ACCOUNTING_FINALS

History of Accounting

• From Ancient Mesopotamia dating back 4000 B.C

• Luca Pacioli- Father of Accounting

Main Motive in creating a Business

• To earn profit (main objective)

Forms of Business Organization

• Sole Proprietorship

• Partnership

• Corporation

• Cooperative

Service

• a company providing its customers with intangible goods. An Intangible good is something that does not have a physical nature like transportation, consultation, repair, and professional services from lawyers, doctors, financial analysts and accountants.

Merchandising/Trading

complete opposite of a Service Business; where you are selling tangible goods. Common businesses who sell tangible products are grocery stores, hardware supplies, and clothing. Merchandising operations however only involve purchasing goods that are ready for sale and reselling it for a certain amount of profit.

Manufacturing

operations concerns manipulating resources like raw materials, labor, machines and transforming them into finished products that are ready to be sold to customers.

Raw Materials

• Concerned with growing or extracting raw materials.

Infrastructure

• Refers to companies or organizations that focus on providing essential physical or virtual assets and facilities necessary for the functioning of a society or industry. 

Financial

Receives deposits, lending, and investing money

Insurance

• Pooling premiums of many to meet claims of a few.

• refers to a financial industry that provides risk management services to individuals, businesses, and other entities.

Difference between Merchandising and Manufacturing Business Operations

A Manufacturer buys goods for the purpose of making new products and selling them, while a Merchandiser buys goods for the sole purpose of selling it right away.

Types of Business Transactions

• Purchase

• Payment

• Sale

• Receipt (Collection)

Basic Accounting Activities

• Identify economic events (relevant business transaction) 

• Record, classify and summarize economic events. 

• Communicate the information to stakeholders using the financial statements. 

Accounting as a Language of Business

• Interpreting and communicating financial information relating to past business operation

• Forecasting future business operations.

Users of Financial Information (Stakeholders)

• Existing and Potential Investors (External)

• Creditors (External)

• Customers (External)

• Government (External)

• Public (External)

• Manager (Internal)

• Production supervisor (Internal)

• Finance director (Internal)

Types of Accounting Reports

• Income Statement

• Statement of Changes in Equity (Capital Statement)

• Statement of Cash Flow (Cash Flow Statement)

• Statement of Financial Position (Balance Sheet)

Underlying Assumptions (Postulates)

• Fundamental premises on which the accounting process is based.

• To avoid misunderstanding

• To enhance usefulness of Financial Statements

Fundamental Concepts

Entity Concept

Periodicity Concept

Stable Monetary Unit Concept

Entity Concept

• The most basic concept in accounting. Simply means that the business itself and the owner/s have a separate identity.

  • Natural Person = owner/s

  • Juridical Person = business

Periodicity Concept

• An entity’s life can be meaningfully subdivided into equal time periods for reporting purposes. Allows the users to obtain timely information (FS).

Stable Monetary Unit Concept

• This is the basis for ignoring the effects of inflation in the accounting records.

• The assumption is that stable lagi yung pera kasi magulo kung susundan yung fluctuation ng pera.

Calendar year

• January 1 to December 31 

Fiscal year

• will start on a first day of any month (except January) and ends on the last day of the twelfth month.

Qualitative Characteristics of Business Reports

Relevance

Faithful Representation

Relevance

• it affects or influences the decision making. 

Predictive value

• helps to predict the future outcome. 

Confirmatory value

•  enables stakeholder to check and confirm earlier predictions.

Faithful Representation

• it represents what it should represent.

Completeness

• includes all information necessary for a user to understand the phenomenon being depicted.

Neutrality (impartial)

• Free from bias. Supported by the exercise of prudence.

Free from error

• No errors or omissions.

Enhancement of Qualitative Characteristics

• Comparability – to determine similarities / dissimilarities 

• Verifiability – supported by evidence.

• Timeliness – information should be available when it is needed for decision making. 

• Understandability – comprehensible to users with reasonable knowledge.

Comparability

•  to determine similarities / dissimilarities 

Verifiability

• – supported by evidence.

Timeliness

• information should be available when it is needed for decision making. 

Understandability

comprehensible to users with reasonable knowledge

Basic Accounting Principles

Objectivity principle

Cost principle 

Historical Cost

Revenue recognition principle 

Expense recognition principle 

Adequate disclosure 

Materiality

Consistency

Objectivity principle

accounting records are based on reliable data.

Cost principle 

• Purchased assets should be recorded using the invoice price.

• Invested assets should be recorded at its fair market value (FMV).

Historical Cost

States that acquired asset should be recorded at their actual cost and not at what management thinks they are worth as at reporting date.

Revenue recognition principle 

• Revenue will be recorded only when it is earned.

• When the service has been done (service)

• When the goods are already delivered (merchandising)

Expense recognition principle 

• Expenses should be recorded in the period when it is incurred not when it is paid.

Adequate disclosure 

Information that is significant must be disclosed in the financial statements.

Materiality

Information that will not affect the evaluations and decisions of stakeholders will not be recorded.

Consistency

• same accounting method must be used from period to period.

• If the need to change the method arises, it must be disclosed.

Accounting Equation

ASSET = LIABILITIES  + CAPITAL/ OWNER’S EQUITY

What should be recorded?

Only those events which will affect the accounting equation.

Assets

• Resources owned by business.

• It has the capacity to bring future benefits to the owner.

• Example: 

• Cash 

• Accounts receivable 

• Notes receivable 

• Office supplies

•  Office equipment

Liabilities

• Creditors claims against assets 

• Example:

• Accounts payable 

• Notes payable 

• Wages payable

Capital/ Owner’s Equity

• Owner’s claim against assets.

Revenue

• It results from either selling merchandise or providing service. 

• Results to increase of asset and capital

Expenses

• Cost of asset consumed or services used.

• Results decrease in asset and capital.

Possible Results of Business Operation

• Profit / Gain

• Loss

• Break-even

Double Entry Bookkeeping

• Business transaction have dual effects. 

• Debit - left side of the account 

• Credit – right side of the account

Normal Balance

• Asset - Debit (left side)

• Liability – Credit (right side)

• Capital / Owner’s Equity – Credit (right side) 

• Withdrawal - Debit (left side)

• Revenue / Income – Credit (right side) 

• Expenses – Debit (left side)

Accounting Cycle (During the Accounting Period)

• Identification of economic events 

• Journalizing 

• Posting to ledger (Classifying)

• Preparation of financial statements 

• Journalizing and posting of adjusting entries 

• Journalizing and posting of closing entries 

• Preparation of a post-closing trial balance

Accounting Cycle (At the start of the Accounting Period)

• Journalizing and posting of reversing entries.

Journal

•  A chronological record of economic events. 

• The book of original entry.

Standard Contents of the Journal

• Date

• Account titles and explanation

• Posting Reference (P.R.)

• Debit

• Credit

Simple Entry

only two accounts will be recorded.

Compound Entry

at least three accounts will be recorded.

Accrual method

•  revenue will be recorded when it is earned. 

Cash method

 revenue and expense will be recorded at the time of payment.

Chart of Account

• List of accounts that will be used in recording economic events.

• Arranged according to financial statement order (asset, liabilities, owner’s equity, revenue and expenses)

• Numbered in a flexible manner.

Chart of Accounts (Assets)

• Cash 

• Accounts receivable 

• Notes receivable 

• Office supplies 

• Office equipment 

• Accumulated depreciation – office equipment 

• Printing Equipment 

• Accumulated depreciation – printing equipment

Chart of Accounts (Liabilities)

• Accounts payable 

• Salaries payable 

• Notes payable 

• Loans payable

Chart of Accounts (Owner’s Equity)

• Baba, capital 

• Baba, withdrawals

• Income summary

Chart of Accounts (Revenue)

• Printing

• Revenue

Chart of Accounts (Expense)

• Supplies expense 

• Salaries expense 

• Depreciation expense 

• Interest expense

Posting

• Transferring of the amounts from the journal to the ledger. 

• Debits in the journal will be posted, on the appropriate account, also as debit in ledger.

• Credits in the journal will be posted, on the appropriate account, also as credit in ledger.

Ledger

• 
   The reference book of accounting system.

• It organizes the accounting information by account and summarizes it.

• To prepare data for basic financial statements.

Accounts Classification in Ledger

• Balance sheet (permanent) accounts 

• Assets, liabilities and owner’s equity

• Income statement (temporary) accounts

• Income and expenses

Trial Balance

• List of all accounts, properly arranged, with their respective debit or credit balances. 

• To determine the equality of all the debits and credits.

Steps in Preparing Trial Balance

• List in proper order all the accounts reflected on the journal; 

• Write the amount of each account base on the ledger; 

• Determine the sum of all the debits, as well as all the credits; 

• Compare the totals of debits and credits. 

Deferral

• postponement of the recognition of an expense already paid but not yet incurred, or revenue already collected but not yet earned.

Accrual

• recognition of an expense already incurred but not yet paid, or revenue earned but not yet collected.

Accrual Basis of Accounting

• Business transactions will be recorded when the event occur, and not when it is paid (expenses) or when payment is received (revenue).

Recognition

• the process of including in the financial statements an item that meets the definition of asset, liability, equity, income or expense.

Derecognition

• the process of removing all or part of a recognized asset or liability from the statement of financial position.

Adjusting Entries

• To record the economic activities that have occurred but have not yet been recorded.

• To assign revenues to the period in which they are earned, and expenses to the period in which they are incurred.

• To properly measure the profit for the period.

• To reflect the correct balances of asset and liability accounts 

Current Ratio

• commonly used to measure liquidity.

Formula for Current Ratio

Current asset / Current Liabilities

Debt Ratio

 a larger ratio means higher risk that the entity may not be able to pay its obligation over the long term.

Formula for Debt Ratio

 Total Liabilities / Total Assets

Return on Investment

• Used to evaluate how efficiently an entity used its resources.

Formula for Return on Investment

Net Profit / Average amount invested

Trade Discount

• To encourage customers to buy in large quantities.

• Trade discount is not recorded in the books.

Cash Discount

• The purpose is to encourage prompt payment of accounts.

Cash Discount

• is computed on the net amount after the trade discount.

Accounting

• Relevant in all walks of life

• An absolute essential in the world of business.

• Also called the Language of Business.

Definitions of Accounting

Its function is to provide quantitative information, primarily financial in nature, about economic entit ies that is intended to be useful in making economic decisions.

• Primitive Accounting

• It can be traced as far back as 8500 B.C., the date archaeologists have established for certain clay tokens-cones, disks, spheres, and pellets - found in Mesopotamia (Modern Iraq).

The Florentine Approach

• Earliest evidence of bookkeeping in Florence, France.

• Derived from “charge and discharge.”

Amatino Manucci

• Inventor of double-entry bookkeeping.

Luca Pacioli

• Regarded as the “Father of Double-Entry Bookkeeping.”

Accountancy in the Philippines

• Act No. 3105: “An Act Regulating the Practice of Public Accounting; Creating the Board of Accountancy (BOA); Providing for Examination, for the Granting of Certificates, and the Registration of Certified Public Accountants (CPAs); for the Suspension or Revocation of Certificates; and for Other Purposes.”

  • March 17, 1923

  • The law paved the way for local accountants to do the work which, up to the time, was performed by foreign accountants in the country.

Professional Accountant

• Defined as “an individual who holds a valid certificate issued by the Board of Accountancy, whether he be in public practice, industry, commerce, the public sector or education.”

• Accountancy and Accounting

• Profession whose members are engaged in the collection of financial data. 

Auditing

• Forms the most important branch of accountancy.

• Once the accounts have been prepared, they may have to be checked in order to ensure that they do not present a distorted picture.

Internal Auditors

• hired by and employees of the company itself.