Basic Financial Accounting and Reporting

Accounting

system that measures business activities, processes that information into reports and communicates the results to the decision makers.

language of business

Accounting is called…

scorekeepers of business

accountants can be called…

-it is a service activity

-its function is to provide quantitative information, primarily financial in nature

definition of accounting (1)

it is an information system that measures, processes, and communicates financial information about an economic entity.

definition of accounting (2)

it is the process of identifying, measuring, and communicating economic information to permit informed judgments and decisions by users of the information.

definition of accounting (3)

it is the art of recording, classifying and summarizing in a significant manner and in terms of money

definition of accounting (4)

-important to accounting pedagogy, policy and practice.

-to better understand our present and to forecast our future.

evolution of accounting

Known as the "Father of Accounting and Bookkeeping." He published "Summa de arithmetica, geometria, proportioni et proportionalita" in 1494, which contained the first printed description of double-entry bookkeeping.

Luca Pacioli

-selling people’s time

-hiring skilled staff and selling their time

-software development, accounting, lega;

Services (activity, structure, example)

-buying and selling products

-buying a range of materials and manufactured goods and consolidating them

-wholesaler and retailer

Trader (activity, structure, example)

-designing products, aggregating components and assembling finished products

-taking raw materials and using equipment and staff to convert them into finished goods

- vehicle assembly, construction, engineering, electricity, water food and drink, chemicals, media, pharmaceuticals

Manufacture (activity, structure, example)

-growing or extracting raw materials

-buying blocks of land and using them to provide raw materials

-farming, mining, oil

Raw Materials (activity, structure, example)

• selling the utilization of infrastructure

• buying and operating assets

• transports, hotels, telecoms, sports facilities, property management

Infrastructure (activity, structure, example)

• receiving deposits, lending and investing money

• accepting cash from depositors and paying them interest

• bank and investment house

Financial (activity, structure, example)

• pooling premiums of many to meet claims of a few

• collecting cash from many customers

• insurance

Insurance (activity, structure, example)

services, trader, manufacture, raw materials, infrastructure, financial, insurance STMRIFI

types of business

sole proprietorship, partnership, corporation SPC

forms of business organization

• single owner called proprietor - generally is also the manager

Sole Proprietorship

Sole Proprietorship

tend to be a small service type (physicians, lawyers, accountants)

Sole Proprietorship

receives all profit, absorbs all losses, responsible for all debts of the business

business owned and operated by 2 or more persons who bind themselves to contribute…

Partnership

Partnership

each partner is personally liable for any debt incurred by the partnership

Partnership

accounting considered this as a separate organization

it is a business owned by its stockholders

Corporation

Corporation

it is an artificial being created by operation of law

they are not personally liable for the corporations debt

Financing Activities, Investing Activities, Operating Activities FIO

Activities in Business Organizations

Financing Activities

organization that requires financial resources to obtain other resources used to produce goods and services.

Financing Activities

they compete for these resources in financial market

Financing Activities

primary sources of this organization are mostly the owners and creditors

Investing Activities

managers use capital from financing activities to acquire other resources used in the transformation process

Investing Activities

transform resources from one form to different form

an efficient business

this is one that provides goods and services at low costs relative to their selling prices

effective business

successful in providing goods and services demanded by the customer

Investing Activities

it involves the selection and management including disposal and replacement of long term resources

Investing Activities

this business organization includes buying land, equipment, buildings and other resources that are needed in the operation of the business

Operating Activities

it involves the use of resources to design, produce, distribute, and market goods and services

Internal and External Users

Users of accounting information

Owners, Managers, Employees OME

Internal Users

Investors, Creditors, Government, Customers ICGC

External Users

Recording, Classifying, Summarizing, Interpreting RCSI

Phases of Accounting

Recording

Record each transaction in the journal

Classifying

transfer journal entries to the ledger(book of final entry), organizing them by account

Summarizing

compiling and presenting the classifies financial data in a clear, concise, and usable format primarily through financial statements

Interpreting

analyzing and explaining the meaning of the financial information presented in the financial statements. it’s where raw numbers turn into insights that support business decisions

• statement of financial position

• income statement

• statement of changes in equity

• statement of cash flows

• notes to financial statement

The financial statements

• dual aspects of every transaction- Dr. Cr.

• three main accounts

• use of journals and ledgers

• balancing principle

• transparency and accuracy

Key concepts of pacioli’s double entry system

• entity concept

• periodicity concept

• stable monetary unit concept

• going concern concept

Fundamental concepts of accounting

Entity Concept

• The entity concept states that the business is separate from it’s owner(s) and other entities. All financial transactions are recorded from the point of view of the business itself, not the personal finances of the owner.

Entity Concept

• To ensure that only business-related transaction are recorded in the business’s books, keeping personal and business finances separate

Periodicity Concept

• The periodicity concept (also called time period assumption) means that a business’s financial activities can be divided into regular, consistent time periods for reporting purposes (e.g., monthly, quarterly, annually)

Periodicity Concept

• To allow for timely and consistent financial reporting and analysis of performance over specific periods

Stable Monetary Unit Concept

• This concept assumes that the value of money remains stable over time and that all financial transaction are recorded using a common currency (e.g., Philippine Peso,) ignoring inflation of definition

Stable Monetary Unit Concept

• To maintain consistency in recording and comparing financial data.

Going Concern Concept

• The going concern concept assumes that a business will continue operating in the foreseeable future and will not be forced closer or liquidate.

Going Concern Concept

• To justify valuing assets at cost rather than liquidation value, and to prepare financial statements assuming ongoing operations.

Objectivity

Reliability. Use of factual evidence

Historical Cost

Stability in valuation. Record assets at original cost

Revenue Recognation

Accuracy in income reporting. Recognize revenue when earned

Expense Recognition

Profitability accuracy. Math expenses with revenue

Adequate Disclosure

Transparency. Reveal all relevant information

Materiality

Relevance. Ignore trivial details

Consistency

Comparability. Use same methods over time