Comprehensive Accounting Reviewer: Fundamentals & Practice

Fundamental vocabulary, definitions, and concepts from accounting basics and the Philippine regulatory framework.

American Institute of Certified Public Accountants (AICPA) definition

The art of recording, classifying, and 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.

American Accounting Association (AAA) definition

The process of identifying, measuring, and communicating economic information to permit informed judgments and decisions by users of the information.

Accounting Standards Council (ASC) of the Philippines definition

A service activity whose function is to provide quantitative information, primarily financial in nature, about economic entities that is intended to be useful in making economic decisions.

Language of Business

A term for accounting because it communicates financial performance, financial position, and economic results to stakeholders.

Internal Users

Individuals within the business including Owners, Managers, and Employees who use accounting for planning, budgeting, and performance evaluation.

External Users

Outside parties such as Investors, Creditors, Banks, Suppliers, Customers, and Government Agencies like the Bureau of Internal Revenue (BIR) and Securities and Exchange Commission (SEC).

Basic Accounting Equation

$$Assets = Liabilities + Owner's Equity$$

Expanded Accounting Equation

$$Assets = Liabilities + Capital + Revenues - Expenses - Drawings$$

Additional Capital

An transaction that increases equity when the owner invests additional resources into the business.

Revenues / Income

Earnings generated from business operations that result in an increase in equity.

Expenses

Costs incurred to produce revenue which result in a decrease in owner's equity.

Drawings / Withdrawals

Occurs when an owner extracts business assets for personal use, leading to a decrease in equity.

Net Income

The result when $Revenues > Expenses$, increasing equity.

Net Loss

The result when $Expenses > Revenues$, decreasing equity.

Normal Balance of Assets

Debit

Normal Balance of Liabilities

Credit

Normal Balance of Owner's Capital

Credit

Normal Balance of Revenues / Income

Credit

Normal Balance of Expenses

Debit

Normal Balance of Owner's Drawings

Debit

Current Assets

Assets expected to be converted into cash, sold, or consumed within one year or the normal operating cycle, whichever is longer.

Accounts Receivable

Collectible amounts from customers arising from sales on credit terms.

Notes Receivable

Written promissory notes received from customers.

Inventory

Merchandise goods held for sale in the normal course of business.

Prepaid Expenses

Future expenses paid in advance, such as Prepaid Rent or Prepaid Insurance.

Non-Current Assets

Assets expected to benefit the business beyond one year, including long-term investments and PPE.

Property, Plant, and Equipment (PPE)

Tangible long-term assets used in operations, such as Buildings, Equipment, and Vehicles.

Land

A specific type of Property, Plant, and Equipment that is not subject to depreciation.

Intangible Assets

Non-physical identifiable assets, such as Patents, Trademarks, and Copyrights.

Current Liabilities

Present legal or constructive obligations expected to be settled within one year or the operating cycle.

Accounts Payable

Short-term debts owed to suppliers for goods or services purchased on credit.

Accrued Liabilities

Unpaid incurred expenses such as Salaries Payable, Utilities Payable, and Interest Payable.

Unearned Revenue

Cash received prior to delivering goods or rendering services.

Mortgage Payable

A long-term debt that is collateralized by real property.

Statement of Financial Position

Also known as the Balance Sheet, it reports Assets, Liabilities, and Equity at a specific point in time.

Statement of Income

Also known as the Income Statement, it shows performance by presenting Revenues, Expenses, and Net Income or Net Loss for a specific period.

Statement of Changes in Equity

Explains capital movement over a period: $\text{Beginning Capital} + \text{Additional Investments} + \text{Net Income} - \text{Net Loss} - \text{Drawings} = \text{Ending Capital}$.

Statement of Cash Flows

Reports cash inflows and outflows categorized into Operating, Investing, and Financing activities.

Notes to Financial Statements

Disclosures providing accounting policies, schedules, and narrative explanations supporting financial statement items.

Journal

The Book of Original Entry where transactions are recorded in chronological order.

Ledger

The Book of Final Entry which groups transactions by account titles through posting.

Unadjusted Trial Balance

An internal summary list verifying the mathematical equality of total debits and credits.

Adjusting Entries

End-of-period entries to update account balances based on accrual basis, matching, and revenue recognition principles.

Accrual Basis

Accounting method where revenue is recognized when earned and expenses when incurred, regardless of cash flow.

Cash Basis

Accounting method where revenue is recognized when cash is received and expenses when cash is paid.

Fra Luca Bartolomeo de Pacioli

Known as the Father of Accounting, he documented the double-entry system in 1494.

Republic Act No. 9298

The Philippine Accountancy Act of 2004, signed on May 13, 2004, to regulate accountancy practice.

Board of Accountancy (BOA)

The regulatory body supervising the CPA examination and ensuring legal compliance in the Philippines.

CPALE Passing Criteria

A general weighted average (GWA) of at least $75\%$ with no subject grade below $65\%$.

Financial Reporting Standards Council (FRSC)

The official Philippine standard-setting body established under RA 9298 that promulgates PFRS and PAS.