FABM 2: Introduction to Accounting

Definition of Accounting

• Accounting is the process of identifying, measuring, and communicating economic information for informed judgment and decision-making.
• Recognized as an art involving recording, classifying, summarizing financial transactions, and interpreting results by the American Institute of Certified Public Accountants (AICPA).
• Considered a service activity by the Accounting Standards Council (ASC).

Components of Accounting

• Input: Economic transactions supported by documents (e.g., capital contributions, service renderings, expense payments).
• Process:
  • Identification: What transactions/accounts are involved?
  • Measurement: How much money is involved?
  • Recording: Capturing transactions in the business's books.
• Output: Communicating useful financial information.

Financial Statements

• Composed of five essential components:
  • Statement of Financial Position (Balance Sheet)
  • Statement of Comprehensive Income (Income Statement)
  • Statement of Changes in Equity
  • Statement of Cash Flows
  • Notes providing a summary of significant accounting policies and additional explanatory information.

Statement of Financial Position

• Represents a “snapshot” of a company's resources (assets), obligations (liabilities), and owner's equity at a specific date (labeled "as at").

Statement of Comprehensive Income

• Describes a company’s performance over a specific period, detailing revenues and expenses (labeled "for the period ended").

Statement of Changes in Equity

• Chronicles the owner’s stake, including beginning capital, additional investments, withdrawals, and net income/loss for a period.

Statement of Cash Flows

• Provides detailed information on cash transactions, categorized into operating, investing, and financing activities.
• Highlights the importance of cash as a vital resource prone to theft and mismanagement.

Notes to Financial Statements

• Contains essential explanatory notes including:
  • Company information (operations, legal structure, registrations).
  • Accounting policies employed.
  • Administrative requirements from regulators (e.g., BIR and SEC).
  • Other pertinent details.

Importance of Useful Financial Information

• Not all financial information is beneficial; it's crucial that it is useful and reliable for decision-making.
• Misleading information could lead to poor decisions by owners and creditors.

Fundamental Qualitative Characteristics

• Relevance: Information must assist in predicting or confirming financial outcomes (predictive and confirmatory value).
• Faithful Representation: Information needs to accurately reflect what it claims to represent, focusing on true facts rather than speculation.

Conclusion

• The objective of accounting is to provide a truthful representation of financial realities, differentiating between valid information and hearsay, ensuring trustworthy decision-making for users.