An oral promise (by an individual or entity) to pay is the value parted with in consideration for the hire of services of another

An oral promise (by an individual or entity) to pay is the value parted with in consideration for the hire of services of another

Illustrative example:

On June 25, 20x2, AAA Trucking Services Company received Bill No. 2222, in the amount of P15,000.00 from BS Accounting Firm, for the tax services rendered which it promised to pay at the end of month.

Analysis and Explanation:

Note: when analyzing a business transaction, the bookkeeper or analyst must look at the side or perspective of the company.   

Analysis:

• The value received by the company: hire of services (tax services)

• The value parted with by the company: oral promise to pay 

Explanation:

The value received by AAA Company is the tax services from BS Accounting Firm.  In exchange, AAA Co parted with its oral promise to pay BS.

Therefore, in this transaction, the value received is the hire of (tax) services of another (BS) and the value parted with is the oral promise to pay by AAA to BS.


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An oral promise (from an individual or entity) is received in consideration for the hire of services by the entity

An oral promise (from an individual or entity) is received in consideration for the hire of services by the entity

Illustrative example:

On June 18, 20x2, AAA Trucking Services Company presented Bill No. 8888, P280,000.00 to Angel Martin Cakes and Ice Cream Company, a customer, for the delivery and trucking services rendered by AAA which the customer promised to pay in 15 days. 

Analysis and Explanation:

Note: when analyzing a business transaction, the bookkeeper or analyst must look at the side or perspective of the company.   

Analysis:

• The value received by the company: oral promise to pay

• The value parted with by the company: trucking services  

Explanation:

The value received by AAA Company is an oral promise to pay from Angel Martin.  In exchange, AAA Co. valued parted with is the trucking services rendered.

Therefore, in this transaction, the value received is an oral promise to pay from an individual and the value parted with is the hire of service (services offered).


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An oral promise (by an individual or entity) to pay is parted with in consideration for a thing of value received

An oral promise (by an individual or entity) to pay is parted with in consideration for a thing of value received

Illustrative example:

On June 23, 20x2, AAA Company bought a brand new L200 Epson printer, P9,800.00  which the company promised to pay in 10 days. 

Analysis and Explanation:

Note: when analyzing a business transaction, the bookkeeper or analyst must look at the side or perspective of the company.   

Analysis:

• The value received by the company:  brand new delivery truck 

• The value parted with by the company:  oral promise to pay 

Explanation:

The value received by AAA Company is a thing of value - the brand new L200 Epson printer.  In exchange, AAA Co parted with its oral to promise to pay.

Therefore, in this transaction, the value received is the brand new  L200 Epson printer  and the value parted with is the oral to promise to pay by AAA Co.


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An oral promise (from an individual or entity) to pay is received in consideration for a thing of value parted with

An oral promise (from an individual or entity) to pay is received in consideration for a thing of value parted with

Illustrative example:

On June 21, 20x2, AAA Trucking Services Company sold a used 3-in-1 printer, P1,500.00 to Emy Cruz which she promised to pay at the end of the month. 

Analysis and Explanation:

Note: when analyzing a business transaction, the bookkeeper or analyst must look at the side or perspective of the company.   

Analysis:

• The value received by the company: oral promise to pay

• The value parted with by the company:  thing of value (used printer) 

Explanation:

The value received by AAA Company is the oral promise to pay by Emy Cruz and the value parted with is a thing of value - the used printer.

Therefore, in this transaction, the value received is the oral promise to pay from an individual and the value parted with is the thing of value - the used printer.


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Use of property, or hire of services, of another person is parted with in exchange for money received.

Use of property, or hire of services, of another person is parted with in exchange for money received

Illustrative example for use or hire of property (owned by the company):

AAA Company received cash, P4,500.00, from a customer for the use of its delivery truck. 

Analysis and Explanation:

Note: when analyzing a business transaction, the bookkeeper or analyst must look at the side or perspective of the company.   

Analysis:

• The value received by the company: money

• The value parted with by the company:  use or hire of the company property

Explanation:

The value received by AAA Company is the money.  In exchange, AAA Co. parted with is the use or hire of the its property.

Therefore, in this transaction, the value received is the money and the value parted with is the use or hire of the delivery truck by another entity or person.


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Illustrative example for use or hire of services:

AAA Company received cash, P2,000.00, for the driving services rendered to a customer. 

Analysis and Explanation:

Note: when analyzing a business transaction, the bookkeeper or analyst must look at the side or perspective of the company.   

Analysis:

• The value received by the company: money

• The value parted with by the company: driving services

Explanation:

The value received by AAA Company is the money.  In exchange, AAA Co. parted with is the company's driving services.

Therefore, in this transaction, the value received is the money and the value parted with is the driving services of the company.


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Use of property, or hire of services, of another person is received in exchange for money parted with.

Use of property, or hire of services, of another person is received in exchange for money parted with

Illustrative example for use of property of another person or entity:

On June 30, 20x2, AAA Trucking Services Company paid cash, P10,000.00, to B & M Property Group Company, in payment for the month on the rental of shop space occupied by AAA Co. 

Analysis and Explanation:

Note: when analyzing a business transaction, the bookkeeper or analyst must look at the side or perspective of the company.   

Analysis:

• The value received by the company: use of the property (of another person)

• The value parted with by the company: the money  

Explanation:

The value received by AAA Company is the use of shop space owned by another person. In exchange, AAA Company parted with is the money.

Therefore, in this transaction, the value received is the use of property of another person  and the value parted with is the money.


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Illustrative example for hire of services of another person or entity:

On June 24, 20x2, AAA Trucking Services Company paid cash P7,000.00, to Rep-Car Auto Repair Shop for the minor repair of its delivery truck. 

Analysis and Explanation:

Note: when analyzing a business transaction, the bookkeeper or analyst must look at the side or perspective of the company.   

Analysis:

• The value received by the company: hire of services of another entity

• The value parted with by the company: money 

Explanation:

The value received by AAA Company is the hire of services of the auto-mechanic. In exchange, AAA Company parted with is the money.

Therefore, in this transaction, the value received is the hire of services of another person or entity and the value parted with is the money.


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A form of property is parted with in exchange for money received

A form of property is parted with in exchange for money received

Illustrative example:

On June 4, 20x2, AAA Company received cash, P250,000.00, for the sale of its old delivery truck used in the business.

Analysis and Explanation:

Note: when analyzing a business transaction, the bookkeeper or analyst must look at the side or perspective of the company.   

Analysis:

• The value received by the company: Money

• The value parted with by the company:   Form of property - Old Delivery Truck

Explanation:

The value received by AAA Company is a form of property which is a thing of value - the P250,000.00 cash money. In return, AAA Company parted with another form of property which is also a thing of value - the old delivery truck.

Therefore, in this transaction, the value received is the P250,000.00 cash money  and the value parted with is the old delivery truck.


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A form of property is received in exchange for money parted with

A form of property is received in exchange for money parted with

Illustrative example:

On June 3, 20x2, AAA Trucking Services Company bought for P890,000.00 cash a Toyota Innova to be used as company service vehicle.

Analysis and Explanation:

Note: when analyzing a business transaction, the bookkeeper or analyst must look at the side or perspective of the company.   

Analysis:

• The value received by the company: Toyota Innova 

• The value parted with by the company:  Cash or Money

Explanation:

The value received by AAA Company is a form of property which is a thing of value - the Toyota Innova. In exchange of the Toyota Innova, AAA Company parted with another form of property which is also a thing of value - the money.

Therefore, in this transaction, the value received is the Toyota Innova and the value parted with is the cash or money.


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Constraints on relevant and reliable information

The following are the constraints on relevant and reliable information:

• Timeliness

• Balance between benefit and cost

• Balance between qualitative characteristics

• True and fair view/fair presentation

Timeliness

Management may need to balance the relative merits of timely reporting and the provision of reliable information.

Balance between benefit and cost

The benefits derived from information should exceed the cost of providing it.

Balance between qualitative characteristics

Generally, the aim of financial statements is to achieve an appropriate balance among the characteristics in order to meet the objective of financial statements.

True and fair view/fair presentation

Financial statements are frequently described as showing a true and fair view of, or as presenting fairly, the financial position, performance and changes in financial position of an entity.

Source:  IFRS-PFRS 

QUALITATIVE CHARACTERISTICS

Qualitative characteristics are the attributes that make the information provided in the financial statements useful to users.

The four principal qualitative characteristics are the following:

• Understandability 

• Relevance 

• Reliability 

• Comparability 

Understandability 

Users are assumed to have a reasonable knowledge of business and economic activities and accounting and willingness to study the information with reasonable diligence. 

Relevance 

Information has the quality of relevance when it influences the economic decisions of users by helping them evaluate past, present and future events confirming, or correcting, their past evaluations.

The following describes the relevance of financial information: 

• Materiality

Information is material if its omission or misstatement could influence the economic decisions of users taken on the basis of the financial statements.

Materiality depends on the size of the item or error judged in the particular circumstances of its omission or misstatements.  

• Predictive Value

Accounting information should be helpful to external decision makers by increasing their ability to make predictions about the outcome of future events. 

• Feedback Value

Accounting information should be helpful to external decision makers who are confirming past predictions or making updates, adjustments, or corrections to predictions. 

• Timeliness

Accounting information must be available on time when needed if it is to influence decisions.  Lack of timeliness reduces relevance.  Information is useless if not available when needed.  

Reliability 

Information has the quality of reliability when it is free from material error and bias and can be depended upon by users to represent faithfully that which is either purports to represent or could reasonably be expected to represent.

• Faithful representation

A statement of financial position should represent faithfully the transactions and other events that result in assets, liabilities and equity of the entity at the reporting date which meet the recognition criteria.

• Substance over form

If information is to represent faithfully the transactions and other events that it purports to represent, it is necessary that they are accounted for and presented in accordance with their substance and economic reality and not merely their legal form. 

• Prudence

Prudence is the inclusion of a degree of caution in the exercise of the judgments needed in making estimates required under conditions of uncertainty, such that assets or income are not overstated and liabilities or expenses are not understated.

• Completeness

To be reliable, the information in financial statements must be complete within the bounds of materiality and cost.  An omission   can cause information to be false or misleading and thus unreliable and deficient in terms of its relevance.

• Neutrality

To be reliable, the information contained in financial statements must be neutral, that is, free from bias.

Comparability 

Users must be able to compare the financial statements of an entity through time in order to identify trends in its financial position and performance.  Users must be able to compare the financial statements of different entities in order to evaluate their relative financial position, performance and changes in financial position. 

Consistency

The reported accounting information should conform to procedures and methods that remain unchanged from one period to another.  Comparisons over time are difficult unless there is consistency in the way accounting principles are applied across fiscal years.

Source : IFRS-PFRS

BASIC ACCOUNTING ASSUMPTIONS

The framework for the preparation and presentation of financial statements mentions underlying assumptions used in the IFRS/PFRS, to wit:

• Accrual Basis Assumption 

Financial statements are prepared on the accrual basis of accounting.  Under this basis, the effects of transactions and other events are recognized when they occur (and not as cash or its equivalent is received or paid) and they are recorded in the accounting records and reported in the financial statements of the periods which they relate.

• Going Concern Assumption 

Under the going concern assumption, organizations are presumed to operate continuously or indefinitely.  Though, realistically speaking, some businesses fail, however, companies are set-up by owners with the hope of long life, and many somewhat achieve that goal...read more

Impliedly, basic inherent assumptions (implicit assumptions) are the following:

• Economic Entity or Separate Entity Assumption 

The economic entity or accounting entity assumption presumes that economic events and transactions can be identified with an economic entity...read more

• Periodicity or Time Period Assumption 

In accounting, periodicity refers to the equal length of time or relatively short periods of the economic life of the organization...read more

• Monetary Unit Assumption

Monetary unit assumption states that elements of financial statements must be measured in terms of Philippine Peso currency...read more

Source Documents

Recall that one qualitative characteristics of accounting is reliability.  In order to be reliable, the accounting information must be verifiable. Verifiability of accounting records means that the entries therein are supported by source documents.

Source Documents are the forms, invoices, receipts, legal papers, or other documents which underlie a business transaction.  These are the so-called evidential matter.   Existence of evidential matter supports and corroborates the objectivity of accounting records.

Below are examples of source documents which underlie an economic event:

• Sales Invoices 
• Official  Receipts    
• Check
• Check Voucher
• Petty Cash Voucher
• Promissory Note
• Debit Memorandum
• Credit Memorandum
• Bank Deposit Slip
• Payroll Records
• Statement of Account or Billing
• Contract of Lease
• Memorandum of Agreement

Note: Click each document to read definition and samples

Financing Activities

The Financing Activities are those transactions between the entity and its owners or creditors.

The primary focus of financing activities is to raise working capital necessary to be used in business operations.  The owners invest to the entity and/or creditors lend capital to the entity.

The transactions involving financing activities and their effects in the cash flows are as follows:

A.   Transactions which increases cash (cash receipts)

1. Owner's investments
2. Borrowings

B.   Transactions which decreases cash (cash payments)

1. Owner's drawings
2. Payments of borrowings

Investing Activities

The main purpose of investing activities is to acquire assets in order to facilitate and expedite the operations of the business.

The Investing Activities are those transactions which involve acquisition and disposal of assets other then inventory, which are necessary in the business operations.

Following are transactions which are considered investing activities and their effects in the cash flow:

A.  Transactions which increases cash (cash receipts)

1. Sale of plant assets
2. Sale of non-trading securities
3. Sale of business segment
4. Collection of principal in loans

B.  Transactions which decreases cash (cash disbursements)

1. Purchase of plant assets
2. Purchase of non-trading securities
3. Making loans to other entities 

Operating Activities

The Operating Activities are those business transactions which generates revenue for the organization. These include expenses incurred to produce revenues.

The following are the transactions included under the operating activities:

A. Transactions which increases cash (cash receipts from operating activities)

1. Selling or sale of goods
2. Rendering or sale of services
3. Selling of trade securities
4. Earnings from interest income
5. Earnings from dividend income

B. Transactions which decreases cash (cash payments or disbursements for activities)

1. Purchases of inventory
2. Operating expenses
3. Taxes
4. Interest expense (short-term)
5. Purchase of trading securities