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Accounting Principles: A Comprehensive Guide for Students, Study notes of Accounting

Silliman University (SU)Accounting

A comprehensive overview of accounting principles, covering key concepts such as financial reporting, conceptual framework, financial statements, and measurement bases. It delves into the international accounting standards board (iasb) and philippine financial reporting standards (pfrs), explaining their application and significance. The document also explores the challenges and constraints of financial reporting, emphasizing the importance of materiality, aggregation, and faithful representation.

Typology: Study notes

2023/2024

Uploaded on 11/04/2024

jerome-valdez
jerome-valdez 🇵🇭

1 document

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CHAPTER 1
Accounting
-An information system, designed to identify,
collect, measure, and communicate
economic information about a business
entity.
-Financial Accounting is a process of
developing general purpose financial
statements and reporting general purpose
accounting information to various external
users
International Accounting Standards Board
(IASB)
Financial Reporting
- OBJECTIVE - to provide financial
information that is useful to users in making
decisions relating to providing resources to
the entity.
External Decision Makers
-Investors
-Employees
-Lenders
-Suppliers and other trade creditors
-Customers
-Governments and their agencies
-Public
Internal Decision Makers
- Includes managers that are responsible for
managing efficiently and effectively the
business. The process of providing
information to such users is called
management accounting
Adoption of PFRSs
- Full PFRS
oFor large and publicly accountable
entities
More than 350 million assets;
250 million on liabilities
- PFRS for Small and Medium-Sized Entities
(SMEs)
oFor medium-sized entities
Range of 100-350 million
assets; 100-250 million on
liabilities
- PFRS for Small Entities
oFor small entities
Range of 3-100 million
assets; 3-100 million on
liabilities
- Other Acceptable Basus of Accounting for
Micro-Entities
oFor micro entities
Below 3 million
Not required to file financial
statements
Can use income tax basis or
PFRS for SEs
Major challenges in financial reporting
environment
-IFRS/PFRS in a Political Environment
oCan be influenced by: Business
entities, Financial Community,
Preparers, Government, Industry
accounts, CPAs and Accounting
Firms, Professional Organizations,
Industry Public, Academicians.
-The Expectation Gap – what public thinks
accountants can do and what accountants
think they are capable
-Financial Reporting Issues
oNonfinancial Measurements
oForward-looking information
oSoft assets
oTimeliness
-The Constraints on Useful Financial
Reporting
oCost-Benefit Balancing
oBalance between Qualitative
Characteristics
oTrue and Fair View Presentation
CHAPTER 2
Conceptual Framework
- Not a standard, only to assist the board in
making the standards
- In such case that a standard is unavailable,
the framework is followed
Qualitative Characteristics
-Relevance
oPredictive Value
To predict future outcomes
oConfirmatory Value
To assure predictions were
correct
oMateriality
Information is material if
misstating it or omitting it
could influence the decision
of users
pf3
pf4
pf5

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CHAPTER 1

Accounting

- An information system, designed to identify, collect, measure, and communicate economic information about a business entity. - Financial Accounting is a process of developing general purpose financial statements and reporting general purpose accounting information to various external users **International Accounting Standards Board (IASB) Financial Reporting

  • OBJECTIVE -** to provide financial information that is useful to users in making decisions relating to providing resources to the entity. External Decision Makers - Investors - Employees - Lenders - Suppliers and other trade creditors - Customers - Governments and their agencies - Public Internal Decision Makers
  • Includes managers that are responsible for managing efficiently and effectively the business. The process of providing information to such users is called management accounting Adoption of PFRSs
  • Full PFRS o For large and publicly accountable entities  More than 350 million assets; 250 million on liabilities
  • PFRS for Small and Medium-Sized Entities (SMEs) o For medium-sized entities  Range of 100-350 million assets; 100-250 million on liabilities
  • PFRS for Small Entities o For small entities  Range of 3-100 million assets; 3-100 million on liabilities
  • Other Acceptable Basus of Accounting for Micro-Entities o For micro entities  Below 3 million  Not required to file financial statements  Can use income tax basis or PFRS for SEs Major challenges in financial reporting environment - IFRS/PFRS in a Political Environment o Can be influenced by: Business entities, Financial Community, Preparers, Government, Industry accounts, CPAs and Accounting Firms, Professional Organizations, Industry Public, Academicians. - The Expectation Gap – what public thinks accountants can do and what accountants think they are capable - Financial Reporting Issues o Nonfinancial Measurements o Forward-looking information o Soft assets o Timeliness - The Constraints on Useful Financial Reporting o Cost-Benefit Balancing o Balance between Qualitative Characteristics o True and Fair View Presentation

CHAPTER 2

Conceptual Framework

  • Not a standard, only to assist the board in making the standards
  • In such case that a standard is unavailable, the framework is followed Qualitative Characteristics - Relevance o Predictive Value  To predict future outcomes o Confirmatory Value  To assure predictions were correct o Materiality  Information is material if misstating it or omitting it could influence the decision of users

- Faithful Representation o Completeness o Neutrality o Free from errors Recognition, Measurement and Disclosure Concepts - Assumption o Going Concern - Principles o Recognition o Measurement o Full Disclosure - Constraints o Cost-Benefit Balancing o Balance between qualitative characteristics o True and fair view presentation General purpose financial reporting - Provide financial information that is useful to users in making economic decisions - Types of useful information o Financial flexibility o Liquidity and Solvency o Operating Capability o Investing, Financing, and Operating Activities - Limitations o Do not and cannot provide all the information o Not designed to show the exact value but rather estimates o May not meet everyone’s expectations for the different needs per individual varies o Financial reports are based on estimates, judgements, or model rather than exact depictions Enhancing Qualitative Characteristics

  • Comparability o Consistency  Comparability is the goal, consistency is the method to achieve that goal
  • Verifiability
  • Timeliness
  • Understandability Underlying Assumption
  • Going Concern o Business will continue to operate in the foreseeable future

CHAPTER 3

Financial Statements

- Principal way of communication by the companies - Provides the company’s history quantified in terms of money - Reporting Entity – one that is required to make these financial statements, not necessarily a legal entity - Maybe presented through o Consolidated Financial Statements  Reports both parent and its subsidiaries o Unconsolidated Financial Statements  Reports only the parent o Combined Financial Statements  Reports 2 or more entities not linked by a parent- subsidiary relationship Complete set of Financial Statements

  • Statement of Financial Position
  • Statement of Changes in Equity
  • Statement of Financial Performance
  • Statement of Cash Flows
  • Notes to Financial Statements
  • Statement of Financial Position at the beginning of the earliest comparative period Objective of Financial Statements - To provide information about the financial position, performance, and changes in financial position of an entity that is useful to a wide range of users in making economic decisions. Elements of Financial Statements - These comprises the assets, liabilities, equity, income, expenses. Asset - Present economic resources controlled by the entity as a result of past events - A right that has the potential to produce economic benefits Liabilities - Present obligation of the entity to transfer an economic as a result of past events - A duty or responsibility that the entity has no practical ability to avoid

with all the requirements of each applicable Financial Reporting Standards

- If there is no specific requirements, there should be policies in place such as: o Relevant to the decision-making needs of users o Reliable in that they:  Are faithfully represented  Reflects the economic substance and not merely the legal form  Neutral  Prudent  Complete in all material respects Accrual Basis of Accounting - An enterprise shall prepare all financial statements except for cash flow according to this basis of accounting - A company records revenues when they are earned and realized and records expenses in the accounting period in which they are incurred Materiality and Aggregation - Each material item shall be separately presented in the financial statements - Immaterial amounts are to be aggregated with amounts of similar nature - If information is immaterial then disclosure isn’t required as per the PFRS - Aggregate means to consolidate one’s data Offsetting - Assets and liabilities should not be offset except when offsetting is required or permitted by another PFRS - Offset is allowed if gains, losses, and expenses are immaterial for they are to be aggregated Frequency of Reporting Comparative Information Consistency of Presentation Current & Non-Current Assets Current & Non-Current Liabilities Equity - Equity capital and reserves are disaggregated into various classes such as paid-in capital, share premium and reserves - An entity shall disclose the following: o For each class of share capital:  Number of shares authorized  Number of shares issued and fully paid, issued and not fully paid  Par value per share or share that have no par  Reconciliation of the number of shares outstanding at the beginning and at the end  Rights, preferences and restrictions attaching to that class  Shares in the entity held by itself or its subsidiaries  Shares reserved for issue o A description of the nature and purpose of each reserve within equity

  • If entity was reclassified: o A puttable financial instrument classified as an equity instrument or an instrument that imposes to deliver to another party a pro rata share

CHAPTER 5

INVENTORY

Merchandise Inventory – all goods that a company owns and holds for sale

  • Goods in Transit o FOB Shipping Point  From warehouse of seller to buyer, buyer shoulders payment, included in buyer’s inventory once shipped. o FOB Destination  From seller straight to buyer “door to door”, seller pays, included in buyer’s inventory once delivery arrives.
  • Goods on Consignment o Goods belong to and is recorded by consignor to be sold by the consignee.
  • Goods that are damaged or obsolete o Goods that cannot be sold are removed from the inventory. For goods that could still be sold but at a lower price, they are included in inventory at net realizable value (NRV). o NRV – sales price minus the cost of making the sale o Loss only recorded when a damage or obsolescence occurs. - Inventory includes costs including invoice cost less any discount, plus any other costs (shipping, storage, import duties, and insurance). Inventory costs are expensed as cost of goods sold when inventory is sold as per expense recognition principle. - Makes a physical count of inventory at least once a year to avoid events such as theft, loss, damage, and errors. COSTING METHODS _- First-in, First-Out (FIFO)
  • Last-In, First-Out (LIFO)
  • Specific Identification
  • Weighted Average_