[FDNACCT] Unit 1: Introduction to Accounting

Accounting

• the process by which financial information about a business is classified, recorded, summarized, interpreted, and communicated to owners, managers, and other interested parties (Price et al., 17th ed)

• 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)

Nature of Accounting

• an art

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

Scope of Accounting

• deals with financial information and transactions

Generally Accepted Accounting Principles (GAAP)

• a common set of rules, procedures, practices and standards followed in the preparation and presentation of financial statements issued by the Financial Accounting Standards Board (FASB). GAAP are rules that accountants follow in recording business transactions and preparing financial statements.

  1. Monetary / Money measurement / Monetary unit

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

  2. Entity / Business entity / Economic entity / Separate entity

     • assumes that a business unit is separate and distinct from its owner/s

     • requires that business’s accounting records should always be kept separate from the owner’s personal accounting records

Areas of Accounting

1. 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

     • Tax Accounting

       • Tax compliance

         • preparation and audit of tax returns

       • 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

2. Private accounting

   • working for a single business entity in a specific industry

3. Governmental accounting

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

Branches of Accounting

1. Financial Accounting

   • provides general-purpose financial reports to various external users

2. 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

3. Cost Accounting

   • accounting and classifying costs and expenses to determine total cost of

     a product/service

4. Managerial Accounting

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

5. Government Accounting

   • prepares financial reports for the government and its agencies

6. Tax Accounting

   • prepares tax returns and ensures tax compliance

7. Accounting Education

   • accounting for the academe and research

8. 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

9. Forensic Accounting

   • focuses on legal affairs such as inquiry into fraud, legal cases, disputes and claims resolution

History of Accounting

Users of Accounting Information

1. Primary users

   1. Investors (Individuals, Businesses, Banks, Insurance companies)

      1. Existing Investors

         • monitor business performance to check return on their investments

      2. Potential investors

         1. monitor business performance to assess risk and reward of future investments

   2. Lenders and other creditors

      1. Lenders

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

      2. Suppliers/Creditors

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

2. Other users

   1. Internal users

      1. Owner/s

         • monitor business performance to check return on their investment

      2. Managers

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

      3. Employees

         • ensure that the business can pay salaries and other benefits

   2. External users

      1. Tax authorities

         • collect taxes (e.g., employee tax, sales tax, property tax, business tax, etc.)

      2. 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)

      3. Customers

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

      4. Employee unions

         • negotiate salary increases, benefits, and profit-sharing

      5. Trade associations

         • provide summary reports to assess the business and the industry

      6. Financial intermediaries

         1. Financial analysts

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

         2. Stock brokers

            • assess returns of current and future stock investments

         3. Mutual fund companies

            • monitor business performance to assess risk and reward of current and future investments

         4. 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

1. As to ownership

   1. 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

      • unlimited liability – owner is solely liable for all business debts

      • business life ends when the owner;

        • passes away

        • unable to carry on business operation

        • decides to close the business

   2. 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)

      • A business entity owned by two or more individuals, called partners

      • partners enter into a contract called 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

      • to conduct business (or practice a profession) and divide profits among themselves

        • Regulated professions cannot be established as a corporation because this will go against public policy by giving practicing professionals a way to avoid personal liability. E.g., Accountants, Architects, Doctors, Engineers, Lawyers

      • Partners are responsible individually and jointly for the business debts

   3. Corporation

      • 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).

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

        • 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)

      • 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)

      • owned by one or more stockholders

        • owners are called stockholders (shareholders) since ownership is divided into number of stocks (shares) and is evidenced by holding a stock (share) certificate

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

2. As to activity

   1. Service

      • a business that provides service

   2. Merchandising/Trading

      • a business that buys and sells goods

   3. Manufacturing

      • a business that converts raw materials to finished goods