Definitions of Accounting 1 Accounting is a service

Definitions of Accounting 1. Accounting is a service activity. Its function is to provide quantitative information, primarily financial in nature, about economic entities, that is intended to be useful in making economic decisions. (Financial Reporting Standards Council) 1

2. Accounting 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. ( Committee on Accounting Terminology of the American Institute of Certified Public Accountants) 2

3. Accounting is the process of identifying, measuring and communicating economic information to permit informed judgment and decision by users of the information. (American Accounting Association in its Statement of Basic Accounting Theory) 3

. Purpose of accounting – to provide quantitative information for making economic decisions Components of accounting: • • • Analytical component – identifying Technical component – measuring Formal component communicating 4

The recognition or non-recognition of business activities as “accountable” events. assets affectin g liabilities Economic activities or business transactions External Internal equity Production 5

The assigning of peso amounts to the accountable economic transactions and events. Philippine peso is the unit of measuring accountable economic transactions in the Philippines. Historical cost – most common measure of financial transactions. 6

The process of preparing and distributing accounting reports to potential users of accounting information. Statement of Financial Position Journals Statement of Comprehensive Income ledgers Statement of Cash Flows 1. Recording 2. Classifying 3. summarizing Statement of Changes in Equity 7

Branches of Accounting 1. Auditing – the checking of accounts and the reporting on them. Businesses have their accounts audited as a legal requirement. • Auditors • Internal & external auditors 8

2. Bookkeeping – a mechanical task involving the collection of basic financial data. 3. Usually ends when the basic data have been entered in the books of accounts and the accuracy of each entry have been tested. 9

3. Cost bookkeeping, costing and cost accounting – involves the recording of cost data in books of account. Cost accounting makes use of these data once they have been extracted from cost books. 10

4. Financial accounting – the preparation and subsequent publication of highly summarized financial information. 5. Financial management – setting of financial objectives, making plans based on those objectives, obtaining the finance needed to achieve the plans, and generally safeguarding all financial resources of the entity. 11

6. Management accounting – incorporates cost accounting data and adapts them for specific decisions which management may be called upon to make. 7. Taxation – responsible for computing tax payable by both business entities and individuals. 12

1. Investors 2. Employees 3. Lenders 4. Suppliers and other trade creditors 5. Customers 6. Government and their agencies 7. Public 13

Types of Business Enterprises 1. Service Concern – its income is derived from services rendered to clients in case of professional services, like that of Accountants, Lawyers, Doctors, Dentists; or to customers in the case of nonprofessional services like hotel, laundry shop, car repair services, janitorial services. 14

2. Merchandising Concern – buying goods or commodities or any form of finished products and sells them at a profit. Examples : grocery stores, food and beverages sold in restaurants and related establishments. 15

3. Manufacturing Concern – the business is engaged in buying of raw materials and supplies to be processed or manufactured, converting them into finished products for sale at a profit. 4. Example : furniture shop, manufacturers of cars and home appliances, bakeries and restaurants. 16

4. Agri-Business – the business is engaged in planting of crops and sells its products either in raw or finished form at a profit. 5. Hybrid Companies – engaged in more than one type of activity which are manufacturing, merchandising and service. 17

Forms of Business Organization & Their Capital Structure 1. Sole Proprietor 2. Partnership 3. Corporation Capital Stock: Common Stock Add: Retained Earnings Stockholder’s Equity, end Retained Earnings, Beginning Add: Profit for the Year total Less: Dividends declared and paid Retained Earnings, End P xxx xxx P xxx 18

Fundamental Concepts in Accounting Process 1. Entity Concept – the transactions of different entities should not be accounted for together. 2. Periodicity Concept – an entity’s life can be meaningfully subdivided into equal time periods for reporting purposes 19

3. Stable Monetary Unit Concept – the Philippine peso is a reasonable unit of measure and that its purchasing power is relatively stable. Ignores the effects of inflation in the accounting records. 20

Accounting Information System & The Accounting Process • objective of the general purpose financial reporting – to provide information that is useful to users for making economic decisions. • accounting system – consists of personnel, procedures, devices and record used by an organization to develop account information and to communicate this information to decision makers. 21

• information system – all the activities, procedures and processes that are used by an entity to : 1. Collect 2. Process 3. Report financial information 22

Basic Function of the Accounting System 1. Interpretation and recording of the effects of business transactions 2. Classification of the effects of similar transactions 3. Summarization and communication of information contained in the system to the decision makers 23

Basic Elements of an Accounting System 1. Procedures 2. Statement of accounting policies and standards 3. Records and reports 4. Bookkeeping system 5. Personnel 6. Equipment and devices 24

Features of an Effective Accounting System 1. Compatibility to the company’s organization 2. Provision of necessary reports 3. Provision for controls 4. Adequacy of provision for audit trail 5. Presence of qualified and competent personnel 6. Simplicity, flexibility and favorable cost/benefit relationship. 25

Tasks in the operation of an Accounting Information System 1. Data collection 2. Data processing • Classification • summarization 3. Report generation 26

Steps in the Accounting Cycle 1. Identify transactions or events to be recorded • Indicate the accounts- either assets, liabilities, equity, income or expenses – affected by the transaction • Ascertain whether each account is increased or decreased by the transaction • Identify the transaction from source documents • Using the rules of debit and credit, determine whether to debit or credit the account to record its increase or decrease 27

2. Journalize transactions and events 3. Posting from journals to ledgers 4. Prepare unadjusted trial balance 5. Journalize and post adjusting journal entries 28

Flow of Information Through the Accounting System Source Documents Financial Statements Journals Ledger 29

Basic GAAP Principles Objectivity principle – accounting records and statements are based on the most reliable data available so that they will be as accurate and as useful as possible. Historical cost – the principle states that acquired assets should be recorded at their actual cost and not at what management thinks they are worth as at reporting date. 30

Revenue recognition principle – revenue is to be recognized when goods are delivered or services rendered or performed. Expense recognition principle – expenses be recognized in the accounting period in which goods and services are used up to produce revenue and not when the entity pays for those goods and services 31

Adequate disclosure – all relevant information that would affect the user’s understanding and assessment of the accounting entity be disclosed in the financial statements. 32

Materiality- concerned with information that is significant enough to affect evaluations and decisions. Consistency principle- use the same accounting method from period to achieve comparability over time within a single enterprise. 33

Conceptual Framework Refers to a set of hypothetical, conceptual and pragmatic principles forming a general frame of reference. It provides solutions to accounting and reporting problems. 34

It deals with: 1. The objective of financial statements 2. The qualitative characteristics that determine the usefulness of information in financial statements 3. The definitions, recognition and measurement of the elements from which financial statements are constructed 4. Concepts of capital and capital maintenance 35

Financial Statements 36

Objectives of Financial Statements To provide information that is: 1. Useful to current and potential investors and creditors in making rational investment, credit, and other related decisions 2. Helpful to current and potential investors and creditors in assessing the amounts, timing, and uncertainty of future cash flows such as dividends or interest payments 3. Accurate in reporting the economic resources of the business 37

4 PRINCIPAL QUALITATIVE CHARACTERISTICS THAT DETERMINE THE USEFULNESS OF INFORMATION IN FINANCIAL STATEMENTS Understandability Relevance Reliability Comparability 38

Financial Statements • Balance Sheet • Income Statement • Capital Statement • Statement of Cash Flow 39

Recognition of the Elements of Financial Statements Criteria for an element to be recognized in the basic financial statements: 1. It is probable that any future or economic benefit associated with the item will flow to or from the enterprise 2. The item has a cost or value that can be measured with reliability 3. The information is faithful, verifiable and neutral 4. The information about it is capable of making a difference in user decisions. 40

• Recognition of assets • Recognition of liabilities • Recognition of income • Recognition of expenses 41

Measurement of the Elements of Financial Statements Bases of measurement 1. Historical cost 2. Current cost 3. Realization (settlement) value 4. Present value 42

Elements of Financial Statements Balance Sheet or Statement of Financial Position 43

Assets Current Assets: Cash equivalents Notes receivable Accounts receivable Credit card receivables Marketable securities Inventories Prepaid expenses 44

Non-current Assets: Land Building Machinery and Equipment China, Glass, Silver, Linen & Uniform Accumulated depreciation Intangible Assets 45

Liabilities Current liabilities Accounts payable Notes payable Accrued liabilities Unearned revenues Current portion of longterm debts Non-current liabilities Mortgage payable Bonds payable 46

Owner’s Equity Capital (Common Stock) Withdrawals Retained Earnings 47

Elements of Financial Statements Income Statement 48

Income Sales Rooms Food and Beverages Other Income 49

Expenses Cost of Sales: Food and Beverages Other income Departmental Expenses Rooms Food and Beverages Other Income 50

Operating Expenses Administrative and general Marketing Property Operations and Maintenance Power, Light & Water Telecommunications Other Expenses Insurance expense Depreciation expense Uncollectible accounts expense Interest expense 51

Accounting Periods 1. Fiscal year – a period of any twelve consecutive months. 2. Calendar year – annual period ending December 31 3. Natural business year – a twelve month period that ends when business activities are at their lowest level of the annual cycle. 4. Interim period – a period of less than a year. 52

Debit and Credit The Double-entry Accounting System 53

The “T” Account Title Left side or the debit side Right side or the credit side 54

The Accounting Equation 55

Rules of Debit and Credit 56

Balance Sheet Accounts Assets Debit (+) Credit (-) Increases Decreases Liabilities and Owner’s Equity Debit (-) Credit Decreas (+) es Increase s 57

Oct 1 Del Mundo obtained the funds to start Case the business by withdrawing P 800, 000 from : his personal savings. He deposited the amount in a new bank account that he opened in the name of the firm, Del Mundo Accounting Services. Assets (Increase) Cash Debit (+) 10 -1 800, 000 Owner’s Equity (Increase) Del Mundo, Capital Credit (-) Debit (-) Credit (+) 10 -1 800, 000 58

Income Statement Accounts Debit for decreases in owner’s equity Credit for increases in owner’s equity Expenses Income Debit Credit ( (+) -) Increas Decrea es ses Debit (-) Credit decreas (+) es Increase s 59

Summary Account Normal Balance Debit Credit Asset Debit Increase Decrease Liability Credit Decrease Increase Capital Credit Decrease Increase Drawing Debit Increase Decrease Revenue Credit decrease increase Expense Debit Increase decrease 60