Accounting Principles Overview Quiz

Overview of Accounting

• Accounting is the process of identifying, measuring, and communicating economic information to enable informed decisions by users of that information.
• The purpose of accounting is to provide information about economic activities intended for use in economic decision-making.

Definition of Accounting

• Accounting is defined as "the process of identifying, measuring, and communicating economic information to permit informed judgment and decisions by users of information."

Three Important Activities

• Identifying: Analyzing events and transactions to determine if they should be recorded. Only the effects of accountable events are recorded.
• Measuring: Assigning numerical values (usually monetary) to economic transactions and events.
• Communicating: Transforming economic data into useful accounting information, such as financial statements, for users.

Types of Events

• External events: Involve an external party.
  • Exchange (reciprocal transfer): Reciprocal giving and receiving.
  • Non-reciprocal transfer: "One-way" transaction.
  • External event other than transfer: Changes in economic resources or obligations of an entity due to an external party, but no transfer involved.
• Internal events: Do not involve an external party.
  • Production: Process of transforming resources into finished goods.
  • Casualty: Unexpected loss from disasters or similar events.

Measurement

• Common measurement bases in accounting include:
  • Historical cost
  • Fair value
  • Present value
  • Realizable value
  • Current cost
  • Inflation-adjusted costs
• Historical cost is most commonly used, often combined with other bases.

Valuation

• Items valued by opinion are affected by estimates.
• Items valued by fact are unaffected by estimates.

Communicating (Three Aspects)

• Recording: Recording identified and measured accountable events through journal entries.
• Classifying: Grouping similar and related items into their respective classes through ledger postings.
• Summarizing: Putting together recorded and classified transactions and events in a condensed form. This leads to the preparation of financial statements.

Basic Purpose of Accounting

• The basic purpose of accounting is to provide information about economic activities intended to be useful for economic decision-making.

Types of Accounting Information

• General purpose: Meets common needs of most statement users; governed by Philippine Financial Reporting Standards (PFRSs).
• Special purpose: Meets specific needs of particular statement users; provided by other accounting types (e.g., managerial accounting, tax basis accounting).

Basic Accounting Concepts

• Double-entry system: Each accountable event is recorded in two parts—debit and credit.
• Going concern: The entity is assumed to operate indefinitely.
• Separate entity: The entity is treated separately from its owners.
• Stable monetary unit: Amounts in financial statements are stated in a common unit of measure; changes in purchasing power are ignored.
• Time period: The life of the business is divided into reporting periods.
• Materiality: Information is material if its omission or misstatement could influence economic decisions.
• Cost-benefit: The cost of processing information should not exceed the benefits derived from it.
• Accrual basis of accounting: Effects of transactions are recognized when they occur (not when cash is exchanged), relating them to the accounting periods they concern.
• Historical cost concept: An asset's value is determined based on its acquisition cost.
• Concept of articulation: All parts of complete financial statements are interrelated.
• Full disclosure: Financial statements contain sufficient detail to inform users, while remaining concise.
• Consistency concept: Financial statements use consistent accounting policies.
• Matching: Costs are recognized as expenses when related revenue is recognized.
• Systematic and rational allocation: Costs not directly related to revenue are allocated over the period of their economic benefits.
• Immediate or outright recognition: Events that do not meet the asset definition are recorded immediately.
• Residual equity theory: In entities with two class shares, Ordinary Equity is calculated as Assets - Liabilities – Preferred Equity.
• Fund theory: Accounting focuses on the custody and administration of funds.
• Realization: The process of converting non-cash assets into cash or cash equivalents.
• Prudence (Conservatism): Cautious estimates of assets/income or liabilities/expenses are made, avoiding overstating or understating values.

Common Branches of Accounting

• Financial accounting: Focuses on general purpose financial statements.
• Management accounting: Focuses on special-purpose financial statements for management.
• Cost accounting: Systematic recording and analysis of costs of materials, labor, and overhead in production.
• Auditing: Evaluating the correspondence of assertions with criteria and providing an opinion.
• Tax accounting: Preparing tax returns and providing tax advice.
• Government accounting: Focuses on the custody, use, and responsibility for public funds.

Four Sectors in Accountancy Practice

• Public accountancy: Rendering audit or accounting services to multiple clients.
• Commerce and industry: Private sector positions involving decision-making with accounting knowledge (often requiring CPA certification).
• Education/Academe: Teaching accounting, auditing, and related subjects.
• Government: Accounting positions in government or government-related organizations where accounting knowledge and/or CPA certification may be needed.

Accounting Standards in the Philippines

• Philippine Financial Reporting Standards (PFRSs): Standards and Interpretations from the Financial Reporting Standards Council (FRSC).
  • Philippine Financial Reporting Standards (PFRSs)
  • Philippine Accounting Standards (PASs)
  • Interpretations

Need for Reporting Standards

• Uniform standards/guidelines are necessary to ensure financial statements are reliable and not misleading.
• Standards are established by authorized bodies or they gain widespread use over time.
• The process of establishing standards involves a democratic process to gain consensus among practicing accountants.

True or False Statements (from Presentation)

1. True - Only transactions affecting assets, liabilities, equity, income, or expenses are recorded.
2. False - Identifying is the process of analyzing transactions, not assigning values.
3. True - Financial accounting focuses on generally accepted accounting principles.
4. False - General purpose financial statements cater to common needs, not every user.
5. False - Financial statements are one tool, but not the only source of information in decision-making.

Additional Information (from Presentation)

• Financial statements are based on source documents from accounting records.
• Fiscal years beginning May 1 end May 31 of the following year.
• Bookkeeping and accounting are closely related but not identical.
• Accounting standards are revised to meet changing user needs.
• The accountant (or entity's governing body) is responsible for selecting accounting policies.