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ACCOUNTING
A service activity. Its function is to provide quantitative information, primarily financial in nature about economic entities that is intended to be useful in making economic decisions.
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 a financial character, and interpreting the results thereof. (AICPA)
the process of identifying, measuring and communicating economic information to permit informed judgment and decision by users of the information. (AAA)
FOUR PHASES OF ACCOUNTING
1. Recording or Journalizing
2. Classifying
3. Summarizing
4. Interpreting
Recording or Journalizing
involves writing the business transactions in a systematic and chronological order in the proper accounting books.
Classifying
recorded business transactions are sorted and grouped according to nature and similarity.
Summarizing
grouped business transactions are summarized through financial statements.
Interpreting
the summarized business transactions are interpreted to evaluate the economic performance and condition of the business to be used in making economic decisions.
THREE PROCESSES IN ACCOUNTING
1. Identifying
2. Measuring
3. Communicating
Identifying
Business transactions are identified whether they are accountable or quantifiable, in other words events can be measured, and thus, only economic activities are recognized as operations.
Measuring
In order that accounting information will be useful, it must be expressed in terms of a common financial denominator. It is done through the assignment of peso amounts to economic activities.
Communicating
It involves organizing and providing information to all possible users to make intelligent and sound decisions. It is in this context that accounting has been identified as the “language of the business”.
ACCOUNTING CYCLE
It is a sequence of accounting procedures which is used to record, classify and summarize the business transactions.
USERS OF FINANCIAL INFORMATION
1. INTERNAL USERS
2. EXTERNAL USERS
INTERNAL USERS
- are those persons or groups with the business organization
INVESTORS/OWNERS
They are the primary users of accounting information.
They are the providers of capital.
EMPLOYEES
The profitability and stability of the business are of utmost importance to employees.
EXTERNAL USERS
- are those stakeholders outside the business organization
LENDERS
One of the sources of funds/capital of the business.
FINANCIAL ACCOUNTING
is the broadest branch and is focused on general purpose financial statements.
MANAGERIAL ACCOUNTING
emphasizes the preparation and analysis of accounting information within the organization.
provides timely and relevant information for those internal users of accounting information, such as the managers and employees in their decision-making needs.
GOVERNMENT ACCOUNTING
This branch of accounting deals with how the funds of the government are recorded and reported.
AUDITING
The area of accounting that involves analytical work of independent examination of the financial statements for the purpose of expressing an opinion as to the fairness of their presentations
Two types of auditing:
External - The examination of financial statements by an independent CPA with the purpose of expressing an opinion as to fairness of presentation and compliance with the generally accepted accounting principles (GAAP).
Internal - Focuses on the following:
Effectiveness and efficiency of operations
Reliability of financial reporting
Compliance with laws and regulations.
TAX ACCOUNTING
It helps clients follow rules set by tax authorities.
It includes tax planning and preparation of tax returns.
It also involves determination of income tax and other taxes, tax advisory services such as ways to minimize taxes legally, evaluation of the consequences of tax decisions, and other tax-related matters.
COST ACCOUNTING
A sub-branch of Managerial Accounting
refers to the recording, presentation, and analysis of different costs and its behavior.
It is very useful in manufacturing businesses since they have the most complicated costing process.
ACCOUNTING EDUCATION
deals with developing future accountants by creating a relevant accounting curriculum.
ACCOUNTING RESEARCH
Focuses on creating new knowledge. It aims to address all aspects of the accounting profession using a scientific method. Practicing accountants also conduct accounting research that focuses on solving problems for a client or group of clients.
Generally Accepted Accounting Principles (GAAP)
It sets guidelines, practices, and standards that are observed in the preparation and presentation of financial statements.
UNDERLYING ASSUMPTIONS (GOING CONCERN)
assumes that the business has an indefinite life and that business operations will have no interruption.
This assumption provides for the recording of business property at historical cost and not at current market value.
PERIODICITY OR TIME PERIODS
This assumption states that the economic life of the business is subdivided into time periods or accounting periods and it may be classified as either calendar year or fiscal year.
A calendar year is a twelve-month period which starts from January 01 and ends on December 31.
On the other hand, a fiscal year is a twelve –month period that starts on a date other than January 1 and ends on a date other than December 31.
ACCOUNTING ENTITY
Accounting entity concept states that the entity is separate and distinct from the people or persons who own, work and manage it.
Therefore, transactions of the business should be recorded and kept separately from the personal transactions of owners.
MONETARY UNIT
This concept has two aspects; it includes the assumptions on quantifiability and peso stability.
The quantifiability assumption provides that business transactions should be recorded or stated in a common unit of measurement which is the Philippine Peso in the Philippines or the currency unit of the country they are in.
The peso stability assumption means that the monetary unit retains its purchasing power regardless of fluctuation in the value of money.
MATCHING PRINCIPLES
The simultaneous recognition of income and related expenses
The generation of revenue is not without any cost
“There is no gain if there is no pain”
CONSERVATISM (PRUDENCE)
Under this principle, if there is uncertainty about incurring a loss, you should tend toward recording the loss. Conversely, if there is uncertainty about recording a gain, you should not record the gain.(anticipate no profit and provide for all possible losses).
It is a policy of being safe.
QUALITATIVE CHARACTERISTICS OF USEFUL FINANCIAL INFORMATION (Fundamental qualitative characteristics)
1. Relevance
2. Faithful representation
Relevance
Relevant financial information is capable of making a difference in the decisions made by users.
MATERIALITY
Information is material if omitting it or misstating it could influence decisions that the primary users of general purpose financial reports make on the basis of those reports, which provide financial information about a specific reporting entity.
Faithful representation
Financial reports represent economic phenomena in words and numbers. It would be complete, neutral and free from error.
SUBSTANCE OVER FORM
Represent the substance of the phenomena that it purports to represent rather than the legal form.
QUALITATIVE CHARACTERISTICS OF USEFUL FINANCIAL INFORMATION (Enhancing qualitative characteristics)
1. Comparability
2. Verifiability
3. Timeliness
4. Understandability
Comparability
Enables users to identify and understand similarities and differences among items, of the same entity for another period or another date
CONSISTENCY
Refers to the use of the same methods for the same items, either from period to period within a reporting entity or in a single period across entities.
Verifiability
different knowledgeable and independent observers could reach consensus, although not necessarily complete agreement, that a particular depiction is a faithful representation.
Timeliness
means having information available to decision-makers in time to be capable of influencing their decisions. Generally, the older the information is the less useful it is.
Understandability
Classifying, characterizing and presenting information clearly and concisely makes it understandable
Financial reports are prepared for users who have a reasonable knowledge of business and economic activities and who review and analyze the information diligently.
MEASUREMENT BASES
1. HISTORICAL COST
2. CURRENT COST
HISTORICAL COST
Assets are recorded at the amount of cash or cash equivalent paid or the fair value of the consideration given to acquire them at the time of their acquisition.
Liabilities are recorded at the amount of proceeds received in exchange for the obligations, or in some circumstances (for example, income taxes), at the amount of cash or cash equivalents expected to be paid to satisfy the liability in the normal course of business.
CURRENT COST
Assets are carried at the amount of cash or cash equivalent that would have to be paid if the same or an equivalent asset was acquired currently.
Liabilities are carried at the undiscounted amount of cash or cash equivalents expected that would be required to settle the obligations currently.
ACCRUAL BASIS ACCOUNTING
depicts the effects of transactions and other events and circumstances on a reporting entity’s economic resources and claims in the periods in which those effects occur, even if the resulting cash receipts and payments occur in a different period.
CASH BASIS ACCOUNTING
The accountant does not record a transaction until cash is received or paid. Generally, cash receipts are treated as revenues and cash payments are treated as expenses.
FIVE PRINCIPAL FINANCIAL STATEMENTS
Statement of financial position (Balance Sheet)
Statement of comprehensive income (Income Statement)
Statement of changes in equity
Statement of cash flow
Notes to financial statements, comprising a summary of significant accounting policies and other explanatory notes.
THREE REPORTING PERIODS
Calendar Year
Fiscal Year
Interim Period
Calendar Year
is a twelve-month period which starts from January 01 and ends on December 31. This is the most common annual accounting period that business adopts.
Fiscal Year
is a twelve –month period that starts on a date other than January 1 and ends on a date other than December 31. Accordingly, the fiscal year does not end on December 31 of the accounting period.
Interim Period
It covers a period shorter than one year. (e.g. weekly, monthly, quarterly or semi-annual).
STATEMENT OF FINANCIAL POSITION (Balance Sheet)
is a statement showing the condition of a business comprising the assets, liabilities and equity as of a given date.
ASSETS
a present economic resource controlled by the entity as a result of past events.
LIABILITIES
is a present obligation of the entity to transfer an economic resource as a result of past events.
CAPITAL/EQUITY
is the residual interest in the assets of the entity after deducting all of its liabilities.
STATEMENT OF COMPREHENSIVE INCOME (Income Statement)
is a statement showing the financial performance or the results of operation of an entity for a given period of time. Users of financial statements use this statement to evaluate the profitability of an entity.
INCOME
represents increases in economic benefit during the accounting period in the form of inflow or increase in asset or decrease in liability that results in increase in equity, other than contribution from equity participants. It encompasses both revenue and gains.
REVENUE
arises in the course of the ordinary regular activities of an entity and not from incidental or investment transactions.
EXPENSES
represents decreases in economic benefit during the accounting period in the form of an outflow or decrease in asset or increase in liability that results in decrease in equity, other than distribution to equity participants.
COMPONENTS OF EXPENSE
a) COST OF SALES
b) DISTRIBUTION COST OR SELLING EXPENSES
c) ADMINISTRATIVE EXPENSES
d) OTHER EXPENSES
e) INCOME TAX
STATEMENT OF CHANGES IN OWNER’S EQUITY
is a basic statement that shows the progress or changes in the elements or components of the owner’s equity (if the entity is a sole proprietorship).
CAPITAL
Is an account that represents the owner’s financial interest in the business.
WITHDRAWAL
is a temporary account used to accumulate the owner’s drawings.
STATEMENT OF CASH FLOWS
It is a statement that provides information about cash inflows and outflows during an accounting period as well as the net change in cash from the operating, investing and financing activities in a manner that reconciles the beginning and ending balances.
DIRECT METHOD
This method encourages the reporting of major classes of cash receipts and cash payments and the net cash flow from operating activities. Accordingly, it resembles the cash basis income statement.
INDIRECT METHOD
this method reports the same amount of net cash flow from operating activities indirectly by adjusting net income to reconcile it to net cash flow from operating activities.
NOTES TO FINANCIAL STATEMENTS
It provides detailed information about the nature of the business, accounting principles and procedures applied.
BUSINESS TRANSACTION
is defined as an exchange of goods or services between two parties for a certain sum of money.
MANAGERIAL ACCOUNTING
is a type of accounting that helps businesses make smart decisions by providing internal financial information. It focuses on analyzing costs, profits, and budgets to guide managers in running the company efficiently.
PLANNING AND CONTROL
The two important functions that enable management to continually plan for the future and assess implementation.
PLANNING
is the process of establishing goals and communicating these goals to employees of the organization.
Process of setting goals, and determining the appropriate action to achieve the goals of the company.
CONTROLLING
Function is the process of evaluating whether the organization’s plans were implemented effectively.
Process of regulating company’s activities so that actual performance conforms to the goals and standards set at the planning stage.
ORGANIZING
Process of allocating and arranging both human and other resources through a formal structure of tasks and authority so that plans can be carried out successfully.
LEADING
Process of guiding and motivating employees to accomplish company’s goals.
COST
may be defined as the amount of resources, usually measured in monetary terms, sacrificed to achieve a particular objective.
means the amount of expenditure incurred on, or attributable to a given thing.
TWO CATEGORIES OF COSTS
1. MANUFACTURING COSTS
2. NON-MANUFACTURING COSTS
MANUFACTURING COSTS
Cost from labor and materials that is directly or indirectly related to producing an item. They are also referred to as product costs.
DIRECT MATERIALS
consist of all those materials that can be identified with a specific product.
DIRECT LABOR
consist of all those costs that can be specifically traced or identified with a particular product.
MANUFACTURING OVERHEAD
refers to the cost pool used to accumulate all indirect manufacturing costs.
NON-MANUFACTURING COSTS
Costs for company operations that are not directly related to manufacturing. They are also referred to as period costs.
SELLING COSTS
Costs incurred to obtain customer orders and provide customers with a finished product (They are also often called marketing costs or advertising costs.)
GENERAL AND ADMINISTRATIVE COSTS
Costs related to the overall management of an organization.
