FABM: Chapters 1 - 5

ACCOUNTING

the process of identifying, measuring, and communicating economic

information to permit informed judgments and decisions by the users of

information (AAA

ACCOUNTING

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)

ACCOUNTING

It is also defined as an information system that measures, processes

and communicates information, which are primarily financial in nature,

about an identifiable entity for the purpose of making economic

decisions.

Stages of accounting

Analyzing —> Recording —> Classifying —> Summarizing —> Reporting —> Interpreting

THE ACCOUNTING INFORMATION SYSTEM

Business Activities —> Documents or Supporting Accounting Papers —> Analyzing, Recording, Classifying, Summarizing —> Reporting with Financial Statements —> Decisions by Users of Financial Statements

Process

Accounting is composed of multiple steps that lead to a common end goal. This proves that accounting is a _______

Art

Accounting is the art of recording, classifying, summarizing, and finalizing

financial data. This proves that accounting is an ___

financial information, transactions

Accounting deals with _________ ___________ and ____________.  

quantifiable financial transactions

Accounting deals only with ____________ ________ ____________.

means and not an end

Accounting is a tool to achieve specific objectives. This means accounting is a _______________

information system

Accounting is recognized and characterized as a storehouse of information. Proves that accounting is an __________

1. 2. Keeping systematic record of business transactions

Protecting properties of the business

3. Communicating results to various parties in or connected with the

business

4. Meeting legal requirements

MAIN FUNCTIONS OF ACCOUNTING

Emperor Augustus

Founder of informal accounting

ancient Mesopotamia

it is where early development of accounting dated back from

Luca Pacioli

who is the father of modern accounting?

internal users and external users

Users of accounting information

Management, Employees, Owners/Stockholders

Internal users of accounting information

Customers, Creditors, Potential, Investors, Government, Academe, Public

External users of accounting information

Accounting Information

produced and presented based on the needs of users

Internal Users

Responsible for budgeting, forecasting, monitoring of investments and returns and assess the sustainability and security of their remunerations

External Users

Responsible for investments, lending, tax and penalty, transactions, and consumer decisions

Customers

Main source of income of businesses; acquire goods and services for a fee

Creditors

Providers of additional funds when the initial investment of owners is exhausted; lend resources to businesses usually in the form of money

Potential Investors

Providers of additional funds when the initial investment of owners is exhausted; invest resources in the business hoping to earn decent returns

Government

An external user whose primary role is to regulate businesses; studies financial statements to determine amount of taxes payable

Academe

Uses accounting information primarily for academic purposes

General Public

Citizens and residents of the country even though they do not plan to transact with the business; use financial statements to gauge the

condition of the economy

Management

Employees that can make decisions for the company; considered the brain of the company

Employees

Persons in the company aside from managers and owners or stockholders; do not have authority to implement decisions

Owners or Stockholders

Existing investors of the company; concerned mostly with the profits of the company

Customers

Patrons, clients, people acquiring goods or services of a company for a fee

Creditors

Banks, lending institutions, wealthy individuals; sometimes the government can also lend resources to a company

Potential Investors

Wealthy individuals, other businesses planning to invest

Government

Different government agencies, taxing authorities, government officials

Academe

Professors, lecturers, students, and researchers

General Public

Common people not connected with the company

Management

Board of directors, top management, middle-level managers, supervisors

Employees

Laborers, field workers, non-managerial employees

Owners or Stockholders

Founders of the company, owners, stockholders, partners, proprietors

Accrual Accounting

A method where transactions are recorded when they happen, not when cash is received or paid.

Matching Principle

Expenses should be recorded in the same period as the revenues they helped generate.

Use of Judgment & Estimation

Accountants must make reasonable estimates when exact values are not available.

Prudence (or Conservatism)

If a customer might not pay, you record an allowance for doubtful accounts now even if you aren’t 100% sure.

Substance Over Form

Transactions must be recorded according to their economic reality, not just their legal form.

Going Concern Assumption

Assumes the business will continue operating and not shut down soon.

Accounting Entity Assumption

The business is separate from the owner. Personal and business finances must not mix.

Time Period Assumption

Business activities can be divided into specific time periods (monthly, quarterly, yearly).

Generally Accepted Accounting Principles (GAAP)

A set of standard accounting rules used in the United States to ensure consistency and reliability in financial reporting.

International Financial Reporting Standards (IFRS)

Global accounting standards developed by the IASB, used by most countries for consistent international reporting.

Philippine Financial Reporting Standards (PFRS)

Accounting standards used in the Philippines—these are basically the Philippine version of IFRS, adapted for local use.

Enumerate the principles/concepts

1. Accrual Accounting

2. Matching Principle

3. Use of Judgement & Estimation

4. Prudence

5. Substance over form

6. Going Concern Assumption

7. Accounting Entity Assumption

8. Time Period Assumption

9. Generally Accepted Accounting Principles (GAAP)

10. International Financial Reporting Standards (IFPS)

11. Philippine Financial Reporting Standards (PFRS)

12. cash basis principle

cash basis principle

A method of accounting where revenues and expenses are recorded only when cash is actually received or paid, regardless of when the transaction happened.

Assets = Liabilities + Equity

Accounting Equation

Assets

Resource you control that have resulted from past events and can provide you with future economic benefits

Control, Past events, Future economic

Essential elements of assets

Control

an essential element of assets that has exclusive right to enjoy the benefits or prevent other from enjoying them.

Past events

an essential element of assets whose control of a resource resulted from a past event or transaction.

Future economic

an essential element in which the resource is expected to provide

economic benefits over more than accounting period.

Economic Benefits

The potential of the resource to provide you, directly or

indirectly, with cash.

1. Sold or exchange for other assets

2. Used singly or in combination with other assets to

produce goods for sale

3. Used to settle a liability

4. Distributed to the owners

(SUUD)

Economic Benefits are:

Liabilities

Present obligations that have resulted from past events and can require you to give up resources when settling them

Present obligation

Essential element of liabilities where The responsibility to pay someone because of an obligating event that has already transpired.

Giving up of resources

an essential element of liabilities where settling an obligation necessarily would require you to pay cash, to transfer other non-cash assets, or to render a service.

Obligating Event

An event that creates either (a) a legal obligation or (b) a constructive obligation

Legal obligation

an obligation that arises from a contract, a law, or peration of law

Constructive Obligation

An obligation that Arises from your past business practices or

published policies that have created a valid expectation on the part of others that you will pay them

ASSETS = LIABILITIES + EQUITY + INCOME

- EXPENSES

Expanded Accounting Equation

EQUITY

Claims of the owner/s to the assets Other terms: Capital, Net assets, and Net worth

Expenses and Income

the Equity Accounts

Expenses

Decreases in economic benefits during the period in the form of outflows or depletions of assets or increases of liabilities that result in decrease in equity, excluding those relating to distributions to the business owners

Income

Increases in economic benefits during the period in the form

of inflows or enhancements or assets or decrease of liabilities

that results in equity, excluding those relating to investments

by business owners

The Account

The basic storage of information in accounting. It is a record of the increase and decrease in a specific item of asset, liability, equity, income or expense.

T- Account

An account may be depicted through a T-account. It is

called as such because it resembles the letter “T”

1. Account Title

2. Debit Side 

3. Credit Side

Parts of a T-account

Account Title

describes the specific item of asset, liability, equity, income, or expense.

Debit Side

the left side of the account

Credit Side

the right side of the account

1. Assets

2. Liabilities

3. Equity

4. Income

5. Expenses

The Five Major Accounts

1. Assets

2. Liabilities

3. Equity

Balance Sheet Accounts

1. Income

2. Expenses

Income Statement Accounts

Cash, Accounts receivable, Allowance for bad debts, Notes receivable, Inventory, Prepaid supplies, Prepaid rent, Prepaid insurance, Land, Building, Accumulated depreciation, Equipment

Types of assets:

Cash

includes money or its equivalent that is readily available for unrestricted use

Accounts receivable

receivable supported by oral or informal promises to pay

Allowance for bad debts

the aggregate of estimated losses from uncollectible accounts receivable.

Notes receivable

receivables supported by written or formal promises to pay in the form of promissory note.

Inventory

represents the goods that are held for sale by the business

Prepaid supplies

represents the cost of unused office and other supplies.

Prepaid rent

rent paid in advance

Prepaid insurance

cost of insurance paid in advance.

Land

the lot on which the building of the business has been constructed or a vacant lot Buildingwhich is to be used as future plants site.

Building

the structure owned by a business for use in its operation.

Accumulated depreciation

the total amount of depreciation expenses recognized since the building was acquired and made available for

Equipment

consists of various assets such

as:

a. Machineries and other factory equipment

b. Transportation equipment

c. Office equipment

d. Computer equipment

e. Furniture and fixtures

• Accounts payable, Notes payable, Interest payable, Salaries payable, Utilities payable, Unearned income

types of liabilities: 

Accounts payable

obligations supported by oral or informal promises to pay by the debtor

Notes payable

obligations supported by written or formal promises to pay by the debtor in the form of promissory notes.

Interest payable

interest incurred but not yet paid.

Salaries payable

salaries already earned by employees but not yet paid by the business.

Utilities payable

utilities already used but not yet paid.

Unearned income

items related to income that were collected in advance before they are earned.