Accounting is the language of business. It is a process of recording, classifying, and summarizing economic events through certain documents or financial statements.

The purpose of accounting is to provide information that will help you make correct financial decisions.

The accountant’s job is to provide the information needed to run a business as efficiently as possible while maximizing profits and keeping costs low.

Bookkeeping procedures and bookkeepers record and keep track of the business transactions that are later used to generate financial statements.

Bookkeeping is keeping books including every facet of recordkeeping.

USES OF ACCOUNTING INFORMATION

1. Individual - Accounting knowledge can help you with investing in the stock market, applying for a home loan, evaluating a potential job, balancing a checkbook, and starting a personal savings plan, among other things.

2. Managers/Business Managers - Marketing (Which line of goods should the company emphasize?); Production (Should the company produce its goods in the United States or open a new plant in Mexico?); Research and Development (How much money should be set aside for new product development?); Sales (Should the company expand the advertising budget and take money away from some other part of the marketing budget?)

3. Bankers - Granting loans to individuals and companies.

Generally Accepted Accounting Principles (GAAP)

• The accounting profession has developed standards that are generally accepted and universally practiced. These standards indicate how to report economic events.

Measurement Principles

1. Historical Cost Principle - dictates that companies record assets at their cost. This is true not only at the time the asset is purchased but also over the time the asset is held.

2. Fair Value Principle - states that assets and liabilities should be reported at fair value (the price received to sell an asset or settle a liability).

Assumptions

1. Monetary Unit Assumption - requires that companies include in the accounting records only transaction data that can be expressed in money terms. This assumption enables accounting to quantify (measure) economic events.

2. Economic Entity Assumption - can be any organization or unit in society. It may be a company, a governmental unit, a municipality, a school district, or a church.

Key Principles of GAAP

1. Principle of Regularity - Adhered to GAAP rules and regulations as a standard.

2. Principle of Consistency - Accountants commit to applying the same standards throughout the reporting process.

3. Principle of Sincerity - Provide an accurate and impartial depiction of a company’s financial situation.

4. Principle of Permanence of Methods - Used in financial reporting should be consistent, allowing a comparison of the company’s financial information.

5. Principle of Non-Compensation - Both negatives and positives should be reported with full transparency and without the expectation of debt compensation.

6. Principle of Prudence - Refers to emphasizing fact-based financial data representation that is not clouded by speculation.

7. Principle of Continuity - It should be assumed the business will continue to operate.

8. Principle of Periodicity - Entries should be distributed across the appropriate periods.

9. Principle of Materiality - Must strive to fully disclose all financial data and accounting information in financial reports.

10. Principle of Utmost Good Faith - Derived from the Latin phrase uberrimae fidel used within the insurance industry. It presupposes that parties remain honest in all transactions.

PFRS - The Philippine Financial Reporting Standards

PAS - Philippine Accounting Standards

Financial Statements

1. Balance Sheet is the statement that presents the Assets of the company and the Liabilities.

2. Income Statement shows all of the Revenues of the company less the Expenses, to arrive at the “bottom line”, the Net Income.

3. Statement of Cash Flow shows how much cash we started the period with, what additions and subtractions were made during the period, and how much cash we have left over at the end of the period.

4. Statement of Retained Earnings shows how the balance in Retained Earnings has changed during the period of time for which the financial statements are being prepared.