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• Profit generates more funds or resources for the ACTIVITIES IN BUSINESS ORGANIZATIONS
business. The three types of business activities are as follows:
• With more funds, it is possible for the business to Financing Activities
expand and create more job opportunities. -are the methods an organization uses to obtain
• Subsequently, more properties acquired, more goods financial resources from financial markets and how it
produced and sold and more taxes are paid to the manages these resources.
government • A business starts with financing activities when the
owner finances the business.
FUNDING A BUSINESS • If the owner’s contribution is insufficient, additional
• The primary source of funds or capital (resources such financing can be extended by banks and other financing
as money) is the investor or owner of the business. institution.
• If the capital put up by the owner is not enough, other • Included under this activities are capital withdrawn by
sources of capital are the relatives, friends or financing the owner and loan repayment.
institutions such as banks and cooperatives. Investing Activities
- Involve the selection and management of long term
resources that will be used to develop, produce and sell
goods and services.
• It also involves disposal and replacement of these income and expenses of a business.
resources. Examples are acquisition of properties in land, 2. Measuring – this is the process of assigning
furniture, machineries and equipment and other amounts or value to the accountable economic
resources needed in the business and selling them when transactions and events.
they are no longer needed.
3. Communicating – this is the process of
communicating accounting information to
Operating Activities
interested users by preparing and distributing
- involve the use of resources to design, produce,
distribute, and market goods and services. accounting reports, the most common form of which
• It includes activities involving business operations such is the financial statements.
as activities related to earning of income when goods or
services are sold and the incurring of expenses when they
NATURE AND PURPOSE OF ACCOUNTING
are paid. Accounting is a process which function is to
provide financial information about economic entities
to statement users so that they could make informed
“Accounting is a service activity. Its function is to judgment and better decision.
provide quantitative information, primarily financial
in nature, about economic entities, that is intended ACCOUNTING AS A BUSINESS LANGUAGE
to be useful in making economic decision.” – Accounting is a bridge between the company and the
Accounting Standards Council (ASC), succeeded by statements users. From the business activities which
Financial Reporting Standards Council (FRSC). accounting accumulates, reports will be prepared and vital
information communicated to the users.
Other definitions of accounting from other Accounting speaks in a language that enables readers to
organizations: understand what is happening in a business, if it is doing
well in terms of finances, before readers or users make
“Accounting is the art of recording, classifying, and
decisions.
summarizing in a significant manner and in terms of
It is difficult for users to make financial decisions that
money, transactions and events which are, in part at are not supported by facts. These facts are contained in
least, of financial character, and interpreting the the accounting reports.
results thereof.” – American Institute of Certified
Public Accountants (AICPA) COMPANY
“Accounting is the process of identifying, accumulates financial data
through its various activities
measuring and communicating economic
information to permit informed judgment and
decision by users of the information.” –American ACCOUNTING
Accounting Association (AAA) processes the financial data and
From the definitions above, we can have the prepares financial reports
THE ACCOUNTING EQUATION AND THE ▪ They also require certain information that should be
DOUBLE –ENTRY SYSTEM included in financial reports and how this information is
presented.
BASIC ACCOUNTING CONCEPTS
Accounting concepts and principles are a set of Development of the Accounting Standards
logical ideas and procedures that guide the accountant in ◻ International Accounting Standard Committee (IASC)
recording and communicating economic information. was created in 1973
to harmonize accounting standards across different
Separate Entity Concept – Under this concept, the countries
business is considered separate and distinct from its ⮚ International Accounting Standards (IAS) - standards
owner. Only business transactions are recorded in the promulgated by the
books of accounts of the business and the personal IASC.
transactions of the owner are not included. ◻ International Accounting Standard Board (IASB)
succeeded IASC in 2001.
Time Period (Periodicity Concept) – This concept assumes
Main objective of the board - to develop a uniform set of
that the operating life of an enterprise maybe divided into
high quality, understandable and enforceable global
series of reporting periods. This allows accounting to
accounting standards. The purpose is to achieve a higher
report on a timely basis the needed information of the
degree of comparability and transparency of financial
users of financial statements to assess the
reporting to help the world’s capital markets and other
condition and performance of the business.
users make economic decisions.
Going Concern Assumption – Under this concept, the
⮚ International Financial Reporting Standards (IFRS) –
business is assumed to continue in operation for an
standards promulgated by the IASB, consists of the
indefinite period of time.
following:
Stable Monetary Unit – Under this concept , all business
■ IFRS,
transactions are recorded and measured using only one
■ IAS
unit of measurement. The unit of measurement in the
■ Interpretation of IFRS and IAS
Philippines is the Philippine peso. It is also assumed that
the purchasing power of peso is stable and therefore The Accounting Standards in the Philippines
changes in the purchasing power due to inflation are ◻ Accounting Standard Council (ASC) - created in Nov.
ignored. 18, 1981 by PICPA- accounting standard setting body in
Materiality Concept – This concept guides the accountant the Philippines. composed of eight members. It was
when applying accounting principles. This is because formed to establish and improve accounting standards
accounting principles are applicable only to material that will be generally accepted in the Philippines.
items. An item is considered material if its omission or ⮚ The accounting standards in the Philippines called
misstatement could influence economic decision. “Statement of Financial Accounting Standards (SFAS)
were basically US bases until gradually the Philippines THE CONCEPTUAL FRAMEWORK FOR
adopt the IAS and IFRS starting 1997.
FINANCIAL REPORTING
Financial Reporting Standard Council (FRSC) – created in ◻ Objective of Financial Reporting
2004 by PRC replacing the ASC – was created to assist the ◻ Qualitative Characteristics of Useful Information -
BOA to carry out its powers and functions provided under fundamental, enhancing
the Republic Act 9298, the Philippine Accountancy Act of ◻ Elements –definition, recognition, measurement
2004. ◻ Capital and capital maintenance
⮚ It was then that the Philippines decided to adopt the
Qualitative Characteristics of Useful Information
accounting standards issued by the IASC and IASB and
◻ Fundamental qualities
they are known as:
■ Relevance – predictive value, confirmatory value
■ PFRS corresponding to IFRS
■ Faithful representation – completeness, neutrality, free
■ PAS corresponding to IAS
from bias
■ Interpretation of the PFRS and PAS corresponding to
◻ Enhancing qualities
IFRS and IAS
■ Understandability
◻ The FRSC consists of 15 members with a chairman.
■ Verifiability
The Philippines has three financial reporting frameworks: ■ Timeliness
the Philippine Financial Reporting Standards (PFRSs) ■ Comparability
the Philippine Financial Reporting Standard for Small
General Purpose Financial Statements
and Medium-Sized Entities (PFRS for SMEs) and
The general purpose financial statements are:
the Philippine Financial Reporting Standard for Small 1. Statement of Financial Performance (Income
Entities (PFRS for SEs). Statement)
The Securities and Exchange Commission has the 2. Statement of Changes in Owner’s Equity
authority to prescribe the financial reporting framework 3. Statement of Financial Position
to be used by corporations in the Philippines. 4. Statement of Cash Flow
In September 2022, the Professional Regulatory Board of
THE ELEMENTS OF FINANCIAL STATEMENTS
Accountancy (BOA) issued Board Resolution No. 44
(s. 2022) that contains the approval of the following: Elements of Financial Position:
Adoption of the IFRS Sustainability Disclosure ❖ Asset- is a present economic resource controlled by
Standards that will be developed by the International the entity as a result of past event. An economic resource
Sustainability Standards Board (ISSB) in the preparation is a right that has the potential to produce economic
of the general-purpose financial statements; and benefits.
Renaming of the Financial Reporting Standards Council Examples:
(FRSC) to Financial and Sustainability Reporting ◻ Current Assets - Cash, Accounts Receivable, Notes
Standards Council (FSRSC) receivable, Inventories, Prepaid expenses
The change in name considers the expanded role of ◻ Noncurrent Assets – Property, Plant and Equipment,
FSRSC in the adoption of future Sustainability Disclosure Intangible Assets
Standards. This is in light of the increasing demand for
❖ Liability – is a present obligation of the entity to
high quality, transparent, reliable and comparable
transfer an economic resource as a result of past events.
reporting by companies on climate and other
Examples:
environmental, social and governance (ESG) matters.
• Current Liabilities- Accounts Payable, Notes Payable,
Accrued Liabilities, Unearned Revenues
• Non current Liabilities – Mortgage Payable, Bonds
Payable
❖Equity – is the residual interest in the assets of the equation
enterprise after deducting all liabilities. ◻ Increase in Asset = Increase in liability
Examples: ◻ Increase in Asset = Increase in equity
• Capital, Withdrawals/Drawing, Income Summary ◻ Increase one Asset = Decrease in another Asset
◻ Decrease in Asset = Decrease in Liability
Elements of Financial Performance: ◻ Decrease in Asset = Decrease in Owner’s Equity
❖ Income – is increase in assets, or decrease in liabilities, ◻ Increase in Liability = Decrease in Owner’s Equity
that result in increases in equity, other than those relating ◻ Increase in Owner’s Equity = Decrease in Liability
to contributions from holders of equity claims. ◻ Increase in one Liability = Decrease in another Liability
Examples: ◻ Increase in one Owner’s Equity = Decrease in another
• Service income, Sales Owner’s Equity
What is an account?
❖ Expenses – are decreases in assets, or increases ❖ An account is a basic summary device of
liabilities that result in decreases in equity, other than accounting. It is a detailed record of the increases,
those relating to distribution to holders of equity claims. decreases and balance of each element that appears
Examples: in an entity’s financial statements. It resembles the
• Cost of Sales, Salaries Expense, Rent Expense, Utilities
letter T the reason why it is called T Account
Expense, Supplies Expense, Insurance Expense,
Depreciation Expense, Interest Expense. DEBITS AND CREDITS- THE DOUBLE ENTRY
USINESS TRANSACTIONS AND THE SYSTEM
❖ Accounting is based on a double entry system
ACCOUNTING EQUATION
which means that the dual effect of a business
❖ A business transaction is an exchange of values
transaction is recorded. A debit side entry must have
involving two parties or within the enterprise.
❖ All business transactions that are taken up in the a corresponding credit side entry. Each transactions
accounting records of the enterprise should have affects at least two accounts. The total debits for a
supporting source documents. transaction must always equal the total credits.
❖ In accounting, business transactions are presented in ❖ An account is debited when an amount is entered
terms of the elements of the financial statements that are on the left side of the account and credited when an
affected by each transaction. This is done through the amount is entered on the right side of the account.
basic accounting equation, which states that:
ASSET = +LIABILITY EQUITY ASSET = LIABILITIES + EQUITY + INCOME - EXPENSES
Note: Income is added while expenses are deducted
BUSINESS TRANSACTIONS AND THE ACCOUNTING in the equation. These are because income increases
EQUATION
equity and expenses decreases equity. This is also the
In analyzing business transactions for purposes of
reason increase in income is recorded on the credit
recording, always remember the following:
side while increase in expense is recorded on the
✔ In every transaction, value received = value parted
with, the two values must always be equal. debit side.
✔ The basic accounting equation must always be
maintained.