ACCOUNTING IMPORTANT ACTIVITIES:
1. Identifying – A process where transaction are analyzed whether to record or not.
Recognition – is a process of accounting events in sfp and sci through journal entries.
Accountable events are ECONOMIC transactions that are relevant to accounting as these
activities affect Assets, Liabilities, or Equity.
o EXTERNAL
o INTERNAL
2. Measuring
o FACT
o OPINION
3. Communicating
o Recording
o Classifying
o Summarizing
BASIC PURPOSE OF ACCOUNTING
There are various ways to assess a standing of an entity. Financial are one of these. Hence, the
basic purpose of accounting is to provide information for making economic decisions.
Economic entities are separate bodies that control economic resources to achieve certain
objectives. They use accounting to record economic activities, process these data and disseminate
information.
1. Not-for-profit entities – common objective is to help common needs of society whose
activity is not directed towards profit making.
2. Business entity – for profit.
Economic Activities are activities that affect A,L,E.
1. Production – internal processing of output which intends to maximize utility rather than
inputs.
2. Exchange – transactions involved by two parties, such as trading.
3. Consumption – usage of final output.
4. Income Distribution – allocation of resources to parties.
5. Savings – allotment of rights for future consumption.
6. Investment – setting a right to increase stocks resources available.
TYPES OF INFO PROVIDED BY ACCOUNTING
1. Quantitative – numeric, units, quantity.
2. Qualitative – descriptive, usually found in notes and in face of the financial statements.
3. Financial information – quantitative in nature as monetary terms are in form of
numbers.
TYPES OF ACCOUNTING INFO AS TO USERS
1. General purpose financial statements – financial reporting, where it meets the common
need of external users governed by GAAP and represented by PFRS.
2. Specific purpose financial statements – to meet specific needs of internal users.
SOURCES OF DATA FROM FINANCIAL STATEMENTS
Info in financial statements is composed of both primary (direct gather of data) and
secondary data (data from external sources).
ACCOUNTING AS ART AND SCIENCE
1. Social Science – Accounting is a body of knowledge which has been systematically
gathered, classified, and organized.
2. Practical art – accounting requires the use of creative skills and judgment.
ACCOUNTING AS INFORMATION SYSTEM
Identify transactions Measure economic activities communicate information to users.
ACCOUNTING AS A LANGUAGE OF BUSINESS
Accounting is fundamental in communication of financial information.
CREATIVE AND CRITICAL THINKING IN ACCOUNTING
o Creative – in a sense that you are to use your insight and imagination to solve problems; it is
important to identify alternative solutions.
- Recognize the problem
- Identify alternative solution
- Evaluate alternative solutions
- Select the proper solution among alternatives
- Implement the solution
o Critical – test relationships of the issues analyzed logically (inductive or deductive reasoning) ;
evaluating alternating solutions.
ACCOUNTING CONCEPTS refer to the principles upon which accounting process is used.
Accounting Assumptions – fundamental principles or a general frame in accounting process.
Accounting theory – logical reasonings in a broad principle.
1. Provides reference for evaluation
2. Guide the development of new procedures.
Most accounting concepts are derived from conceptual framework and the PFRS but are not
imposed on the standards implicitly. Due to long time tradition use, it is generally accepted.
ACCOUNTING CONCEPTS
1. Double-entry system – a transaction recorded must apply to debit and credit.
2. Going concern assumption – The entity will continue to operate indefinitely. Measurement that
are going concern base measures in mixture of costs and values. However, if it is a liquidating
entity, it must use realizable value in presenting measurements.
3. Separate Entity – the business and owner are separate from each other. Any personal
transaction of the owner shall not be included in the books of the business.
4. Stable monetary unit – to use a single currency; a common denominator shall be used
regardless of power instability. Foreign currencies must be translated into pesos (ph).
5. Time Period – the life of the entity is divided into series of reporting periods. Can be a calendar
year or a fiscal year.
6. Materiality concept – if omitting or misstating a measurement will influence decision making. It
requires professional judgment based on the size and nature of the item.
7. Cost-benefit – costs shall never exceed benefit.
8. Accrual Basis – effects of the transactions are recognized immediately after occurrence.
9. Historical Cost – Presents measurement at acquisition cost. However, some PFRS require
presenting costs at other valuation in such that inventories (Lower of cost NRV) , Financial assets
(fair value).
10. Concept of Articulation – all the financial statements are interrelated and interact with each
other.
11. Full disclosure principle – amounts in the financial statement result in judgment trade-offs in
such that sufficient detail matters and yet must be understandable and cost-constraint.
12. Consistency principle – the use of accounting policies must be consisted of unless otherwise
permitted by the PFRS. Change in accounting policy is disclosed in notes to financial statements.
13. Matching Principle – expenses are recognized as revenue is recognized.
14. Entity Theory – proper income determination. A = L + O.
15. Proprietary Theory – proper valuation of assets; importance of balance sheet. A – L = O.
16. Residual Equity Theory – an application to two classes of shares; a theory applied in
computation of book value per share and return on equity. A – L – PSHE = OSHE.
17. Fund Theory – custody and administration of funds. Cash inflow – Cash outflow = Funds.
18. Realization – process of converting noncash assets into cash or claims for cash.
19. Prudence –Assets are not overstated, and Liabilities or expenses are not understated.
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