1 Basic Accountancy Pt. 1

Financial Reporting Standards Council

• accounting as “a service activity”

• function is to provide quantitative information, primarily financial in nature, about economic entities, that is intended to be useful in making economic decision

American Institute of Certified Public Accountants (AICPA)

Accounting is “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.”

American Accounting Association (AAA)

Accounting is “the process of identifying, measuring, and communicating economic information to permit informed judgements and decisions by users of the information.”

relevance, faithful representation

2 fundamental qualitative characteristic of useful financial information

relevance

qualitative charac. where financial information can make a difference in the decisions made by the users

predictive value, confirmatory value

A piece of information is relevant if it has _____ and _____.

predictive value

can be used as an input to processes employed by users to predict future outcomes

confirmatory value

if it provides feedback about previous evaluation

faithful representation

The numbers and descriptions match what existed or happened. The actual effects of the transaction shall be properly accounted for and reported in the financial statements.

completeness, neutrality, free from errors

3 characteristics of faithful representation

completeness

all information necessary for a user to understand the economic activity must be depicted including all necessary descriptions and explanations

neutrality

• enterprise cannot select information that is favorable to one party over the other

• information must be free from bias

free from errors

that there are no errors or omissions in the description of the transaction

Comparability, verifiability, timeliness, and understandability

qualitative characteristics that enhance the usefulness of a relevant and faithfully represented information

Comparability

ability to bring together for the purpose of noting points of likeness and difference

Verifiability

different knowledgeable and independent observers could reach consensus, although not necessarily complete agreement, that a particular depiction is a faithful representation

Timeliness

financial information must be available or communicated early enough when a decision is to be made

Understandability

financial information should be understandable to users who have a reasonable knowledge of business and economic activities and who are willing to study the information with reasonable diligence

internal and external user

2 users of accounting information

internal user

are individual or group who runs, manages, and operates the daily activities of the business. These are composed of sole proprietors, partners, management group, and employees.

External user

are individual or group of people that take interest in the accounting information, but they are not part of the organization. These are composed of investors, trade creditors, banks and other financial institutions, government, customers, and the public.

primary user, other user

2 user classification Under the Conceptual Framework for Financial Reporting

primary user

the financial information are the parties to whom general purpose financial reports are primarily directed. It includes existing and potential investors, lenders, and other creditors

other users

parties that find the general-purpose financial reports useful, but the reports are not directed to them primarily. These are the employees, customers, governments, and their agencies, and the public

single/sole proprietorship, partnership, corporation

3 forms of business organizations

single/sole proprietorship

It is a business owned by one individual only. It is the most basic form of the business organization since there are only minimal requirements to be submitted. Also, decisions are made faster since only one owner makes the decision and all profits will go to that owner only.

partnership

An association of two or more people who bind themselves to contribute money, property, and/or industry to a common fund, with the intention of dividing the profits among themselves. The Civil Code of the Philippines governs partnerships. A partnership is easier to organize than a corporation. Better decisions are made since there are few owners. It is also less complicated to operate than a corporation.

corporation

It is an artificial being created by operation of law, having the right of succession and the powers and attributes expressly authorized by law or incident to its existence. A corporation is the most complex form of business organization. The owners of a corporation are shareholders and certificates of stocks are issued as evidence of ownership in a stock corporation.

service, merchandising, manufacturing business

3 types of business operations

service business

It is the simplest form of business. This business renders services to customers or clients in exchange for a fee. Examples are operators of public transport, beauty parlors, security agencies, janitorial services, and professionals who practice their professions like doctors, nurses, accountants, lawyers, and engineers.

merchandising business

This business buys goods or commodities from suppliers and sells the same at a profit. Examples are sari-sari stores, groceries, supermarkets, hardware, drug stores, car dealers, real estate dealers, and appliance stores.

manufacturing business

This business is quite similar to a merchandising business because both sell the goods at a profit. The difference is that a manufacturing business produces the goods that it sells to its customers.