CIT5 Notes PDF

I. INTRO TO ACCOUNTING TERMS: 5 elements of accounting 1. Assets – what the business owns 2. Liabilities – what the business owes 3. Capital- what the business owner owns 4. Revenues- earned during ope...

I. INTRO TO ACCOUNTING TERMS: 5 elements of accounting 1. Assets – what the business owns 2. Liabilities – what the business owes 3. Capital- what the business owner owns 4. Revenues- earned during operation 5. Expenses- expenses incurred as the business operates Accounting aims to provide information -measures business activites and processes information into reports and communicates results to decision makers -language of business DEVELOPMENT OF ACCOUNTING a) Primitive accounting 8500 Bc – tokens were used in Mesopotamia (now Iraq) -tokens were stored in a bulla (plural bullae) 3600 BC-clay tablets used to record payments of wages in Babylonia -imprinted in tablets instead of tokens b) Middle Ages 13-15th century: Florence, venice and Genoa -merchandising and business flourished in these countries 1340: Genoa, double entry records appeared 1494: venice Luca Pacioli (Father of Modern Accounting) published Summa De Arithmetica Geometria, Proportioni et Proportionalita where the book contains double entry recording c) Industrial Revolution - Emerged from mid-18th to mid-19th century in England - Huge increase in production - Goods and trades increased thus transactions involved large sums of money - Owner assigned managers to their different businesses where managers submit reports-financial reports- financial statements- financial information which shows the state of the business. Implications: 1) Business becomes larger making it more complex and difficult to manage 2) Owners were no longer managers of their businesses d) Information Age -began in 1950s-present -commputers can do accounting w speed, precsion and reliability Why is there still a need to study accounting: 1) To know the process of accounting software 2) In order to Be ablw to create our own accounting software - Accounting is being changed by the internet and electronic commerce Accounting is the ART of reording, classifying and summarizing transactions and interpreting the results thereof. PHASES OF ACCOUNTING: a) Recording -financial events are translated into written accounting data in chronological order  -called the book of original entry or Journal -thus recording is also called journaling b) Classifying -similar and interrelated transactions are grouped together into their respective classes -book of final entry/ledger -also called posting c) Summarizing -involves preparation of reports in the form of financial statements Financial statements: 1)Income statement- summarizes how much profit or loss of the business 2)statement of changes in capital – whether what the owner owns decreases or increases 3) balance sheet- shows the accounting equation which is Asset= Liability + Capital ; total values of each of the 3 basic elements of accounting d) Interpreting - Analyze the context, reveal the financial conditions of a business Liquidity – a business is liquid if cash is readily available for the next 12 months, can be measured after deducting all financial obligations - Balance sheet- reveals the total of all accounts on each element, helps see the liquidity of the business Solvency – availability of cash over a longer term inorder to meet financial commitments as they become due. Profitability – capacity of the business to generate income during its operation. Income statement Financial flexibility- deal with unexpected events, to be able to raise funds when the need suddenly arises, be able to take advantage of sudden/ unexpected opportunities NATURE OF BUSINESS TRANSACTIONS Transactions- an accomplished event, results in a change (increase/decrease) in the accounting elements Characteristics: -definite/certain sum in money -supported by a genuine source document(proof that a transaction occurred) -has 2 parts: value received (debit value), value parted with (credit value) TYPES OF BUSINESS 1) According to Activity 2) According to ownership or organization a) Sole or single proprietorship (most common) -owned/controlled by a single person - received all profit and responsible for all loses and obligations of the business (ex: debts) -when owner dies the business dies b) Partnership -two or more people bind themselves(contract) to contribute resources to a common fund -partners are individually and as a group, responsible for all loses and obligations of the business -dissolves when one of the partner dies or leaves. c) Corporation -divides the ownership of the business through shares/stocks -dividends -profit received by shareholders -business entity that is separate from its owner 2 types: 1) Closely help corporation - ownership is to selected individual usually family  2) Publicly held corporation (open to the public) -corporate owners are not responsible for the debts or taxes of the corporation - board of directors- elected to manage the corporation d) Cooperative -small producers and consumers who voluntarily join together to form a business enterprise, which they themselves own, control and patronize. Customer and member. UNDERLYING ACCOUNTING ASSUMPTIONS a) Separate entity assumption/Economic Entity Assumption/accounting entity assumption/business entity concept -owner of the business is a different entity, separate from the business -transactions of the business are recorded separately from the owners’ personal transactions. b) Going Concern Assumption/continuity assumption -assumes that a business has an unlimited life in the absence of evidence to the contrary -helps make the business keep long term plans/goals and engage in transactions meant to be completed over a long period. c) Monetary Unit Assumption -measurement in terms of money assumption (use currency where the business operates) -the purchasing power of peso is assumed to be stable and constant d) Periodicity assumption -time period assumption -the activities of a business are divided into artificial measurement intervals (vary from one organization to another). -organizations prepare financial statements at least every year -can use calendar year or fiscal year e) Accrual Assumption/ accrual basis of accounting -recorded when the service is given -the effects of transactions are recognized when they occur (render service or incur an expense) and they are recorded in the accounting records and recorded in the financial statements of the periods which they relate -revenues are recorded when earned and expenses are recorded when incurred, paid or not f) Cash basis of accounting -records revenues when cash is received, expenses are recorded after paying cash Sample problem: A client walked in and availed services on Aug 10 for P30000, but unable to settle the bill on aug 10, client came back on aug 20 to pay P20000 and settled bill on sept 10. Accrual- revenue is recorded in aug 10 Cash basis- revenue is recorded in aug 20 and sep 10