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• Accounting is identifying, recording, and communicating economic information for making economic decisions.
• Accounting's basic purpose is to provide information about economic activities for decision-making.

Essential Elements of Accounting

• Identifying involves analyzing business transactions to determine if they are "accountable" or "non-accountable".
  • Only accountable events are recorded in the books.
• Recording involves journalizing and posting.
  • Journalizing recognizes accountable events.
  • Posting classifies the effects of events on accounts after journalizing.
• Communicating summarizes information processed in the accounting system to produce meaningful reports at the end of each accounting period.
  • Accounting information is communicated through accounting reports, with financial statements being the most common form.
• There are three types of information provided by accounting: quantitative, qualitative, and financial.

Functions of Accounting Business

• External users are provided with information useful for making investment and credit decisions.
• Internal users are provided with information useful for managing the business.

Brief History of Accounting

• Accounting can be traced back to prehistoric times, over 10,000 years ago.
• Archeologists found clay tokens dating back to 8500 B.C. in Mesopotamia shaped as cones, disks, spheres and pellets.
  • Clay tokens corresponded to commodities and were used in the Middle East to keep records.
• Clay tablets replaced tokens, marking the start of the art of writing.
• Double entry records first appeared in 1340 A.D. in Genoa.
• In 1494, Fra Luca Pacioli formulated the first systematic record keeping system, known as the "Double Entry Recording System".
  • Pacioli's book "Summa di Arithmetica Geometria Proportioni and Proportionista," included the Double Entry Recording System.
  • The book was published on November 10, 1494, in Venice.
• Fra Luca Pacioli is considered the Father of Modern Accounting and was a Franciscan monk and mathematician.

Common Branches of Accounting

• Financial Accounting involves general record-keeping and the maintenance of journals and ledgers to prepare general-purpose financial statements annually for lenders, investors, or government regulatory bodies.
• Management Accounting involves the preparation of specifically tailored management reports aiding management in functions.
• Government Accounting involves general record-keeping and preparation of financial reports, budgets, and accountability reports for the government and its agencies.
• Auditing involves expressing an opinion on the correspondence between management assertions and established criteria.
  • Businesses with gross quarterly revenues of ₱150,000 need financial statements audited by a CPA.
  • The Independent Auditors' Report is the most common form of opinion attached to audited financial statements.
• Tax Accounting involves preparing tax returns and providing tax advice.
  • All businesses are required to file tax returns.
• Cost Accounting analyzes the costs of products or services
  • Cost accounting is used to analyze the cost of products or services and its impact on earnings and pricing policies.
• Accounting Education teaches accounting and related subjects.
  • It is required by business students, owners, and accounting practioners in their Continuing Professional Development (CPD).
• Accounting Research prepares accounting research papers, articles, and similar publications
  • It is required by business owners and professional organizations.

Users Account of Accounting Information

• Internal Users are those who are directly involved in managing the business, such as:
  • Business owners
  • Board of directors
  • Managerial personnel
• External Users are those who are not directly involved in managing the business, such as:
  • Existing and potential investors
  • Lenders and Creditors
  • Non-managerial employees
  • The public

Forms of Business Organization

• Sole Proprietorship is owned by one individual.
  • It is registered with the DTI.
• Advantages include:
  • Being the boos and keeping all the profits.
  • Simple decision making as you have complete control over business.
  • Relatively easier and less costly ro form.
  • Lower extent of government regulation and reduced taxes.
• Disadvantages include:
  • Assuming the risk of loss
  • Taking all responsiblity and relying mostly on yourself in making decisions.
  • More difficult to raise capital.
  • Personally liable for the debts and obligations of the business.
• Partnership is owned by more than one person.
  • Formed by contractual agreement.
  • Registered with the SEC.
• Advantages include:
  • Better business decisions.
  • Sharing business risk.
  • Easier to form.
  • Greater capital compared to the sole proprietorship.
• Disadvantages include:
  • Rise to conflict.
  • Sharing profits with partners.
  • Dissolution of the partners.
  • Lesser capital compared to a corporation.
  • Taxed like a corporation.
  • Personal assets held for partnership debts.
• Corporation is owned by more than one stockholder.
  • Formed by operation of law.
  • Registered with the SEC.
• Advantages include:
  • Stockholder that is not a member of the board is relieved from managerial responsibilities.
  • Stockholders that are members of the board of directors are tasked with managerial responsibilities.
  • Limited liability of the owners.
  • Greater capital and ease in raising additional funds.
  • Easy transfer of shares.
  • Unlimited life.
  • Can renew every 50 years.
• Disadvantages include:
  • "Say" depends on the number of shares you own.
  • More formal business requirements.
  • Greater extent of governmental regulation and tax.
  • Difficult to distribute business.
• Cooperative is owned by more than one member.
  • Formed in accordance with the Cooperative Code.
  • Registered with the CDA.
• Advantages include:
  • "Say" is unaffected by the number of shares you own.
  • Members with larger shareholdings are entitled to a larger amount of profit (Net Surplus).
  • Exempt from paying taxes.
  • May receive assistance from the government.
  • Easier and less costly to form.
  • Unlimited life.
• Disadvantages include:
  • Prone to poor management.
  • Susceptible to corruption.
  • More difficult for a cooperative. -Success depends on members.

Types of Business According to Activities

• Service Business involves providing services
• Advantages include:
  • No need to worry about inventory.
  • Minimal supplies.
  • Small capital.
  • Percieved as an expert on the field.
• Disadvantages include:
  • May not have flexible personal time.
  • Business success depends on your credibility.
  • More costly error.
• Merchandising (trading) resells goods
• Advantages include:
  • Much lower start-up capital.
  • Take advantage of price fluctuations.
  • Lower cost of quality.
• Disadvantages
  • Need a retail store to store your goods.
  • Less flexibility in managing costs.
  • Tedious inventory management.

Basic Accounting Concepts

• Separate Entity Concept is when a business does not associate with its owner(s).
  • Only the transactions of the business are recorded in the books of accounts.
• Historical Cost Concept is when assets are initially recorded at acquisition cost.
• Going Concern Assumption is when the business has an infinite period of time.
• Matching is when some costs are initially recognized as assets.
• Accrual Basis
  • Income is recorded when earned.
  • Expense is recorded when incurred.
• Prudence is the observance of some degree of caution when exercising judgements.
  • If there is a choice between a potential outcome, the unfavorable one is chosen.
• Time or Reporting is dividing business into periods.
• Stable Monetary Unit states assets, liabilities, equity, in terms of a common unit of measure
• Materiality Concept is when an item is considered regarding its omission.
• Cost-Benefit is when the costs of processing and communicating information should not exceed the benefits received.
• Full Disclosure Principle is when information balances detail and conciseness.
• Consistency Concept is when the nature of data depends on short/long term financial decisions.
• Philippine Financial Reporting Standards (PFRs) are the Standards and Interpretations adopted by the FRSC.
• Fundamental Qualitative characteristics are the characteristics that make information useful to users:
  • Relevance if it can affect decisions.
    • Predictive Value to make predictions.
    • Confirmatory Value to used in confirming past predictions.
    • Materiality that is entity-specific aspect of relevance.
  • Faithful Representation is the information provides a true, correct and complete depiction of what it purports
    • Completeness that is all information for the users to understand depicted is provided.
    • Neutrality information selected is without bias
    • Free from Error that there are no errors.
• Enhancing Qualitative Characteristics are Enhance the usefulness:
  • Comparability- the information helps users in identifying similarities and differences between different sets of information
  • Verifiability- different users could reach consensus as to what the information is
  • Timeliness- the information is available to users in time to be able to influence their decisions

The Accounting Equation

• Assets = Liabilities + Equity
• Assets are the economics resources you control.
• Liabilities are your present obligations.
• Equity is assets minus liabilities.

Expanded Accounting Equation

• Assets = Liabilities + Equity + Income - Expenses
• Income is to the economic benefits- Increases in Assets to decrees in Liabilities that increase owners equity.
• Expenses are decreases in the economic benefits during the period
• Net Profit/Loss = Income - Expenses