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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. (FRSC)
- 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)
-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
THREE PROCESSES IN ACCOUNTING
1. Identifying
2.Measuring
3. Communicating
ACCOUNTING CYCLE
It is a sequence of accounting procedures which is used to record, classify and summarize the business transactions.
TRANSACTION
JOURNALIZING
POSTING
TRIAL BALANCE
WORKSHEET
ADJUSTING
FINANCIAL STATEMENT
CLOSING
ACCOUNTING CYCLE
USERS OF FINANCIAL INFORMATION
1. INTERNAL USERS
2. EXTERNAL USERS
EXTERNAL USERS
are those stakeholders outside the business organization.
INTERNAL USERS
are those persons or groups within the business organization.
WHO ARE THE INTERNAL USERS
INVESTORS/OWNERS
EMPLOYEES
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.
WHO ARE THE EXTERNAL USERS
LENDERS
SUPPLIERS AND OTHER TRADE CREDITORS
CUSTOMERS
GOVERNMENT AND OTHER AGENCIES
PUBLIC
LENDERS
One of the sources of funds/capital of the business are the lenders.
SUPPLIERS AND OTHER TRADE CREDITORS
These information users are interested to know if the business has the capability to pay its obligations arising from goods and/or services delivered.
CUSTOMERS
need information on the ability of the business to continuously supply them with quality products and a price acceptable to them.
GOVERNMENT AND OTHER AGENCIES
Information is needed by the government and their agencies to be able to regulate the business activities and collect the right taxes needed for economic development.
PUBLIC
The general public interests in the business vary.
BRANCHES OF ACCOUNTING
1.FINANCIAL ACCOUNTING
2.MANAGERIAL ACCOUNTING
3. GOVERNMENT ACCOUNTING
4. AUDITING
5. TAX ACCOUNTING
6. COST ACCOUNTING
7. ACCOUNTING EDUCATION
8. ACCOUNTING RESEARCH
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
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.
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.
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)
The going concern assumption assumes that the business has an indefinite life and that business operations will have no interruption.
UNDERLYING ASSUMPTIONS (GOING CONCERN)
The going concern assumption 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.
THREE IMPLICIT ASSUMPTIONS
1.PERIODICITY OR TIME PERIODS
2.ACCOUNTING ENTITY
3.MONETARY UNIT
PERIODICITY OR TIME PERIODS
The time period 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.
calendar year
is a twelve-month period which starts from January 01 and ends on December 31.
fiscal year
s 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.
MONETARY UNIT
This concept has two aspects; it includes the assumptions on quantifiability and peso stability.
quantifiability assumption
business transactions should be recorded or stated in a common unit of measurement which is the Philippine Peso
peso stability assumption
monetary unit retains its purchasing power regardless of fluctuation in the value of money.
OTHER ACCOUNTING CONCEPTS AND ASSUMPTIONS
1.MATCHING PRINCIPLES
2. CONSERVATISM (PRUDENCE)
MATCHING PRINCIPLES
The simultaneous recognition of income and related expenses
The generation of revenue is not without any cost
CONSERVATISM (PRUDENCE)
Under the conservatism 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
I. Fundamental qualitative characteristics
II. Enhancing qualitative characteristics
I. Fundamental qualitative characteristics
1. Relevance
2. Faithful representation
Relevance
is capable of making a difference in the decisions made by users.
2. Faithful representation
Financial reports represent economic phenomena in words and numbers. It would be complete, neutral and free from error.
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.
SUBSTANCE OVER FORM
Represent the substance of the phenomena that it purports to represent rather than the legal form.
II. 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
2. Verifiability
different knowledgeable and independent observers could reach consensus, although not necessarily complete agreement, that a particular depiction is a faithful representation.
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.
3. Timeliness
Timeliness means having information available to decision-makers in time to be capable of influencing their decisions.
4. Understandability
presenting information clearly and concisely makes it understandable
Financial reports are prepared for users who have a reasonable knowledge
MEASUREMENT BASES
1. HISTORICAL COST
2. CURRENT COST
1. 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.
2. 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
Accrual 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
1.Calendar Year
2.Fiscal Year
3.Interim Period- period 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 financial position or condition of a business comprising the assets, liabilities and equity as of a given date.
ASSETS
present economic resource controlled by the entity as a result of past events.
LIABILITIES
- present obligation of the entity to transfer an economic resource as a result of past events.
CAPITAL/EQUITY
-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.
GAINS
represent increases to equity resulting from incidental transactions not associated with the ordinary regular activities of an entity.
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.
e) INCOME TAX.
a) COST OF SALES.
cost incurred in producing or purchasing a product being sold to customers.
- It is also called the cost of goods sold.
DISTRIBUTION COST OR SELLING EXPENSES
These are costs incurred related to selling, advertising and delivery of goods to customers e.g. sales salaries, sales commission, advertising expenses, depreciation of store equipment and store building.
ADMINISTRATIVE EXPENSES
costs incurred in administering the business in general. It includes all operating expenses which are not related to selling of goods e.g. office salaries,…
OTHER EXPENSES.
These are costs incurred which are not directly related to selling and administrative tasks. Loss on sale of resources of an entity other than goods or product for sale, interest related to borrowed funds.
INCOME TAX.
An income tax is a tax levied on the income of an individual or business (corporations or other legal entities).
STATEMENT OF CHANGES IN OWNER’S EQUITY
The statement of changes in 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).
TYPICAL ACCOUNT TITLES USED
Capital
Withdrawal
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
provides information about cash inflows and outflows during an accounting period.
Direct Method.
-reporting of major classes of cash receipts and cash payments and the net cash flow from operating activities.
Indirect 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.
CHART OF ACCOUNTS
is the list of all account titles used by a particular business.
foundation of the financial statements.
EXPANDED ACCOUNTING EQUATION:
MANAGERIAL ACCOUNTING
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.
FUNCTION OF MANAGEMENT
PLANNING
ORGANISING
LEADING
CONTROLLING
PLANNING AND CONTROL
The two important functions that enable management to continually plan for the future and assess implementation are called planning and control.
PLANNING
the process of establishing goals and communicating these goals to employees of the organization.
CONTROL
function is the process of evaluating whether the organization’s plans were implemented effectively.
Relationship between Planning and Control
Planning sets the philosophy and the guidelines on which the company operates. And controlling ensures that the activities of the firm conform to these plans, goals, objectives etc.
So while planning sets the course of the firm, control will observe the deviations from such a course and try and take remedial actions to correct the course.
Controlling is based on planning. If an organization does not plan its objectives in advance, it will not have any basis or planned performance to compare the actual performance with.
Planning without control is meaningless and control without planning is blind.
COST
may be defined as the amount of resources, usually measured in monetary terms, sacrificed to achieve a particular objective.
Cost 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.
EXAMPLES OF MANUFACTURING COSTS
Property taxes
Maintenance of machines
Raw materials costs
Manufacturing labor costs
Depreciation of property
costs associated with MANUFACTURING activities into three categories:
1.direct materials
2.direct labor
3.manufacturing overhead
