Accounting And Its Concepts PDF

Accounting and its concepts Financial Analysis and Reporting Learning objectives Explain the nature of accounting Describe the overall objective of accounting and why accounting is important in terms of financial analysis. Explain how accounting information links economic activities i...

Accounting and its concepts Financial Analysis and Reporting Learning objectives Explain the nature of accounting Describe the overall objective of accounting and why accounting is important in terms of financial analysis. Explain how accounting information links economic activities in terms of decision making Be able to know the development of Generally Accepted Accounting Principle (GAAP) Explain the relationship of accounting and financial management. Accounting It is the process of identifying, measuring, and communicating economic information to permit informed judgments and decisions by users of the information. Called the “Language of the Business”. Overall Objective: Provide information that can be used in making soundful economic decisions. Three (3) important activities in accounting IDENTIFYING MEASURING COMMUNICATING Three (3) important activities in accounting Process of analyzing events and transactions to determine whether or not they will be recognized. IDENTIFYING Three (3) important activities in accounting Involves assigning numbers, normally in monetary terms, to the economic transactions and events. Valuation by fact or opinion MEASURING Three (3) important activities in accounting Process of transforming economic data into useful accounting information, such as financial statements and other accounting reports, for dissemination to COMMUNICATING users. TYPES of information provided by accounting Quantitative Qualitative Financial Information Types of accounting information for the users General Purpose Accounting Information Special Purpose Distinction between accounting and financial management ACCOUNTING FINANCIAL MANAGEMENT Statutory requirement Not a statutory requirement Following GAAP Management Decisions Historical Transactions Future Planning Recording transactions in a systematic manner for Deals with procurement and allocation of financial a particular period resources Comes first before Financial Management Comes after Accounting Users of financial information INTERNAL DECISION MAKERS EXTERNAL DECISION MAKERS  Internal decision makers Management INTERNAL DECISION MAKERS  External decision makers Investors Employees Lenders Suppliers Customers Government and their agencies EXTERNAL DECISION MAKERS Public Accounting CONCEPTS Refer to the principles upon which the process of accounting is based. Accounting assumptions – fundamental concepts or principles and basic notions that provide the foundation of the accounting process. Accounting theory – logical reasoning in the form of a set of broad principles. It comprises the Conceptual Framework and Philippine Financial Reporting Standards (PFRS) Accounting CONCEPTS 1. Double-entry system – Each accountable event is recorded in two parts. 2. Going concern assumption – The entity is assumed to carry on its operations for an indefinite period of time. 3. Separate Entity – The entity is viewed separately from its owners. 4. Monetary unit assumption – Assets, liabilities, equity, income and expenses are stated in terms of a common unit of measure, which Philippine peso. Accounting CONCEPTS 5. Time Period – The life of entity is divided into series of reporting periods. - Calendar year or Fiscal year 6. Materiality concept – Information is material if its omission or misstatement could influence economic decisions. 7. Cost-benefit – The cost of processing and communicating information should not exceed the benefits to be derived from it. Accounting CONCEPTS 8. Accrual Basis of accounting – The effects of transactions and other events are recognized when they occur and not as cash is received or paid. 9. Historical cost concept – The value of an asset is determined based on acquisition cost. 10. Concept of Articulation – All of the concepts of a complete set of financial statements are interrelated. 11. Full disclosure principle – This principle recognizes that the nature and amount of information included in the financial statements reflect a series of judgmental trade-offs. Accounting CONCEPTS 12. Consistency concept – The financial statements are prepared based on accounting principles that are applied consistently from one period to the next. 13. Matching – Costs are recognized as expenses when the related revenue is recognized. 14. Entity theory – The accounting objective is geared towards proper income determination. 15. Proprietary theory – The accounting objective is geared towards the proper valuation of assets. Accounting CONCEPTS 16. Residual equity theory – This theory is applicable when there are two classes of shares issued, i.e., ordinary and preferred. 17. Fund theory – The accounting objective is neither proper income determination nor proper valuation of assets but the custody and administration of funds. This objective directed towards cash flows. 18. Realization – The process of converting non-cash assets into cash or claims for cash. 19. Conservatism – Is the use of caution when making estimates under conditions of uncertainty, such that assets or income are not overstated, and liabilities or expenses are not understated.