Chapter 1 - Overview of Accounting

• Accounting is the process of identifying, measuring and communicating economic information.
• Identifying in accounting involves analyzing events and transactions to determine whether or not they will be recognized.
• Recognition in accounting is the process of including the effects of an accountable event throughout the journal entry.
• Accountable event in accounting is the one that affects the assets, liabilities, equity, income or expenses, also known as economic activity.
• External event in accounting involves changes in the economic resources of an entity caused by an external party, but does not involve transfers of resources.
• Internal event in accounting are events that do not involve an external party, such as production and casualty.
• Measuring in accounting involves assigning numbers, normally in monetary terms, to the economic events.
• Valuation by fact or opinion in accounting is when measurement is unaffected by estimates, the items measured are said to be valued by fact.
• Communicating in accounting is the process of transforming economic data into useful accounting information, such as financial statements.
• Recording in accounting is the process of systematically committing into writing the identified and measured accountable events, also known as journal entries.
• Classifying in accounting involves grouping of similar and interrelated items into their respective classes, also known as posting in the ledger.
• Summarizing in accounting is the process of putting together or expressing in condensed form the recorded and classified transactions and events, also known as preparation of financial statements.
• Interpreting in accounting involves computation of financial statements ratios.
• The basic purpose of accounting is to provide information that is useful in making economic decisions.
• Realization is the process of converting non-assets into cash/claims for cash and deals with revenue recognition.
• Expense Recognition Principles include Matching Concept (Direct Association of Costs and Revenues), Systematic and Rational Allocation, and Residual Equity Theory.
• Suf fi cient condensation to make the information understandable CONSISTENCY CONCEPT The consistent preparation and application of the basis of accounting principles from one period to another
• Financial statements are structured representations of an entity’s financial position and they are the end product of the accounting process.
• Financial Reporting is the provision of financial information about an entity that is useful to external users and includes information provided outside the financial statements.
• Fund Theory's accounting objective is neither proper income determination nor proper value of assets, but the custody and administration of funds.
• Residual Equity Theory applies to two classes of shared issued, such as Ordinary and preferred, and is used in the computation of book per share and return equity.
• Financial reporting includes the financial statements plus other information provided outside the financial statements.
• Matching Costs are recognized as expenses when the related revenue is recognized
• The objectives of Financial Reporting are to provide information and to comply with applicable laws and regulations.
• Entity Theory emphasizes the income statement and is exemplified by the equation Asset= Liabilities + Capital
• Proprietary Theory's accounting objective is Proper Valuation of Assets and it emphasizes the importance of balance sheets.
• Prudence (Conservatism) involves the use of caution when making estimates under conditions of uncertainty and does not allow the deliberate understatement of assets or overstatement of liabilities.
• Financial Accounting focuses on general purpose financial statements that cater to the common needs of external users.
• Social accounting is the process of communicating the social and environmental effects of an entity’s economic actions to the society.
• Estate accounting is the handling of accounts for fiduciaries who wind up the affairs of a deceased person.
• Tax accounting is the preparation of tax returns.
• Fiduciary accounting is the handling of accounts who managed custody and management of property.
• Cost accounting is the systematic recording and analysis of the cost of materials, labor, and overhead incident production.
• The practice of accounting can be classified into two: Public Practice, which is not an employer-employee relationship, and Private Practice, which is an employer-employee relationship.
• Under R.A. 9298 “Philippine Accountancy Act of 2004”, the practice of accounting is sub-classified into the following: Practice of Public Accountancy, Practice in Commerce and Industry, Practice in Education/Academe, and Practice in the Government.
• Accounting research is the careful analysis of economic events and other variables.
• Accounting systems are the installation of accounting procedures.
• The Philippine Financial Reporting Standards (PFRS) represents the generally accepted accounting principles (GAAP) and comprise Philippine Financial Reporting Standards (PFRS), Philippine Accounting Standards (PASs), and Interpretations.
• Management accounting is the accumulation and communication of information for use by internal users of management.
• Bookkeeping is the process of recording the accounts and ends with the preparation of the trial balance.