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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)

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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)

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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)

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Purpose of accountingPurpose of accounting – to provide quantitative information for making economic decisions

Components of accounting:

• Analytical component – identifying

• Technical component – measuring

• Formal component - communicating

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The recognition or non-recognition of business activities as “accountable” events.

assets

liabilities

equity

affecting

Economic activities or

business transactions

External

Internal

Production

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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.

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The process of preparing and distributing accounting reports to potential users of accounting information.

1. Recording

2. Classifying

3. summarizing

Journals

ledgers

Statement of Financial Position

Statement of Comprehensive Income

Statement of Cash Flows

Statement of Changes in Equity

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1. Auditing – the checking of accounts and the reporting on them. Businesses have their accounts audited as a legal requirement.

•Auditors

•Internal & external auditors

Branches of Accounting

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2.Bookkeeping – a mechanical task involving the collection of basic financial data.

Usually ends when the basic data have been entered in the books of accounts and the accuracy of each entry have been tested.

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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.

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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.

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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.

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1.Investors

2.Employees

3.Lenders

4.Suppliers and other trade creditors

5.Customers

6.Government and their agencies

7.Public

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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 non-professional services like hotel, laundry shop, car repair services, janitorial services.

Types of Business Enterprises

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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.

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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.

Example : furniture shop, manufacturers of cars and home appliances, bakeries and restaurants.

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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.

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1. Sole Proprietor

2. Partnership

3.CorporationCapital Stock:

Common Stock P xxx

Add: Retained Earnings xxx

Stockholder’s Equity, end P xxx

Retained Earnings, Beginning P xxx

Add: Profit for the Year xxx

total P xxx

Less: Dividends declared and paid xx

Retained Earnings, End P xxx

Forms of Business Organization & Their Capital Structure

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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

Fundamental Concepts in Accounting Process

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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.

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• 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.

Accounting Information System & The Accounting Process

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• information system – all the activities, procedures and processes that are used by an entity to :

1.Collect2.Process3.Report financial

information

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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

Basic Function of the Accounting System

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1.Procedures

2.Statement of accounting policies and standards

3.Records and reports

4.Bookkeeping system

5.Personnel

6.Equipment and devices

Basic Elements of an Accounting System

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1.Compatibility to the company’s organization

2.Provision of necessary reports

3.Provision for controls4.Adequacy of provision for audit trail

5.Presence of qualified and competent personnel

6.Simplicity, flexibility and favorable cost/benefit relationship.

Features of an Effective Accounting System

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Tasks in the operation of an Accounting Information

System

1.Data collection

2.Data processing

• Classification

• summarization

3.Report generation

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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

Steps in the Accounting Cycle

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2.Journalize transactions and events

3.Posting from journals to ledgers

4.Prepare unadjusted trial balance

5.Journalize and post adjusting journal entries

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Flow of Information Through the

Accounting System

Source Documents

Journals Ledger

Financial Statements

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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.

Basic GAAP Principles

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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

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

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Materiality- concerned with information that is significant enough to affect evaluations and decisions.

Consistency principle- use the same accounting method from period to period to achieve comparability over time within a single enterprise.

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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.

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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

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Financial Statements

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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

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4 PRINCIPAL QUALITATIVE CHARACTERISTICS THAT DETERMINE

THE USEFULNESS OF INFORMATION IN FINANCIAL STATEMENTS

Understandability

Relevance

Reliability

Comparability

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Financial Statements

• Balance Sheet

• Income Statement

• Capital Statement

• Statement of Cash Flow

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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.

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• Recognition of assets

•Recognition of liabilities

•Recognition of income

•Recognition of expenses

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Measurement of the Elements of Financial

Statements

Bases of measurement

1.Historical cost

2.Current cost

3.Realization (settlement) value

4.Present value

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Elements of FinancialStatements

Balance Sheet or Statement of

Financial Position

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AssetsCurrent Assets:

CashCash

equivalentsNotes

receivableAccounts

receivableCredit card

receivablesMarketable

securitiesInventoriesPrepaid

expenses

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Non-current Assets:Land

BuildingMachinery and EquipmentChina, Glass, Silver, Linen

& UniformAccumulated depreciationIntangible Assets

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Liabilities

Current liabilities

Accounts payableNotes payableAccrued liabilities Unearned revenuesCurrent portion of long-term debts

Non-current liabilities

Mortgage payable Bonds payable

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Owner’s Equity

Capital (Common Stock)WithdrawalsRetained Earnings

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Elements of FinancialStatements

Income Statement

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Income

SalesRoomsFood and BeveragesOther Income

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Expenses

Cost of Sales:

Food and Beverages

Other income

Departmental Expenses

Rooms

Food and Beverages

Other Income

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Operating Expenses

Administrative and general

Marketing

Property Operations and

Maintenance

Power, Light & Water

Telecommunications

Other Expenses

Insurance expenseDepreciation expenseUncollectible accounts expense

Interest expense

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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.

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Debit and Credit

The Double-entry Accounting System

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The “T” Account

Account Title

Left side or the debit side

Right side or the credit side

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The Accounting Equation

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Rules of Debit and Credit

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Balance Sheet Accounts

Assets Liabilities and Owner’s Equity

Debit (+)Increases

Credit (-)Decreases

Debit (-)Decreases

Credit (+)Increases

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Case :

Oct 1 Del Mundo obtained the funds to start the business by withdrawing P800,000 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.

Debit(+)

10-1 800,000

Credit(-)

Debit(-)

Credit(+)

10-1 800,000

Assets (Increase) Owner’s Equity (Increase)

Cash Del Mundo, Capital

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Income Statement Accounts

Debit for decreases in owner’s equity

Expenses

Credit for increases in owner’s equity

Income

Debit (+)

Increases

Credit (-)

Decreases

Debit (-)decreas

es

Credit (+)

Increases

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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

Summary