U1-3.A, U3.C-3.D Reviewer PDF

WRITTEN WORK1 COVERAGE Rules for consistent financial reporting were introduced. I.​ INTRODUCTION TO ACCOUNTING B. Branches of Accounting A.​ The...

WRITTEN WORK1 COVERAGE Rules for consistent financial reporting were introduced. I.​ INTRODUCTION TO ACCOUNTING B. Branches of Accounting A.​ The Nature and History of Accounting B.​ Branches of Accounting 1.​ Financial Accounting C.​ Users of Accounting Information Prepares financial statements for external users like investors, creditors and banks. I.​ INTRODUCTION TO ACCOUNTING Example: A company's financial statements show Role of Accounting in Business profit and loss. ​ Accounting is an information system → 2.​ Management Accounting It collects, processes, and presents financial data for decision-making. Helps business owners (internal users) make ​ Accounting is the language of business decisions. → Just like English helps people communicate, accounting helps businesses Example: budgeting and cost analysis. communicate financial health to stakeholders. 3.​ Tax Accounting A. Nature of Accounting Ensures businesses comply with tax laws and file returns. A systematic process of: Example: A business files annual tax returns. 1.​ Identifying – Recognizing which business transactions affect finances. 4.​ Cost Accounting 2.​ Classifying – Grouping similar transactions together. Tracks costs of production and helps set prices. 3.​ Recording – Writing them down in a Example: A factory calculates the cost per product structured way. to price items correctly. 4.​ Summarizing – Organizing data into reports. 5.​ Government Accounting 5.​ Communicating – Sharing financial reports with business owners, managers, and Manages public funds and budgets. investors. Example: Bureau of Internal Revenue, Bureau of A. History of Accounting Treasury, LGUs ​ Ancient Mesopotamia Times (2500 BCE) 6.​ Auditing Early accounting records found in ancient Reviews and verify financial statements for civilizations. accuracy. ​ China (423 BCE) Example: Internal and external audit. First income tax by Emperor Wang Mang. 7.​ Academic Accounting ​ Luca Pacioli, Father of Accounting (1493 Teaches accounting principles in schools and CE) universities. Introduced double-entry bookkeeping (every 8.​ Research Accounting transaction has two sides that must always be equal: debit side & credit side). Studies new trends and improvements in accounting practices. Example: C. Users of Accounting Information ​ Double-entry bookkeeping: Internal Users (Inside the business): A store buys $500 worth of supplies on credit. ​ Management – Uses reports to make Debit (Increase in Inventory) = $500 business decisions. ​ Employees – Check if the company is Credit (Increase in Liabilities) = $500 financially stable for job security. ​ Owners – Monitor business performance. ​ GAAP Development (1920s to Present) External Users (Outside the business): 4.​ Joint Venture – Temporary partnership for a specific project. ​ Investors – Analyze financial health before investing. 🔹 Example: A law firm with multiple partners. ​ Creditors – Decide whether to lend money based on financial stability. ​ Customers – Check if the business will 🔹 Types of Partners: continue providing products or services. 1.​ General Partner – Has unlimited liability ​ Government Agencies – Ensure taxes are and is involved in day to day operations. paid correctly. 2.​ Limited Partner – Has limited liability and ​ General Public – Researchers and involvement is limited to monetary analysts use financial data for reports. contribution. 3. Corporation (A separate legal entity where II.​ BUSINESS ENVIRONMENT ownership is represented by shares) A. Forms of Business Organizations ✅ Advantages: Businesses are classified based on ownership ​ Limited liability (owners are not personally structure, which affects decision-making, responsible for company debts). liability, and financial management. ​ Can raise large amounts of capital by selling shares. 1. Sole Proprietorship (Owned by one person) ​ Perpetual existence (company continues ✅ Advantages: even if an owner leaves). ❌ Disadvantages: ​ Simple and easy to set up. ​ Owner has full control over ​ Double taxation (company pays tax, and decision-making. shareholders also pay tax on dividends). ❌ Disadvantages: ​ More complex management (requires a Board of Directors). ​ Conflicts between owners and ​ Owner is personally liable for all debts management can occur. (unlimited liability). ​ Business ends if the owner dies. 🔹 Example: Apple Inc. (owned by shareholders 🔹 Example: person. A small bakery owned by one and managed by a Board of Directors). B. Types of Business According to Activities 2. Partnership (Owned by two or more people) 1. Service Business (Sells services instead of ✅ Advantages: goods) ​ More skills and resources available. 💼 Steps in a service business: ​ Shared financial burden among partners. 1.​ Start with cash on hand. ❌ Disadvantages: 2.​ 3.​ Pay employees. Perform the service. 4.​ Receive payment from customers. ​ Partners have unlimited liability (except in limited partnerships). ​ Conflicts between partners may arise. 🔹 Examples: ​ If a partner leaves, the partnership may ​ Salon (provides haircuts). dissolve. ​ Law firm (provides legal advice). ​ Bank (offers financial services). ✅ ❌ Advantage: No need for large inventory.​ Disadvantage: Revenue depends on customer 🔹 Types of Partnerships: demand for services. 1.​ General Partnership – All partners share 2. Merchandising Business (Buys and resells equal liability. Hence, all partners are goods) general partners. 2.​ Limited Partnership – Some partners have 🛒 Steps in a merchandising business: limited liability. At least 1 general partner is required. 1.​ Start with cash on hand. 3.​ Limited Liability Partnership - All partners 2.​ Buy products from suppliers. have limited liability. 3.​ Store the products. 4.​ Sell the products.  5.​ Receive payment. If external factors (e.g., government bans) threaten 🔹 Examples: operations, going concern may no longer apply. 3.​ Time Period Concept ​ Supermarket (buys wholesale and sells groceries). Business activities are recorded in specified ​ Clothing store (buys clothes from suppliers accounting periods. and sells them to customers). ✅ ❌ Advantage: Profits depend on price markup.​ Disadvantage: Inventory must be managed Calendar Year (Jan 1 – Dec 31) vs. Fiscal Year (any 12-month period) starting any carefully. month aside from January. 3. Manufacturing Business (Creates products 4.​ Monetary Unit Concept from raw materials) 🏭 Steps in a manufacturing business: Only transactions measurable in money are recorded. 1.​ Start with cash on hand. Example: Cash and land can be recorded, while 2.​ Buy raw materials. company reputation cannot. 3.​ Convert materials into finished products. 4.​ Store finished goods. 5.​ Cost Principle 5.​ Sell the goods. 6.​ Receive payment. Assets are recorded at their purchase price. 🔹 Examples: Example: Equipment purchased for Php 40,000 remains at that value even if its market price drops ​ Car factory (buys metal and parts, to Php 23,000. assembles cars, and sells them). ​ Furniture manufacturer (buys wood, makes 6.​ Full Disclosure Principle furniture, and sells it). Businesses must report all relevant financial ✅ ❌ Advantage: Can produce unique products.​ Disadvantage: Requires high investment in information. machinery and labor.​ Example: A company facing a lawsuit must ​ disclose financial risks to stakeholders. Comparison of Business Types 7.​ Objectivity Principle Type Main Activity Example Key Feature Financial reports must be based on verifiable evidence. Service Provides a Salon No physical service products Example: An accountant must use actual records, Merchandising Buys & sells Grocery Sells not estimates, for payables and receivables. goods ready-made items 8.​ Materiality Principle Manufacturing Produces Car Converts raw goods factory materials into Minor transactions that do not impact financial products decisions can be ignored. III.​ ACCOUNTING FOUNDATION Example: Paper clips and pencils can be recorded as expenses instead of assets. A. Accounting Concepts and Principles 9.​ Accrual Principle (Revenue Recognition) Fundamental Accounting Concepts Revenue is recognized when earned, not when 1.​ Business Entity Concept cash is received. The business is treated as separate from its Example: A sale made in December but paid for in owner. January is recorded in December. Example: A customer repaying a personal loan to 10.​Matching Principle the owner should not be recorded as business income. Expenses must be recorded in the same period as the revenue they help generate. 2.​ Going Concern Concept Example: Employee bonuses related to 2022 Assumes a business will continue operating revenue should be recorded in 2022, even if paid in indefinitely. 2023.  11.​Consistency Principle ​ Furniture & Fixtures – Office furnishings (e.g., tables, chairs, cabinets). Businesses should apply the same accounting ​ Vehicles – Company-owned cars, trucks. methods across periods. ​ Land – Real estate owned (not subject to depreciation). Example: If using FIFO for inventory, a business ​ Building – Business premises. should continue unless a justified change is ​ Accumulated Depreciation – Contra-asset needed. showing asset value reduction. ​ Intangible Assets – Non-physical assets Why is revenue recognized when earned rather (e.g., patents, copyrights, trademarks). than when cash is received? Example Scenario: Scenario-Based Questions ABC Company purchased office furniture worth A company records a building at Php 4.5M despite Php 50,000. This will be recorded as a non-current a new market value of Php 6.5M. Which principle asset under "Furniture & Fixtures." applies? (Cost Principle) Liabilities (Obligations the business owes) A business closes a division but continues operating in other areas. Does it still follow the Current Liabilities (Debts payable within a year) going concern assumption? (Yes) ​ Accounts Payable – Amount owed to The owner rents office space to their own company. suppliers. Is this a valid business expense? (Yes, under ​ Notes Payable – Short-term obligations Business Entity Concept) backed by a promissory note. ​ Unearned Revenue – Payments received C. Types of Major Accounts for services not yet provided. ​ Accrued Expenses – Expenses incurred Classification of Accounts but not yet paid (e.g., salaries payable). 1.​ Permanent (Real) Accounts - Balances Non-Current Liabilities (Debts due beyond 12 carry forward to the next period. months) Examples: Assets, Liabilities, Equity ​ Mortgage Payable – Long-term obligation secured by real estate. 2.​ Temporary (Nominal) Accounts - ​ Loan Payable – Long-term debt with Balances are closed at the end of the interest. period. Example Scenario: Examples: Revenue, Expenses A business took out a 5-year loan for Php 3.​ Personal Accounts - Related to 1,000,000. This will be recorded under "Loan individuals. Payable" (non-current liability). Example: Drawings Equity (Owner’s claim to the business resources after liabilities) Assets (Resources owned by a business) ​ Capital – Owner’s initial and additional Current Assets (Short-term assets convertible investments. to cash within a year) ​ Drawings – Owner’s withdrawals for personal use. ​ Cash – Coins, currencies, and equivalents. ​ Accounts Receivable – Amounts owed by Example Scenario: customers from credit sales. ​ Notes Receivable – Customer obligations Hetty withdrew Php 7,500 for personal use. The backed by a written promise. entry would be: ​ Allowance for Doubtful Accounts – Estimated uncollectible receivables. ​ Debit: Drawings (Php 7,500) ​ Supplies (Unused) – Items on hand (e.g., ​ Credit: Cash (Php 7,500) office supplies). ​ Prepaid Expenses – Payments for future Revenue (Income Earned by a Business) benefits (e.g., rent, insurance). ​ Service Revenue – Earnings from Non-Current Assets (Long-term assets with a providing services. useful life over a year) ​ Sales Revenue – Earnings from selling goods. ​ Equipment & Machineries – Tools used in ​ Interest Income – Earnings from production (e.g., printers, machines). investments.  ​ Professional Fees – Fees charged for Example Ledger Entry (After Posting the Printer expertise. Purchase Transaction) Example Scenario: ​ Equipment Account: Increases by Php 15,000 A customer paid Php 20,000 for consulting ​ Accounts Payable Account: Increases by services. This is recorded as "Service Revenue." Php 15,000 Expenses (Costs Incurred to Earn Revenue) Types of Ledgers ​ Salaries Expense – Employee wages. 1.​ General Ledger ​ Utilities Expense – Electricity, water, internet bills. Contains all the accounts of a business, ​ Rent Expense – Payments for leased summarizing transactions recorded in the journals. properties. Each account in the general ledger provides a ​ Advertising Expense – Marketing and running balance, showing all increases and promotions. decreases over time. It serves as the foundation for ​ Transportation Expense – Delivery and preparing financial statements. travel costs. 2.​ Subsidiary Ledger Example Scenario: Detailed records for specific accounts in the A business pays Php 10,000 for online ads. This is general ledger, usually for accounts with a large recorded under "Advertising Expense." volume of transactions. It helps in tracking individual balances while keeping the general ledger uncluttered. This tracks control accounts D. Books of Accounts like accounts receivable and payables. A. Journal (Book of Original Entry) Importance of Maintaining Books of Accounts ​ Transactions are first recorded in the journal. ​ Ensures Accuracy – Avoids financial ​ Uses a debit-credit format. misstatements. ​ Each entry includes: ​ Helps in Decision-Making – Provides ○​ Date financial insights. ○​ Accounts Affected ​ Compliance with Laws – Required for tax ○​ Amounts (Debit & Credit) and audit purposes. ○​ Explanation ​ Prevents Fraud – Identifies irregularities. ​ Records must be in chronological order. Note: memorize by heart the accounting equation: Example Journal Entry: Twirlie bought a printer on account) Assets = Liabilities + Equity Debit: Equipment (Php 15,000)​ Credit: Accounts Payable (Php 15,000) Types of Journal 1.​ General Journal Transactions that do not fit into specialized journals (such as adjusting entries, closing entries, and uncommon transactions) are typically recorded in the general journal. 2.​ Special Journal Designed to record repetitive transactions efficiently. They help streamline the accounting process by categorizing similar transactions into specific journals. B. Ledger (Book of Final Entry) ​ Contains the chart of accounts (list of all accounts). ​ Transactions from the journal are posted to respective ledger accounts. ​ Must be balanced for financial accuracy.