1 Accounting Cycle

• Accounting


  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 financial character, and interpreting the results thereof
• Accounting


  The process of identifying, measuring and communicating economic information to permit informed judgment and decision by users of the information
• Accounting


  A service activity whose function is to provide quantitative information, primarily financial in nature, about economic entities, that is intended to be useful in making economic decisions
• Luca Pacioli published his book describing double-entry bookkeeping


  1494
• Specialized fields of accounting

  • Financial accounting
  • Auditing
  • Tax accounting
  • Cost accounting
  • Accounting systems
  • Management accounting
  • Accounting education
  • Government accounting
  • Nonprofit accounting
• Bookkeeping


  Systematic recording of business activities, an essential step in the preparation of financial statements
• Accounting


  Covers a wider scope than bookkeeping, including the process of interpretation and analysis of financial reports requiring a higher degree of knowledge, reason and judgment
• Entity concept


  • An accounting entity is an organization or a section of an organization that stands apart from other organizations and individuals as a separate economic unit
  • Transactions, assets, liabilities and equity of an entity are considered separate from those of its owners
• Periodicity concept


  • An entity's life can be meaningfully subdivided into equal time periods for reporting purposes
  • One year is the usual accounting period for reporting to outsiders
• Stable monetary unit


  • The Philippine Peso is a reasonable unit of measure and its purchasing power is relatively stable
• Objectivity


  • Accounting records and statements are based on the most reliable data available, verifiable by independent observers
• Historical cost


  • Acquired assets are recorded at their actual cost, not at what management thinks they are worth
• Going concern


  • Financial statements are prepared on the assumption that the entity will be able to continue operations within a foreseeable future
• Accrual basis of accounting

  • Reports the effects of transactions and events in the periods in which those effects occur, even if the resulting cash receipts and payments occur in a different period
  • Revenue is recognized when goods are delivered or services are rendered
  • Expenses are recognized when goods and services are used up to produce revenue, not when paid for
• Consistency


  • Entities should use the same accounting method from period to period to achieve comparability
• Materiality


  • Omissions or misstatements are material if they could influence the economic decisions of users
  • Material items are to be presented separately in the financial statements
• Business transactions


  Economic activities or events that occur in commercial enterprises which financially affect the capital standpoint or resources of an entity
• Types of business organizations

  • Sole or single proprietorship
  • Partnership
  • Corporation
• Sole proprietorship


  A business entity that is owned by one person called the proprietor who usually conducts the operation of his business and enjoys the profits all by himself
• Partnership


  Owned by two or more persons called partners, who agree to contribute money, property or industry into the business with the purpose of dividing the profits among themselves
• Corporation


  The most complicated among the types of business organizations, is an artificial being created through the operation of law. The owners of corporations are called stockholders or shareholders.
• Assets


  A resource controlled by the entity as a result of past events and from which economic benefits are expected to flow to the entity
• Liabilities


  A present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits
• Equity


  The residual interest in the assets of the entity after deducting all its liabilities
• Income


  Increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity other than those relating to contributions from equity participants
• Income


  • Revenues
  • Gains
• Revenues


  Arises in the course of the ordinary activities of an entity and is referred to a variety of names including sales, fees, interest, dividends, royalties and rent
• Gains


  Represent other items that meet the definition of income and may, or may not, arise in the course of the ordinary activities of an entity. Gains represent increases in economic benefits and as such are no different in nature from revenue.
• Expenses


  Decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrences of liabilities that result in decreases in equity, other than those relating to distributions to equity participants
• Expenses


  • Expenses that arise in the course of the ordinary activities of the entity (e.g. cost of sales, salaries and wages, depreciation)
  • Losses
• Losses


  Other items that meet the definition of expenses and may, or may not, arise in the course of the ordinary activities of the entity. Losses represent decreases in economic benefits and as such they are no different in nature from other expenses.
• Net income/profit or net loss


  The difference between income realized and expense incurred
• Basic financial statements


  • Statement of financial position
  • Statement of comprehensive income
  • Statement of changes in equity
  • Statement of cash flows
  • Notes to the financial statements
• Statement of financial position


  Shows the assets, liabilities and equity of an entity as of a given date
• Statement of comprehensive income

  Shows the income, expense and net profit or loss of an entity during a reporting period
• Statement of changes in equity

  Shows the changes in the components of equity of an entity during a reporting period
• Statement of cash flows


  Shows the changes cash and the cash provided or used by operating, investing and financing activities of an entity during a reporting period
• Notes to the financial statements

  Contain information in addition to that presented in the statements above, and provide narrative descriptions or disaggregations of items presented in those statements and information about items that do not quality for recognition in those statements
• Double-entry accounting


  Financial accounting is based on a double-entry system which means that every transaction has a dual effect (two-sided) on the accounting records. This system provides a logical method for recording transactions and it offers a means of proving the accuracy of the recorded amounts.
• Accounting equation


  Assets = Liabilities + Capital