PRE-MID TOPIC: FINANCIAL ACCOUNTING Accounting - A process of identifying, recording, and communicating economic information useful in making economic decisions. ESSENTIAL ELEMENTS OF THE DEFINITION OF ACCOUNTING 1. Identifying- identifies whether the transaction is an accountable event or non-accountable event. • Non-accountable events- not recorded in the book of accounts. • Accountable events/Economic events- affect the assets, liabilities, equity, income or expenses of a business. 2. Recording- the accountant recognizes the identified accountable events and it is called “journalizing”. 3. Communicating- summarizes the information processed in the accounting system in order to produce meaningful reports. Common form which is “Financial Statements”. NATURE OF ACCOUNTING Accounting a process with the basic purpose of providing information about economic activities that is intended to be useful in making economic decisions. TYPES OF INFORMATION PROVIDED BY ACCOUNTING 1. Quantitative information- information expressed in numbers, quantities, or units. 2. Qualitative information- expressed in words, or descriptive form. 3. Financial information-expressed in money. ACCOUNTING AS SCIENCE AND ART 1. As a social science, accounting is a body of knowledge 2. As a practical art, accounting requires the use of creative skills and judgment. FUNCTIONS OF ACCOUNTING IN BUSINESS ➢ Offered to as the “language of business” because it is fundamental to the communication of financial information. 2 broad functions in Business 1. External users- with information that is useful in making, among others, investment and credit decisions. Not directly involved. Ex. Suppliers, government, customers, lenders, non-managerial employees. 2. Internal users- with information that is useful in managing business. Ex. Owner - Directly involved. Ex. Owners, Board of Directors, Managerial Personnel BRIEF HISTORY OF ACCOUNTING Fra Luca Pacioli ➢ Father of Modern Accounting ➢ First systematic record keeping dealing with the “double entry recording system” ➢ The “double entry recording system” was included in Pacioli’s book titled “Summa di Arethmetica Geometria Proportioni and Proportionista”. ➢ Published on November 10, 1494 in venice Common branches of Accounting FORMS OF BUSINESS ORGANIZATIONS 1. Sole Proprietorship➢ Owned by only one individual ➢ Registered with the Department of Trade and Industry (DTI) 2. Partnership➢ Owned by two or more individuals who entered into a CONTRACT ➢ Registered with the Securities and Exchange Commission (SEC) 3. Corporation➢ Owned by more than one individual. Created by operation of law rather than a contract. ➢ Artificial being or juridical person, shall not be less than 5 but not more than 15 ➢ Registered with the Securities and Exchange Commission (SEC) 4. Cooperative➢ More than one individual ➢ Accordance w/ e provisions of The Philippine Cooperative Code of 2008- formed ➢ Registered with the Cooperative Development Authority (CDA) Types of Business According to Activities 1. Service Business➢ Offers services as its main product rather physical goods. ➢ Ex. Schools, hospitals & clinics,, Bank & other financial ins. Hotels & Restaurant. 2. Merchandising Business or Trading Business➢ Buy and sell goods ➢ Ex. Grocery stores, department store, hardware, pharmacies, online stores 3. Manufacturing Business➢ Buy raw materials & processes them into final products. ➢ Ex. Car manufacturing, Tech. Companies, food processing comp., factories Basic Accounting Concepts 1. Separate Entity Concept➢ Only the transactions of the business are recorded in the book of accounts. ➢ Personal transactions of the business owner are not recorded. 2. Historical Cost Concept- ➢ Assets are initially recorded at their acquisition cost 3. Going Concern Assumption➢ Assumed to continue to exist for an indefinite period of time. 4. Matching (Association of cause and effect)➢ Some costs are initially recognized as assets and charged as expenses only when the related revenue is recognized. 5. Accrual Basis of Accounting➢ Economic events are recorded in the period in which they occur rather than at the point in time. 6. Prudence or Conservatism➢ The accountant observes some degree of caution when exercising judgements needed in making accounting estimates under conditions of uncertainty. 7. Time Period➢ Periodicity, accounting period, or reporting period concept ✓ When need timely periodic info. to help them make economic decisions ✓ Reporting Periods- Usually 12 month it can be longer or shorter • Calendar Year Period- Jan 1 to Dec. 3 • Fiscal Year Period- cover 12 months but pwede ra unsa nga month mag start 8. Stable Monetary Unit➢ Power of the peso sign ➢ Assets, liabilities, equity, income and expenses are stated in terms of a common unit of measure. 9. Materiality Concept➢ A matter of professional judgement & is based on the size & nature of an item being judged 10. Cost – Benefit (Cost Constraint)➢ The cost of processing and communicating information should not exceed the benefits to be derived from the info use. 11. Full Disclosure Principle➢ Sufficient detail to disclose matters. ➢ Sufficient condensation to make the information understandable. 12. Consistency Concept- “consistent” Accounting Standards Accounting concepts and principles are either Explicit or Implicit: ➢ Explicit Concepts and Principles- are those “Conceptual Framework for Financial Reporting” and in the Philippine Financial Reporting Standards (PFRSs). ➢ Implicit Concepts and Principles- not specifically mentioned in the foregoing but are customarily used because of their general and longtime acceptance with in the accountancy profession. ➢ Referred to as the Generally Accepted Accounting Principle (GAAP) ✓ ✓ ✓ ✓ The PFRS issued by the FRSC (Financial Reporting Standard Council) The PFRS patterned IFRS which are issued by the IASB. IFRS- International Financial Reporting Standard IASB- International Accounting Standard Board ✓ ✓ ✓ ✓ SEC- Securities and Exchange Commission BIR- Bureau of Internal Revenue BSP- Bangko Sentral ng Pilipinas CDA- Cooperative Development Authority Qualitative Characteristics of useful financial information 1. Fundamental Qualitative Characteristicsa. Relevance- It can affect the decisions of users. ➢ Predictive Value- helps users to make predictions about future outcomes. ➢ Confirmatory Value/ Feedback Value- a confirmatory value if it can help users confirm. ➢ Materiality- “entity- specific” depends on the facts and circumstances surrounding. b. Faithful Representation-“factual”- actual effects of events that have taken place. ➢ Completeness- have complete understanding of the fin. Statements provided. ➢ Neutrality- selected or presented without bias. ➢ Free from error- not materially misstated. Must perfectly accurate in all respects. 2. Enhancing Qualitative Characteristicsa. Comparability- Can identify similarities and differences between diff. sets of info. b. Verifiability- some agreement “ I say green; you say green” c. Timeliness- info is timely if it is available to users in time to be able to influence their decisions. d. Understandability- “understandable” CHAPTER 3- THE ACCOUNTING EQUATION Assets= Liabilities+ Equity Assets- the economic resources you control that have resulted from past events Liabilities- present obligations that have resulted from past events. ➢ Obligation- duty or responsibility ✓ Legal obligation- results from a contract, legislation or other operation of law ✓ Constructive obligation- results from your past actions that have created a valid expectation. ➢ Giving up of economic resources- require you to pay cash, to transfer other non-cash assets or to render a service Equity- is simply assets minus liabilities ➢ Other term “capital”, “ net assets” or net worth The expanded accounting Equation Assets= liabilities + equity + income- expenses Income- increases in economic benefits during the period in the form of increase in asset. Expenses- decrease in economic benefits during the period. If income is greater than expenses, the difference is profit. If income is less than expenses, the difference is loss.
