Principles of Accounting

ACCO 014

UNIVERSITY OF THE PHILIPPINES

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

Polytechnic University of the Philippines—Parañaque City Campus

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

ACCO 014—Principles of Accounting

 Need for Accounting
 Everyday transactions cannot be retained in the human brain for a quite period
of time without confusions and complications. To avoid these, transactions and
other important events should be recorded.
“Has the business
“What are the resources of the
improved?” ~Owner
business?” ~Management

“Will my money grow in

this business?” ~Investor

“Can the business meet its “Is this firm reporting the
obligation?” ~Creditors correct amount of income?”
~Government

ACCO 014—Principles of Accounting

 Why study Accounting?
 One should understand
HOW data are gathered
and recorded in order to
appreciate and understand
the financial reports of the
business.

ACCO 014—Principles of Accounting

 Definition of Accounting
According to Accounting Standards Council:
 Accounting is a service activity. The accounting function is to provide quantitative information,
primarily financial in nature, about economic entities, that is intended to be useful in making
economic decision.

According to the Committee on Accounting Technology of the American Institute

of Certified Public Accountants:
 Accounting is the art of recording, classifying and summarizing in a significant manner and in
terms of money, transactions and events which are in part at least of a financial character and
interpreting the results thereof.
According to the American Accounting Association:
 Accounting is the process of identifying, measuring and communicating economic information
to permit informed judgment and decision by users of the information.

ACCO 014—Principles of Accounting

 Four Phases of Accounting
 Recording. This is technically called the bookkeeping. In this
phase, business transactions are recorded systematically and
chronologically in the proper accounting books.

 Classifying. In this phase, items are sorted and grouped. They

may be classified as asset accounts, liability accounts, capital
accounts, revenue accounts and expense accounts.

 Summarizing. After each accounting period, data recorded

are summarized through financial statements.

 Interpreting. Due to the technicality of accounting reports,

the accountant’s interpretation is needed. In this case,
analysis reports are submitted together with the financial
statements.
ACCO 014—Principles of Accounting
 Fields of Accounting
 Public Accounting

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

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

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

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

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

ACCO 014—Principles of Accounting

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

ACCO 014—Principles of Accounting

 Fields of Accounting

 Government Accounting. Accountants in private business firms also check and

audit the income, payroll, and tax returns submitted to the government.
 Accounting Education. Faculty members in Accounting in various colleges and
universities are Certified Public Accountants.
 Internal Accounting. This is concerned with the transactions and special
problems of multinational business organizations in their dealings in the
international trade.
 Internal Auditing. Internal auditors see to it that the established accounting
procedures are being followed throughout the year.
 Social Accounting. This involves the measurement of social costs and benefits
such as the measurement of traffic patterns for the most efficient use of traffic
funds
ACCO 014—Principles of Accounting
 Business Organizations (according to ownership)

 Single or Sole Proprietorship.

Owned only by one person.

Usually, the owner is also the
manager of the business. He
usually supplies the capital or
borrow funds from the banks or
other lending institutions.

ACCO 014—Principles of Accounting

 Business Organizations (according to ownership)

 Partnership
Owned by two or more owners.
The owners, called partners, agree
on the capital contributions,
management or the firm,
distribution or profits and losses,
and other matters pertaining to
the operation of the firm.

ACCO 014—Principles of Accounting

 Business Organizations (according to ownership)

 Corporation
This is a business organization
of not less than five persons.
It is organized by operation of
law.

ACCO 014—Principles of Accounting

 Business Organizations (according to nature of business)

 Service Concern
Deals with the rendering of
services to the customers such as
tailoring shops, beauty shops,
firms of CPAs, lawyers, doctors,
and others.

ACCO 014—Principles of Accounting

 Business Organizations (according to nature of business)

 Trading / Merchandising
Deals with the buying of goods
and selling the same goods in the
same form for profit such as sari-
sari stores, department stores,
grocery stores, etc.

ACCO 014—Principles of Accounting

 Business Organizations (according to nature of business)

 Manufacturing
Involves purchase of raw
materials and converting these
raw materials into finished
products such as textile
manufacturing firms, candy
manufacturing firms, etc.

ACCO 014—Principles of Accounting

 Accounting Assumptions / Postulates

 Going Concern or Continuity Assumption

In the absence of evidence to the contrary, the accounting entity
is viewed as continuing in operation indefinitely.

Implication: Assets are normally recorded at cost. As a rule, market

values are ignored.

ACCO 014—Principles of Accounting

 Accounting Assumptions / Postulates

 Accounting Entity
The entity (or accounting entity) is separate from the owners,
managers, and employees who constitute the entity.

Implication: The transactions of the entity shall not be merged with

the transactions of the owners.

ACCO 014—Principles of Accounting

 Accounting Assumptions / Postulates

 Time Period
The indefinite life of an entity is subdivided into accounting
periods which are usually of equal length for the purpose of
preparing financial reports on financial position, performance,
and cash flows.

Implication: It becomes necessary therefore to prepare periodic

reports on financial position, performance, and cash flows of an entity.

ACCO 014—Principles of Accounting

 Accounting Assumptions / Postulates

 Cost Principle
From an accountant's point of view, the term "cost" refers to the
amount spent (cash or the cash equivalent) when an item was
originally obtained, whether that purchase happened last year or
thirty years ago. For this reason, the amounts shown on financial
statements are referred to as historical cost amounts.
Implication: The account principle asset amounts are not adjusted
upward for inflation. General rule: asset amounts are not adjusted to
reflect any type of increase in value.

ACCO 014—Principles of Accounting

 Accounting Assumptions / Postulates

 Full Disclosure Principle

From an accountant's point of view, the term "cost" refers to the
amount spent (cash or the cash equivalent) when an item was
originally obtained, whether that purchase happened last year or
thirty years ago. For this reason, the amounts shown on financial
statements are referred to as historical cost amounts.
Implication: It becomes necessary therefore to prepare periodic
reports on financial position, performance, and cash flows of an entity.

ACCO 014—Principles of Accounting

Identifying the applicable Accounting Principle
1. The personal assets of the owner of a company will not appear on the company's balance sheet because of which
Econ Entity Assumption
principle/guideline? _________________
2. Which principle/guideline requires a company's balance sheet to report its land at the amount the company paid to
Cost Principle
acquire the land, even if the land could be sold today at a significantly higher amount?_________________________
3. Which principle/guideline allows a company to ignore the change in the purchasing power of the peso over time?
Monetary Unit Assumption
__________________________________
4. Which principle/guideline requires the company's financial statements to have footnotes containing information that is
Full Disclosure Principle
important to users of the financial statements? __________________________________
5. Which principle/guideline justifies a company violating an accounting principle because the amounts are immaterial?
Materiality
__________________________________
6. Which principle/guideline is associated with the assumption that the company will continue on long enough to carry out
its objectives and commitments? Going Concern Principle
7. A very large corporation's financial statements have the peso amounts rounded to the nearest P1,000. Which
accounting principle/guideline justifies not reporting the amounts to the penny? Materiality
8. Accountants might recognize losses but not gains in certain situations. For example, the company might write-down the
cost of inventory, but will not write-up the cost of inventory. Which principle/guideline is associated with this action?
Conservatism
9. Which principle/guideline directs a company to show all the expenses related to its revenues of a specified period even
if the expenses were not paid in that period? Matching principle
10. When the accountant has to choose between two acceptable alternatives, the accountant should select the alternative
that will report less profit, less asset amount, or a greater liability amount. This is based upon which principle/guideline?
Conservatism
______________________________
 Transactions
 These are economic activities of the entity that
are recorded in the accounting books (such as
general journal, special journals, general ledger,
subsidiary ledgers, etc.)
 External transactions (activities that involve one
entity and another entity); internal transactions
(activities within the entity)

 In every transaction, there is always a value

received and a value parted with (like money,
property, or services).
ACCO 014—Principles of Accounting
 Illustration

Transactions Value Received? Value Parted With?

Tools Money
Purchased
tools for cash

ACCO 014—Principles of Accounting

 Illustration

Transactions Value Received? Value Parted With?

Office Supplies Obligation / Debt
Purchased
office supplies
on credit

ACCO 014—Principles of Accounting

 Illustration

Transactions Value Received? Value Parted With?

Cash Services
Completed
repair work
for a client
and received
cash

ACCO 014—Principles of Accounting

 Illustration

Transactions Value Received? Value Parted With?

Cash Receivable Services
Completed
repair work
for a client on
credit

ACCO 014—Principles of Accounting

 Illustration

Transactions Value Received? Value Parted With?

Secretarial Services Money
Paid the
monthly
salary of the
office
secretary

ACCO 014—Principles of Accounting

 Illustration

Transactions Value Received? Value Parted With?

Right to occupy the space Money
Paid the rent
of the shop
space

ACCO 014—Principles of Accounting

 Elements of Financial Position

Asset. A resource controlled

by the entity as a result of past
events and from which future
economic benefits are expected
to flow to the entity.

ACCO 014—Principles of Accounting

 Elements of Financial Position
Classifications of Assets
 Current Asset. (PAS 1; Par. 66) The asset is cash or
cash equivalent unless the asset is restricted to
settle a liability for more than twelve months after
the reporting period. The entity holds the asset
primarily for the purpose of trading. The entity
expects to realize the asset within twelve months
after the reporting period. The entity expects to
realize the asset or intends to sell or consume it
within the entity’s normal operating cycle.
 Noncurrent Asset. (PAS 1; Par. 66) Simply states that
“an entity shall classify all other assets not classified
as current as noncurrent”.
ACCO 014—Principles of Accounting
 Elements of Financial Position

Liability. A present
obligation arising from past
events the settlement of which
is expected to result in an
outflow from the entity of
resources embodying economic
benefits.

ACCO 014—Principles of Accounting

 Elements of Financial Position
Classifications of Liabilities

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

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

ACCO 014—Principles of Accounting

 Elements of Financial Position
 Equity. Is the residual interest in the
assets of the entity after deducting all
of the liabilities.
 Owner’s Equity in a proprietorship
 Partner’s Equity in a partnership
 Stockholders’ Equity or Shareholders’
Equity in a corporation

 Under PAS 1, paragraph 7, the holders of

instruments classified as equity are simply known
as owners.
ACCO 014—Principles of Accounting
 Elements of Financial Performance
 Income. Increase in
economic benefit during the
accounting period in the form
of inflow or increase in asset
or decrease in liability that
results in increase in equity,
other than contribution from
equity participants.

ACCO 014—Principles of Accounting

 Elements of Financial Performance
 Expenses. Decrease in
economic benefit during the
accounting period in the form
of an outflow or decrease in
asset or increase in liability
that results in decrease in
equity, other than
distribution to equity
participants.

ACCO 014—Principles of Accounting