[FDNACCT] Unit 1: Introduction to Accounting

Accounting

The process by which financial information about a business is classified, recorded, summarized, interpreted, and communicated to owners, managers, and other interested parties. (Price et al., 17th ed)

Accounting

the art of recording, classifying, and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least of financial character, and interpreting the results thereof (AICPA)

Accounting

An art and a service primarily engaged in providing financial information to interested users in making economic decisions.

Accounting

Deals with financial information and transactions.

Generally Accepted Accounting Principles (GAAP)

A common set of rules, procedures, practices, and standards followed in the preparation and presentation of financial statements.

Monetary

Assumes that only transactions that can be expressed in monetary terms are recorded.

Entity

Assumes that a business unit is separate and distinct from its owner/s and requires that business's accounting records should always be kept separate from the owner's personal accounting records.

Public
Private
Governmental

3 Areas of Accounting

Public Accounting

Providing accounting services for other companies, including auditing, tax accounting, and management advisory services.

Auditing

deals with the review of financial statements to assess their fairness and adherence to accounting principle

fair

means that a transaction is accounted for in accordance with accepted accounting rules

Tax Accounting

deals with tax compliance and tax planning

Tax compliance

preparation and audit of tax returns

Tax planning

giving advice to clients on how to structure their financial affairs in order to reduce tax liability

Management advisory services

deals with helping clients to improve their information system and business performance

Private Accounting

Working for a single business entity in a specific industry.

Governmental Accounting

Keeping financial records and preparing financial reports for the national government, its various departments, and local government units.

Financial
Auditing
Cost
Managerial
Government
Tax
Accounting Education
Accounting Information System
Forensic

9 Branches of Accounting

Financial Accounting

Provides general-purpose financial reports to various external users.

External audit

an independent third party that reviews a company’s financial statements to assess their fairness and adherence to accounting principles

Internal audit

evaluate the company's policies and procedures to identify and weakness, mismanagement, waste, or fraud

Cost Accounting

Accounting and classifying costs and expenses to determine the total cost of a product/service.

Managerial Accounting

Provides internal financial reports, mainly to managers, for decision-making.

Tax Accounting

Prepares tax returns and ensures tax compliance.

Accounting Education

Accounting for the academe and research.

Accounting Information System

A system that a business uses to collect, store, manage, process, retrieve, and report its financial data that are used by various internal users

Forensic Accounting

focuses on legal affairs such as inquiry into fraud, legal cases, disputes and claims resolution

Existing investors
Potential investors
Lenders
Suppliers/Creditors

4 Primary Users of Accounting Information

Existing investors

primary user; monitor business performance to check return on their investments

Potential investors

primary user; monitor business performance to assess risk and reward of future investments

Lenders

primary user; ensure that the business is capable of repaying a loan and determine the terms of the loan

Suppliers/Creditors

primary user; assess the ability of the business to pay its bills for extending credit and setting credit terms and credit limit

Owners
Managers
Employees

3 Internal Users of Accounting Information

Owners

internal user; monitor business performance to check return on their investment

Managers

internal user; evaluate the results of the company’s operations to plan and make decisions for the future

Employees

internal user; ensure that the business can pay salaries and other benefits

Tax authorities
Regulatory agencies
Customers
Employee unions
Trade associations
Financial Intermediaries

6 External Users of Accounting Information

Tax authorities

external user; collect taxes (e.g., employee tax, sales tax, property tax, business tax, etc.)

Regulatory agencies

external user; oversee the financial information provided by public companies (e.g., The Securities and Exchange Commission (SEC))

Customers

external user; check to see if they can rely on continued service or supply of goods

Employee unions

external user; negotiate salary increases, benefits, and profit-sharing

Trade associations

external user; provide summary reports to assess the business and the industry

Financial analysts
Stock brokers
Mutual fund companies
Credit-rating agencies

4 Financial Intermediaries

Financial analysts

external user; financial intermediary; provide summary reports to assess the business and the industry for investment purposes

Stock brokers

external user; financial intermediary; assess returns of current and future stock investments

Mutual fund companies

external user; financial intermediary; monitor business performance to assess risk and reward of current and future investments

Credit-rating agencies

external user; financial intermediary; provide summary reports to assess the credit-worthiness of public companies (ability to make timely payments of principal and interests)

Sole Proprietorship
Partnership
Corporation

3 Forms of Business Organizations as to Ownership

Service
Merchandising/Trading
Manufacturing

3 Forms of Business Organizations as to Activity

Service

a business that provides service

Merchandising/Trading

a business that buys and sells goods

Manufacturing

a business that converts raw materials to finished goods

unlimited liability

owner is solely liable for all business debt

Sole proprietorship

A business entity owned by an individual trading alone in his/her own name, or under a recognized business name, who solely takes all business profits and solely assumes all business losses

1

number of owner/s in sole proprietorships

Sole Proprietorship

business ends when the owner:

• passes away

• unable to carry on business operation

• decides to close the business

Partnership

A business entity owned by two or more individuals who enter into a contract, to conduct business (or practice a profession) and divide profits among themselves

partners

term for the owners of partnerships

partnership agreement

a contract that covers provisions such as:

• Capital invested

• Profit & loss sharing

• Interest on capital

• Interest on drawings

• Salary and bonus for partners working in the partnership

• Interest given to a partner who extends loan to the partnership

• Responsibilities of the partners in managing the business

regulated professions

cannot be established as a corporation because this will go against public policy by giving practicing professionals a way to avoid personal liability

2 or more

numbers of owner/s in partnerships

Partnership

owners are responsible individually and jointly for the business debts

Partnership

business ends by:

• the termination of the definite term or particular undertaking of the business

• the express will of any owner, acting in good faith

• the death, insolvency, civil interdiction of any owner

• decree of court (Article 1830, Civil Code of the Philippines)

Corporation

a separate legal entity that has a legal right to own property and conduct business in its own name

1 or more

number of owner/s in corporations

Corporation

Can continue indefinitely and ends only when:

• business goes bankrupt

• when the stockholders vote to liquidate

stockholders

term for owners in corporations

limited liability

owners are not responsible for the business debts; their liability is limited to the amount of their individual investment

separate legal entity

means that:

• the business can sue and be sued in itself

• the business can carry out transactions in the business name

• the business needs to pay company tax (corporate tax)

Accounting

to provide different users with financial information to make economic decisions

Language of business

Accounting is sometimes called the _______

Luca Pacioli

the Father of Accounting

Luca Pacioli

was a monk, mathematician, and friend of Leonardo da Vinci, and published the first known book on double-entry bookkeeping entitled Summa De Arithmica, Geometria, Proporitioni et Proportionale

American Institute of Certified Public Accountants

according to this organization, accounting is defined as the art of recording, classifying and summarizing in a significant manner and in terms of money, transactions and events that are, in part at least, of a financial character, and interpreting the results thereof

Generally accepted accounting principles

must be followed by publicly owned companies and are changed and refined in response to changes in the environment in which businesses operate

Accounting

deals with providing financial statements to aid users in making decisions

Accounting

identifies and records business activities

Accounting

aids a variety of users in making better decisions

Accounting

communicates information about business activities