Accounting: Core Activities and Events

Overview of Accounting

• Accounting is identifying, measuring, and communicating economic information for informed decisions (American Association of Accountants).

Core Activities in Accounting

• Identifying accountable events for recognition.
• Measuring events in monetary terms.
• Communicating financial data to users.

Identifying Accountable Events

• It involves analyzing transactions to determine recognizability.
• Recognition puts affects on assets and financial statements via journal entries.
• Only accountable events (affecting assets, liabilities, equity, income, or expenses) are recognized.
• These events are also termed economic activity.
• Sociological and psychological matters are not recognized
• Non-accountable events are disclosed in notes if relevant, but not recognized directly.
• Non-accountable events with relevance may be recorded via memorandum entry.

Types of Events/Transactions

• External events involve the entity and another party.
• Exchange (reciprocal transfer): giving and receiving of economic resources.
• Examples include sales, purchases, and payments.
• Non-reciprocal transfer: one party gives/receives without return.
• Examples include donations and taxes.
• External events other than transfer: changes caused by an external source without resource transfers.
• Examples include obsolescence and vandalism.
• Internal events do not involve an outside party.
• Production: transforming resources into finished goods.
• Casualty: unanticipated loss from disasters.

Measuring Economic Transactions

• Assigning monetary values to transactions and events.
• Common bases include historical cost, fair value, present value, realizable value, current cost and replacement cost.
• Financial statements use a mixture of these bases.

Valuation and Estimates

• Estimates are essential, so financial statements mix facts and opinions.
• Estimates affect items such as depreciation and retained earnings.
• Items unaffected by estimates are valued by fact like share capital.

Communicating Financial Data

• It is transforming data into useful information for users.
• It interprets and disseminates financial statements and reports.

Aspects of Communication

• Recording: systematically writing accountable events in journals.
• Classifying: grouping similar items via postings in the ledger.
• Summarizing: condensing transactions into statements and reports.
• Interpreting: computing financial ratios.
• Regulatory bodies may require specific ratios in notes.

Basic Purpose of Accounting

• It provides information useful for economic decisions.
• Financial statements are just one source among current events and expert advice.
• Economic entities use accounting to record activities and provide data.
• An economic entity is a separate unit controlling resources to achieve goals.
• It can be not-for-profit or business.

Economic Activities

• Activities affecting economic resources (assets) and obligations (liabilities).
• Production: converting resources.
• Exchange: trading resources or obligations.
• Consumption: using final output.
• Income distribution: allocating output rights.
• Savings: setting aside consumption rights.
• Investment: using inputs to increase resources.

Types of Provided Information

• Quantitative: expressed in numbers.
• Qualitative: descriptive, found in notes.
• Financial: expressed in money (also quantitative).

Classification of Information

• General purpose: for common user needs, governed by GAAP (PFRSs).
• Special purpose: for specific needs, i.e. managerial accounting.

Information Sources in Financial Statements

• Information is from both internal and external sources.
• External examples: fair value and lease payments.

Accounting as a Science and Art

• As a social science: organized body of knowledge.
• As practical art: requires creative skills and judgment.

Accounting as an Information System

• Identifies, measures, processes and communicates economic activities for decision-making.

Accounting as a Language

• Functions as the language of business due to its communication role.

Creative and Critical Thinking

• Practice of accountancy relies on these thinking skills.
• Creative thinking involves finding new solutions.
• Critical thinking involves logical analysis to determine effectiveness.
• Problem-solving uses both for steps such as identifying, and implementing

Accounting Concepts

• Principles upon which accounting is based.
• Accounting assumptions (postulates): fundaments such as the going concern assumption.
• Accounting theory is logical reasoning that provides a reference frame and guides new practices.

Core Accounting Concepts Examples

• Double-entry system: each event recorded as debit and credit.
• Going concern assumption: entity operates indefinitely, impacting measurement.
• Separate entity: business viewed separately from its owners.
• Stable monetary unit: value stated in consistent currency as the peso.
• Time Period: dividing life into reporting periods, like calendar or fiscal years.
• Materiality: information matters if it influences economic decisions.
• Cost-benefit: processing costs should’nt exceed benefits.

Additional Key Concepts

• Accrual Basis of Accounting effects recognized when they occur, not when cash changes hands.
• Historical cost that’s based on acquisition cost.
• Concept of Articulation interrelation within the Financial Statements.
• Full Disclosure Principle strives for the balance between detail and understandability.
• Consistency concept preparation based on consistent application across the reporting period.
• Matching costs are recognized to align with related revenue.
• Entity theory the focus geared income determination.

Income statement

• Income statement is exemplified by A= L+C.
• Proprietary theory that’s geared toward proper valuation of assets.
• Residual equity theory where the residual equity to the ordinary shareholders is calculated by A - L - Preferred Shareholders equity is Ordinary Shareholders equity.
• Fund theory where it’s related to the custody and administration funds, focused toward cash flows.
• Realization non cash assets go to cash or claim for cash.
• Prudence caution and estimates done under uncertainty.

Exercise of Prudence

• Prudence does not allow for the deliberate measures with the goal overstated the liabilities, the overstatement of assets or deliberate understatement of assets.
• Matching concept the cost with the earnings are directly related to the expenses and revenue in the same period.
• Systematic and rational allocation the costs and not directly revenue is allocated expenses over the allocated consumption period.
• Immediate recognition the examples include casualty losses and impairment losses.
• The difference is financial and financial statements.

Branches of Accounting

• Financial accounting caters to general use and guided by PFRSs.
• Management is the internal use.
• Cost recording and labor.
• Auditing is done with the goal of issuing and expression.
• Tax for taxation.
• Government in relation to the government.
• Fiduciary who handle accounts with custody.
• Estate is for handling of accounts but for the deceased.
• Social communicating social affairs.
• Also important, book keeping is not required for the interpretations.

Four Sectors in the Practice Accountancy

• R.A 9298
• Public practice audit, accounting, rendering clients with fees
• Commerce and Industry is employment with decision making and professional knowledge to where the holder is a certified public accountant.
• The board of accountancy is considered in the private sector.
• The financial standards is represented as GAAP.

Reporting Standards Hierarchy

• The term "generally acceptable" means that either:
  • The standard has been established by an authoritative accounting rule-making body, or
  • The principle has gained general acceptance due to practice over time.

Proper Application of Accounting

• Proper application of accounting principles is most dependent upon the professional judgment of the accountant.
• The requirements in PFRSs dealing with similar and related issues
• The conceptual framework.
• Management may also consider the financial literature.

Setting Bodies

• Composed of 15 accounting individuals.
• The Philippine interpretation committee.
• The board of Accountancy supervise registration.
• Securities and exchange commission ruling affect accounting.
• Internal revenue provisions of internal revenue code
• Bank is policy control.
• The IASC was founded in 1973.
• Due process involves reviewing the staff
• International Federation is an enhance for standards development.
• International organization of securities commissions are by the SEC.
• IFRSs accounting previously by GAAP.
• Made due to increasing international businesses.

Future of IFRSs

• Called “Norwalk Agreement.
• Set new standards.
• Changes and reporting standards are continually revised.