TRIMESTRAL EXAM REVIEWER FOR FUNABM1 - Definition and Terms

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Management

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