- is the process of identifying, measuring and communicating economic information to permit informed judgment and decision by users of the information.

Components of accounting (MIC)

1. 1. Measuring (technical component) ƛ is the assigning of peso amounts to the accountable economic transactions 2. 2. Identifying (analytical component) ƛ is the recognition or non-recognition of business activities as Ơaccountableơ events.

 An event is accountable when it has an effect on , liabilities and equity.

-> External Transactions ƛ economic events involving one entity and another entity Example

 Purchase of merchandise from suppliers

-> Internal Transactions ƛ economic events involving the entity only Example:

 Casualty ƛ any sudden and unanticipated loss  Production ƛ resources are transformed into products

1. 3. Communicating (formal component) ƛ is the process of preparing and distributing accounting reports to potential users of accounting information.

-> Recording ƛ is the process of systematically maintaining a record of all economic business transactions -> Classifying ƛ sorting or grouping of similar and interrelated economic transactions into their respective classes. It is accomplished by posting to the ledger. -> Summarizing ƛ is the preparation of financial statements.

Basic Purpose of Accounting - To provide quantitative financial information about a business that is useful to statement users particularly owners and creditors in making economic decisions.

Republic Act 9298 ƛ is the law regulating the practice of accountancy in the Philippines.

Board of Accountancy ƛ is the body authorized by law to promulgate rules and regulations affecting the practice of accountancy profession in the Philippines -> Single practitioners and partnerships shall be a registered CPA and have a minimum of 3 years experience in public accounting -> SEC shall not register any corporation organized for the practice of public accountancy Controller ƛ highest accounting officer in an entity

Three main areas in the practice of accountancy profession

1. Public Accounting ƛ individual practitioners, small accounting firms and large multinational organizations that render independent and expert financial services to the public

3 kinds of services offered by public accountants (ATM)

 Auditing ƛ examination of financial statements by independent CPA for the purpose of expressing an opinion as to the fairness with which the financial statements are prepared  Taxation Service ƛ includes the preparation of annual income tax returns and determination of tax consequences of certain proposed business endeavours  Management Advisory Service Ɗ it refers to service to clients on matters of accounting, finance, business policies, organization procedures, product costs and etc. 1. Private Accounting ƛ assists management in planning and controlling the entityƞs operations. Private accountants are responsible for the determination of the various taxes the business is obliged to pay.

1. Government Accounting ƛit involves the process of analyzing, classifying, summarizing and communicating all transactions involving the receipt and disposition of government funds.

Accounting (constructive) vs. Auditing (analytical) - Accounting ceases when financial statements are already prepared

- Auditing examines the financial statements whether they are in conformity with GAAP.

Accounting (conceptual) vs. Bookkeeping (procedural) - Accounting is concerned with the why, reason or justification for any action adopted - Bookkeeping is concerned with maintenance of accounting records. Accounting vs. Accountancy - Accountancy refers to the profession of accounting practice - Accounting refers to the particular field of accounting such as public, private and government accounting.

Financial vs. Managerial accounting - Financial accounting is primarily concerned with the recording of business transactions and the eventual preparations of financial statements. It is an area of accounting that emphasizes reporting to creditors and investors.

- Managerial accounting ƛ area of accounting that emphasizes developing accounting information for use within an entity.

Generally Accepted Accounting Principles ƛ rules, procedures, practice and standards followed in the preparation and presentation of financial statements. - GAAP are like laws that must be followed in financial reporting Financial Reporting Standards Council (FRSC) ƛ is the accounting standard setting body created by PRC upon the recommendation of the board of accountancy in carrying out its powers and functions provided under RA 9298. - The main function is to establish and improve accounting standards that will be GAAP. ->FRSC adopted entirety IAS and IFRS. International Accounting Standards Board ƛ its objective is to achieve uniformity in accounting principle around the globe

Underlying Assumptions (G2AMP)

1. 1. Going concern ƛ means that in the absence of evidence to the contrary, the accounting entity is viewed as continuing in operation indefinitely.

- Recorded @ cost.

1. 2. Accrual ƛ transactions are organized when they occur and not as cash is received or paid. 2. 3. Accounting Entity ƛ entity is separate from the owners, managers and employees who constitute the entity.

- if parent and subsidiary relationship exists, consolidated financial statements are made. And the reporting entity is the mother company.

1. 4. Monetary Unit

Quantifiability ƛ should be stated in the amount of peso Stability of peso ƛ purchasing power of peso is stable or constant.

1. 5. Periodicity ƛ the indefinite life of an entity is subdivided into time periods which are usually of equal length for the purpose of preparing financial reports on financial position, performance and cash flows.  Fiscal Period ƛ a period of twelve months  Calendar year ƛ twelve-month period that ends on December 31, 2010  Natural Business year ƛ is a 12 month period that ends on any month when the business is at the lowest or experiencing slack season

Users and their information needs Investors ƛ they need information to help them determine whether they should buy, hold or sell. Employees ƛ they are interested in information which enables them to assess the ability of the entity to provide salaries, retirement benefits, and etc. Lenders Ɗ for them to determine whether their loans and interest thereon will be paid on due Customers ƛ interested in information about the continuance an entity especially when they have a long-term involvement with the entity Governments and their agencies ƛ they need information to regulate the activities of the entity, to determine taxation policies and as a basis for national income and similar statistics Suppliers ƛ they need information to determine whether there amounts owing to them will be paid on maturity Public ƛ for the information of recent developments in the prosperity of the entities

-> In the absence of a standard management shall consider the applicability of framework

Framework ƛ is the summary of terms and concepts that underlie the preparation and presentation of financial statements - Deals with objective of financial statements, qualitative characteristics of financial statements, concepts of capital and capital maintenance Management ƛ primary responsible for the preparation and presentation of financial statements of the entity Stewardship of management ƛ or the accountability of the management for the resources entrusted to it Liquidity ƛ is the availability of cash in the near future to cover currently maturing obligations Solvency - is the availability of cash over a long term to meet financial commitments when they fall due Financial structure ƛ is the source of financing for the assets of the entity. It indicates the amounts of assets that have been financed by the creditors. It is the ratio of equity to liabilities. Capacity for adaptation ƛ is the ability of the entity to use its available cash for unexpected requirements and investment opportunities Notes to financial statements ƛ provide narrative description or disaggregation of the items presented in the financial statements about items that do not qualify for recognition

Accounting concepts

1. Entity theory ƛ emphasizes the importance of the income statement

A = L + C

1. Proprietary theory ƛ emphasizes the importance of the statement of financial position

A ƛ L = C

1. Residual equity theory ƛ objective is also proper valuation of assets.

A ƛ L ƛ Preference Shareholderƍs equity = ordinary shareholdersƍ equity

1. Fund theory ƛ main objective is the custody and administration of funds

Fund = Cash inflow Ɗ Cash outflow

Financial Reporting ƛ is the provision of financial information about an entity to external users that is useful to them in making economic decisions and for assessing the effectiveness of the entityƞs management. The principal way of providing financial information is through annual financial statements

Qualitative Characteristics of financial statements (2RUC) - qualities or attributes that make financial accounting information useful to the users 1. Relevance ƛ the capacity of the information to influence a decision.

Ingredients of Relevance (PFT)

 Predictive Value Ɗ forecasting outcome of events  Feedback Value Ɗ enables users to confirm or correct earlier expectations  Timeliness Ɗ providing information to the decision maker while it has the capacity to affect a decision.

1. Reliability ƛ is the quality of information that assures users that the information is free from bias and error and faithfully represents what it purports to represent.

Factors to enhance the reliability of financial information (FNSCC)

 Faithful representation Ɗ supported by 3rd party (banks) and have evidence  Neutrality ƛ Free from bias  Substance over form ƛ should be in accordance with their substance not in their legal form. Example: Finance Lease  Conservatism ƛwhen alternative exist, the alternative which has the least effect on equity should be chosen  Prudence ƛ desire to exercise care and caution when dealing with uncertainties in the measurement process such that assets or income are not overstated and liabilities or expense are not understated  Completeness ƛto be reliable the information on financial statements shall be complete within the bounds of and cost

1. Understandability Ɗ information should be presented in a form and expressed in a termininology that a users understand.

1. Comparability ƛ is the ability to bring together for the purpose of noting points of likeness and difference.

 Comparability within an entity ƛ is the quality of information that allows comparisons within a single entity. It is also known as horizontal comparability or intracomparability.  Necessary to identify trends in the financial position and performance within a single entity  Comparability within and across entities ƛ is the quality of information that allows comparisons between two or more entities engaged in the same industry  to be useful, the financial information shall be compared with similar information of previous periods, or with similar information provided by another entity.  Consistency ƛ is the uniform application of accounting method from period to period.  Example: if the fifo method is adopted in one year, such method is followed from year to year.  but consistency does not mean that no change in accounting method can be made. If the changes would result to more useful and meaningful information, then such change shall be made.

Accounting Constraints (TCMB) - are the factors that may affect the relevance and reliability of financial accounting information

1. 1. Timeliness ƛ requires that the accounting information must be available or communicated early enough when the decision is to be made.

1. 2. Cost-benefit ƛ is a consideration of the cost incurred in generating information against the benefit to be obtained from having the information

1. 3. Materiality (principle of convenience) ƛ is practical rule in accounting which dictates that strict adherence to GAAP is not required when an item is not significant enough to affect the evaluation, decision and fairness of the financial statements.

 An item is material if knowledge of it would affect or influence the economic decision of the informed users of the financial statements  Factors of Materiality  Size of the item in relation to the total of the group to which the items belongs  Nature of the item ƛ an item may be inherently because by its very nature it affects economic decisions

1. 4. Balance between relevance and reliability ƛbalance between timely reporting and reliable information

 Example: if the information is not reported in a timely manner, it may lose its relevance.

Definition of Terms

1. 1. Assets ƛ resources controlled by the entity as a result of past transactions or events and from which future economic benefits are expected to flow to the entity 2. 2. Liabilities ƛ are present obligations of the entity arising from past transactions or events the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits 3. 3. Equity ƛ residual interest in the assets of the entity after deducting all of its liabilities 4. 4. Expenses ƛ decrease in economic benefit during the accounting period in the form of an outflow or decrease in or increase in liability that results in decrease in equity, other than distribution to equity participants.

Recognition of Elements (ALIE) Recognition ƛ is a term which means the reporting of an asset, liability, income or expense on the face of the financial statements of an entity

1. 1. Asset recognition principle ƛ as assent is recognized when it is probable that future economic benefits will flow to the entity and the asset has a cost or value that can be measured reliably

- the term Ơprobableơ means that the chance of the future economic benefit arising is more likely rather that less likely

- Future economic benefit ƛ is the potential to contribute directly or indirectly to the flow of cash and cash equivalents to the entity - Cost principle ƛ requires that assets should be recorded initially at original acquisition cost

 In a cash transaction, cost is equivalent to the cash payment. Thus if an equipment is acquired for P100, 000 cash, the cost of the equipment is P100, 000.  In a noncash transaction, the cost is equal to the fair value of the asset received

1. 2. Liability recognition principle ƛ a liability is recognized when it is probable that an outflow of resources embodying economic activities will be required for the settlement of a present obligation and the amount of the obligation can be measured reliably

1. 3. Income recognition principle ƛ income is recognized when it is probable that an increase in future economic benefits related to an increase in an asset or a decrease in a liability has arisen and that the increase in economic benefits can be measured reliably

- Revenue ƛ arises in the course of the ordinary regular activities of an entity - Gains ƛ represent other items that meet the definition of income and do not arise in the course of the ordinary regular activities of an entity - Exceptions to the points of sale

 Instalment method ƛ revenue is recognized at the point of collection  Cost recovery or sunk cost method ƛ revenue is recognized also at the point of collection also at the point of collection. However, all collections are applied to the cost of the merchandise sold.  Cash method ƛ revenue is recognized when received regardless of when earned  Percentage of completion method ƛwhen the outcome of a construction contract can be estimated reliably, contract revenue and contract costs associated with the construction contract shall be recognized as revenue and expenses, respectively, by reference to the stage of completion of the contract activity  Production method ƛ revenue is recognized at the point of production. This method is applicable to agricultural, forest and mineral products. - Interest revenue shall be recognized on a time proportion basis that takes into account the effective yield on the asset - Royalties shall be recognized on an accrual basis in accordance with the substance of the relevant agreement - Dividends shall be recognized as revenue when shareholderƞs right to receive payment is established, meaning, when the dividends are declared - Other income recognition

 Installation fees are recognized as revenue over the period of installation by reference to the stage of completion  Subscription revenue should be recognized on a straight line basis over the subscription period  Admission fees are recognized as revenue when the event takes place  Tuition fees are recognized as revenue over the period in which tuition is provided

1. 4. Expense recognition principle ƛ expenses are recognized when it is probable that a decrease in future economic benefits related to decrease in asset or an increase in liability has occurred and that the decrease in economic benefit be measured reliably

- the expense recognition principle is the application of the matching principle - Three applications of matching principle (CSI)

 Cause and effect association ƛ the expense is recognized when the entity revenue is already recognized. The best example is the cost of merchandise inventory.  Systematic and rational allocation ƛ some costs are expensed by simple allocating them over the periods benefitted. Example: depreciation expense  Immediate response ƛ the cost incurred is expensed outright because of uncertainty of future economic benefits or difficulty of reliably associating certain costs with future revenues.Example: office salaries and most administrative expense.

Measurement of elements Measurement ƛ is the process of determining the monetary amounts at which the elements of financial statements are to be recognized and carried in the statement of financial position and income statement

Measurement bases (HCRP):

1. Historical cost ƛ past purchase exchange price. The amount of cash or cash equivalent paid or the fair value of the consideration given to acquire an asset at the time of recognition. Most commonly adopted by entities. 2. Current cost - current purchase exchange price. The amount of cash or cash equivalent that would have to be paid if the equivalent asset was acquired currently. 3. Realizable Value ƛ current sale exchange price. The amount of cash or cash equivalent that could currently be obtained by selling the asset in an orderly disposal. 4. Present value ƛ future exchange price. The discounted value of the future net cash inflows that the item is expected to generate in the normal course of business

The financial performance of an entity is determined using two approaches:

1. Transaction approach ƛ is the traditional preparation of an income statement

1. Capital Maintenance ƛ means that net income occurs only after the capital used from the beginning of the period is maintained

Two concepts of capital maintenance

1. Financial capital ƛ is the absolute monetary value of the net assets contributed by shareholders and the value of the increase in net assets resulting from earnings retained by the entity. Based on historical cost. 2. Physical capital ƛ is the quantitative measure of the physical capacity to produce goods and services