INTRODUCTION TO

FINANCIAL
ACCOUNTING
 • The Nature of Accounting
• The Purpose of Accounting
• The Branches of Accounting
• The Nature and Purpose of Financial Reporting and the
Accounting Postulates
• The Generally Accepted Accounting Principles
CONTENT OF • The Financial Statements
PRESENTATION • The Basic Elements of the Financial Statements
 • ACCOUNTING is the process of identifying, measuring
and communicating financial information about an entity
to permit informed judgements and decisions by users of
the information. (American Accounting Association)
• ACCOUNTING is a service activity whose function is to
provide quantitative information, primarily financial in
nature, about economic entities that is intended to be
THE NATURE useful in making economic decisions. [Philippine Institute
of Certified Public Accountant (PICPA)]
OF • Nature/Characteristics:
ACCOUNTING • It is a SERVICE ACTIVITY.
• It is a PROCESS, a SOCIAL SCIENCE.
• It is an ART.
• It is FINANCIAL.
• It is an INFORMATION SYSTEM
 • Accounting involves the following important activities:
1. IDENTIFYING is the process of analyzing events and
transactions to determine whether or not they will be
recognized in the books.
• RECOGNITION is the process of including the
effects of an accountable event in the financial
THE NATURE statements of an entity through a JOURNAL ENTRY
made in the books.
OF • ACCOUNTABLE EVENTS (or ECONOMIC
ACTIVITIES) are events that have an effect on the
ACCOUNTING financial elements of an entity (i.e. assets,
liabilities, equity, income and expenses) and whose
effects can be measured reliably.
 • Types of Accountanble Transactions:
1. External Events
A. Transfers
a. Exchange (Reciprocal Transfers)
b. Non-Reciprocal Transfers
THE NATURE B. Non-Transfers
OF 2. Internal Events
A. Production
ACCOUNTING B. Casualty
 2. MEASURING involves assigning quantitative value,
normally in monetary terms, to the economic
transactions and events.
• Some of the Measurement Bases used in Accounting:
1. Historical Cost
2. Present Value
THE NATURE 3. Fair Value
OF 4. Fair Value less Cost to Sell
ACCOUNTING 5. Revalued Amount
 3. COMMUNICATING is the process of transforming
economic data into useful accounting information, such
as financial statements and other accounting reports,
for dissemination to users. It also involves interpreting
the significance of the processed information.
• Aspects of the Accounting Communication Process:
THE NATURE 1. Recording
2. Classifying
OF 3. Summarizing
ACCOUNTING
 • To provide QUANTITATIVE FIANANCIAL
INFORMATION about ECONOMIC ACTIVITIES of an
ECONOMIC ENTITY intended to be useful in MAKING
INFORMED ECONOMIC DECISIONS by VARIOUS
USERS.
• Quantitative vs Financial Information
THE PURPOSE • Quantitative Information – information expressed in
numbers, quantities or units.
OF • Financial Information – information expressed in
terms of monetary value.
ACCOUNTING • Types of Accounting Information (classified as to user’s
needs):
1. General Purpose Accounting Information
2. Special Purpose Accounting Information
 • Economic Activities where Economic Decisions may be
Made:
• Production
• Exchange
• Consumption

THE PURPOSE • Income Distribution

• Savings
OF • Investment
ACCOUNTING • Lending
• Types of economic entity:
1. Not-for-Profit Entities
2. Business Entities
 • Forms of Business Entities:
1. Sole Proprietorship
2. Partnerships
3. Corporations
• Types of Business Operations
THE PURPOSE 1. Service Business

OF 2. Merchandising Business
3. Manufacturing Business
ACCOUNTING
 • USERS OF ACCOUNTING INFORMATION
• Internal Users
• Management
• Employees
• External Users
THE PURPOSE • Investors

OF • Creditors
• Suppliers
ACCOUNTING • Customers/Clients
• Government and Other Regulatory Bodies
 FUNDAMENTAL QUALITIES
• RELEVANCE – a characteristic of information being
capable of making a difference in the decisions made by
users.
• PREDICTIVE VALUE – information can be used as an
QUALITIES OF input to processes employed by users to predict
future outcomes.
USEFUL • CONFIRMATORY VALUE – information provides
feedback about (confirms or changes) previous
FINANCIAL evaluations
INFORMATION • MATERIALITY – omission or misstatement of
information could influence decisions that users
make on the basis financial information about a
specific reporting entity.
 FUNDAMENTAL QUALITIES
• FAITHFUL REPRESENTATION – a characteristic of
information being able to represent economic
phenomena it purports to represent.
• COMPLETENESS – all information necessary for the
QUALITIES OF understanding of the phenomenon being depicted
shall be provided.
USEFUL • NEUTRALITY – financial information are selected or
presented without bias (no manipulation was made to
FINANCIAL make information appear favorable or unfavorable to
the users).
INFORMATION
• PRUDENCE – the exercise of caution when
making judgements under conditions of
uncertainty.
• FREE FROM ERROR – no errors or omissions in the
description of the phenomenon, and the process used
to produce the reported information has been
selected and applied with no errors in the process.
 ENHANCING QUALITIES
• COMPARABILITY – a characteristic that enables the user
to identify and understand similarities in, and differences
among, items reported.
• VERIFIABILITY – characteristic that enables different,
QUALITIES OF knowledgeable and independent observers to reach
consensus (but not necessarily complete agreement) that
USEFUL a particular depiction is a faithful representation.
• TIMELINESS – characteristic of making information
FINANCIAL available to decision-makers in time to be capable of
influencing their decisions.
INFORMATION
• UNDERSTANDABILITY – making information classified,
characterized and presented clearly and concisely.
 • FINANCIAL ACCOUNTING – involves the preparation and
interpretation of financial statements primarily intended
for external users.
• MANAGEMENT ACCOUNTING – involves the
accumulation and communication of information for use
by internal parties or management.
THE • COST ACCOUNTING – the systematic recording and
BRANCHES analysis of the costs of materials, labor, and overhead
incidental to production.
OF • AUDITING – deals with the independent verification and
examination of the accounting records for the purpose
ACCOUNTING giving credibility to the financial statements.
• TAX ACCOUNTING – involves the preparation of tax
returns and rendering of tax advice.
• GOVERNMENT ACCOUNTING – deals with the
administration of public funds to bring about service to
the people.
 • FINANCIAL REPORTING – involves the provision of
financial information about an entity that is useful in
making economic decisions by external users and
assessing the management’s stewardship
THE NATURE • Objectives of Financial Reporting: To provide financial
information about the reporting entity that is useful to
existing and potential investors, lenders and other
OF FINANCIAL creditors in making decisions about providing resources
to the entity.
REPORTING • ACCOUNTING POSTULATES – are the fundamental
AND THE concepts or principles and basic notions that provide the
foundation of the accounting process.
ACCOUNTING • The Accounting Postulates (Concepts and Principles) are
divided into:
POSTULATES 1. Underlying Assumptions
2. Implicit Assumptions
3. Pervasive Concepts
4. Other Concepts
 • Underlying Assumption – one that is explicitly stated in
the financial reporting standards
1. Going Concern - a concept which assumes that the
business enterprise will continue to operate for an
THE NATURE unforeseeable future.
• Implicit Assumptions – not expressly provided in the
OF FINANCIAL standards but are followed implicitly for the purpose of
structuring the financial reports
REPORTING 1. Entity Concept - a concept which regards the
business enterprise as separate and distinct from its
AND THE owners and from other business enterprises.

ACCOUNTING 2. Periodicity concept - the concept behind providing

financial accounting information about the
economic activities of an enterprise for specified
POSTULATES time periods.
3. Stable Monetary Unit Concept – the concept which
requires that accounting records should only include
transactions that are measurable in terms of a
monetary unit and that the same shall be a
relatively stable in terms of its purchasing power.
 • Pervasive Concepts – those that affect all items in the
financial statements
1. Materiality – a principle which recognizes that
financial reporting is only be concerned with
THE NATURE information that is significant enough for a
particular user to affect its decision.
OF FINANCIAL 2. Cost-Benefit Concept – the cost of processing and
communicating information should not exceed the
REPORTING benefits to be derived from it.
• Other Concepts
AND THE 1. Objectivity Principle – a principle which states that
all business transactions that will be entered in the
ACCOUNTING accounting records must be duly supported by
verifiable evidence.
POSTULATES 2. Accrual Principle – a principle which states that
revenue should be recognized at the time it is
earned (goods are delivered and services are
rendered) and expenses must be recognized at the
time they are incurred (goods and services are
used).
 • Other Concepts
3. Historical Cost – a principle which states that all
properties and services acquired by the business
must be recorded at its original acquisition cost.
THE NATURE 4. Full Disclosure Principle – a principle which states
OF FINANCIAL that all material facts that will significantly affect
the financial statements must be indicated.
REPORTING 5. Consistency Principle – a principle which requires
the entity to use uniform accounting
AND THE approaches/method/policies from period to period
to allow comparability of financial reports over time
ACCOUNTING within a single entity.
POSTULATES 6. Concept of Articulation – all of the components of a
complete set of financial statements are
interrelated.
7. Matching Principle – costs are recognized when the
related revenue is recognized
 • GENERALLY ACCEPTED ACCOUNTING PRINCIPLE
(GAAP) – is a widely accepted set of rules, concepts, and
principles that governs the application of accounting
procedures.
• The GAAP has been developed by the accounting
THE professionals to guide preparers of financial statements
in recording and reporting financial information
GENERALLY regarding a business enterprise.
ACCEPTED • The generally accepted accounting principles (GAAP) in
the Philippines are represented by the Philippine
ACCOUNTING Financial Reporting Standards (PFRSs).
• These are STANDARDS and INTERPRETATIONS adopted
PRINCIPLES by the Financial Reporting Standards Council (FRSC).
• PFRSs (adopted from IFRSs – IASB)
• PASs (adopted from IASs – IASC)
• Interpretations (SICs – IASC and IFRICs – IASB)
 • Hierarchy of Reporting Standards
• PFRSs
• In the absence of a Standard or Interpretation that
specifically applies to a transaction, management
THE must use its judgment in developing and applying an
accounting policy that results in information that is
GENERALLY relevant and reliable
• Requirements and guidance in PFRSs dealing
ACCEPTED with similar and related issues
ACCOUNTING • Conceptual Framework
• Most recent pronouncements of other standard-
PRINCIPLES setting bodies
• Other accounting literature and accepted
industry practices
 • FINANCIAL STATEMENTS - are structured
representation of the financial position of and the
transactions undertaken by an enterprise.
• They provide information about the entity’s economic
resources and the claims against the reporting entity,
as well as the effects of transactions and other events
THE that change a reporting entity’s economic resources
FINANCIAL and claims.

STATEMENTS
 • Statement of Financial Position or Balance Sheet – it
shows the financial condition/position of a business as
of a given period.
• Income Statement or Statements of Comprehensive
Income – the income statement shows the result of
operations for a given period.
THE • Statement of Changes in Owner’s equity or Statement
FINANCIAL of Owner’s Equity – shows the changes in the capital or
owner’s equity as a result of additional investment or
STATEMENTS withdrawals by the owner, plus or minus the net
income or net loss for the year.
• Statement of Cash flows – summarizes the cash
receipts and cash disbursements for the accounting
period.
 STATEMENT OF FINANCIAL POSITION ELEMENTS:
• Asset - a present economic resource controlled by the
entity as a result of past events
• Economic Resource – a right that has the potential
to produce economic benefits.
THE BASIC
• Liability - a present obligation of the entity arising
ELEMENTS OF from past events, the settlement of which is expected
to result in an outflow from the entity of resources
FINANCIAL embodying economic benefits.
REPORTS • Equity - the residual interest in the assets of the entity
after deducting all its liabilities.
 INCOME STATEMENT ELEMENTS
• Income – increases in economic benefits during the
accounting period in the form of inflows or
enhancements of assets or decreases of liabilities that
result in increases in equity, other than those relating to
THE BASIC contributions from equity participants.

ELEMENTS OF • Revenue – arises in the course of the ordinary

activities of an entity and is referred to by a variety of
FINANCIAL different names including sales, fees, interest,
dividends, royalties and rent.
REPORTS • Gains - represent other items that meet the definition
of income and may, or may not, arise in the course of
the ordinary activities of an entity.
 INCOME STATEMENT ELEMENTS
• Expenses - decreases in economic benefits during the
accounting period in the form of outflows or depletions
of assets or incurrences of liabilities that result in
decreases in equity, other than those relating to
THE BASIC distributions to equity participants.

ELEMENTS OF • Losses - represent other items that meet the

definition of expenses and may, or may not, arise in
FINANCIAL the course of the ordinary activities of the entity.

REPORTS