Principles of accounting aug 15 2019

1. Principles of Accounting
Lovely C. Guerra, CPA
August 15, 2019
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2. Why study accounting?
• Lehman Brothers Holdings Inc, 4th largest investment bank
in the US with 25K employees worldwide, filed for the
largest bankruptcy in US history. Lehman Brotherslargest bankruptcy in US history. Lehman Brothers
borrowed significant amounts to fund its investment in
housing related-assets, and was the largest victim of the
US subprime mortgage-induced financial crisis, which
swept the financial markets in 2008.
• Worldcom restated their inflated earnings ($3.8B) which
contributed to losses to their shareholders of $179.3B and
job losses of 17K
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3. Why study accounting?
• Enron’s variety of schemes, which inflated profit by
$586M, led to financial restatements and bankruptcy and
caused investor losses of $66.4B and job losses of 6100caused investor losses of $66.4B and job losses of 6100
• Xerox Corp using “accounting tricks” to fool investors,
restated 5 years of earnings to reclassify more than $6B in
income
• 2Go Group Inc restated its financial statements due to
misclassification of receivables and thus overstating its
income from P1B to P330M in 2016 and P97 in 2015.
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4. Why study accounting?
Because of these scandals, a lot of proposals have been
introduced to improve business practices and accounting
oversights from the government, regulators andoversights from the government, regulators and
professional associations. (Sarbanes- Oxley Act, Jul 2002)
What is evident from the mentioned illegal and unethical
business events?
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5. Why study accounting?
Good accounting is essential to sound business and investing
decisions.
Bad accounting cannot be tolerated.
The recent events prove the necessity to study accounting
process and information.
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6. What is accounting?
It is an information system that identifies, records
and communicates the economic events of anand communicates the economic events of an
entity to interested users.
It is composed of 3 activities.
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7. 3 activities of accounting
1. Identifying – identifying economic events involves
selecting the economic activities relevant to a particular
entity.entity.
2. Recording – once identified, economic events are
recorded to provide a history of the entity’s financial
statement. It consists of keeping a systematic,
chronological diary of events, measured in monetary
denomination. We also need to classify and summarize
these economic events
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8. 3 activities of accounting
3. Communicating – Financial information is communicated
through financial reports, most common used are called
financial statements. To make the reported financialfinancial statements. To make the reported financial
information meaningful, accountants report the recorded
data in a standardized form.
Vital element in communicating economic events is the
accountant’s ability to analyse and interpret the reported
information.
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9. The accounting process
summarized:
Identification Recording Communicating
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Select economic
events
Record, classify
and summarise
Prepare accounting
reports, analyse and
interpret for users

10. Why is accounting important?
• Accounting is the language of business.
• Its purpose is to assist users (internal/ external) to make• Its purpose is to assist users (internal/ external) to make
decisions about the allocation of scarce resources.
• It provides information to help users understand where
the entity has been by looking at its past performance,
and where it is now by looking at its current financial
position and to provide insights into what its likely future
prospects are.
• It is a means of measuring business activity to help in
making informed business decisions.
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11. Who uses accounting data?
1. Internal Users – are managers who plan,
organize and run the business.organize and run the business.
Questions asked by internal users:
-Is cash sufficient to pay bills
-What is the cost of manufacturing each unit
-Can we afford to give employees pay rises
-Which product line is most profitable
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12. Who uses accounting data?
2. External Uses – Investors, creditors (suppliers&
banks), governmentbanks), government
Questions asked are:
-Is the business earning satisfactory income
-How does the business compare in size and
profitability with competitors
-Will the business be able to pay its debts as they
fall due
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13. Brief History
Luca Pacioli is the father of accounting. He is an
Italian mathematician. Close friend and tutor toItalian mathematician. Close friend and tutor to
Leonardo Da Vinci and contemporary of
Christopher Columbus.
His work is compiled in Summa de arithmetica,
geometria, proportione et proportionalite, which
described a system that ensures financial
information are recorded efficiently and
accurately
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14. Bookkeeping VS Accounting
Bookkeeping- involves only the recording of
economic events.economic events.
Accounting – involves the 3 activities: identifying,
recording and communicating. May be further
divided into financial accounting and
management accounting.
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15. How will the study of accounting
help you as a student?
Working of knowledge in accounting in almost every
field of endeavour.field of endeavour.
1. General management
2. Marketing
3. Finance (banker, investment analyst or stockbroker)
4. Real estate agent
5. Doctor, lawyer, a social worker, teacher,
engineer, architect, entrepreneur and etc
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16. Short Quiz # 1
1. It is the process of identifying, recording and
summarising economic events.
2.2. Who is the father of accounting?
3. It involves the recording of economic events
4. What are the 2 groups of accounting data users
5. Give at least 3 questions asked by accounting data users.
6. Give atleast 3 reasons why accounting is important (10
points)
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17. Generally Accepted Accounting
Principles (GAAP)
• Accountants follow accounting principles, rules and
standards in order to measure, process and communicate
financial information to the users of accounting reports.financial information to the users of accounting reports.
• Financial information should be relevant, reliable,
comparable and understandable.
• GAAP are the rules applicable in any country.
• Cost principle states that assets should be recorded at
their cost. Also known as the historical cost principle.
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18. Generally Accepted Accounting
Principles (GAAP)
Cost – the value exchanged at the time something is
acquired.
Example:
If you house today, the cost is the amount you pay for it, say
P5million.
If you sell the house in 2 years for P5.3million, the selling
price is the market value or fair market value.
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19. Assumptions under GAAP
1. Monetary unit assumption- requires that only
transaction data that can be expressed in terms of
money be included in the accounting records. To quantifymoney be included in the accounting records. To quantify
or measure economic events.
2. Economic entity assumption- requires that the activities
of the entity be kept separate and distinct from the
activities of its owners and all other economic activities.
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20. Types of business entity accdg to
formation
1. Proprietorship – a business owned by one person
2. Partnership – owned by 2 or more persons associated as2. Partnership – owned by 2 or more persons associated as
partners
3. Corporation – a business organized as a separate legal
entity under the corporation law and ownership is
divided into transferable shares.
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21. Proprietorship
• The owner is the manager of the business
• Usually are small service type of businesses like beauty• Usually are small service type of businesses like beauty
salons and repair shops
• Needs a relatively small amount of money to start
• Owner receives profits, suffers all losses and is personally
liable for all debts of the business
• No legal distinction between owner and the business
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22. Partnerships
• A partnership agreement is set for the initial investment,
duties of each partner, division of profit or loss and
settlement upon death or withdrawal of a partnersettlement upon death or withdrawal of a partner
• Each partner generally has unlimited personal liability for
the debts of the partnership
• Are normally used to organize professional practice like
lawyers, doctors, architects and accountants
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23. Corporations
• Shareholders enjoy limited liability for the debts of the
company
• Shareholders may transfer their ownership to other
investors any time
• Enjoys unlimited life because ownership can be
transferred without dissolution
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24. Basic Accounting Equation
• The two basic elements are what the company owns and
what it owes.
• Assets are the resources owned or controlled by a
business.
• Liabilities & equity are the rights or claims against the
assets. Liabilities are those claims of those whom money
is owed. Equity is the claim of owners
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25. Basic Accounting Equation
Assets = Liabilities + Equity
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P 200million = P 80 million + P 120 million
This equation applies to all economic entities regardless of size, nature or form of business
organization.

26. Assets
• Is a resource controlled by an entity
• Are used in carrying our activities like production,• Are used in carrying our activities like production,
consumption and exchange
• Has the capacity to provide future services or benefits
• Future economic benefits eventually results to cash
inflows
• Example: Campus Pizza owns a delivery truck which gives
economic benefits by delivering pizzas.
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27. Liabilities
• Are claims against assets
• Are the existing debts and obligations
•• Are the money borrowed by the business or the inventory purchases
on credit
• When Jollibee purchases chicken, fires, pasta on credit from
suppliers and is called accounts payable
• When Jollibee gets a loan from the BDO to purchase a delivery truck
and is called loan payable
• Jollibee may also have wage payable and taxes payable
• Creditors have the legal right to claim first against assets in case of
liquidation
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28. Equity
• The ownership claim on total assets
• This is the remaining assets after deducting the total claim of
creditors.creditors.
• Also known as the residual equity
• Also known as Net Asset or Net Worth
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Assets - Liabilities = Equity
We need to increase
by earning income

29. Increases in Equity
1. Investments by owner – the assets that owner puts into
the business
2. Income – increases in equity resulting from business
activities entered into for the purpose of earning profit.
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30. Income
• Results in an increase in an asset
• Includes both revenue and gains• Includes both revenue and gains
• Revenue- arises in the normal course of the business
Common sources of revenue are sales, fees, services,
commissions, interest, dividends, royalties and rent
• Gains- arises on disposal of non-current assets and
unrealized gains on revaluing assets.
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31. Decreases in Equity
1. Drawings – are cash or other assets withdrawn by the
owner for personal use.
2.2. Expenses – are the cost of assets consumed or services
used in the process of earning income.
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32. Expenses
• Decreases in equity resulting from operating the business
• Are actual or expected cash outflows/ payments• Are actual or expected cash outflows/ payments
Examples are: utilities, supplies, wages, telephone,
internet, rent, delivery expense, interest expense,
licenses and depreciation
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33. Summary of Equity movements
Equity is increased by investments and income. It is
decreased by drawings and expenses.
Profit – Revenue exceeds the expenses
Loss – Expenses exceeds the revenue
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34. Summary of Equity movements
INCREASES DECREASES
Investments by Withdrawals
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Investments by
owner
EQUITY
Withdrawals
by owner
Revenue Expenses

35. SHORT QUIZ # 2
Complete the basic accounting equation and ensure the
equality of the basic accounting equation.
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Assets = Liabilities + Equity
1 Php 100,000 = __________ + Php 50,000
2 __________ = Php 60,000 + Php 70,000
3 __________ = __________ + Php 30,000
4 Php 120,000 = Php 30,000 + __________
5 Php 250,000 = __________ + Php 120,000