Lesson 1

• Accounting as defined by the Accounting Standards Council is a service activity that provides quantitative information about a business for the basis of economic decisions and resolutions.
• Accounting is also called the “language of business” that serves as a communication link between the entity and the users of financial information.
• Accounting is also defined as 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.
• Section 232A of the Internal Revenue Code of the Philippines requires all businesses which are compelled by law to pay internal revenue taxes to keep books of accounts & records in accordance with the standard accounting system.
• In 1494, Friar Luca Pacioli, a mathematician, wrote a book entitled (translated in English) Everything about Arithmetic, Geometry, Proportions and Proportionality discussing Double-entry bookkeeping system. Because of this, he was considered the father of double entry bookkeeping.
• In the mid-18th and 19th centuries, the Industrial Revolution took place and cost accounting emerged.
• Businesses as the profit-oriented body really requires an accounting for its activities. In general, accounting as an information system, provides reports about economic activities and condition of a business.
• In 18th to 19th centuries the corporate form of business organizations was created to accommodate the need for the increasingly large amount of funds which was required to finance the expansion of the businesses.
• Accounting provides the necessary information essential in the formulation and execution of business and non-business policies. Business and the government acknowledge accounting as an essential tool of management.
• Specialized Accounting Fields

  • Public Accounting
  • Auditing
  • Tax Services
  • Management Advisory Services
  • Private Accounting
  • Internal Auditor
  • Cost Accountant
  • Accounting clerk
  • Government Accounting
  • Auditor
  • Consultant
  • Budget Officer
  • Accounting Education
  • Instructors
  • Professors
  • Reviewers
• Public Accounting – Accountants and their staff who render services for a fee are said to be engaged in public accounting.
• Auditing – independent examination of financial statements for the purpose of expressing an opinion on the fairness of the said statements prepared by the company under audit. (Primary service offered by most CPAs in public practice)
• Tax Services – CPAs who specialize in tax accounting prepare income tax returns and advise clients on tax matters like legal ways to pay lower taxes. (Major source of income by accountants especially during tax season)
• Accounting Education – Accountants employed as instructors, professors, reviewers or researchers are in the field of accounting education. Only CPAs can engage in this field
• Single or Sole Proprietorship - owned by only an individual called the proprietor.
• Partnership – 2 or more persons bind themselves to contribute money, property or industry to a common fund with the intention of dividing profits among themselves.
• Corporation – an artificial being created by the operation of law having the rights of succession and the powers and attributes expressly authorized by law or incident to its existence.
• Forms of Business Organizations

  • Single or Sole Proprietorship
  • Partnership
  • Corporation
• Service – renders services to customers or clients for a fee (e.g. Public Transport, schools, clincs etc.)
• Merchandising or trading – buys goods or commodities and sells them at a profit (e.g. Groceries, car dealers, drugstores etc)
• Manufacturing – makes finished goods from raw materials or unassembled parts (e.g. Shoe factories, car assembler, food processing plants etc.)
• Types of Business

  • Service
  • Merchandising or trading
  • Manufacturing
• The Generally Accepted Accounting Principles defines what is accepted accounting practice that must be followed in financial reporting.
• The Generally Accepted Accounting Principles is the guideline that will govern how accountants will accumulate, measure, record and report the financial affairs & activities of the business.
• The Generally Accepted Accounting Principles

  • Business Entity Concept
  • Going concern or continuity assumption
  • Time period assumption
  • Monthly basis
  • Quarterly basis
  • Semi-annual basis
  • Annual basis
  • Calendar year
  • Fiscal year
  • Natural Business year
  • Unit of Measurement Assumption
  • Accrual Basis
  • Matching Principle
• Going concern or continuity assumption – assumes that unless there is evidence to the contrary, the business entity will continue to operate for an indefinite period
• Time period assumption – requires the indefinite life of the business to be divided into time periods or accounting periods for the purpose of preparing financial reports on the performance and financial position of the business.
• Calendar year – Jan 1 to Dec 31
• Fiscal year – 12-month period starting at any month except January
• Natural Business year – 12-month period ending on any month when the business is at the lowest point or is experiencing slack season
• Unit of Measurement Assumption – specifies that accounting should measure and report the results of a business’ economic activities in terms of a monetary unit such as Philippine Peso.
• Accrual Basis – requires the revenue or income should be recognized when earned regardless of when collection is received; and expense should be recognized when incurred regardless of when payment is made.
• In contrast, revenues and expenses may be accounted for on a cash received or cash paid basis – known as Cash basis of accounting
• Matching Principle – relates to the expense recognition principle which requires that costs and expenses incurred in generating the revenue should be properly matched against the related revenue in determining the net income or net loss for the period.
• Financial Statements is the end product of the accounting process.
• Financial statements are the means by which financial information about an economic entity is communicated to its users.
• Basic Financial Statements of Business Organizations

  • Statement of Comprehensive income or Income Statement
  • Statement of Financial Position or Balance Sheet
  • Statement of Changes in Owner’s Equity or Capital Statement
  • Statement of Cash Flows
  • Notes to the Financial statements
• Statement of Comprehensive income or Income Statement – shows the summary of the company’s revenue and expenses for a given period. It shows the result of the company’s business operation. (Profit? Loss? How much?)
• Statement of Financial Position or Balance Sheet – shows the list of the company’s asset, liabilities and owner’s equity as of a specific date, usually at the last day of the period. It shows the financial condition of an enterprise as of a particular date.
• Notes to the Financial statements – presents in narrative form the significant accounting policies and other related explanatory notes that have affected the preparation of the financial statements that makes it more useful to its users.