Unit 1

Definition • 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 (AICPA) • commonly referred to as the “language of business”

Nature • an art • a service primarily engaged in providing financial information to interested users in making economic decisions

Scope • deals with financial information and transactions

Generally Accepted Accounting Principles (GAAP):

Monetary / Money measurement / Monetary unit

• assumes that only transactions that can be expressed in monetary terms are recorded

Areas

Public Accounting - providing accounting services for other companies

Auditing – deals with the review of financial statements to assess their fairness and adherence to accounting principles (The word 'fair' in Accounting means that a transaction is accounted for in accordance with accepted accounting rules.)

Tax Accounting – deals with o Tax compliance – preparation and audit of tax returns o Tax planning – giving advice to clients on how to structure their financial affairs in order to reduce tax liability

Management advisory services – deals with helping clients to improve their information system and business performance

Private accounting - working for a single business entity in a specific industry

Governmental accounting - keeping financial records and preparing financial reports for the national government, its various departments, and local government units

Branches

Financial Accounting - provides general-purpose financial reports to various external users

Auditing:

External audit – provided by external auditors, an independent third party that reviews a company’s financial statements to assess their fairness and adherence to accounting principles

Internal audit – provided by internal auditors that evaluate the company's policies and procedures to identify and weakness, mismanagement, waste, or fraud

Cost Accounting - accounting and classifying costs and expenses to determine total cost of a product/service

Managerial Accounting - provides internal financial reports, mainly the managers, for decision-making

Government Accounting - prepares financial reports for the government and its agencies

Tax Accounting - prepares tax returns and ensures tax compliance

Accounting Education - accounting for the academe and research

Accounting Information System- a system that a business uses to collect, store, manage, process, retrieve, and report its financial data that are used by various internal users Forensic Accounting focuses on legal affairs such as inquiry into fraud, legal cases, disputes and claims resolution

Primary users

• Investors (Individuals, Businesses, Banks, Insurance companies)

  • Existing investors – monitor business performance to check return on their investments

  • Potential investors – monitor business performance to assess risk and reward of future investments

• Lenders

  • Lenders – ensure that the business is capable of repaying a loan and determine the terms of the loan

  • Suppliers / Creditors – assess the ability of the business to pay its bills for extending credit and setting credit terms and credit limit

Other users

• Internal users

  • Owner/s – monitor business performance to check return on their investment

  • Managers – evaluate the results of the company’s operations to plan and make decisions for the future

  • Employees – ensure that the business can pay salaries and other benefits

• External users

  • Tax authorities – collect taxes (E.g., employee tax, sales tax, property tax, business tax, etc.)

  • Regulatory agencies – oversee the financial information provided by public companies (E.g., The Securities and Exchange Commission (SEC) enforces security laws and protects against infractions like insider trading, accounting fraud, and companies which provide misleading information about their financial condition)

  • Customers – check to see if they can rely on continued service or supply of goods

  • Employee unions – negotiate salary increases, benefits, and profit-sharing

  • Trade associations – provide summary reports to assess the business and the industry

  • Financial intermediaries

    • Financial analysts – provide summary reports to assess the business and the industry for investment purposes

    • Stock brokers – assess returns of current and future stock investments

    • Mutual fund companies – monitor business performance to assess risk and reward of current and future investments

    • Credit-rating agencies – provide summary reports to assess the credit-worthiness of public companies (ability to make timely payments of principal and interests)

Forms of business organization

• As to ownership

  • Sole proprietorship

  • Partnership – By the contract of partnership two or more persons bind themselves to contribute money, property, or industry to a common fund, with the intention of dividing the profits among themselves (Article 1767, Civil Code of the Philippines)

  • Corporation – A corporation is an artificial being created by operation of law, having the right of succession and the powers, attributes and properties expressly authorized by law or incident to its existence (Section 2, Revised Corporation Code of the Philippines)

• As to activity

  • Service – a business that provides service

  • Merchandising / Trading – a business that buys and sells goods

  • Manufacturing – a business that converts raw materials to finished goods

Forms of business organization as to ownership

Sole proprietorship

• A business entity owned by an individual trading alone in his/her own name, or under a recognized business name, who solely takes all business profits and solely assumes all business losses

• One

• Ends when the owner -passes away -unable to carry on business operation -decides to close the business

• Owner is solely liable for all business debts up to the extent of the owner’s personal assets (unlimited liability)

Partnership

• A business entity owned by two or more individuals, called partners, who enter into a contract called the partnership agreement*, to conduct business (or practice a profession**) and divide profits among themselves

• Two or more

• Ends by -the termination of the definite term or particular undertaking of the partnership -the express will of any partner, acting in good faith -the death, insolvency, civil interdiction of any partner -decree of court (Article 1830, Civil Code of the Philippines)

• Partners are responsible individually and jointly for the business debts

Corporation

• A separate legal entity* that has a legal right to own property and conduct business in its own name

• One or more

• Can continue indefinitely and ends only when -business goes bankrupt -when the stockholders** vote to liquidate A corporation shall have perpetual existence unless its articles of incorporation provides otherwise. (Section 11, Revised Corporation Code of the Philippines)

• Stockholders are not responsible for the business debts; their liability is limited to the amount of their individual investment (limited liability)

The partnership agreement covers provisions such as:

• Capital invested • Profit & loss sharing

• Interest on capital – an agreed rate of interest given to a partner for capital invested

• Interest on drawings – an agreed rate of interest charged to a partner for drawings made

• Salary and bonus for partners working in the partnership

• Interest given to a partner who extends loan to the partnership

• Responsibilities of the partners in managing the business

Separate legal entity means that

• the business can sue and be sued in itself

• the business can carry out transactions in the business name

• the business needs to pay company tax (corporate tax)