increases Other Income Recognition in assets / decreases in liabilities. Interest Revenue - Recognized on a Income- Increases in economic TIME Proportion basis that considers benefits during the accounting period the EFFECTIVE YIELD on the asset in the form of inflows or enhancements Royalties - Accrual = Based on of assets or decreases of liabilities that AGREEMENT result in increases in equity, other than Dividends – Upon Declaration those relating to contributions from Installation Fees – Stage of equity participants. Completion INCOME Subscription Revenue – Straight Line Basis over the Subscription Period Admission – When the Event Takes Place Tuition Fees -The Period in Which Tuition is Provided Expense Recognition Principle POINT OF SALE Expenses are recognized when there Legal title to the goods passes to the is a decrease in future economic buyer, “the risk & rewards” of benefits associated with a reduction in ownership at point of sale an asset or an increase in a liability It is usually the point of delivery. that can be reliably measured. This means expense recognition occurs EXCEPTIONS to the POINT OF SALE simultaneously with the increase in liabilities or decrease in assets. 1. Installment Method – Revenue is recognized at the point of collection Revenue = Gross Profit Rate x Collections 2. Cost Recovery Method – Revenue is recognized at the point of collection Collections are applied first to cost of merchandise sold Matching Principle – requires that cost 3. Percentage of Completion and expenses incurred in earning a Method – Contract Revenue and revenue shall be reported in the same Contract Cost associated with period construction contract shall be There must be a Cost in earning a recognized as revenue and expenses, Revenue " NO PAIN,,, NO GAIN " respectively  Application of Matching Principle The Amount of: 1. Cause and Effect Association A) Cash or Cash Equivalent PAID or – Expense is recognized when RECEIVED Revenue is Recognized Transaction Cost - Costs that is Cost of Merchandise Inventory directly attributable to the Doubtful Accounts acquisition, issue or disposal of an Warranty Expense Sales Commission asset or liability eg: Legal Fees, Finders Fee, Transportation Cost 2. Systematic and Rational Allocation B) Fair Value (FV) of the – Expensed by Allocating over consideration given to acquire the the PERIODS benefited asset “at the time of acquisition” Depreciation – The price that would be received to Amortization sell an asset or Transfer a liability Allocation of Prepayments in an orderly transaction between market participants at the 3. Immediate Recognition measurement date. – Cost Incurred is Expense outright because; Hierarchy or best evidence NO future economic Benefit; Cease to of fair value qualify as an asset Administrative & Selling Expenses Level 1 -INPUTS Loss from Disposal of Asset Quoted Price in an active market for Identical Assets DERECOGNITION *Active Market – transactions take – is defined as the removal of all or part place with sufficient regularity and of a recognized asset or liability from volume the statement of financial position. Level 2 -OBSERVABLE INPUTS Derecognition of an asset occurs Quoted Price in an active market for when the entity loses control of all or Similar Assets or part of the asset. Quoted Price in an inactive market for Derecognition of a liability occurs Similar Assets or Identical when the entity no longer has a present obligation for all or part of the Level 3 - UNOBSERVABLE INPUTS liability. Assets Developed by the entity using BEST AVAILABLE INFORMATION from entity’s own data 6. Measurement – involves assigning monetary NOTE: Historical Cost Does not change in amounts at which are to be recognized value EXCEPT, Changes related to; Impairment of assets or Onerous and reported. Liabilities The Revised Conceptual Framework mentions two categories, including: 2. Current Value - Also known as "Current Purchase Exchange Price" 1. Historical Cost - Also known as “Past Purchase Exchange Price” & it is Fair value (at measurement date) the Most Commonly Adopted Value in use for asset- present value of the expected cash flows from the asset's use and eventual disposal.  Fulfillment value for liability- the reclassifications to the previous present value of cash that an entity amounts, more information must be expects to pay to settle a liability. provided. Current Cost- the cost of an equivalent asset at the 8. Concepts of Capital and measurement date, reflecting the Capital Maintenance consideration that would be received minus any transaction Financial concept of capital - capital costs at that date. is synonymous with net assets of the enterprise. This is the concept of 7. Presentation and Disclosure capital adopted by most enterprises. A financial concept of capital means Going Concern - An entity preparing capital is the net assets or equity of PFRS financial statements is the entity. presumed to be a going concern. If Physical concept of capital – capital management has serious concerns is regarded as the productive capacity about the entity's ability to continue, it of the enterprise based on, for must be disclosed. example, units of output per day. Accrual Basis of Accounting Concepts of Capital Maintenance PAS 1 requires that an entity prepare Financial capital maintenance – a its financial statements, except for profit is recognized only if the value of cash flow information, using the net assets at the end of the period is accrual basis of accounting. greater than at the beginning, Consistency of Presentation excluding any contributions or The presentation and classification of distributions to and from owners items shall be retained from one period during the period. to the next unless a change is justified NET ASSET END > NET ASSET either by a change in circumstances or BEGINNING = PROFIT a requirement of a new PFRS. Physical capital maintenance – Materiality and Aggregation Under this concept, profit is Material classes of similar items must recognized only if the physical be presented separately, while productive capacity of the enterprise dissimilar items can be aggregated if at the end of the period exceeds its individually immaterial. capacity at the beginning, excluding any contributions or distributions to and from owners during the period. Offsetting Assets and liabilities, and income and expenses, may not be offset unless UNDERLYING ASSUMPTION required or permitted by a Standard or Accounting assumptions are the an Interpretation. fundamental premises on which the accounting process is based. Comparative Information – are also known as postulates. PAS 1 requires that the previous – as a foundation or bedrock of period's information be included in accounting in order to avoid financial statements and notes, unless misunderstanding but rather enhance another Standard says otherwise. If the understanding and usefulness of there are any changes or the financial statements.  Going Concern Time Period Concept The Conceptual Framework for Financial - the indefinite life of an entity is Reporting mentions ONLY ONE divided into accounting periods, ASSUMPTION, that is GOING CONCERN. typically of equal length, for financial - financial statements presume that an statement preparation. The traditional enterprise will continue in operation accounting period is one year. indefinitely or if that presumption is not The accounting period may be; valid, disclosure and a different basis Calendar year - A 12 – month of reporting are required. Its period that ends on December 31 foundation is the COST PRINCIPLE Natural business year - A 12 – (assets are recorded at COST). month period that ends on any NOTE: If there is evidence that the entity month when the business at its would experience large losses or subject lowest or slack season for termination, GOING CONCERN IS Fiscal Year - A 12 - month period that ABANDONED. starts from any other month than January Accrual accounting Interim Period - business period within an accounting period. These – shows the impact of transactions and are financial reports prepared at any events on a company's economic date even if the 12 month period is not resources and claims in the periods yet due. (weekly, monthly, quarterly they occur, regardless of when cash is or semi annual) received or paid. Monetary Unit Accrual - revenue are recognized when earned; expenses are – Refers to (1) the quantifiability of recognized when incurred the peso and (2) its stability. Cash basis - revenue are recognized Quantifiability means financial when cash is received; expenses are statement elements should be recognized when cash is paid. measured in Philippine Pesos. Stability indicates the purchasing INHERENT ASSUMPTIONS OF power of the peso is constant, with FINANCIAL STATEMENTS insignificant fluctuations ignored. Stability reinforces the going concern Accounting Entity or Separate assumption, suggesting no Entity Concept adjustments are needed for nominal - means that the entity is separate pesos, only for constant pesos. from the owners. Personal transactions of owners shall not be allowed to distort the financial statements of the entity Single Economic Entity – where a Parent and Subsidiary (PS) Relationship exists. PS Relationship consolidates their Financial Statements. Consolidation, however, does not eliminate the legal boundary segregating the affiliated entities Accounting will continue to be done separately for each entity.  Disadvantages PARTNERSHIP 1. Easily dissolved and thus unstable Definition of Partnership compared to a corporation (death withdrawal, incapacity) – By the contract of partnership, TWO or MORE persons bind themselves to 2. Mutual agency and unlimited CONTRIBUTE money, property or liability may create personal industry, to a COMMON FUND with obligations to partjers 3. Less effective that corpo in raising the intention of DIVIDING the large amount of capital PROFITS among themselves - a partnership can be formed by a Distinguished from Corporation verbal agreement, with no Manner of creation: documentation of the arrangement P: created by mere agreement at all but may be lead to future C: created by operation of law disagreements among the owners Number of Persons regarding what was originally P: Two or More agreed to. So, it is advisable to C: Not more than 15 create written documents outlining Single stockholder: one person corpo. how situations should be handled. Commencement of Juridical Personality Elements of Partnership P: starts from the execution of 1. Voluntary & Valid AGREEMENT articles of partnership between parties C: starts at Issuance of certificate of 2. LAWFUL purposes for which incorporation by the Securities and partnership is organized Exchange Commission. 3. CONTRIBUTIONS: Money, Management. property and/or Industry P: every partner is agent of 4. Objective to earn PROFIT that is partnership if the partners did not to DIVIDED among the partners appoint a managing partner 5. MUTUAL AGENCY among corporation partners C: Managed by Board of Directors 6. Practice of TRANSPARENCY on Extent of Liability. the records & transactions. P: Each partner, except limited Advantages and Disadvantages partner, is liable to the extent of his of Partnerships personal assets C: stockholders are liable only to the extent of their interest or investment Advantages vs Proprietorship Right of Sucesion. 1. Brings greater financial capability P: No right of succesion to the business C: there is right of succesion. 2. Combines special skills, expertise Terms of Existence. and experience of the partners P: Any period of time stipulated by 3. Offers relative freedom and the partners flexibility of action in decision C: Shall have perpetual existence making unless its articles of incorporation Advantages vs Corporation provides otherwise (Sec. 11,Révised 1. Easier and less expensive to Corporation Code of the Philippines). organize 2. More personal and informal  Classifications of Partnership Kinds of Partners 1. According to object A. Universal partnership of all 1. General Partner – liable to present property. All extend of personal assets contributions become part of the 2. Limited Partner – liable only to partnership fund his capital contribution B. Universal partnership of 3. Capitalist Partner – contributes profits. All acquired during money partnership belongs to the 4. Industrial Partner – contributes partnership knowledge or serice C. Particular Partnership. The 5. Managing Partner- appointed object of the partnership is as manager determinate - its use of fruit, 6. Liquidating Partner -assigned specific undertaking, or exercise to settle affairs of partnership of a profession or vocation. after dissolution 7. Dormant Partner - one who 2. According to liability does not take active part in the A. General - All partners are liable business of the partnership and to the extent of their separate is not known as a partner properties 8. Silent Partner - does not take an B. Limited - The limited partners active part in the business of the are liable only to the extent of partnership though may be their personal contributions. In known as a partner this, the states that there shall be 9. Secret Partner - takes an active at least one general partner. part but is not known to be a partner of outside parties 3. According to Duration 10. Nominal Partner or partner by A. Partnership with fixed term or estoppel - not actually a partner for a particular undertaking but who represents himself as B. Partnership at will - one in one. which no term is specified and is not formed for any particular undertaking. Additional info: 4. According to Purpose A partnership is automatically A. Commercial or trading DISSOLVED when there is a Change partnership - one formed for the in Relationship within the partners transaction of business such as; B. Professional or non-trading –Admission of New Partner partnership - one formed for the –Withdrawal of a Partner exercise of profession. –Death of a Partner 5. According to legality of existence –Personal Bankruptcy A. De jure partnership - has –Incapacitated of a partner complied with all the legal reqs for its establishment B. De facto partnership - failed to comply with all legal req  Articles of Co-Partnership Rights of a Partner – An agreement concerning formation, A Partner has a right over; operation dissolution and liquidation of the partnership is embodied here – Specific partnership property – a written contract made by the – Share in the Profits resulting from partners that will act as a form of business operation governance of partnership activities – Share in the remaining assets and will clearly reflect the upon partnership liquidation after relationships of the partners among the partnership creditors have each other and with third parties. – needs to appear in a PUBLIC been paid INSTRUMENT and to registered – To co-manage the partnership with the SEC if partners contributed – To ask that the books be kept in the REAL PROPERTY (land or building) principal place of business subject or REAL RIGHTS or if the total to inspection at a reasonable time partnership capital amounted to P3,000 or more. Failure to register with the SEC, it cannot acquire legal personality to maintain an action against third persons, but the may file a suit jointly against third party persons. Failure to comply with the registration requirement does not affect the liability of the partnership and its partners to the third-party persons. The partnership agreement commonly contains the following information: 1. Name of the partnership 2. Names and address of the partners 3. Kinds of partners 4. Principal place and purpose of business 5. Manner of Management of the Partnership 6. Duration of the contract (date of effectiveness and life of the partnership) 7. Contributions of the partners 8. Duties and rights of each partner 9. Conditions for withdrawals 10. Salary and the profit and loss agreement 11. Dissolution and Liquidation Procedures 12. Arbitration of disputes