The language of business to communicate accounting information to help many types of users
User's need for financial information
Depend upon the type of decisions to be made
External Users
Individuals or organizations outside the company who are not involved in operating the business
External Users of Accounting
Investors
Suppliers and Creditors
Customers
Government and their agencies
Investors
Need accounting information to evaluate and examine the feasibility of investing in a company
Need accounting information to assess the ability of the enterprise to pay dividends
Suppliers and Creditors
Need accounting information to determine the credit integrity, worthiness of the organization and credit terms
Customers
Have the interest in information about the continuance of enterprise especially when they have a long-term involvement with or are dependent on the enterprise
Government and their agencies
Require information to regulate the activities of the enterprise, determine taxation policies and as a basis for national income and similar statistics
Internal Users
Also called as "primary users" of accounting information, persons who are actually involved in the daily operation of the business, inside the organization who plan, organize and run the business
Internal Users of Accounting
Management
Employees
Owners
Management
Need information to know the income/earnings for the period, sales, cash available and production cost
Need information to analyze the organization's performance and take appropriate measures to improve the company
Employees
Use information as factor to consider in staying employment, interested about the stability and profitability of the company that enable them to assess the ability of the enterprise to provide remuneration, retirement benefits and employment opportunities
Owners
Need information to know the profit or income, asset and liabilities of the business
Need information in consideration regarding additional investment, expand the business, borrow funds to support any expansion plans
Accounting Concepts and Principles
Fundamentals of Accountancy, Business & Management
At the end of this lesson, learners will be able to:
Explain the varied accounting concepts and principles
Solve exercises on accounting principles as applied in various cases
Financial Statements
Statement of Financial Position (Balance Sheet)
Statement of Comprehensive Income
Statement of Changes in Equity
Cash Flow Statement
Financial Accounting Standards Board (FASB)
Developed and established accounting standards to provide basic framework for financial reporting
Generally Accepted Accounting Principles (GAAP)
Forms a theoretical basis for determining how transactions are measured and reported, how they are presented and communicated to users
Ensure the users of financial information are not misled when taking decisions
Preparation of financial statements
Governed and guided by GAAP
GAAP are uniform set of accounting rules, procedures, practices and standards that are followed in preparing the financial statements
Serves as "ground rules" that guide the accounting practitioners in recording and reporting financial information of a business entity
Basic Assumptions
Economic Entity Assumption
Money Measurement Assumption
Accounting Period Assumption
Going Concern Assumption
Economic Entity Assumption
The business is considered as "an entity that is separate and distinct from the owner or management"
Money Measurement Assumption
Only business transactions and events which are financial in nature are recorded and reported in the financial statements
All transactions and events must be reduced to a unit of monetary currency (e.g. Peso)
Memorandum is used for non-financial/non monetary information
Five Major Accounts
Assets
Liabilities
Capital
Income
Expenses
Asset
Resources controlled by the enterprise as a result of past transactions and events and from which economic benefits flow to the enterprise
Accounting Period Assumption
The accounting measures activity for a specified interval of time, usually, a period of 365 days or 52 weeks
Calendar Year - Jan 1-Dec 31 of the same year (most common annual accounting period)
Fiscal Year - begin 1st day of any month except January and will end on the last day of the 12th month completing the one year period (interim financial statement)
Assets
Tangible Assets - physical existence (ex: cash, building…)
Intangible Assets – no physical existence (A/R, patents, trademarks…)
Assets by life span or liquidity
Current Assets – assets that are expected to be realized, consumed or converted into cash in 12 months time or less (ex. Cash, receivables, inventories)
Non-Current Assets (Fixed Assets) – assets with a life span of at least one year and usually longer (ex. Buildings, vehicle, machinery)
Going Concern Assumption
That the business will continue for a long period of time and transactions are recorded from this point of view
Liabilities
Present obligation of the entity arising from past events, the resulted of which is expected to result in an outflow from the entity of resources embodying economic benefits
Liabilities
Current - are debts that are paid in 12 months or less
Non-current – long-term debts that are paid off in years rather than months
Capital or Equity
The residual assets of the entity after deducting all of its liabilities
Equity affected by
Initial and additional contributions of owner/s (investment)
Income
Withdrawals made by owner/s (dividends for corporation)
Expenses
On the basis of the 4 Assumptions, Basic Concepts and Principles have been developed to guide how business transactions are reported
Equity types
Sole Proprietorship - Owner's Equity
Partnership - Partner's Equity
Corporations - Stockholder's Equity
Statement of Comprehensive Income or Income Statement
Shows the "result of operation" of the business for a given period of time, Contains nominal accounts or temporary accounts (Income and Expenses)
Income
Increase in the economic benefits of the entity that may be a result of enhancement or inflow of asset or such decrease in the liability that cause equity to increase. However, this does not include additional investments made by shareholders.
Duality Concept
Fundamental convention of accounting that necessitates the recognition of all aspects of an accounting transaction
Basis for double entry accounting system
Transactions are classified in two main types: Debit (portion that accounts for increase in assets/expenses, decrease in liabilities/equity/income) and Credit (portion that accounts for increase in income/liabilities/equity, decrease in assets/expenses)
Types of Income
Revenues – income earned in the course of ordinary activities of business (ex. service income, professional fees, sales)
Gains – income earned from the activities other than the normal activities of the business (ex. gain on sale of equipment, gain on sale of short-term investment)
Objectivity
All accounting record must be based on objective evidence
Should have supporting evidence or documentation
Documentary evidence of transactions should be free from any bias and are capable of verification
Expenses
Decrease in the economic benefits of the entity during the accounting period which are the result of depletions or outflow of assets or incurrences of liabilities that cause equity to decrease. However, this does not include distributions of dividends to shareholders