FINANCIAL ACCOUNTING AND REPORTING

o Overview of Accounting
ACCOUNTING AND FINANCIAL ACCOUNTING CONCEPTS

OVERVIEW OF ACCOUNTING

1. GLIMPSES OF THE PAST 

Why is there a need to recall some aspects of the historical background of accounting? 
 a glimpse back into this period helps illuminate our past generally, which led to where the
accountancy profession is, at the current time
 to help explain the phenomenal growth that the profession of accountancy  has enjoyed
worldwide.

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 Mesopotamia, circa 3500 B.C.

Produced some of the oldest known records of commerce, 5,000 years before the appearance
of double entry.

 Accounting In Ancient Egypt, China, Greece and Rome 

Government accounting records in Egypt show “in kind" tax payments. Accounting was used in
China 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 of existence, these records showed simple list-making only. 

(The Roman Empire : 25 BC - 20 BC) - The early Romans had the following financial records:
rationarium (account) which listed public revenues; an aerarium (treasury) which listed amounts of cash
in the provincial fisci (tax officials and in the hands of the publican (public contractors which included
the names of freed men and slaves. Records of cash, commodities, and transactions were kept
scrupulously by military personnel of the Roman army. (Implication: Relate to the concept of an "asset") 

 Medieval Europe (13th century) 

The introduction of double-entry bookkeeping. Historical origin of the use of the words 'debit' and
'credit' dates back to the days of single-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' Latin for 'he trusts" 

The Messari (Italian : Treasurer's) accounts of the city of Genoa (1340) - is the oldest discovered record
of a complete double-entry system. This accounts contain debits and credits journalized in a bilateral
form. 

 Luca Pacioli and Double-entry bookkeeping system

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 account designed by Luca Pacioli

o The memorandum, or memorial, (a daybook), for the recording, in chronological order, of

business transactions as they occurred.
o The journal was the merchant's private account book. Entries consisted of a narrative debit,
credit and explanation in one continuous paragraph.
o The ledger - The money and date columns were almost identical to those in modern ledgers,
with entries consisting of brief paragraphs, 
 Debits on the left side of a double page and credits on the right

Trial Balance is the end of Pacioli's accounting cycle. (Implication: Significance of a statement of
assumptions or premises). Debit amounts 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 Summa represents 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 

o In 1880: Institute of Chartered Accountants in England and Wales brought together all the
accountancy organizations in those countries. 
o 1887 - the first national accounting society of the United States was formed: The American
Association of Public Accountants, the predecessor of the American Institute of Certified Public
Accountants (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. 

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. 

2. DEFINITION / NATURE / PURPOSE OF ACCOUNTING 

2.1 Definition and nature of accounting - 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. 

Accounting (in reference to 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. 

2.2 Nature of Accounting 

Accounting as science and art 

o 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. 
o Accounting is a practical art which requires the use of creative skill and judgment 

Accounting as an information system. 

o Accounting identifies and measures economic activities, processes information into financial

reports and communicates these reports to decision makers. 

2.3 BASIC PURPOSE OF ACCOUNTING: To provide quantitative information about economic entities

intended to be useful in making economic decisions 
o Financial accounting communicates information about the economic effects of accounting
transactions and events of an economic entity to different groups of external users.
o Types of information provided by accounting 
1. Quantitative information - expressed in numbers, quantities or units
2. Qualitative information - expressed in words or descriptive form
3. Financial information - expressed in terms of money 
o Financial reporting is the process of communicating financial accounting information about a
company to external users. The primary medium of communication is the general-purpose
financial statements. 

2.4 Economic entity vs. Business entity 

o 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 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. 
o Business entity is an entity that produces and distributes goods or services primarily for
profit. 
3. FUNCTIONS OF ACCOUNTING 
3.1 Identification - the accounting process of recognition or non-recognition business activities as
“accountable events" or whether they have accounts relevance. 
3.2 Measurement - the accounting process of assigning of peso amounts or numbers to the economic
transactions and events. The unit of measure accounting is money, expressed in prices
3.3 Communication - the accounting process of preparing and distributing accounting reports to
potential users of accounting information and interpreting the significance of this processed
information. 
3.3.1 Three aspects of communication process of accounting 
1. Recording - the process of systematically committing to writing business transactions and events
after they have been identified and measured. in books of account in a systematic and
chronological manner according to accounting rules and regulation.
2. Classifying - the grouping of similar and interrelated items into their respective classes.
3. Summarizing - putting together or expressing in condensed or brief form the recorded and
classified statements which includes the statement of financial position, the statement of
comprehensive income, the statement of cash flows, the statement of changes in equity and the
notes to financial statement, and notes to financial statement 

4. Uses of Accounting Information 

Accounting information is designed to meet the information needs of a wide range of external users
such as an entity's: 

o Financial health - liquidity, solvency, stability and financial flexibility

o Performance - results of operations
o Cash flows - cash inflows from operating, investing and financing activities
o Other information such as information needed in forecasting economic decisions, assessing the
stewardship ability of the management of the economic entity, and other significant non-
financial information. 

5. USERS OF ACCOUNTING INFORMATION and their INFORMATION NEEDS (details discussed in the
conceptual framework)
The users of accounting information may be classified into external and internal users who will make
economic decisions based on the information presented in the financial statements. "Internal users"
refer to the management of the economic entity who exercises stewardship (stewardship function)
over the assets and liabilities of the entity. 

All the rest of the users will fall within the "external users" category and these are: 

1. Investors - The providers of risk capital and their advisers - this includes financial consultants
and analysts and company lawyers. 
2. Employees - Employees and their representative groups and their advisers - this includes
financial consultants hired by the labor group as well as labor lawyers, trade associations and
labor unions. 
 3. Lenders - refer to “long-term” creditors 
4. Suppliers & other trade creditors – refer to short-term creditors
5. Customers - those who consume the goods and services produced by others 
6. Government and their agencies 
7. Public 

6. Branches of Accounting / Areas of Specialization 

Focus of Attention
6.1 Financial Accounting - the recording of transactions, preparation of financial statements and
communication of financial information to external user groups. (Focus: general purpose reports) 

6.2 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) 

6.3 Management Accounting (or MAS) - 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. 

6.4 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.

6.5 Tax Accounting - involves the preparation of tax returns and rendering of tax  advice, such as
determination of tax consequences of certain proposed business endeavors. 

6.6 Fiduciary Accounting - handling of accounts managed by a person entrusted with the custody and
management of property for the benefit of another 

6.7 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. 

6.8 Environmental Accounting - the area of accounting that focuses on programs, activities and projects
that are focused on care for Mother Earth. One example of this is carbon accounting such as “Cap
and Trade Scheme", which is a process of encouraging reductions in greenhouse gas emissions 

6.9 Price-Level Accounting - (Otherwise known as Accounting for Hyperinflationary Economies ) - simply

defined, 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. (For detailed discussion, refer to PAS 29) 
7. Accounting Systems - the installation of accounting procedures for the accumulation of financial
data; includes designing of accounting forms to be used in data-gathering. 

8. Financial Accounting distinguished- from 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
GAAP management needs
o Prepares general purpose statements that o Prepares special purpose reports for internal
can be used by external and internal users users
o Historical in nature o Future-oriented
o Emphasizes objective data o Makes use of objective data as long as it is
relevant

9. AREAS OF PROFESSIONAL ACCOUNTING PRACTICE 

9.1 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. 
9.2 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. 
9.3 Government accounting - composed of accountants employed in the different branches of
government, particularly, the Bureau of Internal Revenue, Commission on Audit, Securities and
Exchange Commission, etc. The focus of government accounting is custody and administration of
public funds. 
9.4 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. 
 ENVIRONMENT OF ACCOUNTING

Financial accounting is shaped to a significant extent, by the environment, and in particular, all
of the following, except: 

1. The economic activities in society

2. The means of measurement of economic activity
3. The financial statement users and their information needs 

1. Economic Activities in society - (Economic Environment: a "walk through") 

1.1 Economic Activities and their classification 
1. Production - the process of converting economic resources into outputs of goods and services
that are intended to have greater utility than the required inputs
2. Exchange - the process of trading resources or obligations for other resources or obligation
3. Income distribution - the process of allocating rights to the use of output among individuals and
groups in society
4. Consumption - the process of using the final output of the production process
5. Investment - the process of using current inputs to increase the stock of resources available for
output as opposed to immediately consumable output
6. Savings - the process by which individuals and groups set aside rights to present consumption in
exchange for rights to future consumption 

1.2 Accountable Events 

1.2.1 Accountable event- one that is quantifiable and has an effect on assets, liabilities and equity.
This is also known as economic activity., which is the subject matter of accounting 
o Only economic activities are emphasized and recognized in accounting. Sociological
and psychological matters are not recognized 
1.2.2 Criteria for accountable event 
1. It must affect a financial element of accounting (increasing or decreasing asset, liability or equity
(probability criterion)
2. It is a result of a past activity
3. Its cost can be measured reliably (measurability criterion) 

2. Types of Accountable events 

I. External Events - events wherein another party participates 
1) Transfers: 
1. Exchanges - (two-way movement, giving and receiving) 
Examples: purchase or sale of merchandise, borrowing of money, collection of accounts
receivable, and the like.
2. Non-reciprocal transfers - (one-way movement; either giving or receiving).

2.1 Owner to Entity, or vice-versa - Examples: Investment by owner(s), donation by

stockholder; declaration of dividends, donation of asset.
2.2 Entity to another entity, or vice-versa - Examples: Payment of taxes, imposition of
fines, donations and the like 
 2) Other than transfers - Examples: Increase or decrease in interest rates, changes in price
levels, vandalism 

II. Internal events - those wherein only the entity participates 

1. Production - process by which resources are transformed into finished products
2. Casualties - sudden, unanticipated occurrences usually known as fortuitous events or "acts
of God". Examples: fires, floods, earthquakes, volcanic eruptions. 

3. Measurement of Accountable Events 

Different measurement bases in accounting (From: Conceptual Framework of Accounting) 

1. Historical cost 
2. Current cost 
3. Realizable / settlement value
4. Present value

(1) Historical cost: 

Assets - record at the amount of cash or cash equivalents paid or the fair value of the
consideration given to acquire them at the time of acquisition 

Liabilities - record at the amount of the proceeds received in exchange for the obligation, or in
some circumstances (for example, income taxes), at the amounts of cash or cash equivalents
expected to be paid to satisfy the liability in the normal course of business. 

(2) Current cost: 

Assets - are carried at the amount of cash or cash equivalents that would have to be paid, if the
same or an equivalent asset was acquired currently. 
Liabilities - are carried at the undiscounted amount of cash or cash equivalents that would be
required to settle the obligation currently. 

(3) Realizable (settlement value):

Assets - carried at the amount of cash or cash equivalents that could currently be obtained by
selling the asset in an orderly disposal. 
Liabilities - are carried at their settlement values; that is, the undiscounted amounts of cash or
cash equivalents expected to be paid to satisfy the liabilities in the normal course of business. 

(4) Present value:

Assets - are carried at the present discounted value of the future net cash inflows that the item
is expected to generate in the normal course of business.
Liabilities - are carried at the present discounted value of the future net cash outflows that are
expected to be required to settle the liabilities in the normal course of business. 
4. Ethics in the Environment of Accounting 

Ethics - refers to a code or moral system that provides criteria for evaluating right or wrong. In
general, accountants should be able to recognize and understand ethical issues to identify and
Accountants perform a highly important role in society 

Furthermore, they face pressures and influence behavior. CPAs are expected make an unswerving
commitment to honorable behavior even at the sacrifice of personal advantage.