Accounting Fundamentals

Accounting Fundamentals Overview

• Accounting is the art of recording, classifying, and summarizing financial transactions and events in a significant manner using money.
• Interpretations of financial results as defined by the American Institute of Certified Public Accountants are also key.

Branches of Accounting

• Financial accounting involves preparing financial statements for external users.
• Management accounting focuses on providing information for internal decision-making.
• Government accounting deals with the financial management of government entities.
• Auditing is the examination of financial statements to ensure their fairness and reliability.
• Tax accounting concerns tax planning and compliance.
• Cost accounting involves determining the cost of products or services.
• Accounting education involves teaching accounting principles and practices.
• Accounting research focuses on developing new accounting theories and practices.

Users of Accounting Information

• External users include investors, creditors/lenders, government agencies, suppliers, customers, and the public/researchers.
• Internal users include managers, employees, owners, and directors.

Forms of Business Organization

• Sole proprietorships are businesses owned and run by one person.
• Partnerships are businesses owned and run by two or more persons.
• Corporations are legal entities separate from their owners.
• Cooperatives are businesses owned and operated for the benefit of their members.

Types of Business According to Activities

• Service businesses provide services to customers.
• Merchandising businesses buy and sell goods.
• Manufacturing businesses produce goods.

Fundamental Accounting Concepts

• Entity concept: Each accounting entity should be evaluated separately.
• Periodicity concept: Financial information can be divided into equal time periods (one year is usual for external reporting).
• Stable monetary unit concept: The Philippine peso is considered a reasonable unit of measure with stable purchasing power, ignoring inflation.
• Going concern concept: Financial statements are prepared assuming the entity will continue operating in the foreseeable future.

Criteria for General Acceptance of Accounting Principles

• Principles should encompass necessary conventions, rules, and procedures.
• General acceptance depends on relevance, objectivity, and feasibility.

Basic Accounting Principles

• Objectivity principle: Statements should be based on reliable and verifiable data.
• Historical cost: Assets should be recorded at their actual cost.
• Revenue recognition principle: Revenue is recognized when goods are delivered or services are performed.
• Expense recognition principle: Expenses should be recognized in the accounting period when goods and services are used to produce revenue.
• Adequate disclosure requires all relevant information to be disclosed in financial statements.
• Materiality: Financial reporting focuses on information significant enough to affect evaluations and decisions.
• Consistency principle: Firms should use the same accounting method from period to period.

The Accounts

• Asset, liability, equity, income, and expense are major account types.
• Assets are classified into current and non-current assets.
• An revised Philippine Accounting Standards (PAS) No. 1 defines current assets like realizing assets, intending to sell them, or holding primarily for trading.
• An revised Philippine Accounting Standards (PAS) Assets are cash or cash equivalents unless restricted for over 12 months.
• Assets not meeting current asset criteria are classified as non-current.
• Examples of current assets include cash, cash equivalents, notes receivable, accounts receivable, inventories, and prepaid expenses.
• Book of accounts includes the journal and the ledger.
• The journal can be either general or special, and the ledger can be general or subsidiary.
• The accounting equation is Assets = Liabilities + Owner's Equity.
• The left side of the T-account is the debit side, and the right side is the credit side.

Debits and Credits in the Double-Entry System

• In balance sheet accounts, assets increase with debit entries and liabilities/owner's equity increase with credit entries.
• In income statement accounts, expenses increase with debit entries and income increases with credit entries.

The Accounting Cycle

• The accounting cycle involves: identification of events, journal recording, ledger posting, trial balance preparation, worksheet creation, financial statement preparation, adjusting/closing journal entries, and a post-closing trial balance.
• In the new accounting period, reversing journal entries simplifies regular transactions.

Step 1: Transaction Analysis

• Analyze transactions by: source identification, impacted accounts, account increase or decrease, and debit/credit determination.
• Source documents such as invoices, receipts, or bank statements serve as journal entry bases.
• A journal is a chronological record, and a journal entry shows debit/credit effects.
• A journal is called the book of original entry, and the general journal is the simplest type.
• The format requires, date, account title, posting reference, debit, and credit.

Step 2: Transactions are Journalized

• Ledger accounts are permanent (balance sheet accounts) or temporary (income statement accounts).
• A chart of accounts lists all accounts and their numbers in the ledger.

Step 3: Journal Entries are Posted to the Ledger

• Posting involves transferring data from the journal to the ledger.
• Date of transaction, page number, debit/credit, and account number are needed.
• Balance is found by Footing the debits and credits.
• Each account balance is determined by totaling all the debits and credits.
• The sum of an account's debits being greater than its credits provides a debit balance.
• The sum of an account's credits being are greater than its debits provides a credit balance.

Step 4: Trial Balance

• Is a list of all accounts with their respective debit or credit balances.
• Preparation involves listing account titles, obtaining balances, entering debit/credit amounts, and comparing totals.
• Locating errors in a trial balance includes checking for posting errors, balance errors, and trial balance preparation errors.

Deferrals and Accruals

• Adjusting entries apply accrual accounting to multi-period transactions.
• Deferrals postpone recognition of paid/collected amounts.
• Accruals recognize incurred/earned amounts.

Adjustment for Deferrals

• Prepaid expenses expire over time, becoming expenses.
• Unearned revenues are recognized as revenues when earned.

Adjustment for Accruals

• Accrued expenses reflect unpaid/unrecorded expenses.
• Accrued revenues reflect uncollected/unrecorded revenues.

Step 5: Adjustment for Accruals

• Accrual for uncollectible accounts recognizes bad debt risk based on credit sales or receivables.
• No entry is made to Uncollectible Accounts Expense, since there is entry to show prior experience for all receivables.

Effects of Omitting Adjustments

• Omission of proper adjusting entries will fail to present a financial position and the performance of the entity accurately.

The Worksheet

• Worksheet aids in multi-columning it provides information on the unadjusted trial balance balance the financial statements.
• It simplifies adjusting and closing proccesses and can also reveal errors.

Setps for Preparing the Worksheet

• Record all account balances in the designated trial balance columns.
• Any adjustments to each account in entered into account columns.
• Add all adjustments to the unadjusted trail balance columns to create an adjust balance.
• Liability, Asset, and owners equity are transferred to their own column while all income and expenses are transferred to an income statement column.
• Compute profit or loss as the difference between all accounts.

Step 6: Preparing the Financial Statements

• Once completed, it is easy to prepare financial statements from the appropraite income statement and balance sheet accounts.
• Information like state of change in e wquity are ready from the worksheet.

Step 7: Adjustments are Journalized and Posted

• The process of all adjustments is a crucial ellement of accounting.
• After adjustments the legder is to be in agreement with the financial statement data which brings it into agreement with accounting.

Step 8: Closing Entries Are Journalized and Posted

• A temporary account can be closed when its balance reache zero.
• Closing inlcudes, closing the income account, closing the expense accounts, the closing the income summary account and the closing of the withdrawal account.

Step 9: Preparation of a Trail balance.

• post closing is meant to verify all debits are alligning with all of the credits of accounting.
• only shows all assets, capital and liabilities as income and expense accounts have been cleared out.

Step 10: Reversing Entries

• May be taken out to reverse certain account balances for the begning of another accounting period.
• They are entirely optional, as the entries do not make previous entries innefective.

Complete Set of Financial Statements

• A set of financial statements will present five catagories: financial postions, statement of finanical performance, statement of chnages in equity, statment of cash flows, and notes to finanical statements.

Cash Flow Activities.

• These include : receipts from sale of goods or services and recipts from roaylties, payments to employess or supliers, taxes payments etc.

Cash Flow activites from investing.

• These include : Sale of equipment, debt, assets etc, and payments to aqquire debt, land and other notes.

Cash flows from Finanaces.

• These Include: resourse aquisitions, receipts for note repaymens, etc, Payments to settlr note for cash withdrawals.

Merchandising

• In service, profit is found with revenues - Expenses
• Merchandising requires to find from Net sale- Cost sales to find the gross profits and subtracting income statements and epxenses to the result in a profit.
• The process includes buying inventory selling and receiving cash.

Other factors to concider with merchandisng

• Terms are to be found, like purchasing and recieving goods and so on.
• Trade is discoutned price
• Transporation, whos pays who shoulders what etc

Terms to concider

• Prepaid: seller pays transport.

Freight Colllect

• Freight comapny is paid.
• Title Passes when goods are purchased.

FOD

• who pays various depending on who owns the merhcandise.

what is Cost of Good soild?

• represents the total accumaltion and expense when purchasing merhcandise.

• Beginning inventory + Nety purchases.

• **Perpetual inventory systems requires to use both inventy and costs as entries thruought th accounting period.

• Both systems will also results in the same eneding Inventory Amount at period.

Tax Definitions

• Exercises the sovereign power to raise income for expenses.

Basic Nature

• To provid funds and general welfare.
• includes all powers such as eminet domain and safety.
• Levying or imposition of the tax.

Theory Basis

Life blood : as tax is required to keep a gvoernment open.

Symbiotic Relationship

• Bnefitial tax and services.
• Tax requirment*
• Enforement
• legislative authoirty
• Must be equal and justified
• only enforced in the state
• imposed on just the payer.
• Sounds taxe requirments*
• Adequacy
• Equal and based on the tax payers ability to pay.