Basic Accounting for Non-Accountants PDF

Basic Accounting for Non- Accountants  Learning Objective 1. Describe the nature of a business and the role and purpose of accounting in business 2. Describe the accounting concepts and principles and constraints 3. State the accounting equation and define each element of the equation. 4....

Basic Accounting for Non- Accountants  Learning Objective 1. Describe the nature of a business and the role and purpose of accounting in business 2. Describe the accounting concepts and principles and constraints 3. State the accounting equation and define each element of the equation. 4. Introduction to debit and credits 5. Introduction to the accounting process  What is a Business? A business is an organization in which basic resources (inputs), such as materials and labor, are assembled and processed to provide goods or services (outputs) to customers. The objective of most businesses is to earn a profit. Profit is the difference between the amounts received from customers for goods or services and the amounts paid for the inputs used to provide the goods or services.  The Role of Accounting in Business Accounting can be defined as an information system that provides reports to users about the economic activities and condition of a business. What is ACCOUNTING? is a service activity. Its function is to provide quantitative information, primarily financial in nature, about economic entities, that is intended to be useful in making economic decision. Accounting Standards Council  Accounting is the process of Measuring Interpreting Communicating financial information to support internal and external business decision making. Purpose of Accounting It gives you an excellent gauge of how well your business is doing Accounting also provides financial information throughout the year so you can test the success of your business strategies and make course corrections to ensure that you reach your year-end profit goals. Acccounting can become your best system for managing your financial assets and testing your business strategies  The Need for Accounting Managers, investors, and other internal groups want the answers to two important questions: How well did the organization perform? Where does the organization stand? Accountants answer these questions with three major financial statements: Income Balance statement sheet Statement of cash flows Users of Financial Information Accounting Concepts and Terminologies  Accounting Concepts: Underlying Assumptions ACCRUA  Income is recognized when earned L regardless of when received  Expense is recognized when incurred regardless of when paid  The effects of transactions are recognized when they occur  The business will continue in operational GOING existence for the foreseeable future CONCER  Financial statements should be prepared on N a going concern basis unless management either intends to liquidate the enterprise or CONCEP BUSINES to cease trading, The business and its owner(s) are two T separate entities S ENTITY  Any private and personal incomes and CONCEP expenses of the owner(s) should not be T treated as the incomes and expenses of the business  Accounting Concepts: Underlying Assumptions TIME The life of an entity is subdivided into PERIOD time periods which are of equal length for the purpose of making financial reports Usually twelve months MONETARYAssets, liabilities, capital, income and UNIT expenses should be stated in terms of a unit of measure (Philippine Peso) The purchasing power of the Peso is stable/constant  Accounting Concepts: Business Entities Sole Proprietorshi A proprietorship is owned by one p individual. They are easy and cheap to organize and resources are limited Partnership Ato those of the partnership owner. to a is similar proprietorship except that it is owned by two or more individuals. Combines the skills and resources of more than one person. Corporation A corporation is organized under state statutes as a separate legal taxable entity. Accounting Concepts: Qualitative Characteristics Relevance The capacity of information to influence a decision Reliability The degree of confidence users place upon the truthfulness of the representations in the financial statements The quality of information that assures users that the information is free from Faithful bias Theand actual effects error of the represents and faithfully transaction Representat what should it purports be properly to represent accounted for and reported in the ion financial statements Substance Transactions should be accounted over Form in accordance with their substance in reality and not Accounting Concepts: Qualitative Characteristics Neutrality Information in the Financial Statements must be free from bias “fairness” Conservatis Care and caution must be exercised when dealing with m or uncertainties in the measurement Prudence process The Revenues and profits are not anticipated. Only realized profits with reasonable certainty are Completene recognized in the profit Relevant information andbe must loss account presented in a way that facilitates ss understanding and avoids erroneous implication Accounting Concepts: Qualitative Characteristics Understandab Financial information must be ility comprehensible or intelligible if it is to be useful Comparabil Information must be comparable ity with similar information of previous periods or with information of another entity  Accounting Concepts: Accounting Constraints TIMELINES Information must be available or communicated early enough when a S decision is to be made COST- The benefit derived from the information should exceed the cost incurred in BENEFIT obtaining the information An item is material if knowledge of it MATERIALI would affect or influence the decision of TY the informed users of the financial statements RELEVANCE There is a tradeoff between relevance vs (reporting information in a relevant RELIABILITY manner) and reliability (ensuring that the information is reliable)  THE ACCOUNTING EQUATION Assets = Liabilities + Equity The resources The rights of The rights of the owned by a creditors are the owners business debts of the business  Accounting Terminologies TRANSACTI ON a business event having a monetary impact on the financial statements of a business It is recorded in the accounting records of the business ACCOUN A record in the general ledger that is used to collect and store T similar information  Types of Accounts ASSET are valuable resources that ACCOUN are owned by a firm. T LIABILIT present obligations of the firm. Y ACCOUN T EQUITY  represents the owners' residual interest in the assets ACCOU of the business. NT Residual interest is another name for owners' equity.  INCOME  the payment you receive for your time, services you provide, or the ACCOUN use of your money  Examples include commissions, T tips, dividend income from stocks, and interest income from bank accounts. EXPENSE money you spend to ACCOUNT purchase goods or services provided by someone else Examples include rent, electricity, and light expenses  OF ACCOUN a listing of the names of the accounts that a company has TS identified and made available for recording transactions in its general ledger T- ACCOUNTS  An informal term for a set of financial records that use double-entry bookkeeping.  If a large letter T were drawn on the page, the account title would appear just above the T, debits would be listed under the top line of the T on the left side and the credits would be listed under the top line of the T on the right side L BALANC  The sum of the increases in an account is usually equal to or E greater than the sum of the decreases in the account. Thus, the normal balance of an account is either a debit or a credit depending on whether DEBI increases in the account are recorded as debits or credits. T  An accounting entry that results in either an increase in assets or a decrease in equity or liabilities on a company's CREDI balance sheet or in your bank T  account. An accounting entry that either decreases assets or increases liabilities and equity on the company's balance sheet. Debits and Credits You just need to understand that debit and credit are two actions that are opposite in nature. An element (account) that is effected by an accounting transaction is either debited or credited (with an amount that is reflected in the transaction) depending on the nature of the account and the rule applicable to it. Entries to the left side of the an account are debits (DR), and accounts with left sided balances (asset accounts and expense accounts) are debit accounts. Entries to the right side of the an account are credits (CR), and accounts with right sided balances (liability accounts, owners' equity accounts, and revenue and profit accounts) are credit accounts. Understanding debit and credit is essential for bookkeeping and analysis of balance sheets.  Debit and Credit Rules DEBIT CREDIT An accounting An accounting entry that: entry that:  Increases an asset  Decreases an account asset account  Increases an  Decreases an expense account expense account  Decreases a  Increases a liability account liability account  Decreases a  Increases a revenue account revenue account Summary of Debits and Credits The Accounting Process The Accounting Process Systematic recording of the financial operations of a business or of an individual Before an accounting system can be started, the owner of a business must find: What the business owns (assets) What the business owes (liabilities) What the business is worth (equity) Single-entry vs Double-entry Single – One account entry for each transaction Double – Two account entries for each transaction One debit and one credit Hybrid systems May not match income with expenses May not distinguish cash, check, or credit  Double-entry Accounting A process by which accounting transactions are entered each individual transaction always has an offsetting transaction. double-entry bookkeeping gets its name because you enter all transactions twice One account will receive a "debit" entry, meaning the amount will be entered on the left side of that account. Another account will receive a "credit" entry, meaning the amount will be entered on the right side of that account. The initial challenge with double-entry is to know which account should be debited and which account should be credited. Rules of Debit and Credit – Normal Balances of Accounts  Accounting Methods Accounting methods dictate how the company's transactions are recorded in the company's financial books Cash-basis accounting  companies record expenses in financial accounts when the cash is actually laid out, and they book revenue when they actually hold the cash Accrual accounting  companies record revenue when the actual transaction is completed (such as the completion of work specified in a contract agreement between the company and its customer), not when they receive the cash. Companies record any expenses when they're incurred, even if they have not paid for the supplies yet Accounting Process Reference HTTPS://WWW.SCRIBD.COM/PRESENTATION/ 253302132/BASIC-ACCOUNTING-FOR-NON- ACCOUNTANTS-PART-1-PPT