ACC212 Week 1: Comprehensive Financial Accounting and Reporting Study Guide

Introduction to Financial Accounting and Reporting

• Course Code: ACC212

• Course Title: Financial Accounting and Reporting

• Academic Unit: Central Mindanao Colleges - College of Accountancy and Business Management Education

• Lecturer: Ms. Jonna Rey Yson-Platon

• Institutional Identity: CMC Champions Global Goals through the Sustainable Development Goals (SDGs).

Definitions and Nature of Accounting

Accounting is defined and characterized through several overlapping perspectives:

• Service Activity: It is primarily a service function used to assist users in making economic decisions.

• Function: Its specific function is to provide quantitative information, primarily financial in nature, about economic entities that is intended to be useful in making economic decisions.

• Information System: It acts as a system that measures, processes, and communicates financial information regarding an economic entity.

• Procedural Process: It is the systematic process of identifying, measuring, and communicating economic information to permit informed judgments and decisions by users of the information.

• The Art of Accounting: It is 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.

Types of Business Activities and Structures

Businesses are classified by the nature of their activities, operational structures, and specific examples:

• Services

  • Activity: Selling people’s time.

  • Structure: Hiring skilled staff and selling their time.

  • Examples: Software development, Accounting firms, Legal firms.

• Trader

  • Activity: Buying and selling products.

  • Structure: Buying a range of raw materials and manufactured goods, consolidating them, and making them available for sale.

  • Examples: Wholesalers, Retailers.

• Manufacture

  • Activity: Designing products, aggregating components, and assembling finished products.

  • Structure: Taking raw materials and using equipment and staff to convert them into finished goods.

  • Examples: Vehicle assembly, Construction, Engineering, Pharmaceuticals.

• Raw Materials

  • Activity: Growing or extracting raw materials.

  • Structure: Buying blocks of land and using them to provide raw materials.

  • Examples: Farming, Mining, Oil extraction.

• Infrastructure

  • Activity: Selling the utilization of infrastructure.

  • Structure: Buying and operating assets; selling occupancy often in combination with services.

  • Examples: Transport, Hotels, Telecoms, Sports facilities, Property management.

• Financial

  • Activity: Receiving deposits, lending, and investing money.

  • Structure: Accepting cash deposits and paying interest, then using those funds to provide loans to borrowers and charging them fees.

  • Examples: Banks, Investment houses.

• Insurance

  • Activity: Pooling premiums of many to meet the claims of a few.

  • Structure: Collecting cash from many customers and investing that money to pay for the losses experienced by a few customers.

  • Example: Insurance companies.

Forms of Business Organizations

There are three primary forms of business organization:

• Sole Proprietorship: A business owned by a single individual.

• Partnership: A business owned by two or more people who share profits and liabilities.

• Corporation: A legal entity that is separate from its owners, providing limited liability to shareholders.

Classification of Micro, Small, and Medium Enterprises (MSMEs)

Enterprises are categorized based on their asset value and the size of their workforce:

• Micro Enterprises

  • Assets: Total assets of $3M$ or less.

  • Employees: Employs not more than $9$ workers.

• Small Enterprises

  • Assets: Total assets ranging from $3M$ to $15M$.

  • Employees: Employs between $10$ and $99$ workers.

• Medium Enterprises

  • Assets: Total assets ranging from $15M$ to $100M$.

  • Employees: Employs between $100$ and $199$ workers.

Essential Business Activities

Organizations engage in three core activities to maintain operations:

• Financing: Obtaining financial resources from financial markets and managing how these resources are utilized.

• Investing: The use of capital for investment opportunities, including long-term investments or Property, Plant, and Equipment (PPE). Maintaining the correct mix of resources is essential for efficient and effective operations.

• Operating: The use of resources to design, produce, distribute, and market goods and services.

Purpose and Phases of Accounting

• Business Transaction: An economic activity of a business that serves as the basis for accounting records.

• Recording: The phase of capturing historical business events.

• Measuring: Expressing business transactions in terms of a common financial denominator using money as a medium of exchange and a measure of value. Key issues in measurement include:

  • Valuation Issue: Determining the monetary value of an item.

  • Recognition Issue: Determining when a transaction should be recorded.

  • Classification Issue: Determining how a transaction should be categorized.

• Classifying: This involves reducing the effects of numerous transactions into useful groups or categories.

• Summarizing: The preparation of financial statements to provide a concise view of the entity's financial health.

Pacioli’s Double Entry System

Luca Pacioli, often considered the father of accounting, stated that every successful merchant needs three things: sufficient cash or credit, a good bookkeeper, and a functional accounting system.

Key Terms

• Debet dare: Translated as "should give."

• Debet habere: Translated as "should have" or "receive."

Three Books in PACIOLI'S SUMMA

1. Memorandum: A book where all transactions are recorded at the time they are conducted, in the currency in which they occurred. It serves as a supporting document.

2. Journal: The private book of the merchant, where transactions are recorded in a single currency.

3. Ledger: An alphabetical listing of all business accounts along with a running balance for each particular account.

Recording Standards

• Recording must be done in chronological order.

• Recording must be in narrative form.

Strategic Questions Answered by the System

1. What profit has the business made?

2. How much does the business owe?

3. How much is owed to the business?

Types of Accounting Purposes

• Financial Accounting: Supplies information primarily to business owners and external stakeholders.

• Management Accounting: Supplies information specifically to managers for internal decision-making.

Fundamental Accounting Concepts

These concepts form the underlying assumptions for recording business transactions:

1. Entity Concept: The business is treated as a separate economic entity, distinct from its owners.

2. Periodicity Concept: To provide timely information, the life of an entity is subdivided into equal, discrete time periods.

3. Stable Monetary Unit Concept: The Philippine peso is considered a reasonable and stable unit of measure.

4. Going Concern: The assumption that the entity will continue operations for the foreseeable future and is not currently in the process of ceasing trade or entering liquidation.

Criteria for Generally Accepted Accounting Principles (GAAP)

For an accounting principle to be generally accepted, it must meet three criteria:

• Relevance: The information must be meaningful and useful to the users.

• Objectivity: The information must not be influenced by the personal bias or judgment of those providing it.

• Feasibility: The principle can be implemented without undue complexity or excessive cost.

Basic Accounting Concepts and Principles

• Objectivity: Records and statements must be based on the most reliable data available so they are accurate and useful; they must be substantiated with evidence.

• Historical Cost: Acquired assets should be recorded at their actual cost rather than current market value.

• Revenue Recognition: Revenue is recorded at the specific point when goods are delivered or services are rendered.

• Expense Recognition: Expenses are recognized in the specific accounting period in which the goods or services were used.

• Adequate Disclosure: All relevant information that could affect a user's interpretation must be disclosed in the financial statements.

• Materiality: This concept is concerned with ensuring information is significant enough to affect the evaluations and decisions of users.

• Consistency: The entity must use the same accounting methods from one period to the next to achieve comparability over time.

Accountancy Act of 2004 and Professional Ethics

Scope of Practice for CPAs

1. Practice of Public Accountancy: Working in environments such as auditing firms.

2. Practice in Commerce and Industry: Being employed as a CPA within a private business.

3. Practice in Education and Academe: Engaging in teaching and academic research.

4. Practice in Government: Working for government agencies or Government-Owned and Controlled Corporations (GOCCs).

Fundamental Ethical Principles

1. Integrity: Being straightforward, honest, and maintaining fair dealings and truthfulness.

2. Objectivity: Not allowing bias, conflict of interest, or the undue influence of others to override professional or business judgments.

3. Professional Competence and Due Care: Providing competent professional service and acting diligently in accordance with technical and professional standards. This involves two phases: attainment and maintenance of competence.

4. Confidentiality: Respecting the privacy of information acquired and not disclosing it to third parties without proper authority.

5. Professional Behavior: Complying with relevant laws and regulations and avoiding any action that might discredit the profession.

Branches of Accounting

1. Auditing: Focuses on ensuring that the presented financial statements are not distorted; involves both external and internal auditors.

2. Bookkeeping: A mechanical task involving the collection of basic financial data.

3. Cost Bookkeeping, Costing, and Cost Accounting: Cost bookkeeping involves recording costs, while cost accounting uses the collected data for analysis.

4. Financial Accounting: Centered on the recording of transactions and the preparation of reports on financial position and results of operations.

5. Financial Management: Responsible for setting financial objectives, planning, obtaining necessary finance, and safeguarding the entity's financial resources.

6. Management Accounting: Incorporates both financial and non-financial information from a wide range of sources for internal use.

7. Taxation: Involves the preparation of tax returns and the consideration of tax consequences for business decisions.

8. Government Accounting: Concerned with identifying the sources and uses of financial resources in consistency with city, municipal, provincial, or national laws.

Elements of Financial Statements

Financial statement elements are grouped by what they measure:

1. Financial Position: Comprised of Assets, Liabilities, and Equity.

2. Financial Performance: Comprised of Income and Expenses.