IBA TERMS

Accounting

often called the language of business because it is used in describing all types of business activities.

BASIC ACCOUNTING EQUATION

Assets= Liabilities+ Owner’s Equity

Expanded Accounting Equation

Assets= Liabilities+ Owner’s Equity (+ Revenues- Expenses)

Users of Financial Statements

 Investors  Employees  Lenders  Suppliers and other trade creditors  Customers  Government and their agencies  Public

Service concern

the business derived its income from services rendered to clients

Merchandising

engaged in buying goods or commodities or any form of finished products and sell these at a profit.

Manufacturing

engaged in buying of raw materials and supplies to be processed or manufactured.

Sole proprietorship

Owner’s Equity

Partnership

Partner’s Equity

Corporation or Hybrid company

Stockholder’s Equity or Shareholder’s Equity

Cooperatives

Member’s Equity

Accounting Principles

are the rules that an organization follows when reporting financial inforamtion

economic entity principle 

an accounting principle that states that a business entity’s finances should be keep separate from the owner personals.

Monetary unit principle

the assumption that money itself treated as a unit of measurement, and that all transactions or economic events recorded in accounts of a business can be expressed and measured in monetary terms by a currency.

Specific time period assumption 

accounting principle which states that  a business should report their financial statements appropriate to a specific time period.

Full disclosure principle

a concept that requires a business to report all necessary information about their financial statements and other relevant information to any persons who are accustomed to reading this information.

going concern principle

a fundamental principle of accounting. it assumes that during and beyond the next fiscal period a company will complete its current plans, use its existing assets and continue to meet its financial obligation.

Matching principle

requires that revenues and any related expenses be recognized together in same reporting period.

Accrual Basis 

a method of accounting where revenues and expenses are recorded when they are earned, regardless of when the money is actually received or paid.

Revenue Recognition

recognized when they are earned regardless of when they are received

Expense Recognition 

recognized when they are INCURRED regardless of when they are PAID

Exchange Price or Cost Concept

Assets/services received will be recorded at the cash amount or equivalent at the time that an asset is acquired.

Quantifiability of peso

only transaction that can be measured in money  Philippine peso reported in books.

Stability of peso 

P1 today is same with P1 tomorrow, change in purchasing power of Peso ( inflation or deflation) is not accounted for.

Expense recognition

recognized  when they are incurred regardless of when they are paid.

Materiality 

refers to the relatives size of an amount. Relatively large amounts are material, while relatively small amounts are not material. requires professional judgements.

Conservatism

a principle that requires company accounts to be prepared with caution and high degrees if verification. all probable losses are recorded when they are discovered, while gains can only be registered when they are fully realized.

Consistency

requires that companies use the same accounting methods and principles for similar transactions over time, ensuring comparability and reliability in financial reporting.

Objectivity Principle

this principle requires that accounting records should be based on reliable and verifiable data as evidence of transactions.

Substance Over Form

means recording financial transactions to truly represent the essence in statements, focusing on economic reality rather than just legal appearances.

It involves complete disclosure and aims to reveal the genuine intent of transactions

Relevance

is the concept that the information generated by an accounting system should impact the decision-making of someone perusing the information.

Confirmatory Value

means that the information provides feedback on previous evaluations.

Predictive Value

refers to the fact that quality financial information can be used to base predictions, forecasts, and projections on.

Faithful Representation 

implies that financial information faithfully represents the phenomena it purports represent. Complete, Neutral, Free from Error.

Verifiability 

should be possible for an organization’s reported financial results to be reproduced by a third party, given the same facts and assumptions.

Direct verification

means verifying an amount or other representation through direct observation, for example, by counting cash.

Indirect verification

means checking the inputs to a model, formula or other technique and recalculating the outputs using the same methodology.

Neutrality

Financial statements should be fairly stated, free from bias and from material errors.

Comparability

level of standardization of accounting info that allows the financial statements of multiple organizations to be compared to each other.

Understandability

implies that prepares of information have classified, characterized, and presented the information clearly and concisely.

Timeliness

how quick information is available to users of accounting information. less timely (thus resulting in older information), the less useful is for decision - making.

Balance sheet

- Also called statement of financial position or statement of financial condition that shows the financial position at a certain date or a specific date

As of ( particular date)

Three sections 

- Assets, Liabilities and owner’s equity

Income Statement 

- a FS which shows the performance of the enterprise for a given period of time

-Used to be known as the “ results of operations” of the enterprise consisting revenues, expenses and operating results which would be either be profit or loss.

-For the (month, year, quarter) ended

Statement of Changes in Owner’s Equity 

a FS that summarizes the changes in equity for a given period of time

The beginning equity of the owner is increased by the additional investment and profit, and it is decreased by withdrawal and loss.

For the (month, year, quarter) ended

Assets

are economic resources that are expected to benefit future activities of the organization

Current Assets

Refers to all assets that are expected to be realized, sold, and consumed within the enterprise normal operating cycle.

Liabilities

are the entity’s economic obligations to non-owners

Owner’s equity

is the residual interest in the assets of the enterprise after deducting all its liabilities

Cash

an account used to record the amount of money received by the business that is composed of bills and coins, checks and postal money order.

Cash equivalents

short-term, highly liquid instruments that are readily convertible into cash

Petty Cash Fund

for petty or small expenses

Notes Receivable

receivable supported by promissory note

Accounts Receivable

used to record sales on account in the ordinary course of the business customers and clients of goods and services

Allowance for Doubtful Accounts

a valuation account which shows the estimated uncollectible account of A/R. (contra assets- deduction to accounts receivable)

Accrued Income

the amount of income earned but not yet collected

Advances to employees

collectible from employees for allowing them to make cash advances which are deductible against their salaries or wages.

Inventories

asset held for sale in the ordinary course of business

Prepaid Expenses

expenses paid in advance such as prepaid rent, prepaid insurance, prepaid interest, prepaid advertising, etc.

Unused Supplies

other supplies purchased for use but are left on hand and still unused.

Non-Current Assets (Fixed assets)

Long- term investments

Property and Equipment

tangible assets which are permanent in nature and used in business operations

Land

not depreciated, it is expected to be useful to business for indefinite period of time.

Building

finished construction owned by the business where operations and transactions took place

Equipment, Furniture and Fixtures

depreciable assets

Accumulated Depreciation

contra asset, deduction from P&E

Intangible assets

(patent, copyright, franchise, trademarks, etc.

Current Liabilities

Trade and other payables, short term maximum 1 year

Accounts Payable

financial obligation of an enterprise that constitutes an oral or verbal promise to pay

Notes Payable (short-term) 

evidenced by a promissory note, the enterprise is the one who issued note

Accrued Expenses

expenses incurred by the enterprise but are not yet paid

Pre-collected or Unearned Income

obligations of the business that will be settled when certain services are rendered.

Non- Current Liabilities

long-term obligation of the enterprise which are due and payable for more than one year

Notes Payable (long-term)

requires payment for more than one year

Mortgage Payable

requires a fixed or tangible to be pledged as a collateral to ensure payment

Withdrawal

owner’s withdrawal is likewise indicated by the use of the owner name with the word drawing

Professional fees or service revenue

for service company / Income

Net income/Profit

excess of income over total expenses

Profit (Loss) 

if expenses exceed the revenues, it is called a “loss”

Expenses include ordinary

1. Cost of sales

2. Advertising expense

3. Rent expense

4. Salaries expense

5. Income tax

6. Repair expense/repair and maintenance

7. Uncollectible accounts/ Bad debts

8. Depreciation expense

9. Insurance expense

10. Taxes and licenses

11. Amortization expense

12. Office supplies expense

13. Utilities expense

14. Miscellaneous expense

Fiscal year

an accounting period of twelve months starting with any month except January and ending in any month except December.

Calendar Year

an accounting period of twelve months starting from January to December.

Accounting

is 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 result thereof.

Bookkeeping

is the process of recording “systematically” the business transactions in a chronological manner.

Recording

is a phase of accounting which involves the routine and mechanical process of writing down the business transactions and events in the books of accounts in a chronological manner called journalizing.

Chronological

arranged in order to the date occurrence

Journalizing

to be recorded in journal Note: Before recording transactions, each transaction must be identified, analyzed and measured.

Classifying

is a phase of accounting which involve sorting of grouping of similar and interrelated transactions and events.

Posting

is the process of transferring the entries from the journal to ledger. Example for this is the T-Account where in the left side is debit while in the right side is credit.

Left side

Debit

Right side

Credit

Summarizing

is a phase of accounting which involves the completion of the financial statements and the accounting requirements as well.

Interpreting

is the phase of accounting which involves “analytical and interpretative works”.

Business Transactions

are the business activities that can may affect the assets, liabilities and owner’s equity or what we called accounting elements.

Buyer

Purchased or Bought, it means the business is the

Seller

Purchased or Bought, it means the business is the

Paying

Paid means the business is ———- (and there’s a cash involve)

Collected

it means the business is collecting

Rendered Service

means the business is rendering service (Service Revenue)

initial investment (Capital)

When the owner Invested it means the business made an

Withdrawal (Drawing)

When the owner got cash from the bank, means that there is