MODULE 1

ACCOUNTING AND
ITS ENVIRONMENT
Learning Objectives:
• Define accounting and its role in business
• Evolution of accounting and how it affects
accounting pedagogy, policy and practice
• ASEAN and how it will affect accountancy
practice in the region
• Fundamental business model
• Types of businesses and its organization
• Activities in business organizations
Learning Objectives:
• Pacioli’s Double Entry Bookkeeping
• Fundamental concepts of accounting
• Criteria for GAAP
• Basic Principles of accounting
• Accountancy in the Philippines
• Accountancy Act of 2004
• Professional Organization
Learning Objectives:
• Core competencies framework for
accountants
• Code of ethics for professional
accountants
• Branches of accounting
 Definition of accounting
• Accounting is a process of identifying,
recording and communicating economic
information that is useful in making
economic decisions.
 Definition of accounting
Is a service activity.
Art of recording, classifying and
summarizing in a significant manner and
in terms of money, transactions and
events and interpreting the results
thereof.
 Essential elements of the definition
of accounting

1. Identifying – The accountant analyzes each

business transaction and identifies whether the
transaction is an “accountable event” or “non-
accountable event.” This is because only
“accountable events” are recorded in the
accounting books. “Non-accountable events”
are not recorded in the accounting books.
 Essential elements of the definition
of accounting

2. Recording – The accountant recognizes (i.e.,

records) the “accountable events” he has
identified. This process is called “journalizing.”
After journalizing, the accountant then
classifies the effects of the event on the
“accounts.” This process is called “posting.”
 Essential elements of the definition
of accounting

3. Communicating – At the end of each

accounting period, the accountant summarizes
the information processed in the accounting
system in order to produce meaningful reports.
Accounting information is communicated to
interested users through accounting reports,
the most common form of which is the
financial statements.
 Nature of accounting
• Accounting is a process with the basic
purpose of providing information about
economic activities intended to be useful
in making economic decisions.
 Types of information provided
by accounting
1. Quantitative information
2. Qualitative information
3. Financial information
 Functions of Accounting in
Business
1. To provide external users with
information that is useful in making
investment and credit decisions; and
2. To provide internal users with
information that is useful in managing
the business.
 Users of Accounting Information
1. Internal users – those who are directly involved in
managing the business.
Examples:
• Business owners who are directly involved in
managing the business
• Board of directors
• Managerial personnel
 Users of Accounting Information
2. External users – those who are not directly
involved in managing the business. Examples:
• Existing and potential investors (e.g., stockholders
who are not directly involved in managing the
business)
• Lenders (e.g., banks) and Creditors (e.g.,
suppliers)
• Non-managerial employees­
• Public
 Accounting as a managerial tool
Accounting provides information that helps a
business manager perform the following
management functions:
1.Planning
2.Organizing
3.Staffing
4.Directing
5.Controlling
 Evolution of Accounting
• Accounting can be traced as far back as the
prehistoric times, perhaps more than 10,000 years
ago.
• Archaeologists have found clay tokens as old as
8500 B.C. in Mesopotamia which were usually
cones, disks, spheres and pellets. These tokens
correspond to commodities like sheep, clothing or
bread. They were used in the Middle West in
keeping records. After some time, the tokens were
replaced by wet clay tablets. During such time,
experts concluded this to be the start of the art of
writing. (Source: http://EzineArticles.com/456988)
 Evolution of Accounting
• The development of more formal accounting-
keeping methods (double entry bookkeeping) was
attributed to the merchants and bankers of
Florence, Venice and Genoa during the 13th to 15th
centuries.
• The emergence of double entry bookkeeping was
first witnessed in the ledgers of Renieri Fini &
Brothers (1296- 1305) and Giovanni Farolfi &
Company (1299- 1300). Amatino Manucci,
partner of Giovanni Farolfi & Company, was
considered as the inventor of double-entry
bookkeeping.
 Evolution of Accounting
• Fra Luca Pacioli, a Franciscan friar and
mathematician, has been regarded as the father of
double entry bookkeeping. He was not the one
who developed it but he was the one to first
publish about it in 1494 in his book “Summa di
Arithmetica Geometria Proportioni and
Proportionista”. In this book, he described the
prevalent accounting practices in Venice, Italy
which became known as the Method of Venice or
the Italian Method.
 Evolution of Accounting
• Legal requirement for businesses to keep
accounting records was first introduced in the
Ordonnance de Commerce of 1673 which was put
through by Jean-Baptiste Colbert during the reign
of Louis XIV and the Napoleonic Commercial
Code of 1807 that influenced the bookkeeping
provisions of commercial law throughout
Continental Europe, Francophone Africa and
beyond.
 Evolution of Accounting
• Jacques Savary, principal author of French
Commercial Code of 1673 also known as Code
Savary, introduced the lower-of-cost or market
valuation of inventories.
• In the 17th century, Nicolas Petri was the 1st
person to group similar transactions in a separate
record and enter the monthly totals in the journal
rather than recording all the transactions in a
series.
 Evolution of Accounting
• In 1769, Benjamin Workman published the
American Accountant, the earliest known
American accounting textbook.
• The formation of accounting profession was
closely tied to the rise of a modern industrial
society in Britain during the mid-18th century to
mid-19th century or the so-called Industrial
Revolution.
• Accountancy reached the shores of the USA as a
natural result of the investments being made by
British businessmen into the land of opportunities.
 Evolution of Accounting
• The concept of depreciation was introduced in the
18th century during the rise of the US railroad
system but it was only widely used/ accepted in
the 20th century.
• The concept of consolidated financial statements
or consolidation of accounts was 1st introduced in
1903 as published by US Steel. FS were audited
by Price Waterhouse & Company.
 Evolution of Accounting
• Eugen Schmalenbach, German academic and
economist, laid the foundation for the development
of chart of accounts in Germany in the early 1920s
to meaningfully compare the financial data by
different companies.
• The concept of taxation was introduced in the year
of 10 CE during the reign of Emperor Wang Mang
of the Xin dynasty. He instituted the imposition of
10% income tax for profits, for professionals and
for skilled labor.
 Evolution of Accounting
• BIR was created through the passage of
Reorganization Act No. 1189 on July 2, 1904. If
conflicts arise in the preparation of income tax
returns, the Tax Code will prevail.

• Dan Brinklin and Bob Frankston invented the

first electronic spreadsheet (VisiCalc for Apple II)
in 1979.
ASEAN & Accountancy Practice
• government-to-government cooperation
established on August 8, 1967

Vision:
a stable, prosperous and highly competitive ASEAN
economic region

Members:
Thailand, Indonesia, Malaysia, Philippines, Singapore,
Brunei, Vietnam, Lao PDR, Myanmar, Cambodia
ASEAN & Accountancy Practice
Opportunities:
MRA (mutual recognition arrangement) as governed by
ASEAN Framework Agreement on Services- equal
recognition of professional service providers

How?
-apply through the Monitoring Committee of his country of
origin to be registered as an ASEAN Chartered
Professional Accountant (ACPA) subject to certain
qualifications
-practice in a host country is in collaboration with
designated professional accountants in the host country
and not as an independent practice
Fundamental Business Model
 Types of Business
1. Service business
2. Merchandising (Trading)
3. Manufacturing
4. Raw Materials
5. Infrastructure
6. Financial
7. Insurance
Forms of Business Organizations
 Micro, Small and Medium
Enterprises (MSMEs)
• Micro
– Assets before financing of P3M or less
– Not more than 9 workers
• Small
– Assets BF above 3M to 15M
– 10-99 workers
• Medium
– Assets BF above 15M to 100M
– 100-199 workers
 Activities in Business
Organizations
• Financing Activities
– obtain financial resources from financial
markets
• Investing Activities
– use capital from FA to acquire other resources
used in the transformation process.
• Operating Activities
– use of resources to design, produce, distribute
and market goods and services.
 Phases of Accounting
• Recording
• Classify
• Summarizing
• Interpreting
Pacioli’s Double Entry Bookkeeping
• concept of debit (value received) and credit (value
parted with)

3 Types of Books:
a) Memorandum- narrative description of all transactions
recorded in chronological order
b) Journal- merchant’s private book; entries are in one
currency, in chronological order and in narrative form
c) Ledger- alphabetical listing of all the business accounts
along with the running balance of each particular
account
 Criteria for GAAP
1. Relevance- results in meaningful and useful
information
2. Objectivity- information is not influenced by
personal bias or judgment; reliability,
trustworthiness and verifiability
3. Feasibility- can be implemented without undue
complexity or cost
FUNDAMENTAL CONCEPTS
OF
ACCOUNTING
1. Separate Entity Concept

• Also referred to as economic entity

• The separate entity concept states that
we should always separately record the
transactions of a business and its owners.
2. Time Period Concept
• also called Periodicity Concept
• a company can divide its economic
activities into time periods.
• also states that a business should
report their financial statements
appropriate to a specific time period
(accounting period).
3. Stable Monetary Unit Concept
• money is the common denominator
• assumes that the value of the peso
is stable over time
4. Going Concern Concept
• Unless otherwise stated, the company
will last long enough to fulfill objectives
and commitments.
• It assumes that during and beyond the
next fiscal period a company will
complete its current plans, use its
existing assets and continue to meet its
financial obligations
 BASIC
PRINCIPLES
OF
ACCOUNTING
 Objectivity Principle
• Accounting records and statements are
based on the most reliable data available
• Data are verifiable when they can be
confirmed by independent observers
 Historical Cost
• Acquired assets are recorded at their
actual cost .
Revenue Recognition Principle
• Revenue is recognized in the
accounting period when goods are
delivered or services are rendered or
performed.
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.
 Adequate Disclosure
• All relevant information that would
affect the user’s understanding and
assessment of the accounting entity
should be disclosed in the financial
statements.
 Materiality

• Financial reporting is only concerned

with information that is significant
enough to affect evaluations and
decisions. Materiality depends on the
size and nature of the item.
 Consistency Principle
• Firms should use the same
accounting method from period to
period to achieve comparability over
time within a single enterprise.
 Matching
• Requires that the expenses incurred
during a period be recorded in the
same period in which the related
revenues are earned.

• Recognizes that businesses must

incur expenses to earn revenues.
 Accrual Basis
• An accounting method where revenue or
expenses are recorded when a transaction
occurs rather than when payment is received
or made.
• The method follows the matching principle,
which says that revenues and expenses
should be recognized in the same period.
Accountancy in the Philippines
• officially recognized as a profession on March 17,
1928 by virtue of Act No. 3105 as approved by the
Sixth Legislature
• Local accounting firms and partnerships entered the
mainstream of international practice by establishing
tie-ups with the Big Five of the accounting world-
Arthur Andersen, PriceWaterhouseCoopers, Ernst &
Young, KPMG and Deloitte Tohmatsu International
• Biggest local firm SGV & Co. was the first to offer
services outside the country and initiated the
establishment of the SGV Group in Asia.
 Accountancy in the Philippines
• The increasing complexity of professional regulation and
the developments in the practice of the profession resulted
in the expansion of the Board of Accountancy membership
from 3 members in 1923 to 7 members in 1975.
• BOA introduced the following developments to raise the
standards of the profession to a very high level of
excellence:
• Full computerization of the CPA licensure exam
• Upgrading of the quality of accounting education
• Regulation of CPA firms and partnerships
• Requirement of CPAs in civil service
Accountancy in the Philippines
• PICPA was accredited by the PRC in 1975 as the
bona fide professional organization representing
CPAs in the country.
• BOA and PICPA worked together to strengthen the
profession. Among their contributions are as follows:
• Accountancy Act of 1967
• Code of Professional Ethics in 1978
• CPE program in 1987- 120 CPD units every 3 years
• Biennial oathtaking of new CPAs
• Accountancy week
• Accountancy Act of 2004
• Professional standards- FRSC and AASC
 Accountancy Act of 2004
The act discusses the following topics:

1. The scope of the profession's practice

2. The creation of the Regulatory Body for CPAs
3. The admittance and licensure of qualified candidates for the
CPA profession.
4. The guiding rules and law in the practice of
accountancy which includes prohibitions, limitations,
accreditations and the continuing professional education (CPE).
5. The Penal and Final provisions.
 Accountancy Act of 2004
Scope of the Profession’s Practice:

•Practice of Public Accountancy

•Practice in Commerce and Industry
•Practice in Education/ Academe
•Practice in Government
 Accountancy Act of 2004
The Professional Regulatory Board of Accountancy
-composed of a Chairman and 6 members to be appointed by
the Pres. of the Phils.
-members of the Board must meet the following qualifications:
•must be a natural-born citizen and resident of the Phils.
•registered CPA with at least 10 years work experience in any
scope of practice of accountancy
•must not have any pecuniary interest, directly or indirectly, in
any school/ institution/ review center at the time of appointment
•must not be a Director/ Officer of the Accredited National
Professional Organization of CPAs at the time of appointment
 Accountancy Act of 2004
CPA Examination
-applicants must be a:
1.Filipino citizen
2.of good moral character
3.holder of the degree of BSA from a CHED-accredited
institution
4.has not been convicted of any criminal offense involving moral
turpitude
5.NSO birth certificate & marriage contract (if married)
6.Transcript of Records (TOR)
7.NBI clearance
 Accountancy Act of 2004
CPA Examination
-exam shall cover the following subjects:
1.Theory of Accounts
2.Business Law and Taxation
3.Management Services
4.Auditing Theory
5.Auditing Problems
6.Practical Accounting Problems I
7.Practical Accounting Problems II
-to pass the exam, candidate must obtain a general average of
75% with no grades lower than 65% in any of the subjects
-conditional passers must retake the exam w/in 2 years from the
preceding examination
 Accountancy Act of 2004
CPA Examination
-ratings shall be submitted by BOA to PRC w/in 10 calendar
days after the examination
-candidate who fails in 2 CPA exams shall be disqualified from
taking another set of exam unless he/she submits evidence of
completing a refresher course- 24 units of subject given in the
exam

Professional Organization
- PICPA is the integrated national professional organization for
CPAs
Core Competencies Framework
• Knowledge- General Knowledge; Organizational
and Business Knowledge; IT Knowledge;
Accounting Knowledge

• Skills- Intellectual; Interpersonal; Communication

• Values- Professional Ethics; Moral Values

Code of Ethics for Accountants
• Integrity
• Objectivity
• Professional competence and due care
• Confidentiality
• Professional behavior
 Branches of Accounting
1. Auditing
2. Bookkeeping
3. Cost Bookkeeping, Costing and Cost Accounting
4. Financial Accounting
5. Financial Management
6. Management Accounting
7. Taxation
8. Government Accounting