Overview of Accounting

Overview of Accounting

• Accounting identifies, measures, and communicates economic information for informed judgments and decisions.
• Three essential activities: identifying, measuring, and communicating.

Identifying Accountable Events

• Identifying involves analyzing events to determine recognition.
• Recognition is including accountable event effects in financial statements through a journal entry.
• Accountable events affect assets, liabilities, equity, income, or expenses and are termed economic activity.
• Only economic activities are emphasized and recognized.
• Non-accountable events are disclosed in notes if relevant but recorded via a memorandum entry.

Types of Events/Transactions

• External events involve the entity and another external party.
• Exchanges are reciprocal transfers; examples include sales, purchases, and liability payments.
• Non-reciprocal transfers are one-way, such as donations, taxes, and theft.
• Other external events involve economic resource or obligation changes without transfers.
• Examples include changes in fair values, obsolescence, and vandalism.
• Internal events do not involve an external party.
• Production transforms resources into finished goods.
• Casualty refers to unanticipated losses from disasters.

Measuring

• Measuring assigns numbers, usually in monetary terms, to economic events.
• Common measurement bases: historical cost, fair value, present value, realizable value, current cost, etc.
• Historical cost is commonly used, often combined with other bases; financial statements use a mix of costs and values.

Valuation

• Valuation by opinion means estimates are essential for relevant information.
• Valuing uncollectible receivables involves opinion.
• Depreciation and amortization expenses use estimates.
• Estimated liabilities, like provisions, involve estimates.
• Retained earnings are affected by estimate variances of income and expenses.
• Ordinary share capital at par value is valued by fact.
• Land stated at acquisition cost is a fact.
• Cash measured at face amount is a fact.

Communicating

• Communicating transforms economic data into accounting information for users.
• It involves interpreting the processed information's significance.
• The communication has three aspects:
• Recording systematically commits accountable events into writing via journal entries.
• Classifying groups similar items into classes through ledger postings.
• Summarizing condenses recorded transactions into financial statements and reports.
• Interpretation involves calculating financial statement ratios.

Basic Purpose of Accounting

• The fundamental reason for accounting is to provide useful information for economic decisions.
• Economic decisions also use; industry publications, internet, professional advice, etc.
• Economic entities record activities, process data, and disseminate useful information.
• An economic entity is a separate combo of persons/property using/controlling resources to meet goals.
• Non-profits address community needs.
• Business entities aim to profit.
• Economic activities affect assets/liabilities/equity.
• Production converts resources into more valuable outputs.
• Exchange trades resources and obligations.
• Consumption uses the final output.
• Income distribution allocates output rights.
• Savings sets aside rights for future consumption.
• Investment uses inputs to increase available resources.

Types of Information

• Quantitative information is expressed in numbers or units.
• Qualitative information is descriptive and found in financial statement notes.
• Financial information is expressed in money; monetary amounts are quantitative.
• General purpose information serves most statement users and adheres to GAAP, being Philippine Financial Reporting Standards (PFRSs).
• Special purpose information is tailored to specific users, such as managerial or tax accounting.

Sources

• Financial statements use info from the entity's accounting records
• External resources like fair value measurements, uncertainty resolutions, etc. Accounting as Science and Art
• As a social science, accounting is a systematized, classified, and organized body of knowledge.
• As practical art, accounting involves creative skills and judgment.

Accounting as an Information System

• Accounting identifies, measures, processes, and communicates economic activities through reports.
• It is a fundamental "language of business".

Creative and Critical Thinking

• The practice of accountancy needs both creative and critical thought.
• Imagination to find new relationships between data.
• Testing new relationships to determine effectiveness.
• Problem-solving involves:
• Recognizing a problem.
• Identifying alternative solutions.
• Evaluating alternatives.
• Selecting and implementing a solution.

Accounting Concepts

• Accounting concepts provide the base principles that define the process.
• Accounting assumptions are basic notions underlying accounting:
• Assumptions are the basic notions underpinning the accounting process.
• Theory provides a framework for evaluating practices and guiding development.
• Accounting theory:
• Organizes concepts and guides accountant actions in identifying, measuring, and communicating information.
• Includes Conceptual Framework and PFRSs.
• Implicit concepts
• Double-entry system records events in debits and credits.
• A business will continue to operate indefinitely.
• Measurement is appropriate when the entity is a going concern.
• Realizable value should be used if the entity is liquidating.

Separate Entity

• The entity is separate from its owners.
• This concept defines the accountant’s area of interest.

Stable Monetary Unit

• Assets, liabilities, equity, income, and expenses use a common measure (peso).
• The peso's purchasing power is considered stable.
• Information must be in a common denominator (e.g., pesos).

Time Period

• The entity's life is divided into reporting periods.
• The period is usually 12 months (calendar or fiscal year).

Materiality Concept

• Information is material if its omission or misstatement could influence economic decisions.
• Materiality is based on judgment of size and nature of the item.

Cost Benefit

• Communicating information should not exceed its benefits.
• Accrual Basis
• Transactions are recognized when they occur, not when cash changes hands.
• Income is recognized when earned, and expenses when incurred.
• Historical Cost
• An asset's initial value is based on acquisition cost.
• This isn't always maintained, as PFRSs may require using net realizable value.
• Concept of Articulation
• Financial statements are interrelated.
• Users need to use each financial statement to make decisions.
• Statements provide details on future cash flows, earnings, and shares.
• Notes describe earnings (e.g., realized/unrealized). Disclosure recognizes that the nature of information reflects trade-offs.

Full Disclosure Principle

• Full financial statements should include enough detail to make a difference to users, but concise enough to allow understandability.
• Consistency Concept
• Financial statements should be prepared using principles applied consistently.
• Changes in accounting policies are only made when required/permitted by PFRSs and disclosed in notes.

Matching Principle

• Costs are recognized as expenses when related revenue is recognized.
• Entity Theory
• Accounting aims for income determination and proper matching of costs is the aim.
• Proprietary theory
• Emphasizes valuation, and the balance sheet's assets, liabilities, and capital equation.

Residual Equity Theory

• Is applicable when there are two share classes.
• Fund Theory
• Focuses on custody of funds.
• Realization
• The process of converting into cash.
• Prudence
• Use caution and only choose effects which has the least effect on equity.
• Expenses Recognition Principle
• Matching concept: recognizing costs directly related to earning revenue.
• Systematic & rational allocation: allocation of assets over periods.
• Immediate recognition: expensing costs that are not definitions of assets

Common Accounting Branches

• Financial accounting creates general purpose statements meeting external user needs under PFRSs.
• "Other financial reporting" improves interpretations.
• Financial statements communicate an entity's financial position/results.
• Financial reports include statements and outside information improving decision-making.
• Primary objective of financial reporting
• Is to provide info about a company's economic information.
• Secondary objective of financial reporting
• Is to assess management's stewardship.

Management Accounting

• Communicating information to internal users or management.
• Cost accounting is the systematic recording and analysis of the cost of materials, labour and overhead.
• Auditing is to evaluate assertions.
• Tax accounting prepares returns and provides tax.
• Government accounting emphasizes public funds custody/accountability.
• Fiduciary accounting handles accounts for another's benefit.
• Estate accounting is the handling of affairs.
• Social accounting social and environmental factors.
• Institutional accounting is accounting for non-profit entities.
• Accounting systems involve installing accounting procedures/forms.
• Accounting research analyses economy.
• Bookkeeping records an entity's transactions up to the trial balance without needing interpretation.

Accountancy

• Refers to the profession of accounting.
• Public practice doesn't involved an employer-employee relationship
• Private practice involves an employer-employee relationship
• Under the "Philippine Accountancy Act of 2004," the practice will be sub-classified:
• Practice of Public Accountancy involves more accounting related services on a fee basis.
• Practice in Private Sector
• Employment in education
• Practice in the government

Accounting Standards

• PFRSs represent GAAP in the Philippines.

The Need for Reporting Standards

• Financial statements should use reporting standards to be useful.
• Acceptability means standard establishment or general acceptance.

Hierarchy of Accounting Standards

1. PFRs
2. Management judgment

Accounting Standard Setting Bodies

• FRSC is the official body in the Philippines by the No. 9298
• The PIC with interpretations.
• The BOA supervises the practice of accounting.
• The SEC regulates corporations.
• The BIR controls code, influences choice.

International Accounting Standard

• The IASB develops the ISFR
• IASC was found in June 1973
• The IFRSs helps in international relations