Chapter 1: Introduction to Accounting - FAR

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73 Terms

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Accounting

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

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Identifying

Recording

Communicating

Essential elements of the definition of accounting:

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Identifying

The account analyzes each business transaction and identifies whether the transaction is an “accountable event” or “non-accountable event”.

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Accountable events or economic events

It affects the assets, liabilities, equity, income, and expenses of a business

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Recording

The accountant recognizes (i.e., records) the identified “accountable events”.

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Journalizing

The process of recognizes the identified “accountable events”

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Posting

After journalizing, the accountant then classifies the effects of the event on the “accounts”. This process is called?

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Account

Basic storage of information in accounting

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Communicating

At the end of each accounting period, the accountant summarizes the information processed in the accounting system in order to produce meaningful reports

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Financial statements

Accounting information is communicated to interested users through accounting reports, the most common form of?

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Accounting

Process with the basic purpose of providing information about economic activities that is intended to be useful in making economic decisions

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Quantitative information

Qualitative information

Financial information

Types of information provided by accounting:

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Quantitative information

Information expressed in numbers, quantities, or units

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Qualitative information

Information expressed in words or descriptive form. It is also found in the notes to financial statements as well as on the face of the other components of financial statements

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Financial information

Information expressed in money. It is also quantitative information because monetary amounts are normally expressed in numbers

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Social science

Accounting is a body of knowledge which has been systematically gathered, classified and organized

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Practical art

Accounting requires the use of creative skills and judgement

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Bookkeeping

Refers to the process of recording the accounts or transactions of an entity. It normally ends with the preparation of the trial balance

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Accounting

It covers the whole process of identifying, recording, and communicating information to interested users

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Language of business

Accounting is often referred to as the?

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To provide external users with information that is useful in making, among others, investment and credit decisions

To provide internal users with information that is useful in managing the business

Accounting has the following two broad functions in a business:

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Internal users

External users

Users of Accounting Information:

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Internal users

Those who are directly involved in managing the business

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External users

Those who are not directly involved in managing the business

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General purpose accounting information

Special purpose accounting information

Types of accounting information classified as to users’ needs:

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General purpose accounting information

It is information designed to meet the common needs of most statement users. It is provided by financial accounting and is prepared primarily for external users

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Special purpose accounting information

It is information designed to meet the specific needs of particular statement users. It is provided by management accounting or other branches of accounting and is prepared primarily for internal users

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Double entry recording system

It is the first systematic record keeping dealing with and was formulated by Fra Luca Pacioli

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Fra Luca Pacioli

A Franciscan monk and mathematician and considered as the father of modern accounting

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Summa di Arithmetica Geometria Proportioni and Proportionista

Pacioli’s book that is published on November 10, 1494 in Venice

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Financial accounting

Management accounting

Government accounting

Auditing

Tax accounting

Cost accounting

Accounting education

Accounting research

Common branches of accounting:

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Financial accounting

It is the branch of accounting that focuses on general purpose financial statements

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General purpose financial statements

Those statements that cater to the common needs of external users, primarily the potential and existing investors, and lenders and other creditors

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PFRS Accounting Standards

Financial accounting is governed by?

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Financial statements

These are the structured representation of an entity’s financial position and result of its operations

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Financial report

Includes the financial statements plus other information provided outside the financial statements that assists in the interpretation of a complete set of financial statements or improves users’ ability to make efficient economic decisions

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Financial reporting

It is the provision of financial information about an entity that is useful to external users, primarily the investors, lenders, and other creditors, in making investment and credit decisions

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Management accounting

Involves the accumulation and communication of information for use by internal users

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Management advisory services

Which includes services to clients on matters of accounting, finance, business policies, organization procedures, product costs, distribution, and many other phases of business conduct and operations

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Government accounting

It refers to the accounting for the government and its instrumentalities, focusing attention on the custody of public funds, the purpose or purposes to which those funds are committed, and the responsibility and accountability of the individuals entrusted with those funds

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Auditing

Involves the inspection of an entity’s financial statements or business process to ascertain their correspondence with established criteria

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Tax accounting

It is the preparation of tax returns and rendering of tax advice, such as the determination of tax consequences of certain proposed business endeavors

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Cost accounting

It is the systematic recording and analysis of the costs of materials, labor, and overhead incident to the production of goods or rendering of services

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Accounting education

Refers to teaching accounting and accounting-related subjects in an organized learning environment. It is a process of facilitating the acquisition of knowledge and skills regarding one or more of the other branches of accounting

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Accounting research

Pertains to the careful analysis of economic events and other variables to understand their impact on decisions. It includes a broad range of topics, which may be related to one or more of the other branches of accounting, the economy as a whole, or the market environment

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Financial accounting

Impact of fair value measurement on the financial statements

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Management accounting

Inventory management and its effect on earnings

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Auditing

Internal controls and modern technology

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Accounting education

Becoming a certified public accountant

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Sole or single proprietorship

Partnership

Corporation

Cooperative

Forms of Business Organizations:

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Business

It is an activity where goods or services are exchanged for money

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Entrepreneur or Businessman

A person who is engaged in business

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Sole or single proprietorship

It is a business that is owned by only one individual. It is the most common and simplest form of a business organization

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Sole proprietor

Business owner of single proprietorship

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Department of Trade and Industry (DTI)

A sole proprietorship is registered with?

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Partnership

It is a business that is owned by two or more individuals who entered into a contract to carry on the business and divide among themselves the earnings therefrom

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Partners

Business owners in the partnership

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Securities and Exchange Commission (SEC)

A partnership is registered with?

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Corporation

Owned by more than one individual. However, unlike a partnership, it is created by operation of law rather than a contract

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Shares of stocks

Ownership in a corporation is represented by?

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Stockholders or shareholders

Owners in the corporation are called?

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Corporation

It is an artificial being or a juridical person

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Securities and Exchange Commission

A corporation is registered with?

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Cooperative

It is also owned by more than one individual. It is formed in accordance with the provisions of The Philippine Cooperative Code of 2008

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Members

Owners of a cooperative

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Net surplus

Cooperative earns profit

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Patronage refund

Pertains to the profit that a cooperative returns to its owners

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Cooperative Development Authority (CDA)

A cooperative is registered with?

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Service Business

Merchandising (Trading)

Manufacturing

Types of Business according to activities

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Service Business

It is one that offers services as its main product rather than physical goods. It may offer professional skills, expertise, advice, lending service, and similar services

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Merchandising or Trading Business

It is one that buys and sells goods without changing their physical form

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Manufacturing Business

It is one that buys raw materials and processes them into final products

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Hybrid business

Engage in more than one type of activity