Introduction to accounting

Introduction to Accounting

• Accounting involves recording, classifying, and summarizing financial transactions in a significant manner, using monetary terms, and interpreting the results.
• Accounting identifies, measures, and communicates economic information for informed judgments and decisions.
• Is a service activity that provides quantitative, primarily financial, information about economic entities to aid in decision-making.

Functions of Accounting

• Accounting functions are centered on the three Objectives of an information system:
  • Stewardship of management/owners.
  • Support of daily business operations.
  • Helping interested users with informed decisions.

Bookkeeping vs. Accounting

• Accounting is broad, while bookkeeping is specific.

Accounting vs. Accountancy

• Accounting refers to the nature of work, while Accountancy refers to the profession

Objectives of Financial Statments

• Financial statements provide info about an entity's financial position, performance, and cash flows for a wide range of users making economic decisions.

Key Dates in Accounting

• 1494: Luca Pacioli, an Italian mathematician, introduced double-entry bookkeeping in "Summa de Arithmetica, Geometria, Proportioni et Proportionalita".
• 1923: The Philippines passed its first Accountancy Law, Republic Act (RA) 3105, creating the Board of Accountancy (BoA).
• 1975: The Accountancy Law was revised and passed under Presidential Decree No. 692 in the Philippines.
• 1981: The Philippine Institute of Certified Public Accountants (PICPA) created the Accounting Standards Council (ASC) to improve accounting principles (GAAP) in the Philippines.
• 1997: The Philippines transitioned from American-based accounting standards (SFAS) to International Accounting Standards (IAS).
• 2004: Commission (PRC) created the Financial Reporting Standard Council (FRSC).
• 2004: The RA 9298, Philippine Accountancy Act of 2004, was passed into law.
• The Philippines now fully complies with the International Financial Reporting Standards (IFRS).

Accounting Process

• Consists of nine steps:
  • Analyzing business documents/transactions.
  • Journalizing.
  • Posting.
  • Preparing financial statements.
  • Preparing adjusting entries.
  • Preparing the unadjusted trial balance.
  • Preparing the closing entries.
  • Preparing a post-closing trial balance.
  • Preparing the reversing entries.

Three Important Activities in the Accounting Process

• Identifying is recognizing accountable events that affect assets, liabilities, and equity.
• Measuring determines the monetary amounts for financial statement elements.
• Communicating prepares and distributes accounting reports to users, making accounting a "universal language".

Branches of Accounting

• Recording involves chronologically writing business transactions in the books, called journalization.
• Classifying involves sorting similar transactions and events by posting them to the ledger.
• Summarizing involves preparing financial statements.

Sectors of Accounting

• This is under RA 9298
• Public Practice involves accountants providing business and accounting services to clients, resulting in attest reports according to standards, including:
  • External Auditing.
  • Tax Preparation and Planning.
  • Management Consultancy.
• Private Accounting involves accountants in executive positions within companies, managing operations as:
  • Financial Accountants.
  • Management Accountants.
  • Tax Accountants.
  • Cost Accountants.
  • Budget Officers.
  • Internal Auditors.
  • Accounting Information System professionals.
• Government Accounting involves CPAs in government agencies like the Bureau of Internal Revenue, managing public funds.
• Accounting Education involves accountants as instructors in colleges/universities, educating aspiring accountants.

Branches/Areas of Accounting

• Financial Accounting focuses on recording business transactions and preparing financial statments for internal and external users while complying with GAAP. It Emphasizes reporting to external users.
• Management Accounting focuses on preparing internal financial reports for management, not strictly complying with accounting principles. Works within companies to direct financial processes.
• Government Accounting involves analyzing, classifying, summarizing, and communicating transactions of government funds and property.
• Auditing involves examining financial statements to express an opinion on their fairness. External auditing examines statements, while internal auditing improves the organization's processes.
• Tax Accounting includes preparing tax returns, determining tax consequences, and advising on tax planning and minimizing taxes legally.
• Cost Accounting determines the cost of projects or services to improve quality, efficiency, and decision-making.
• Accounting Education focuses on teaching accounting, auditing, and related subjects in educational institutions.

Accounting Research

• Examines how accounting is used by and affects individuals, organizations, and governments: - Academic Accounting Research addresses accounting issues using evidence from financial information, experiments, and surveys. - Research by Practicing Accountants solves problems for clients, such as implementing new standards.

Users of Financial Information

• Under the Conceptual Framework for Financial Reporting, the users of financial information can be categorized into primary users and other users.
• Primary users include: - Existing and potential investors who are concerned with risks and returns and the ability of the entity to pay dividends. - Lenders and other creditors. - Lenders use this information to determine loan terms.
• Other users include: - Employees - helping them assess stability, profitability, benefits, and opportunities.
• Other users: - Customers are interested in the entity's continuation. - Governments need the information for taxation and statistics. - Public
• Internal users have direct access to financial data and are involved in the business, like owners, managers, and employees.

External Users

• Are not connected with the business. Investors, creditors/lenders, auditors, the public, research scholars, tax authorities, consumers and suppliers rely on public financial data and information for their decision making.

Forms of Business Organizations

• These refer to how businesses are categorized based on the number of owners with four types: sole proprietorship, partnership, corporation, and cooperative.
• Sole Proprietorship is a business owned by an individual, being easy to set up and is the least costly, with the owner having unlimited liability.
• Organization of Sole Proprietorship requires registration with DTI, Barangay Office, Mayor's Office, BIR, SSS, PhilHealth, and Pag-IBIG Fund. It is easy to establish, requires little capital, with freedom in business but limited capital, life, and opportunities.
• Partnership is formed when two or more people contribute money, property, or industry to a common fund and divide the profits, per Article 1767, Civil Code of the Philippines.

Characteristics of a Partnership

• There's Mutual Agency.
• Unlimited Liability.
• Limited Life.
• Mutual Participation in Profits.
• Legal Entity.
• Co-ownership of Contributed Assets.
• Income Tax.

Types of Partners

• Capitalist.
• Industrial.
• General.
• Limited.

Types of Partnership

• Trading.
• Non-trading.
• General and Limited.
• To organize a partnership, it needs to be registered with SEC, Barangay Office, Mayor's Office, BIR, SSS, PhilHealth, and Pag-IBIG Fund.

Advantages of Organizing a Partnership

• Its easy and inexpensive to begin
• However, the liability can be unlimited with managerial difficulties and limited life

Corporations

• These are artificial beings under the Revised Code of the Philippines, Section 2 and possess succession rights and authorized attributes
• A corporation's succession power is also very advantageous providing a continuous existence, enabling larger business ventures through collective investments, however Its centralized management restricts shareholder input and is subjected to heavy governmental control.

Characteristics of a Corporation

• Separate Legal Entity which is an Official Being
• Creation by Law.
• Right of Succession.
• Lawful Powers and Attributes.
• Divided Ownership (Shares).
• Board of Directors.

Types of Corporations

• Stock/Non-Stock.
• Public/Private.
• Domestic/Foreign.
• Open/Closed.

Organization of a Corporation

• Register with SEC, Barangay, Mayor's Office, BIR, SSS, PhilHealth, and Pag-IBIG.

Republic Act No. 11232

• The "Revised Corporation Code of the Philippines'
• Consolidation of Senate Bill No. 1280 and House Bill No. 8374 of February 20, 2019

Cooperative

• This is an association with a common interest, joining to achieve a shared goal, contributing to capital, and sharing risks/benefits per RA 6938. Can be incorporated or unincorporated.

Principles of Cooperatives

• Open and Voluntary Membership.
• Democratic Control.
• Limited Interest on Capital.
• Division of Net Surplus.
• Education and Cooperation.

Types of Cooperatives

• Credit, Consumers, Producers.
• Marketing and Service.
• Multi-Purpose.

Business activities

• Service business offers intangible products.
• Merchandising business buys and sells products.
• Manufacturing business produces items to be sold.

Elements of Financial Statement

• Assets- Items or services owned or controlled by the entity
• Liabilities- What the company owes to vendors, suppliers and lenders due in the short-term
• Equity- What the company owes to it's shareholders
• Income- Revenues generated from sales
• Expenses- Costs required to run the business daily

Operation Cycle

• This is the time to convert cash to goods/services and sell those goods/services. The cycle is usually longer that of a service

Conceptual Framework for Financial Reporting

• The framework underlies financial statement preparation but is not an accounting standard.
• It is used to help the FRSC in developing standards, preparers in applying standards, and users in interpreting statements.

Qualitative Characteristics

- Relevance: Information's capacity to influence decisions through predictive and confirmatory value.
- Faithful Representation: When Reports represent economic truths (Free from error, complete and neutral)

Enhancing Qualitative Characteristics (VCUT)

• Verifiability means that there’s an agreement that the knowledge is accurately being portrayed.
• Comparability helps users identify the similarities and likeness within and across items or businesses.
• Understandability requires the information to be comprehensible and usefull
• Timeliness assists decision makers when they need to use the information during decisions

Accounting Assumptions

• Economic Entity states an entity is separate from its owners, managers, and employees.
• Monetary Unit assumes that accounting should be stated with a unit of measure (Philippine Peso).
• Stability of the Peso assumes it has the same value over time.
• Time Period divides the indefinite life of an entity into accounting periods

Accounting Periods

• Calendar Year follows the standard January to December format
• Fiscal Year any 12 month period that does not start on January
• Interim is shorter reporting periods within a year (monthly/quarterly).

Accounting Principles/Concepts

• Accrual Accounting records transactions when they occur, not when cash exchanges hands
• Matching Principle records expenses in the same period as the related revenue is earned
• Revenue Recognition recognizes revenue when goods are sold or services rendered, not when payment is received.
• Objectivity Principle requires impartial evidence for transactions
• Cost-Benefit holds that the benefit of information should exceed its cost.
• Conservatism: The least favorable impact should be chosen, and it's best to record losses that prevent understatement
• Consistent use period after period

Accounting definitions

• Cost Principle: An item is valued at the amount initially spent.
• Full Disclosure Principle: All details should be included to give a reasonable accounting of the business to the public

Major Accounts

• Assets: Resources the entity controls from past events, expecting future economic benefits which include cash or current and other accounts, accounts recivables or debts, notes recieveable that have a promissory, goods on hand for sale
• Office Supplies: Supplies used in the business.
• Prepaid Expenses: Expenses paid in advance, like rent and insurance.
• Property, Plant, and Equipment: Fixed assets like: - Office or Store Equipment. - Furniture and Fixtures. - Land and Buildings. - Vehicles.
• Accumulated Depreciation is also a fixed asset.
• Intangible Assets: Non-monetary assets without physical substance that are expected to provide economic value to the company such as: Patents or Trademarks

Current accounts consist of

• Cash.
• Prepaid Expenses.
• Accounts Receivable.
• Supplies.
• Merchandise Inventory.

Non-current assets consist of:

• Property.
• Plant and Equipment.
• Intangible Assets.
• Long-term Investments.
• Liabilities: Obligations from past events, expected to result in an outflow of economic benefits
• Accounts Payable and Notes Payable are liabilities.

Balance Sheet accounts

• Salaries Payable and Utilities Payable
• Unearned Revenue.
• Interest Payable is a liability account.

Accounts are catagorized into current and non-current payments

• Equity/Capital is the owner's claim on the assets. Owner's Drawing is also included
• Equity has current assets short term and current liabilities
• Working Capital measures liquidity and efficiency (Current Assets - Current Liabilities).

Income

• This inflow results in assets or a decrease in other expenses

Rules of Debits and Credits

• Real Accounts carry over from from year to year. Such as Assets, Liabilities and Equity.
• Nominal Accounts do not carry over that are in the Income and Expense statements
• The fundamental assunption where Assets = Liabilities + Owner's Equity
• Expanded Accounting Equation: Owner's Drawing + Expenses + Assets = Liabilities + Equity + Income/Revenue and can be referred to as "Dealer"
• Double-entry book keeping is a good way to ensure at least one debit and one credit, resulting in giving and receiving equal balance that reflects accurately the business

Debit Balance

Cash, Drawing, Expenses, and Assets

Credit Balance

Liabilities, Owner’s Equity, and Revenue

Normal account balances

• The most essential part of double is the debit/credit balance.
• These balances can reduce when a debit or credit is applied with equal parts

Accounting Cycle

1. Source Documents
2. Journal
3. Ledger
4. Trial Balance
5. Worksheet
6. Financials
7. Adjusting Entries
8. Closing Entries
9. Post Closing Entries

Books of Journalizing and Posting of Business and Accounts

• An account is either debit or credit.
• The debit/credit chart gives a good overview of the assets. As the year and month arent rewritten for the account balances.
• The process consistes of entering on the left extreme until the journal is set.
• After those balances, the account can be put in a journal or special chart to be put in an excel document or other means

General Journal

• Date- month and year are not rewritten with new changes
• Account Titles and Explanations are used to show that the account is debited
• Posting Reference- where the use of entries are posted
• Debit/Credit- the balance on amount for the account to show the chart in action

Special Journal

• Sales- to be used in the sales balances
• Purchases- used to show the purchases journal
• Cash Receipts- shows the balances from cash being applied
• Cash Disbursments- shows cash being used in the busines