Reviewer combining almost... everything. (thank you kristine your notes hard-carried) Purple text+highlight = start of a new module DISCLAIMER: If you're using knowt's study/practice test feature, I suggest choosing multiple choice only. Even then, i dont know how knowt will make the tests for you so i do apologize if that feature doesn't help. Goodluck on your exams; i'm getting cooked because i dont understand my professor's lessons
Management
Planning, organizing, staffing, directing and controlling the activities of an organization to realize its objectives.
Vision of a business
Contribution to the society; Businesses should make a difference in the world
Accounting
An information scienced used to collect and organize financial data for organizations and individuals
Helps organize and represent financial information
Helps individuals and organizations make financial decisions
Uses the past to help take action in the present and change the future
How Accounting Works
Organizes financial information
Bookkeeping
Responsible for all info collected and taken into consideration
Ensures that financial information has been gathered systematically
Financial Accounting
Prepared for the company’s ownership, its lenders, financial analysts, and other external stakeholders
Highly regulated; prepared for viewing by third part users; showed be able to read without insider information
Prepared according to specific set of rules, renders it comparable with the one prepared by other companies which in turn facilitates investors and lenders
Specific set of rules = Accounting principles
Aims to allow externals (e.g. banks, investors) to get an idea of your business
How much sales you had, was the company profitable, how it was financed, etc.
Managerial Accounting
Only for insiders
Not defined by accounting principles
More detailed than financial accounting
Strategic information that shouldn’t be seen by firm’s competitors
Looks into:
Pricing
Competition
Marginality
Budgeting
Interrelated with financial accounting; therefore, it is a frequent practice to reconcile managerial and financial accounting figures
Tax Accounting
Determines the amount of taxes the company has to pay
A technical field that varies for every single legislation in the world
For profit organization
BUSINESS organization
Non-profit organization
Established for social, charitable, governmental, or religious purposes
Sole/Single Proprietorship
Owned by ONE person
This one person is legally responsible for debts and taxes of the business
Ends when person cannot carry on, dies, or closes the firm
Partnership
Two or more persons combined to contribute assets (e.g. money, equipment, property, industry) to a common fund
Divides profits among the persons
Ends when person(s) withdraws, dies, or closes the firm
Can be individually and jointly responsible for debts
Corporation
Artificial being created by law
Right of succession
Possesses powers, attributes, and properties authorized y law or essential to its existence
Owned by one or thousands
Continues definitely
Ends when business goes bankrupt or stockholders vote to liquidate
Stockholders can lose only the amount invested
Cooperative
An autonomous, registered association of persons.
Members share a common bond of interest.
Voluntarily joined to meet social, economic, and cultural needs.
Members contribute equitably to capital.
Members patronize products and services.
Accept a fair share of risks and benefits.
Operates according to universally accepted cooperative principles.
Both partnership and corporation…
Have separate legal entity
Service business
ex. Delivery service, barbershop
Trading business
Final product is ready already (buy and sell)
ex. hardware store, furniture store, appliance store, grocery, department store
Manufacturing business
Conversion takes place (raw materials to final product)
ex. San Miguel Corporation, UNILAB
Accounting is the language of the business because…
It is a means of communication
Accounting is an art of…
Recording, classifying, summarizing, and interpreting financial transactions in monetary terms.
— American Institute of Certified Public Accountants (AICPA)
Accounting is the process of…
Identifying, measuring, and communicating economic data to enable informed decisions.
— American, Accounting Association (AAA)
Accounting’s function is to…
provide quantitative financial information about economic entities for decision-making.
— Accounting Standards Council (ASC)
Luca Pacioli
Father of Accounting
Wrote “Summa de Arithmetica, Geometrica, Proportioni et Proportionalita” in 1494
Florence approach
Amatino Manucci
Prevailing approach for journal entries
Venetian approach
Andrea Bargarigo
prevailing approach for ledger postings
Debit
Recorded on the left
“he owes”
Credits
Recorded on the right
“he trusts”
Philippines Accountancy Act of 2004 (R.A. 9298)
Governs the practice of accounting in the Philippines
Professional Regulatory Board of Accountancy (PRBOA)
The body authorized to establish rules and regulations for supervising accountancy registration and practice in the Philippines.
under the supervision & administrative control of the Professional Regulation Commission (PRC) - issuer of accounting license
Public accounting
Private firm, open practice
Open to anyone who needs their services
ex. KPMG, Deloitte, EY, PWC, Grant Thornton
Private accounting
Accountant working for a company
Not accepting clients
ex. Ayala, San Miguel, Metro Pacific Investments, P&G, JP Morgan Chase & Co, Nestle
Government accounting
ex. Bangko Sentral ng Pilipinas, Landbank, DBP, Department of Budget and Management, Securities and Exchange Commision, Commission on Audit, Department of Finance, Bureau of Internal Revenue
Accounting education/academe
Accounting faculty typically employed by an educational institution such as a university
ex. faculty, research
Specialized areas
ex. forensic accounting, info. tech, environmental accounting, international accounting
External Users
People OUTSIDE the company who rely on financial info to make decisions
ex. Investors, Lenders, Creditors, Tax Authorities, Regulatory Agencies, Public
Investors
External
People who invest money in a business by buying shares of stock
Provide funds to the business and expect to receive dividends (a share of the profits)
Lenders (Banks)
External
Banks or financial institutions that lend money
Use financial information to decide whether to give a loan and to determine the terms (e.g. interest rates, payment periods)
Creditors
Companies that supply goods and services on credit (suppliers)
Use financial information to assess if the company can pay its bills and to set a credit limit for the company
Tax Authorities
National and local tax offices
Use financial information to determine taxes the business needs to pay (e.g. income taxes, business taxes like VAT, local taxes)
Regulatory Agencies
Securities and Exchange Commission (SEC)
Supervise the corporate sector, capital markets, securities, and investing public to ensure everything is legal and fair.
Public
People who buy products or services from the company
Look at financial information to check the business’s financial health and see if it will stay open to provide services and support
Internal Users
People WITHIN the company who use financial info to run the business efficiently
ex. Owners, managers, other officers, labor unions, employees
Owners, Managers, Other Officers
People who own/manage the business
Use financial info to make decisions about business operations and monitor its financial condition and performance
Employees, Labor Unions
Use financial info to negotiate wages and benefits and to monitor the profitability of profit-sharing plans
Generally Accepted Accounting Principles (GAAP)
Rules and standards for preparing and presenting financial statements, guiding the recording, measuring, and reporting of financial information. They serve as essential guidelines for financial reporting, having evolved from experience and practical necessity. The Philippines benchmarks its standards against International Accounting Standards (IAS) and International Financial Reporting Standards (IFRS). Publicly accountable companies, including those listed on the Philippine Stock Exchange (PSE), and financial institutions must follow these standards to ensure compliance and transparency in financial reporting.
Fundamental Qualitative Characteristics
Necessary
Relevance and Faithful Representation
Relevance
CAPABLE OF MAKING A DIFFERENCE to decisions made by users
Financial info is capable of making a difference in decision if it has predictive, confirmatory value, or both.
Confirmatory Value
Provides feedback about previous evaluations
Can be used as an input to processes employed by users to predict future outcomes
Faithful Representation
Information should accurately show what it claims to represent.
Should be Complete, free from error, and neutral
Completeness
Includes all the information needed so users can fully understand what is being shown, with all necessary details and explanations.
Free from error
There are no mistakes or missing parts in describing what’s being shown, and everything used to create the information is accurate.
Neutrality
The information is presented fairly and without any favoritism or bias.
Enhancing Qualitative Characteristics
Not entirely necessary but good to have
Verifiability, Comparability, Understandability, Timeliness
Verifiability
Different experts can agree that the information shown is a true and accurate representation, even if they don’t agree on everything.
Comparability
Identify and understand similarities in, and differences among items
Understandability
Presenting information in a way that is clear and easy to understand for people who know a bit about the topic.
Timeliness
Making sure the information is ready and available when needed, so it can actually help in making decisions.
Underlying assumptions
Basic ideas that everyone agrees on to keep financial information consistent and clear.
Separate Economic Entity, Going Concern, Monetary Unit, Periodicity/Time Period, Accrual
Separate Economic Entity
Assumes that a business is separate from its owners
The business’s financial records should be kept separate from the owners’ personal finances.
Going Concern
Assumes that a business will keep operating for the foreseeable future.
Financial statements are prepared knowing that the business will not shut down soon and no plans to do so.
Monetary Unit (Stable monetary)
Financial records are kept in monetary terms and value of money remains stable.
Only things that can be measured in money are included in financial statements
Unlike cash basis where income and expenses are recorded when money is received or paid
Periodicity/Time Period
Assumes that a business’s life can be divided into time periods, like quarters or years (usually years)
Income and expenses should be reported for these periods
Accrual
Records revenues and expenses when they HAPPEN not just when cash is received or paid
Allows for tracking what the business is owed and what it owes
Historical Cost
Assets — recorded at their original cost when bought.
Long-term assets: this cost stays the same in the records, giving info based on the price paid at the time
Revenue Recognition
Recorded when services are PERFORMED or goods are DELIVERED, not when cash is received.
Matching
Revenues and the costs to earn them are recorded in the same period.
Helps in figuring the net income or loss by matching what was earned with what was spent
Full Disclosure
All important info that could affect understanding of a company’s financial health should be included in the financial statements or notes.
Statements should be ACCURATE and COMPLETE.
Objectivity Principle
Accounting records should be based on clear, verifiable evidence like official receipts to ensure accuracy.
Materiality Principle
Importance of an item affects how it’s valued.
ex. small items like staplers are listed separately from big assets like land
Consistency
Accounting methods should stay the same from one period to the next.
ex. If you use a certain method for depreciation last year, use the same method this year.
Accounting Constraints
Companies must follow GAAP (Generally Accepted Accounting Principles)
Allowed some flexibility in how they report their finances due to practical limitations
Not breaking rules okay bro
Materiality Constraint
Info — considered important if leaving it out or getting it wrong can affect the decisions of people using the financial reports
How significant something is in the context of the company’s financial situation
ex. A small expense might be recorded immediately rather than spread out over time.
Conservatism/Prudence Constraint
Being cautious and choosing methods that might show lower asset values or income when unsure
Ensures that assets and income aren’t overstated, and liabilities and expenses aren’t understated.
Cost-benefit Relationship
When reporting financial info, the cost of gathering and preparing that info should be worth the benefits it provides.
Benefits should be greater than the costs involved in following the accounting rules.
Basically, benefit > cost
Industry Practice
Some industries have special practices that differ from regular accounting rules
ex. Farmers might report the value of their produce based on current market value instead of historical cost because tracking all farming costs is too difficult.
Financial Statements
Reports that show the info collected in financial accounting to the users
Clear picture of a company’s financial health and performance
Purpose of Financial Statements
Main goal: Provide useful information about a company’s financial status, performance, and cash flow to help people make informed decisions
Also show how well management has used the company’s resources
Statement of Financial Position
Shows the company’s financial health at a specific time, including assets (what the company owns), liabilities (what it owes), and equity (the owner’s share)
Statement of Profit or Loss
Shows how much money the company made and spent over a certain period, showing its overall performance
Statement of Changes in Equity
Details all changes in the owner’s equity during a period, like investments or withdrawals
Statement of Cash Flows
Shows how cash is used in the company’s operations, investments, and financing activities, including:
Cash inflows (money coming in)
Outflows (money going out)
Notes to Financial Statements
Provides extra details about the financial statements, explaining accounting methods, policies, and specific transactions.
Asset
Something valuable that a company owns or controls
Item that can help the company make money FRFR OMG!
ex. furniture, vehicle, computer
Liability
Debt or obligation the company has to pay/fulfill
Responsibility that is unavoidable
ex. loan, bills
Equity
What’s left after subtracting liabilities from assets
Owner’s share of the company’s value
Income
When a company makes money or gains value, either by increasing its assets or reducing its liabilities
Shows how much the company is earning
Expenses
Costs that reduce the company’s value, either by reducing assets or increasing liabilities
Shows how much the company is spending
Normal Operating Cycle
Time it takes for a company to acquire assets, process them, then turn back into cash
Hard to tell how long the cycle is; ASSUMED TO BE 12 MONTHS
Average time needed to convert cash into more cash basically
Cash > merchandise > account receivable > cash
Current Asset
Assets that a company expects to turn into cash, sell or use up within its normal operating cycle or within 12 months after the reporting period.
Non-current Asset
Assets that are expected to be held for longer than a year
Cash
Current Asset
Money available for immediate use in current operations
e.g. operating expenses, current liability, acquisition of current asset
Accounts Receivables (Trade and Other Receivable)
Money owed to the company by customers who purchased ON CREDIT.
Company’s right to receive payment
keywords: “sold on account”
Allowance for Doubtful Accounts
Estimate of the amount of accounts receivable that the company DOESN’T EXPECT TO COLLECT
Contra account to reduce total accounts receivable, reflecting potential bad debts
Notes Receivable
Money owed to the business based on a formal written promise (promissory note) to pay at a future date
Interest receivable (extra money paid for borrowing
Advances to Employees
Cash given to employees in advance—settled once the related task is completed
Used for specific work-related activities
Accrued Income
Income that has been earned but not yet received in cash
Represents revenue to be collected later
Inventory
Goods available for sale in the regular course of business
Important for both merchandising and manufacturing businesses
Prepaid Expenses
Expenses paid in advance for assets that will be used or consumed later
e.g. supplies, rent, insurance, or advertising
Prepayments for services or goods to be used in the future
Investments in Trading Securities
Also known as marketable securities, these are short-term investments in stocks.
Held with the intent of selling them in the near future for profit.
Non-current assets
Assets that a company plans to hold onto for more than a year.
Used to help the business operate and are not intended to be sold in the short term