INTRODUCTION TO ACCOUNTING

• 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 decision.

  • Financial Reporting Standards Council

  (FRSC)
• 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.

  • American Institute of Certified Public Accountants

  (AICPA)
• Accounting is a system that measures

  business activities, processes given

  information into reports, and

  communicates findings to decision

  makers.

  • Philippine Institute of Certified Public Accountants

  (PICPA)
• Accounting is the process of

  identifying, measuring, and

  communicating economic

  information to permit informed

  judgment and decisions by users of

  the information.

  • American Accounting

  Association (AAA)
• Accounting is the "Language of Business." All the documents speak about the performance of the company. It is used to effectively communicate with interested users of information about the operations of the business.
• The ff. are usually communicated in Accounting:

  1. Results of Financial Information (know profitability - Income Statements)
  2. Status of Financial Condition (know stability - Statement of Financial Condition)
  3. Cash Inflows and Outflows (know where cash is obtained and spent - Statement of Cash Flow)
  4. Other facts that are probable to happen in the future (Historical Background)
• 3 Fundamental Objectives of Information System:

  1. Fulfill stewardship function of management/owners.
  2. Support daily operations of the business.
  3. Help interested users communicate informed decision.
• The objective of financial statements is to provide information about financial position, performance and cash flows of an entity.
• The 1st basic function of Accounting is Recording. It is a.k.a. Journalizing and Bookkeeping. Only the quantifiable and measurable transactions or events are recorded in the book of accounts. It is done daily and chronologically.
• The 2nd basic function of Accounting is Classifying. It is sorting similar transactions or events based on their kinds/classes. It is first input in the Jounral (Book of Original Entry) and then transferred to the Ledger (Book of Final Entry). This process is called Posting (usually done at the end of the month).
• The 3rd basic function of Accounting is Summarizing. It involves the preparation of financial statements (final product of accounting).
• The ff. is the complete set of financial statements:

  1. Statement of Financial Position (a.k.a. balance sheet - status of assets, liability, equity)
  2. Statement of Comprehensive Income (a.k.a. income statements - info in services or sales, expenses, net income, losses)
  3. Statement of Changes in Equity (a.k.a. statement of retained earnings - covers net profit or loss)
  4. Statement of Cash Flows (data of all cash transactions - cash inflows and cash outflows)
  5. Notes to Financial Statements (detailed assumptions of accountants)
• The 4th basic function of Accounting is Interpreting. The information from the face of financial statements are analyzed and evaluated. It presents the ff. information:

  • Profitability (ability to realize more revenues than expenses - income statement)
  • Liquidity (ability to pay current maturing obligations/liabilities within 1 year - short term)
  • Stability (ability to pay long term financial obligations and to remain stable)
  • Management Efficiency (effectiveness in utilizing resources)
• Financial Accounting is the preparation of General Purpose Reports (e.g. financial statements) that is intended for both internal and external users.
• Preparation of financial statements in Financial Accounting should be aligned with the Philippine Financial Reporting Standards (PFRS).
• Management Accounting prepare financial reports intended for internal users only. It deals with the needs of the management and involves application of analytical tools and techniques to economic data.
• Government Accounting involves receipts and disposition of the Government funds and property and its political instrumentalities. It ensures proper allocation and use of Government funds and resources and is done by Commission on Audit.
• In Auditing, External Auditing is for fair and honest presentation of financial statements and is done by an independent CPA outside the company. Internal Auditing on the other hand, adds value and improve the operations and processes of the organization and is done by an Accountant within the finance group of the company.
• Tax Accounting speacializes in taxation, focuses on tax advising services, preparation of tax returns and determination of tax consequences of businesses. It complies with taxation laws and regulation.
• Cost Accounting focuses on technique/method in determining the cost or cash equivalent that has been sacrified to gain a benefit or achieve certain objectives.
• Accounting Education is a teaching profession by Certified Public Accountants. They teach accounting, auditing, managemet services, taxation, finances and business law.
• Accounting System involves the manual or electronic systematic procedure of accumulating data for accuracy and proper decision making. Accountants' exposure to day-to-day business operations help in deciding what type of Accounting System to use.
• Investors or Shareholders (providers of risk capital) use financial statement to decide whether to buy, hold, or sell stocks. It allows them to determine the ability of the entity to pay them dividends.
• Employees and their representative groups use financial statement in determining the profitability and stability of their employers. They also use this to acquire information about the benefits and opportunities the entity offers.
• Lenders use financial statements to decide on who will they allow borrowing of money based on their ability to pay when it is due.
• Suppliers and other trade creditors use financial statement in determining the ability of the entity to pay the amount owing to them when due. They are interested in a short period of time unless it is a major customer.
• Customers use financial information in determining the contiuance of existence of an entity especially if they have long-term involvement or highly dependent on them.
• Government and their agencies use the financial statements in monitoring allocation of resources and activities of the businesses. They use this to regulate activities and determine taxation policies.
• Public Entities use financial statements to acquire information about the trends and recent developments in the progress of an entity and activites.