ACCOUNTING – is the process of identifying, measuring, and communicating economic
information to permit informed judgments and decisions by users of the information.
THREE IMPORTANT ACTIVITIES INCLUDED IN THE DEFINITON OF ACCOUNTING
1. Identifying
2. Measuring
3. Communicating
IDENTIFYING – is the process of analyzing events and transactions to determine whether or
not they will be recognized.
RECOGNITION – refers to the process of including the effects of an accountable
event in the statement of financial position or the statement of comprehensive income
through a journal entry.
o Only accountable events (economic activity) are recognized.
o Sociological and psychological matters are not recognized.
o Non-accountable events are not recognized but disclosed only in the notes, if
they have accounting relevance. This can be recorded through a
memorandum entry.
TYPES OF EVENTS OR TRANSACTIONS
1. External events – events that involve an entity and another external party.
Types of External events
i. Exchange (reciprocal transfer) – event wherein there is a reciprocal giving and
receiving of economic resources or discharging of economic obligations between an
entity and external party (e.g. sale, purchase, payment of liabilities, receipt of N/R in
exchange of A/R.)
ii. Non-reciprocal transfer – “one way” transaction in that the party giving does not
receive anything in return (e.g. donations, charitable contributions, payment of taxes,
imposition of fines, theft, provision of capital by owners, distribution to owners.)
iii. External event other than transfer – changes in the economic resources or obligations
of an entity caused by an external party but does not involve transfer of resources or
obligations (e.g. changes in fair values and price levels, obsolescence, technological
changes, vandalism.)
2. Internal events – events that do not involve an external event.
Types of Internal events
i. Production – process by which resources are transformed into finished goods.
ii. Casualty – unanticipated loss from disasters or other similar events.
MEASURING – involves assigning numbers, normally in monetary terms, to the economic
transactions and events.
Several measurement bases – historical cost, fair value, present value, realizable value,
current cost, replacement cost, and sometimes inflation-adjusted costs. The most commonly
used is historical cost. Financial statements are prepaid using a mixture of costs and
values. Costs include historical cost and current cost while values include the other
measurement bases.
Valuation by fact or opinion – FS are said to be a mixture of fact and opinion.
When measurement is affected by estimates, the items measured are said to be
valued by opinion.
When measurement is unaffected by estimates, the items measured are said to be
valued by fact.
COMMUNICATING – process of transforming economic data into useful accounting
information, such as financial statements and other accounting reports, for dissemination to
users.
The communicating process of accounting involves three aspects:
1. Recording – process of systematically committing into writing the identified and
measured accountable events in the journal.
2. Classifying – the grouping of similar and interrelated items into their respective
classes through postings in the ledger.
3. Summarizing – putting together in condensed form the recorded and classified
transactions and events. This includes the preparation of financial statements and
other accounting reports.
Interpreting the processed information involves the computation of financial statement
ratios. Bangko Sentral ng Pilipinas (BSP), require certain financial ratios to be
disclosed in the notes to financial statements.
Basic purpose of accounting
Is to provide information that is useful in making economic decisions.
Financial statements are one of the sources of information. Other sources may
include current events, industry publications, internet resources, professional advices, expert
systems.
Economic entity is a separately identifiable combination of persons and property that
uses or controls economic resources to achieve certain goals. Economic entity may either be
a:
a. Not-for-profit entity – socially desirable needs of the community or its members
and whose activities are not directed towards making profit; or
b. Business entity – operates primarily for profit.
Economic activities are activities that affect the ALE. Economic activities include:
1. Production – converting economic resources into outputs of goods and services.
2. Exchange – trading resources and obligations for other resources and
obligations.
3. Consumption – using the final output of the production process.
4. Income distribution – allocating rights to the use of output among individuals.
5. Savings – setting aside rights to present consumption in exchange for rights to
future consumption.
6. Investment – using current inputs to increase the stock of resources available for
output as opposed to immediately consumable output.
Types of information provided by accounting
1. Quantitative information – expressed in numbers, quantities, or units.
2. Qualitative information – expressed in words or descriptive form. It is found in the
notes to FS as well as on the face of the other financial statements.
3. Financial information – expressed in money. It is also quantitative information.
Types of accounting information classified as to users’ needs
1. General purpose accounting information – meet the common needs of most
statement users. This information is provided under financial accounting. This is
governed by generally accepted accounting principles (GAAP) represented by the
Philippine Financial Reporting Standards (PFRSs).
2. Special purpose accounting information – meet the specific needs of particular
statement users. This information is provided by managerial accounting, tax basis
accounting.
Accounting as science and art
1. As a social science, accounting is a body of knowledge which has been
systematically gathered, classified, and organized.
2. As a practical art, accounting requires the use of creative skills and judgment.
Accounting as an information system
Identifies and measures economic activities, processes information into financial reports, and
communicates these reports to decision makers.
Accounting as a language of business
It is fundamental to the communication of financial information.
Creative and Critical thinking in accounting
a. Creative thinking – the use of imagination and insight to solve problems. It is most
important in identifying alternative solutions.
b. Critical thinking – the logical analysis of issues, using inductive or deductive
reasoning. It is most important in evaluating alternative solutions.
Accounting Concepts
Refers to the principle upon which the process of accounting is based. This term is used
interchangeably with the following terms:
Accounting assumptions (Accounting postulates) – the fundamental concepts or
principles and basic notions that provide the foundation of the accounting process.
Accounting theory – logical reasoning in the forms of a set of broad principles that (i)
provide a general frame of reference by which accounting practice can be evaluated
and (ii) guide the development of new practices and procedures. It comprises the
Conceptual Framework and the Philippine Financial Reporting Standards.
Accounting Concepts:
1. Double-entry system – each accountable event is recorded in two parts – debit and
credit
