MMCO Continuing Professional Development Training Center (CPDTC)

2F MMCO Building, 8000 Lakeview Ph3 Angela Street, Halang Calamba City Laguna, Philippines
Tel No. (02) 330-8617, (049) 523-6031; (02) 330-6057
CPA REVIEW (May 2019 Batch)
FAR Theory Cedrick Zapanta, CPA
Module 1
1. Overview of Accounting
2. Accounting Standard-setting Process and Institutions
3. Conceptual Framework

OVERVIEW OF ACCOUNTING
1. History of Accounting
Historical records show that the beginnings of record keeping or storing information dates back some 76,000 years ago in the
Blombos caves of Africa.

Accounting In Ancient Egypt, China, Greece and Rome

• Government accounting records in Egypt show “in kind” tax payments.
• China used Accounting as a means of evaluating the efficiency of governmental programs
• Legislation on financial matters in Greece (5th century BC) included control of receipts and expenditures of public monies
through the oversight of “public accountants” chosen by lot
• In its thousand years of existence, these records showed simple list-making only, similar to single-entry bookkeeping
• Early financial records in the Roman Empire include the Account, (listed public revenues); the Treasury, (which listed
amounts of cash in the provincial tax officials and in the hands of the public contractors). The records included not only cash
and commodities but also the names of freed men and slaves, especially the records Roman army.
• Medieval Europe (13th century) –introduction of double-entry bookkeeping. The chief objective was to keep track of
amounts owed by customers (debtors) and amounts owed to creditors. Debit is Latin for 'he owes' and credit is Latin for 'he
trusts'.
• The Messari (Italian for Treasurer’s accounts, of the city of Genoa 1340) is the oldest discovered record of a complete
double-entry system. These accounts contain debits and credits journalized in a bilateral form.

Luca Pacioli and Double-entry System of Bookkeeping

• Luca Pacioli's "Summa de Arithmetica, Geometria, Proportioni et Proportionalità," published in Venice in 1494, included a
27-page, 36 short chapters on bookkeeping.
• Books of accounts used by Luca Pacioli
o The memorandum (a daybook) – for chronological recording of business transactions as they occurred
o The journal – the merchant's private account book
o The ledger – the money and date columns were almost identical to those in modern ledgers, with entries
consisting of brief paragraphs
• The trial balance is the end of Pacioli's accounting cycle. Debits from the old ledger are listed on the left side of the balance
sheet and credits on the right. If the two totals are equal, the old ledger is considered balanced. If not (in balance), says
Pacioli, "that would indicate a mistake in your ledger, which mistake you will have to look for diligently with the industry and
intelligence God gave you."
• The objective of Luca Pacioli’s keeping records is to give traders prompt information as to his assets and liabilities.
• The Summa is the first known printed treatise on bookkeeping and was translated into different languages. It is widely
believed to be the forerunner of modern bookkeeping practice.
• Thus, it can be said that Luca Pacioli systematized record keeping through the double-entry bookkeeping system.

Professional Accountancy Travels across the Globe

• 1880: Institute of Chartered Accountants in England and Wales (ICAEW) brought together all the accountancy organizations
in those countries
• 1887: the first national accounting society of the United States was formed, the American Association of Public Accountants
(predecessor of the AICPA)
Accounting in the Internet Era
• The act of accounting is usually defined as the act of collecting information on resource usage for the purpose of trend
analysis, auditing, billing, or cost allocation.
o For example when a user uses a connectivity service paid with a pay-per-view approach the accounting process is
based on a metering of the resource usage by the user (usually time spent with an active connection or the
amount of data transferred using that connection). The accounting is hence the recording of this connectivity
service consumption for subsequent charging of the service itself.

Recent Trends and Developments in Accounting

• Cloud Accounting
• Automation (Artificial Intelligence)
• Data Analytics
• Environmental Accounting
• Standardization and Harmonization
2. Definition, Nature, and Purpose of Accounting
 Definition: Accounting is a service activity. Its function is to provide quantitative information, primarily financial in nature, about
economic entities that is intended to be useful in making economic decisions.

Accounting is the art of recording, classifying, 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.

Nature:
• Accounting as Science and Art – Accounting is a social science with a body of knowledge which has been systematically
gathered, classified, and organized. It is influenced by, and interacts with, economic, social and political environments.
Accounting is a practical art which requires the use of creative skill and judgment.
• Accounting as an Information System – Accounting identifies and measures economic activities, processes information into
financial reports and communicates these reports to decision makers.

Purpose: To provide quantitative information1 about economic entities2 intended to be useful in making economic decisions.

1 – Types of information provided by accounting

• Quantitative information – expressed in numbers, quantities or units
• Qualitative information – expressed in words or descriptive form
• Financial information – expressed in terms of money

2 – Economic entity vs business entity

• Economic entity – is a separately identifiable combination of persons and property that uses or controls economic or scarce
resources to achieve certain goals or objectives. Scarce resources have one significant characteristic: because of their
limited nature, they command a price.
o Business entity is an economic entity that produces and distributes goods or services primarily for profit.
o Not-for-profit or non-profit entity is one that carries out some socially desirable needs of the community or its
members whose activities are not directed towards making profit.

3. Functions of Accounting
a. Identification – the accounting process of recognition or non-recognition of business activities as “accountable events” or
whether they have accounting relevance.
b. Measurement – the accounting process of assigning of peso amounts or numbers to the economic transactions and events. The
unit of measure of accounting is money, expressed in prices.
c. Communication – the accounting process of preparing and distributing accounting reports to potential users of accounting
information and interpreting the significance of this processed information. The three aspects of communicating are:
i. Recording – the process of systematically committing to writing business transactions and events in books of account in
a systematic and chronological manner according to accounting rules and regulation.
ii. Classifying – the grouping of similar and interrelated items into their respective classes.
iii. Summarizing – expressing in condensed or brief form the recorded and classified information in financial statements.

4. Branches of Accounting
a. Financial Accounting – the recording of transactions, preparation of financial statements and communication of financial
information to external user groups. (Focus: general purpose reports)
b. Auditing – the examination of financial statements by independent certified public accountant for the purpose of expressing an
opinion on the fairness of presentation of financial statements. (Focus: audit report)
c. Management Accounting (or Management Services) – the accumulation and communication of information for use by internal
parties or management. This includes services to clients on matters of accounting, finance, business policies, organization
procedures, product costs, distribution, and many other phases of business conduct and operations. (Focus: advisory services;
consultancy)
d. Government Accounting – accounting for the national government and its instrumentalities, focusing attention on the custody of
public funds and the purpose or purposes to which such funds are committed.
e. Tax Accounting – involves the preparation of tax returns and rendering of tax advice, such as determination of tax consequences
of certain proposed business endeavors. (Focus: Tax advisory services)
f. Fiduciary Accounting – handling of accounts managed by a person entrusted with the custody and management of property for
the benefit of another.
g. Social Responsibility Accounting – reporting of programs and projects that have to do with the upliftment of the welfare of the
people of a community or of the nation.
h. Environmental Accounting – the area of accounting that focuses on programs, activities and projects that are focused on care for
Mother Earth. One example is carbon accounting which is a process of encouraging reductions in greenhouse gas emissions.
i. Price-level Accounting (Accounting for Hyperinflationary Economies) – is accounting that recognizes in the financial statements
changes in the purchasing power of money. This is in contrast to traditional accounting which assumes a stable monetary unit
when it reports financial information.

5. Financial Accounting vs. Management Accounting

Financial Accounting Management Accounting
o Basically concerned with income o Basically concerned with decision-making
determination and asset valuation o Prepares statements in accordance with
o Prepares statements in accordance with management needs
GAAP o Prepares special purpose reports for
o Prepares general purpose statements internal users
 that can be used by external and internal
users o Future-oriented
o Historical in nature o Makes use of subjective data as long as it
o Emphasizes objective data is relevant

6. Areas of Professional Accounting Practice

a. Public Accounting – composed of individual practitioners, accounting firms and large multinational organizations that render
independent expert financial services to the public on a professional fee basis. Public accountants usually offer three kinds of
services: assurance and audit, taxation, and management advisory services.
b. Private Accounting – composed of individuals employed in business enterprises on salary basis. The major objective of private
accounting is to assist management in planning and controlling the enterprise’s operations.
c. Government Accounting – composed of accountants employed in the different branches of government, such us the BIR, COA,
SEC, and GBEs. The focus of government accounting is custody and administration of public funds.
d. Accounting Education – composed of CPAs who are professors of accounting in various colleges and universities. Their task is to
prepare entrants into the accountancy profession.

7. Environment of Accounting
Financial accounting is shaped to a significant extent, by the environment, and in particular, all of the following:
• The economic activities in society
• The means of measurement of economic activity
• The financial statement users and their information needs

Economic Activities and their Classification

a. Production – the process of converting economic resources into outputs of goods and services that are intended to have
greater utility than the required inputs
b. Exchange – the process of trading resources or obligations for other resources or obligation
c. Income distribution – the process of allocating rights to the use of output among individuals and groups in society
d. Consumption – the process of using the final output of the production process
e. Investment – the process of using current inputs to increase the stock of resources available for output as opposed to
immediately consumable output
f. Savings – the process by which individuals and groups set aside rights to present consumption in exchange for rights to
future consumption

Accountable Events – are events that are quantifiable and has an effect on assets, liabilities and equity. Also known as economic
activities, these are the subject matter of accounting.
• Only economic activities are emphasized and recognized in accounting. Sociological and psychological matters are not
recognized.
• Criteria for an accountable event
o It must affect a financial element of accounting (increasing or decreasing asset, liability or equity (probability
criterion)
o It is a result of a past activity
o Its cost can be measured reliably (measurability criterion)

Types of Accountable Events

1. External Events – events wherein another party participates
a. Transfers – there is flow of economic resources
i. Exchanges – two-way
ii. Non-reciprocal Transfers – one-way
b. External Events other than Transfers – no flow of economic resources
2. Internal Events – those wherein only the entity participates
a. Production
b. Casualties

Measurement of Accountable Events (to be discussed in Conceptual Framework)

1. Historical Cost
2. Current Cost
3. Realizable (Settlement) Value
4. Present Value

QUIZZER 1 – OVERVIEW OF ACCOUNTING

History of Accounting
1. Are the following statements about the history of Accounting true or false?
I. According to the history of accounting, debit means “he owes” and “credit” means “he trusts”.
II. Frater Luca Bartolomes Pacioli did not invent accounting but his treatise, “De Computis et Scripturis is said to have laid the
foundation for double-entry bookkeeping as it is practiced today.
III. The earliest accounting records date back to the 14th Century and were found in the Roman Empire.
Statement I Statement II Statement III
a. True False True
b. False True False
 c. True True False
d. False False True

2. Which of the following statements pertaining to Luca Pacioli’s bookkeeping system is (are) true?
I. The books of accounts included a Memorandum, a Journal and a Ledger
II. The objective of Luca Pacioli’s keeping records is to give traders prompt information as to his assets and liabilities.
III. Luca Pacioli’s accounting cycle is basically the same as the accounting cycle as practiced today.
a. Statements I and II are true c. Statements II and III are true
b. Statements I and III are true d. All statements are true

3. Which of the following statements is (are) true?

I. Accountancy is a communication service profession.
II. Financial accounting is the process of identifying, measuring, analyzing, and communicating financial information needed by
management to plan, evaluate, and control an organization's operations.
III. Financial statements are the principal means through which financial information is communicated to those outside an
enterprise.
a. Statements I and II only c. Statements II and III only
b. Statements I and III only d. Statements I, II and III

4. Which of the following statements is not a proper description of accounting as a communication profession?
a. Financial statements can be expressed in any national language.
b. Financial statements can be expressed in any dialect of a country.
c. Financial statements should use terminology within the level of understanding of the statement user.
d. Financial statements, as far as possible, should show information that can be verified from documentary evidence in order
to gain the confidence of statement users

5. Which of the following statements about accounting information is (are) true?

I. Accounting provides quantitative and financial information only.
II.Accounting provides quantitative, qualitative and financial information
III. Information in the financial statements are sourced only from the books of account.
a. I and II only b. II and III only c. II and III only d. I, II and III

6. Which of the following statements is not an objective of financial reporting?

a. Provide information that is useful in investment and credit decisions.
b. Provide information about enterprise resources, claims to those resources, and changes to them.
c. Provide information on the liquidation value of an enterprise.
d. Provide information that is useful in assessing cash flow prospects.

7. How does accounting help the capital allocation process attract investment capital?
a. Provides timely, relevant information c. Promotes productivity
b. Encourages innovation d. (a) and (b)

8. The information provided by financial reporting pertains to

a. Individual business enterprises, rather than to industries or an economy as a whole or to members of society as consumers.
b. Business industries, rather than to individual enterprises or an economy as a whole or to members of society as consumers.
c. Individual business enterprises, industries, and an economy as a whole, rather than to members of society as consumers.
d. An economy as a whole and to members of society as consumers, rather than to individual enterprises or industries.

9. Which of the following represents a form of communication through financial reporting but not through financial statements?
a. Statement of financial position c. Income statement
b. President's letter d. Notes to financial statements

10. Qualitative information is found

a b c d
Only in the face of the financial statements yes no yes no
In the face of the financial statements and
the accompanying notes yes yes no no

11. In which of the following situations is the science aspect of accounting demonstrated?
I. The accountant makes use of the rules of debit and credit in recording transactions of the business
II.Transactions and events are processed using the steps of the accounting cycle.
III. A provision for doubtful accounts was estimated by the accountant on the basis of recorded data and the collection
experience of the company
a. I only b. I and II only c. II and III only d. I, II and III

12. The art aspect of accounting is applied in which of the following circumstances?
I. The accountant records a purchased equipment at cost plus expenses in acquisition and putting it available for use.
II.The external auditor gives an unqualified opinion that the financial statements are fairly presented in conformity with
generally accepted accounting principles.
III. The accountant selects the reliable fair value at which a consumable biological asset will be recognized and measured in
the books of account.
 a. Statement I only c. Statements II and III
b. Statements I and II d. Statements I, II and III

13. Which of the following statements is (are) true?

I. Not all quantitative information is also financial in nature.
II.Measurement is the process of assigning numbers to objects such as inventories or plant assets and to events such as
purchases or sales.
III. Management decisions are oriented to the future whereas the decisions of external users are oriented to the past.
a. I and II only c. I and III only
b. II and III only d. I, II and III

14. Which of the following features of an asset closely links its definition to the science of Economics?
a. An asset is controlled by an entity c. An asset can command a price
b. An asset can provide future benefits to an entity d. An asset is exclusively owned by an entity

15. Which of the following is not an economic entity?

a. Aldo, Baldo, Calvo & Associates, a law office c. Polytechnic University of the Philippines
b. Luna Sangre Group of Companies d. Janet, a filipino citizen who owns JLN Piggery

16. Which of the following is an economic entity but not a business entity?
a. Golden Acres, a charitable institution c. Rustan’s supermarket
b. Consolidated Foods Corporation d. ABC Co., a stock corporation

17. It is the process of recognition and non-recognition of business activities as “accountable events” or whether they have
accounting relevance
a. Identification c. Communication
b. Measurement d. Summarization

18. The accounting process of assigning peso amounts or numbers to relevant objects and events is known as
a. Identification c. Communication
b. Measurement d. Summarization

Branches of Accounting / Areas of Professional Practice

19. Which of the following branches of accounting focuses on general purpose reports on financial position and results of
operations, known as financial statements?
a. Financial accounting c. Management advisory services
b. Auditing d. Bookkeeping

20. The process of analyzing, recording, classifying, summarizing and communicating all transactions involving state funds and
property is known as
a. government accounting c. fiduciary accounting
b. estate accounting d. receivership accounting

21. An independent appraisal function established within an organization to examine and evaluate its activities as a service to the
organization.
a. external auditing c. fiduciary accounting
b. internal auditing d. management accounting

22. The process of identifying, measuring and communicating financial information used for planning , evaluation, and control
within the organization
a. financial accounting c. social responsibility accounting
b. estate accounting d. management accounting

23. Handling of accounts for fiduciaries who wind up the affairs of a deceased person.
a. estate accounting c. receivership accounting
b. fiduciary accounting d. macro accounting.

24. The process of measuring and disclosing the performance of a firm in terms of community involvement and related criteria.
a. macro accounting c. social responsibility accounting
b. enterprise accounting d. community accounting

25. Accounting for not-for-profit entities other than the government

a. Estate accounting c. Receivership accounting
b. Institutional accounting d. Enterprise accounting

26. The practice of accounting by one whose principal employment is confined to a single enterprise
a. single-proprietorship accounting c. estate accounting
b. enterprise accounting d. private accounting

27. Branch of accounting which deals with rendering of services to the public for compensation.
a. Private Accounting c. Public Accounting
b. Government Accounting d. Enterprise Accounting