1ST SEM

Question 1

Brief History of Accounting

Answer 1

More than 10,000 years ago: Methods of record keeping and accounting have been invented.

Accounting has existed for thousands of years, with early examples in Mesopotamia, Babylonia, Egypt, China, and Greece.

Question 2

Definition of Accounting

Answer 2

Accounting is a process of identifying, recording and communicating economic information that is useful in making economic decisions.

Fra Luca Pacioli is known as the father of modern accounting.

Question 3

Essential elements of the definition of accounting

Answer 3

Identifying. The process of analyzing each business transaction and identifying whether the transaction is an ‘accountable event’ or ‘non-accountable event.’

‘Accountable events’ are those that affect the assets, liabilities, equity, income, or expenses of a business.

Question 4

Recording

Answer 4

Journalizing – the process of recognizing (i.e., records) the identified ‘accountable events.’

‘Account’ is the basic storage of information in accounting, e.g., ‘cash,’ ‘land,’ ‘sales,’ etc.

Question 5

Communicating

Answer 5

The process of summarizing the information processed in the accounting system to produce meaningful reports.

Accounting provides quantitative, qualitative, and financial information for decision-making.

Question 6

Branches of Accounting

Answer 6

Financial accounting – is the branch of accounting that focuses on general purpose financial statements.

Financial accounting is governed by the Philippine Financial Reporting Standards (PFRSs).

Question 7

Users of Accounting Information

Answer 7

Internal users – those who are directly involved in managing the business. Examples include business owners and managerial personnel.

External users – those who are not directly involved in managing the business. Examples include investors, lenders, creditors, government agencies, and customers.

Users of accounting information are classified into internal and external users.

Question 8

External users include:

Answer 8

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), government agencies (e.g., BIR, SEC), non-managerial employees, customers, public

Question 9

Forms of Business Organizations

Answer 9

Sole or single proprietorship – is a business that is owned by only one individual. It is the most common and simplest form of a business organization. The business owner is called a “sole proprietor.” A sole proprietorship is registered with the Department of Trade and Industry (DTI).

Example: A small bakery owned and operated by a single individual.

Question 10

Types of Business according to Activities

Answer 10

Service business – is one that offers services as its main product rather than physical goods. A service business may offer professional skills, expertise, advice, lending service, and similar services. Examples of service businesses include: Schools, Professionals (accounting firm, electrician, etc.), Banks and other financial institutions, hotels and restaurants

Example: An accounting firm providing financial advisory services.

Question 11

Accounting concepts and principles

Answer 11

Separate entity concept – Under this concept, the business is viewed as a separate person, distinct from its owner(s). Only the transactions of the business are recorded in the books of accounts. The personal transactions of the business owner(s) are not recorded.

Example: A business owner using personal funds for groceries should not be recorded in the business’s financial records.

Question 12

Liquidating concern

Answer 12

The assets of a liquidating concern are measured at net selling price rather than at historical cost. (Going concern - good; Liquidating concern-bad)

Example: A business that is bankrupt and is winding up its operations.

Question 13

Matching (or Association of cause and effect)

Answer 13

Some costs are initially recognized as assets and charged as expenses only when the related revenue is recognized.

No additional information.

Question 14

Accrual Basis of accounting

Answer 14

Economic events are recorded in the period in which they occur rather than at the point in time when they affect cash.

Example: Recording income when it is earned, not when it is collected.

Question 15

Prudence (or Conservatism)

Answer 15

The accountant observes caution when making accounting estimates under uncertainty.

Explanation: Choosing unfavorable outcomes over favorable ones to avoid overstatement of assets or income.

Question 16

Time Period (Periodicity, Accounting period, or Reporting period concept)

Answer 16

The life of the business is divided into series of reporting periods.

No additional information.

Question 17

Stable monetary unit

Answer 17

Assets, liabilities, equity, income, and expenses are stated in terms of a common unit of measure.

Explanation: Using the peso in the Philippines as the stable monetary unit.

Question 18

Materiality concept

Answer 18

Accountant considers materiality when applying accounting principles to material items.

Explanation: Omission or misstatement of material items can influence economic decisions.

Question 19

Cost-benefit (Cost constraint)

Answer 19

The cost of processing and communicating information should not exceed the benefits.

No additional information.

Question 20

Full disclosure principle

Answer 20

Information communicated to users reflects judgmental trade-offs for sufficient detail and condensation.

No additional information.

Question 21

Consistency concept

Answer 21

Business must apply accounting policies consistently and present information consistently.

Explanation: Like transactions must be accounted for in the same manner.

Question 22

Accounting Standards

Answer 22

Explicit concepts and principles are specifically mentioned in the Conceptual Framework for Financial Reporting and in the Philippine Financial Reporting Standards (PFRSs).

No additional information.

Question 23

Philippine Financial Reporting Standards (PFRS)

Answer 23

PFRSs are Standards and Interpretations adopted by the Financial Reporting Standards Council (FRSC).

No additional information.

Question 24

Relevant Regulatory Bodies

Answer 24

Other than the FRSC, the SEC, BIR, BSP, and CDA affect accounting policies and financial reporting.

Explanation: Regulatory bodies like SEC and BIR require specific financial reporting from businesses.

Question 25

What does the SEC require corporations and partnerships to file?

Answer 25

Audited financial statements

Example sentence: The SEC requires corporations and partnerships to file audited financial statements.

Question 26

What is the role of the Bureau of Internal Revenue (BIR)?

Answer 26

Collecting national taxes and administering the provisions of the Tax Code

Example sentence: The BIR is tasked in collecting national taxes and administering the provisions of the Tax Code.

Question 27

What is the role of the Bangko Sentral ng Pilipinas (BSP)?

Answer 27

Regulating banks and other entities performing banking functions

Example sentence: The BSP is tasked in regulating banks and other entities performing banking functions. The BSP influences the selection and application of accounting policies by these businesses.

Question 28

What is the role of the Cooperative Development Authority (CDA)?

Answer 28

Regulating cooperatives

Example sentence: The CDA is tasked in regulating cooperatives. The CDA influences the selection and application of accounting policies by cooperatives.

Question 29

What is the Conceptual Framework for Financial Reporting?

Answer 29

A general frame of reference in developing or applying accounting standards

Example sentence: Just like the Standards, the Conceptual Framework for Financial Reporting also prescribes accounting concepts that are relevant to the preparation of financial statements. However, the Conceptual Framework is not a standard. Rather, the Conceptual Framework serves as a general frame of reference in developing or applying the standards.

Question 30

What are the fundamental qualitative characteristics in accounting?

Answer 30

Relevance and Faithful representation

Example sentence: Fundamental qualitative characteristics are the characteristics that make information useful to users. They consist of Relevance and Faithful representation.

Question 31

What are the enhancing qualitative characteristics in accounting?

Answer 31

Comparability, Verifiability, Timeliness, and Understandability

Example sentence: Enhancing qualitative characteristics support the fundamental characteristics. They enhance the usefulness of information. As such, they must be maximized. The enhancing qualitative characteristics consist of Comparability, Verifiability, Timeliness, and Understandability.

Question 32

What is the Basic Accounting Equation?

Answer 32

Assets=Liabilities+Equity

Example sentence: All the processes in an accounting system must observe the equality of the accounting equation, which is basically an algebraic equation.

Question 33

What is the Expanded Accounting Equation?

Answer 33

Assets=Liabilities+Equity+Income-Expenses

Example sentence: We can expand the basic accounting equation by including two more elements income and expenses. The expanded accounting equation shows all the financial statement elements.

Question 34

What is an Account in accounting?

Answer 34

Basic storage of information in accounting

Example sentence: An account is a record of the increases and decreases in a specific item of asset, liability, equity, income or expense.

Question 35

What are the three parts of a ‘T-account’?

Answer 35

Account title, Debit (Dr.) side, Credit (Cr.) side

Example sentence: A ‘T-account’ has three parts, namely: Account title – describes the specific item of asset, liability, equity, income or expense. Debit (Dr.) side – the left side of the account. Credit (Cr.) side – the right side of the account.

Question 36

What are the five major accounts in accounting?

Answer 36

Assets, Liabilities, Equity, Income, Expenses

Example sentence: The five major accounts, also called the elements of the financial statements, are actually the items in the expanded accounting equation presented in the previous slide.