Intro to accounting 2

• Accounting is commonly referred to as the "language of business" because it is practical and universal
• Income statements or balance sheets prepared according to Generally Accepted Accounting Principles (GAAP) are readable and understandable by anyone who understands the basics of GAAP
• Investors and executives worldwide understand income, expenses, and company value in the same way
• Three widely acknowledged definitions of accounting:

  • Financial Reporting Standards Council (FRSC): accounting is a service providing quantitative financial information about economic entities for making economic decisions
  • American Accounting Association (AAA): accounting is the process of identifying, measuring, and communicating economic information for informed judgment and decisions
  • American Institute of Certified Public Accountants (AICPA): accounting is the art of recording, classifying, and summarizing money, transactions, and events of financial character
• Nature of Accounting:

  • Accounting is an art that establishes rules and principles for an economic entity's bookkeeping procedure
  • Accounting is a science of observing and investigating economic events using established methods
  • Accounting is considered an ideology that justifies social, economic, and political arrangements
  • Accounting deals with financial information and transactions, recording and finalizing financial statements
  • Accounting is an information system.
• Functions of Accounting:

  • Systematic recording of financial transactions through journalizing, posting, and statement preparation
  • Safeguarding business property from unauthorized use
  • Creating a system that satisfies legal requirements is the third function of accounting.
  • Accounting is used to communicate a variety of transactions. Owners, creditors, the government, employees, and others are interested in the company's outcomes.
• Users of Accounting Information:

  • Internal Users: owners, managers, employees within a business organization
  • External Users: investors, creditors/lenders, customers, suppliers, government agencies, public
• History and Development of Accounting:

  • Accounting's beginnings found in the Renaissance era, notably with Luca Pacioli in 1445
  • Cost accounting emerged in the mid-18th to 19th centuries
  • Generally Accepted Accounting Principles (GAAP) set standards for public accountants globally
  • According to deSantis (1995), The Summa made Pacioli famous and secured his place in history as "The Father of Accounting."
• Branches of Accounting:

  • Financial Accounting: gathering, classifying, analyzing, and recording financial data
  • Managerial Accounting: reporting data necessary for management decisions
  • Auditing: external and internal auditing to ensure correctness of financial data
  • Taxation: preparation of tax returns and tax planning
  • Government Accounting: overseeing government services and funding compliance
  • Cost Accounting: analyzing business costs to control expenses
• Specialized Accounting Fields:

  • Practice of Public Accountancy: providing audit, tax planning, and advisory services
  • Practice in Commerce and Industry: supporting companies with accounting-related tasks
  • Practice in Government: using accounting information for planning, budgeting, and fund allocation
  • Practice in Education or Academe (Accounting Educator and Researcher) – This area comprises accountants who are into teaching, research, and training and development.
• Generally Accepted Accounting Principles (GAAP) are a common set of standards developed by the accounting profession to guide preparers of financial statements in recording and reporting financial information
• Underlying Assumptions:

  • Economic Entity or Business Entity Concept assumes that all business transactions are separated from the owner's personal transactions
  • Accrual Basis requires that all business transactions and events are recognized when they occur, regardless of when cash is received or paid
  • Going Concern assumes that a company will continue to exist long enough to carry out its objectives and commitments
  • Monetary Unit assumes that only transactions expressible in money are recorded
• • Time-Period requires completing the accounting process over a specific operating period, such as monthly, quarterly, semi-annually, or annually
• Basic Accounting Principles:

  • Cost Principle refers to the amount spent when an item was originally obtained, without adjusting for inflation
  • Full Disclosure Principle requires including sufficient information in financial statements for stakeholders to make informed judgments
  • Matching Principle requires matching expenses with revenues to show actual profit
  • Revenue Recognition Principle recognizes revenues when goods are sold or services rendered, regardless of when money is received
• • Materiality Principle considers business transactions affecting financial information users as important and must be reported properly
  • Conservatism Principle directs recording the lower value when given two valuation options
  • Objectivity Principle requires impartial supporting evidence for business transactions
• Forms of Business Organizations:

  • Sole Proprietorship: owned by one individual, easy to set up and least costly
  • Partnership: formed by two or more individuals, can be general or limited partnership
  • Corporation: a separate legal entity consisting of at least five to 15 individuals, with specific attributes and powers authorized by law
• Types of Business According to Activities:

  • Merchandising Business: involves buying and selling products at a higher price than purchased
  • Manufacturing Business: converts raw materials into finished products
  • Service Business: focuses on providing intangible products like professional skills and expertise
• Comparison of the Types of Business:

  MERCHANDISING

  • Activity: Buys goods and sells in the same form
  • Nature of Revenue: Sales
  • Cost and Expenses: Cost of Goods Sold, Selling & Administrative Expenses

  MANUFACTURING

  • Activity: Converts raw materials to finished goods
  • Nature of Revenue: Sales
  • Cost and Expenses: Cost of Goods Sold and Manufactured, Selling & Administrative Expenses

  SERVICE

  • Activity: Does work for others
  • Nature of Revenue: Service Income
  • Cost and Expenses: Cost of Service and Administrative Expenses
• According to the Philippine Accountancy Act of 2004 (RA9298), the practice of accountancy shall include, but is not limited to, the following Specialized Accounting Fields
• Department of Trade and Industry (DTI) oversees the registration of sole proprietorship businesses and regulating consumer commodity transactions
• Bureau of Internal Revenue (BIR) oversees the proper collection of taxes from the public.
• Securities and Exchange Commission (SEC) oversees the registration of partnership and corporation businesses, accumulating audited financial statements,and regulating companies issuing shares and bonds to the public
• • Bangko Sentral ng Pilipinas (BSP) regulates Philippine bank operations, setting monetary policies, and other bank-related functions.

  • Commission on Audit (COA) oversees auditing government-related transactions.
• o Calendar Year – A 12-month period that ends on December 31.

  o Fiscal Year – A 12-month period that may or may not end on December 31.
• In the Middle East, around 8,500 B.C., traders used clay objects to depict goods like sheep flocks, spice and oil jars, clothing bolts, and other goods.
• The well-known "Summa de Arithmetica, Geometria, Proportioni et Proportionalita" (The Collected Knowledge of Arithmetic, Geometry, Proportion, and Proportionality) by Pacioli was published in 1494 in the Gutenberg Press.