introduction to fabm 1

• 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 for economic decisions
  • American Accounting Association (AAA): accounting is the process of identifying, measuring, and communicating economic information for informed judgment
  • American Institute of Certified Public Accountants (AICPA): accounting is the art of recording, classifying, and summarizing financial transactions
• Nature of accounting:

  • Accounting is an art that establishes rules and principles for bookkeeping
  • Accounting is a science of observing and investigating economic events
  • Accounting is considered an ideology that justifies social, economic, and political arrangements
  • Accounting deals with financial information and transactions at every stage
  • Accounting is an information system that collects, processes, and communicates financial information
• Functions of accounting:

  • Systematic recording of financial transactions
  • Safeguarding business property
  • Creating a system that satisfies legal requirements
  • Communicating a variety of transactions to interested parties
• Users of accounting information:

  • Internal users: owners, managers, employees
  • External users: investors, creditors/lenders, customers, suppliers, government, public
• History and development of accounting:

  • Traders in the Middle East used clay objects for commercial transactions around 8,500 B.C.
  • Luca Pacioli, known as the "Father of Accounting," published "Summa de Arithmetica" in 1494
  • Cost accounting emerged in the 18th to 19th centuries
  • Generally Accepted Accounting Principles (GAAP) set standards for public accountants
• Branches of accounting:

  • Financial Accounting: gathering, classifying, analyzing, and recording financial data
  • Managerial Accounting: reporting data for management decisions
  • Auditing: external and internal auditing
  • Taxation: preparation of tax returns and tax planning
  • Government Accounting: overseeing government services and funding
  • Cost Accounting: analyzing costs incurred by the business
• Specialized accounting fields:

  • Practice of Public Accountancy: providing audit, tax planning, and advisory services
  • Practice in Commerce and Industry: performing accounting-related tasks in private companies
  • Practice in Government: using accounting information for planning, budgeting, and allocating government funds
• • Bangko Sentral ng Pilipinas (BSP): regulates Philippine bank operations, sets monetary policies, and other bank-related functions
  • Commission on Audit (COA): oversees auditing government-related transactions
• Government agencies involved in business registration and regulation:

  • Department of Trade and Industry (DTI): oversees the registration of sole proprietorship businesses and regulates 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
• Accounting Concepts and Principles:

  • 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: all business transactions are separated from the owner's personal transactions
  • Accrual Basis: requires recognizing business transactions when they occur, not when cash is received or paid
• • Going Concern: assumes the company will continue to exist long enough to fulfill its objectives
  • Monetary Unit: records transactions that can be expressed in terms of money
  • Time-Period: requires completing the accounting process over a specific operating period (e.g., monthly, quarterly, annually)
• Basic Accounting Principles:

  • Cost Principle: refers to the historical cost of items without adjusting for inflation
  • Full Disclosure Principle: includes sufficient information in financial statements for stakeholders to make informed judgments
  • Matching Principle: matches expenses with revenues to show actual profit
  • Revenue Recognition Principle: recognizes revenues when goods are sold or services rendered
  • Materiality Principle: reports important business transactions properly
  • Conservatism Principle: records the lower value when given two valuation options
• • Objectivity Principle: requires impartial supporting evidence for business transactions
• Forms of Business Organizations:

  1. Sole Proprietorship: owned by one individual, easy to set up, and least costly

  2. Partnership:

  • General Partnership: partners have unlimited liability for business debts
  • Limited Partnership: contains general and limited partners with different levels of liability

  3. Corporation: a separate legal entity consisting of at least five individuals, with specific attributes and powers authorized by law
• Types of Business According to Activities:

  1. Merchandising Business: involves buying and selling products at a higher price

  2. Manufacturing Business: converts raw materials into finished products

  3. Service Business: focuses on providing intangible products like professional skills and expertise