Module in AE 13 (Financial Accounting and Reporting)

Course Code: AE 13
Course Title: Financial Accounting and Reporting
Unit Credit: 6 units
Contact Hours/Week: 6 hours
Prerequisite: None
Course Description:

This course provides a reinforcement of basic accounting, within the context of business and
business decisions. Students obtain additional knowledge of the principles and concepts of accounting
as well as their application that will enable them to appreciate the production of accounting data.
Emphasis is placed on understanding the reasons underlying basic accounting concepts and providing
students with an adequate background on the recording of transactions, their classifications and
reporting function of accounting in a service and trading concerns through the preparation of
Statement of Financial Position, Income Statement, Statement of Changes in Equity and Cash Flow
Statement.

Exposure through the use of practice sets, either manual or computerized system (MS Excel,
Quickbooks) in recording and reporting transactions for service or trading firm is a requirement in this course.
Toward the end of the course covering financial statements for corporation, there must be an introduction to
regulatory reporting in the Philippines for Corporations.

Introduction

This module is an introduction of basic accounting, how it evolved from the ancient time until
the 20th century, the definition of accounting is introduced. The fundamentals of accounting are discussed
so that the students will appreciate better their higher accounting subjects. The different forms of business
organizations are also explained because they are the entities that need the services of accountants who
possess accounting skills.

The basic concepts of accounting and the Generally Accepted Accounting Principles (GAAP)
which are applicable in the preparation of financial statements of all forms business organization is
thoroughly discussed in order that students will know them by heart.

The different branches of accounting are presented for the students to understand the
wider scope of accounting.

Towards the end of the module the various elements of the financial statements are introduced,
followed by the rules of debit and credit in preparation for the development of the skills of the students in
transaction analysis. This module ends with the discussion of the accounting cycle
 MODULE ONE

The Nature of Accounting

This module provides the evolution of accounting and the definition of accounting. It orients also the student
about the different forms of business organizations. Moreover, the fundamental concepts of accounting and the
generally accepted accounting principles as well as the fundamental principles of accountants arc explained.

The different branches of accounting arc presented in order for the student to be aware of the wider scope of
accounting,

The various elements of the financial statements are discussed before the rules of debit and credit.
and transaction analysis. Finally, the accounting cycle is explained. This module consists Of ten lessons,

General Objective

At the end of this module, the student will be able to explain the evolution of accounting, define
accounting, and discuss the different forms of business organizations which are the users of accounting
information.

The student is also expected to explain the fundamental concepts of accounting, the GAAP, and the
fundamental principles of accountants. The student will be able also to identify the various elements of the
financial statements, and the different branches of accounting.

Towards the end of module one the student will be able to apply the rules of debit and credit, analyze
transactions and discuss the accounting cycle.

Lesson 1 Evolution of Accounting

Specific Objectives:

At the end of the lesson the student should be able to

l. Explain the evolution of accounting

2. Define accounting

Evolution of Accounting

One way of understanding accounting better is studying its brief history. Its evolution from primitive
accounting, during middle ages, at the time of the industrial revolution, as well as during the information age, and
accounting at present are discussed in the following paragraphs.
Accounting deals with keeping business records. According to historians, in 8500 B.C. there were archaeologists
who established that certain clay tokens, disks, spheres and pellets found in Mesopotamia (Iraq) were used to keep
business records. Ancient civilizations of China, Babylonia, Greece, and Egypt also maintained different types of
business records.
In 3600 B.C. in Babylonia, historians found clay tablets were used to record payment of wages. The costs or
labor and materials used in building pyramids were also kept during this ancient civilization.
Accounting is one Of our oldest skills. Tablets were used to record bushels of grain collected as tax that
came into the king's warehouse.
Bookkeeping in the ancient world has been attributed to various factors such as the invention of writing,
the introduction of Arabic numerals, the decimal system, the diffusion of knowledge of algebra, the
presence of inexpensive writing materials, the rise of literacy, and the existence of a standard medium of
exchange.

During the middle ages, from the 1 1 th to the 13th centuries, Northern Italy's literacy has become
widespread. Arabic numerals were also being used as a result of trade with the Near East.
In 1494, Luca Pacioli, a Franciscan friar, a mathematician, introduced double-entry bookkeeping. In this
year he published his book, Summa de Arithmetica, Geometria, Proportioni et Propotionalita or
"Everything about Arithmetic; Geometry, Proportions and Proportionality," which includes, Particularis de
Computis et Scripturis or "Details of Calculation and Recording," describing double-entry bookkeeping.
He has been regarded as the father of double-entry bookkeeping.

The industrial revolution, which occurred in England from the mid-18 th to the mid-19th century, changed the
method of producing commercial goods from the handicraft method to the factory system. The problem of
costing large volume of products came. Cost accounting then emerged to answer the need of costing mass
produced products.

Business operations expanded which spearheaded the growth of corporations. The

shareholders are no longer the managers of their businesses. Management then had to create
accounting systems to report to the owners the results of their stewardship of the business.

The manual system of accounting had further revolutionized and now computerized accounting system is
common to large businesses,

The Association of Southeast Asian Nations (ASEAN) was established on August 8,

1967 and drafted the vision of ASEAN 2015. This has four pillars and one of these is Single
market and production base which measures to ensure the free flow of goods, services,
investment, capital, skilled lábor, priority integration sectors. One of the agreements entered by
the ASEAN was the ASEAN Framework Agreement on Services (AFAS). This aims to provide
mobility of ASEAN professionals to provide their services in the region, This includes CPAs,
accredited ASEAN CPAs will be authorized to practice their profession in o the ASEAN
countries. The other three pillars are competitive economic region, equitable economic
development; and integration into the global economy.

Definition of Accounting

Different organizations that affect the accountancy profession provide different definitions of
accounting. The definition from the American Accounting Association (AAA) is the most
frequently used which is as follows:
Accounting is theprocess Ofidentifying, measuring and communicating economic information to permit
informedjudgments anddecisions by users ofthe information,

The definition states that the very purpose of accounting is to provide quantitative information to be useful
in making economic decision. It also states that that accounting has three components which are: identifying
as the analytical component, measuring as the technical component, and communicating as the formal
component,
Identifying as the analytical component deals with the recognition and nonrecognition of business activities
as "accountable evenf' or "non-accountable event". As accountant you have to analyze the activity if it affect
two or more elements in the financial statements, if it does then it is to be recorded in the accounting books of
the business.
There are three elements of the statement of financial position, which are the: assets, liabilities, and equity,
whereas, there arc two elements of the income statement, which are: the revenues and expenses, These will be
discussed in detail in the next lesson.

For example a store selling softdlinks sold one pack coca cola (mismo) for P300. This business activity
increases cash which is an asset of the business and decreases inventory also an asset of the business,
Therefore, this an accountable event to be recorded in the accounting books of the business.

Another business activity is hiring of an employee. Upon hiring, there is no salary yet, therefore no element in
the financial statements are affected by this activity so this is a nonaccountable event.

Measuring as the technical component deals with assigning of peso amounts to the
accountable events. In the Philippines the Philippine peso is used in assigning the value of the
event. In the example above sales for cash is recorded at P300. [n other countries their legal
tender will be used, like business activities in the USA will be recorded in US dollars.

Communicating as the formal component deals with the preparation of financial statements regularly. Financial
statements should be prepared at least annually, but they could be prepared monthly or quarterly depending on
the needs of the business. They have to be disseminated or distributed to the different users of accounting
infomation.
Lesson 2Forms of Business Organizations

Specific Objectives;
At the end of the lesson the student should be able to:

1. Distinguish the different forms of business organizations

2. Identify the needed accounting procedures for each business organization

The Different Forms of Business Organizations

The different forms of business organization need to keep records Of their revenues and
expenses to have an up-to-date information regarding their financial performance and financial
condition. They need to prepare timely financial statements. They are required to comply to the
different reportorial requirements of regulatory agencies, such as the Bureau of Internal Revenue, the
Securities and Exchange Commission, and the like.

At the start ofthe business the owner or owners choose the form of the business organization.
The business is required to be registered according to the choice of the owner or owners- Registration is
needed before actual operation.

There are four usual forms of business organizations in the Philippines. These are: sole
proprietorship, partnership, corporation, and cooperative.

Sole Proprietorship. This is a business that is owned and managed by only one person. The
owner receives all profits, absorbs all losses, and responsible for all debts of the business. The sole
proprietorship is treated separately from the owner.

The accounting records of the sole proprietorship are for the business activities only- The
personal financial records of the owner should not be included in the books or records of the sole
proprietorship.

Partnership. This is a business owned by two or more persons Who bind themselves to
contribute money, property, or industry to a common fund, with the intention of dividing the
profits and losses among themselves. Each partner is personally liable for any debt incurred by the
partnership. The business owners are called partnery The partnership is treated separately from the
partners.
The accounting records of the partnership are kept for the business activities of the
partnership only. The personal financial records of the partners should not be included in the
books or records of the sole partnership.
Corporation. This is a business owned by its. stockholders or shareholders. It is usually owned by
more than one person but now there one person corporation under the revised corporation law. A
corporation is an artificial being created by operation of law, having the rights of succession and the
powers, attributes and properties expressly authorized by law or incident to its existence,
 The shareholders owns share of stocks. They will rcceivc periodic dividends either quarterly or
annually as their share in the net income of the corporation. The shareholders arc not personally liable
for the corporation 's debts.
The corporation is a separate legal entity. The busincss activities of the corporation are
recorded in the books of the corporation. The personal business activities of the shareholders are
treated separately and they are not included in the books of the corporation.

Cooperative. A cooperative is owned by morc than one person. This is an association of individuals
who joined together to contribute capital and cooperate in order to achieve certain goals, It may engage in
different business activities like credit or trading. The owners of the cooperativc are called ffinembers".

The members will receive their share in the net surplus of the cooperative annually in the form of
dividends and patronage refunds.

The business records of the cooperative are recorded in the books of the cooperative. The personal
business activities of the members are not recorded in the books of the cooperative-

Lesson 3 Types of Business According to Activities

Specific Objectives:

At the end of the lesson the student should be able to:

l. Compare thc different types of business according to activities

2. Explain the different business activities

The different types of business according to activities need accounting information. There
are many types of business according to the activities they undertake. Only three major types of
business activities will be discussed. These three major types of business activities are: service
business, merchandising or trading business, and manufacturing business,

Service Business. This is a business that offers services as its main product rather than
selling physical goods. It may offer professional skills, expertise, advice, lending service, and
other types of services.

Examples of service businesses include:

a. Schools 4
Specific examples: DWCB, Data Center College of the Philippines
b. Professionals (accounting finn, auditing firm, law firm, etc.)
Specific examples: SGV and Company, PriceWaterhouseCoopers, Deloitte, etc.)

c. Hospitals and clinics

Specific examples: St. James Hospital, Bangued Christian Hospital, Reyes Dental
Clinic
d. Banks and other financial institutions
Specific examples: PNB, LBP, ADTEMPCO, etc.
 e. Others

Merchandising or trading business. This is a busincss that buys and sells goods without
changing their physical fonn.

Examples of merchandising business :

a. General merchandise resellers
Specific example: JTC Supermarket, LANS Merchandising, etc.

b. Distributors and dealers

Specific example: Rice wholesalers. Car dealers, etc.

Manufacturing business. This is a business that buys raw materials and processes them into
finished products.

Examples of manufacturing business:

a. Car manufacturers
Specific examples: Toyota, Mercedes Benz

b. Food processing companies

Specific examples: Datu Puti, Purefoods

c. Others

Summary:

Accounting started during the primitive era. It started in countries with ancient civilization
like Babylonia, China, Greece, and Egypt. It began with manual recording of revenues and expenses
until it became computerized accounting system.

The different forms of business organizations are the primary users of accounting
information. They are also required to comply with the reportorial requirements of different regulatory
agencies.

Activities:

l . Read and comprehend the module. Search the internet cr œad any of the references
regarding the topics discussed in the module.
 Module in AE 13 (Financial Accounting and Reporting)

Course Code: AE 13
Course Title: Financial Accounting and Reporting
"nit Credit: 6 units
:ontact HoursIWeek: 6 hours
'rerequisite: None
MODULE ONE

Lesson 4 Fundamental Concepts of Accounting

Specific Objectives:

At the end of the lesson the student should be able to:

l . Explain the fundamental concepts of accounting

2. Appreciate the application of the different concepts in business organizations

lil recording business transactions the accountant should consider the fundamental concepts
of accounting. Business transactions refer to business activities which are accountable, like sales of
goods, purchase ofgoods to be sold, payment for operating expenses like salaries, rent, water bills
and electric bills. There are three fundamental concepts of accounting. Other authors would name
four or even more fundamental concepts.

Only the basic three fundamental concepts of accounting will be discussed here which are as
follows:

L Entity Concept. This is the most basic concept in accounting. The different business organizations
are referred to as an accounting entity. The entity or the business organization is treated as separate
and distinct from the owner/s, managers, and employees who constitute the entity. The business
transactions of the entity shall not be merged with the transactions of the owner/s.

An example here is electric bill, if the store of a sole proprietor is located in the first floor of
their building and the second and third floors of their building is their residence, then ABRECO will
install a commercial electric meter for the first floor and industrial rate or commercial rate is used in
computing the electric bill Of the store, Residential electriç meter will be installed for the second and
third floors and the rate is cheaper.
Only the electric bill for the first floor which is beingA1sed for business purposes will be
recorded as expense of the business. The electric bill for the second and third floor will not bc
recorded as expense of the business, it will be treated as personal expense of the owner.

2. Periodicity Concept (or Time Period Concept). An entity's life can be meaningfully subdivided
into equal time periods for reporting purposes. Users Of accounting information need timely
infomation for making an economic decision. Therefore, financial statements are prepared
 either monthly, quarterly or annually. The regulatory agencies like the Bureau of Internal Revenue
requires Monthly VAT Returns and Quarterly Income Tax Returns.

3i Monetary Unit Concept (or Stable Monetary Unit Concept). In the Philippines the assumption
that the peso is a stable measure over time is not necessarily valid. The effect or inflation is
ignored in the accounting records. The accountants add and subtract peso amounts as though each
peso has the same purchasing power as any other peso at any time.

For example the business purchased land worth PI 00,000 in the year 2000. It was recorded
as PI 00,000 in the year 2000. By now (year 2021) the value

Lesson 5 Generally Accepted Accounting Principles (GAAP)

The GAAP represent the rules, procedures, practices, and standards followed in the
preparation and presentation of financial statements. The general acceptance of an accounting
principle usually depends on how well it meets three criteria: relevance, objectivity and feasibility,

There are authors that mentioned four GAAP, others state more than four. Seven GAAP will
be discussed here which are as follows:

l. Objectivity Principle. Accounting records are based on the most reliable data available so that they
will be as accurate and useful as possible. For example you paid your tuition fee of PI 0,000 to the
cashier of DWCB. She will issue an Official Receipt (OR) indicating that you paid P10,000 for your
tuition fee. The duplicate of the OR is the supporting document which the School Accountant will use
in recording the cash receipt. Is the data reliable? Yes, because the supporting document is also
reliable,

2. Historical Cost. It states that acquired assets should be recorded at their actual cost and not at
what management thinks they are worth as at repotting date. For example, the business bought Land and
building for PI Million on January 15, 2019. The accountant will record Land and building at PI Million.
As of December 31, 2020, the Land and building could be sold for P2 Million. Will the Accountant changed
the recorded amount to P2 Million? No, the value of the Land and building in the accounting books would
remain at PI Million.

3. Revenue Recognition Principle. Revenue is to be recognized in the accounting period when goods
are delivered or services are rendered or uperformed. It refers to income received. A merchandising business
may sell goods for cash or on credit. Sales will be recorded in the accounting books when there is already an
exchange of values. Example, a bookstore sells books for cash worth PI ,000, The buyer paid PI,OOO and
the seller gave the books. There is already an exchange of values. Therefore, the accountant of the bookstore
will record revenues. Another example, if the seller sells on credit, which means the buyef only promise to
pay after one month, but the seller already gave the books to the buyer. There is already an exchange of
values. The buyer received the books and the seller received the buyer's promise to pay. The accountant will
then record the revenue and the amount receivable from the buyer. In short, revenue is recognized when
earned although not yet paid, not only when cash is received.
4. Expense Recognition Principle. Expenses should be recognized in the accounting period in which
goods and services are used up to produce revenue and not when the entity pays for those goods and
services. In other words, expenses should be recognized when incurred not only when
paid. Example, the meter reader of ABREco came and read electric meter on July 25, 2021, the bill
amounted to P5,ooo. The business did the bill July 25, The paid bill on August l, 2021. The accountant
prepared the financial statements for the month ending July 3 1, 2021 , the light expense or power expense
should recognized as expense on July 25, 2021 , and not upon payment on August l, 2021,

5, Adequate Disclosures This principle Rquires that all relevant information that would affect the user's
understanding and assessment of the accounting entity bc disclosed in the financial statements. The
accountant should determine what is relevant information. Example, the Warehouse of a business completed
as of December 31, 2020 but it was burned down on January 31, 2021, The financial statements on December
31, 2020 show a Warehouse among the assets. The financial statements were issued on March 31, 2021. Was
the burning ofthe warehouse a relevant information on March 31, 2021? Yes, the accountant should Include a
narrative statement that the Warehouse was bumed on January 31, 2021,

6. Materiality. This principle requires that all significant information that affects evaluations and
decisions should be included in the financial statements. Materiality depends on the judgment of
management. A business with assets amounting to Billions may decide that an asset woflh P500 is
immaterial.

7, Consistency Principle. The business should use the same accounting method from period to
period to achieve comparability over tine within a single enterprise. However, changes are
permitted ifjustifiable and disclosed in the financial statements,