Accounting-as-an-IS-Branches-of-Accounting Reviewer

Accounting as an Information System

  • Definition: Accounting is defined as an information system that measures, processes, and communicates primarily financial information about an identifiable entity to aid in economic decision-making.

Introduction to Accounting

  • History:

    • Luca Pacioli: Known as the "Father of Accounting". An Italian mathematician who published Summa de Arithmetica in 1494, which described accounting practices of that era.

The Accounting Process

  1. Analyzing:

    • The first phase involves examining financial transactions and determining their impacts on the business.

  2. Recording:

    • Involves documenting the effects of analyzed transactions. Can be done manually or through computerized methods.

    • Special Journals include:

      • Cash Receipts Book

      • Cash Disbursement Book

      • Sales Book

      • Purchases Book

  3. Classifying:

    • Sorting similar transactions into specific accounts, akin to organizing information into similar categories.

  4. Summarizing:

    • Grouping classified accounts into larger categories such as assets, liabilities, owner’s equity, revenue, and expenses.

  5. Reporting:

    • Preparing financial summaries (financial statements) that communicate operational results, financial position, and cash flows.

    • Key Statements include:

      • Income Statement

      • Balance Sheet

      • Cash Flow Statement.

  6. Interpreting:

    • Analyzing the significance of various financial figures and their relationships, forming the final step of the accounting process.

Accounting Concepts

  • Business Entity Concept:

    • A business is treated separately from its owners, meaning only business transactions are recorded.

    • Types of entities include:

      • Sole Proprietorship

      • Partnership

      • Corporation.

  • Double Entry System:

    • Involves recording two effects of every transaction; for each value received, there is a value parted with.

    • Example: If cash increases, it can also indicate a revenue increase or a decrease in another asset.

Purpose of Financial Statements

  1. Balance Sheet:

    • Shows assets, liabilities, and owner’s equity at a specific point in time.

  2. Income Statement:

    • Displays revenues and expenses over a specific period, aiding in assessing profitability.

  3. Cash Flow Statement:

    • Tracks cash movement into and out of the company, crucial for financial health assessment.

Importance of Financial Statements

  • Informed Decision-Making:

    • Helps stakeholders (investors, creditors, managers) make informed decisions.

  • Performance Tracking:

    • Measures the company's financial performance and operational efficiency.

  • Cash Flow Understanding:

    • Essential for ensuring that profits align with cash flow availability.

  • Accountability:

    • Demonstrates management's stewardship over resources.

Financial Statement Users

  • Various parties utilize financial statements, including:

    • Investors:

      • Assess investment opportunities and profitability.

    • Employees:

      • Evaluate employer stability and salary prospects.

    • Lenders:

      • Assess borrower creditworthiness and repayment capacity.

    • Suppliers:

      • Determine customer reliability.

    • Customers:

      • Assess business longevity and product supply stability.

    • Government Agencies:

      • Monitor tax compliance and regulatory adherence.

    • Public:

      • Gauge enterprise contribution to the economy.

    • Management:

      • Use financials for internal planning and control.

Accounting Profession

  • Growth of the Profession:

    • Accounting and auditing have evolved into formal professions characterized by a collective body of knowledge and ethical standards above legal requirements.

Scope of Accountancy

  • Defined under the Philippine Accountancy Act of 2004, accounting roles include:

    1. Public Accountancy

    2. Commerce and Industry Practice

    3. Education/Academe

    4. Government Practice.

Practice Areas

  • Public Accountancy:

    • Involves providing professional services to multiple clients, including auditing, tax assessment, and accounting services.

  • Commerce and Industry:

    • Involves working in businesses where accounting knowledge is essential for decision-making.

  • Education:

    • Focuses on teaching accounting-related subjects and developing educational resources.

  • Government:

    • Engages in public sector accounting, budgeting, and compliance auditing.

Responsibilities of Accountants

  • Auditing:

    • Ensuring accuracy of financial records.

  • Tax Services:

    • Preparing tax returns and representing clients before authorities.

  • Management Advisory Services:

    • Consulting on business performance and strategy.

Benefits of Accounting Services

  • Financial Integrity:

  • Ensures the accuracy of financial statements presented to financial institutions.

  • Improved Resource Management:

  • Facilitates efficient organizational resources utilization.

  • Internal Control Assurance:

  • Enhances reliability of financial information.

  • Tax Compliance:

  • Establishes confidence in tax applications.

  • Sound Management Practices:

  • Promotes public interest through responsible decision-making.

Certification of Accountants

  • Types of Certifications:

  1. CPA (Certified Public Accountant)

    • Passed examinations for professional qualification.

  2. CMA (Certified Management Accountant)

    • Focuses on management accounting competencies.

  3. CIA (Certified Internal Auditor)

    • Specializes in evaluating internal controls and risk management.