Fundamentals of Accountancy, Business, and Management 1 PDF

 **Name:** **Grade & Section:** **INTRODUCTION** **What is Accounting?** - **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 ec...

 **Name:** **Grade & Section:** **INTRODUCTION** **What is Accounting?** - **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 decisions (Statement of Financial Accounting Standards No. 1, "Basic Concepts and Accounting Principles Underlying Financial Statement of Business Enterprises" (Manila: Accounting Standards Council, 1983), par. 1)** - **Accounting is an information system that measures, processes and communicates financial information about an economic entity (Statement of Financial Concepts No. 1, "Objectives of Financial Reporting by Business Enterprises" (Norwalk, Conn.: Financial Accounting Standards Board, 1987), par. 9)** - **Accounting is the process of identifying, measuring and communicating economic information to permit informed judgments and decisions by users of the information (American Accounting Association, "A Statement of Basic Accounting Theory" (Evanston, III.: American Accounting Association, 1966) par. 1; Accounting Principles Board, Statement No. 4, "Basic Concepts and Accounting Principles Underlying Financial Statements of Business Enterprises" (New York: AICPA, 1970), par. 40).** - **Accounting is the art of recording, classifying and summarizing in a significant manner and terms of money, transactions and events which are, in part at least, of a financial character, and interpreting the results thereof (American Institute of Certified Public Accountants, "Review and Resume", Accounting Terminology Bulletin No. 1 (New York: AICPA, 1953), par. 9).** **Evolution of Accounting** - **Primitive Accounting** - **8500 B.C. -- the date archeologists have established for certain clay tokens - cones, disks, spheres and pellets -- found in Mesopotamia (modern Iraq). These tokens represented such commodities as sheep, jugs of oil, bread or clothing and were used in the Middle East to keep records.**  **The tokens were often sealed in clay balls, called bullae, which were broke on delivery so the shipment could be checked against the invoice; bullae, in effect, were the first bills of lading.** - **2286 -- 2242 B.C. -- Account records date back to the ancient civilizations of China, Babylonia, Greece and Egypt. People in these civilization maintained various types of records business activities. During the 1^st^ dynasty of Babylonia (2286 -- 2242 B.C.), its law, which was based on the Code of Hammurabi, requires merchants trading goods to give buyers a sealed memorandum containing the agreed price before it can be considered enforceable. The agreed-upon transaction was recorded by the Scribe on a small mound of clay with the parties affixing "their signatures" on it.** - **3600 B.C. -- in Babylonia, clay tablets also recorded payments of wages. The rulers of these civilizations used accounting to keep track of the costs of labor and materials used in building structures as in the case of the pharaohs of Egypt in building their great pyramids.** - **Middle Ages** - **Double-entry bookkeeping is not the discovery of science; it is the outcome of continued efforts to meet the changing necessities of trade. German philosopher, Oswald Spengler wrote in The Decline of The West (1928) that the invention of double-entry bookkeeping was the decisive event in European economic history.** - **The Florentine Approach -- To them, doing business and living life were extensions of each other. Business was conducted on logic of friendship, but friendship in turn was instrumental, as well as emotional.** - **Giovanni Farolfi and Company. The financial records that he kept, although these s records are incomplete, they show enough details to be identified as double-entry bookkeeping. These details include the use of debits and credits and duality entries. They are the oldest known existing examples of the double entry system.** - **Luca Pacioli -- he has been regarded as the father of double-entry accounting. He stated that the purpose of bookkeeping was "to give the trader without delay information as to his assets and liabilities." Geothe, the famous German poet and dramatist, referred to double-entry bookkeeping as "one of the finest discoveries of human intellect." Werner Sombart, the eminent economist-sociologist, believed that "double entry bookkeeping is born of the same spirit as the system of Galileo and Newton.'** - **Savary and Napoleonic Commercial Code** **The earliest systematized form of accounting regulation developed in continental Europe, starting in France in 1673. The government introduced the submission of an annual fair value statement of financial position to protect the economy from bankruptcies.** **The Napoleonic Code or Code Napoleon is the French civil code, established under Napoleon Bonaparte on March 21, 1804. The commercial code was adopted in 1807.** - **Eugen Schmalenbach (1873 -- 1955)- he was frustrated repeatedly with his failure to compare meaningfully the financial data made available by different companies. This lead to research on the problem and the publication of his book, The Model Chart of Accounts. With this book, he laid the foundations for all subsequent developments in uniform accounting in Germany.** - **Imposition of Income Tax and Conflicts with Financial Accounting** **In the year 10 CE, Xin Dynasty's Emperor Wang Mang instituted an unprecedented tax- the income tax -- at the "rate of 10% profits, for the professional and skilled labor."** **William Pitt the Younger of Britain levied an income tax on his budget of December 1798 to pay for weapons in preparations for Napoleonic wars.** **The 1862 Union Government established the Bureau of Internal Revenue to assess and corporate income taxes to help finance the Civil War.** **In 1943, the US Congress passed income tax withholding as the only way to collect on high tax rates to fund Civil World War II.** **The Philippines' Bureau of Internal Revenue was created through the passage of Reorganization Act No. 1189 dated July 2, 1904. On August 1, 1904, the BIR was formally organized and made operational under the Secretary of Finance** **Financial accounting is conservative and it's about matching efforts with results. Tax accounting in turn, is about improving the amount and the timing of collections.** - **Information Age** **Dan Brinklin and Bob Frankston wrote VisiCalc for the Apple II, the first electronic spreadsheet, the most important business application for the personal computer.** **SUMMARY\ \ ** **USERS OF ACCOUNTING INFORMATION** - **USERS OF ACCOUNTING INFORMATION** **[Internal Users]** - is the users who are directly involved in the planning, organizing & running the business. They use the information to help improve the performance & profitability of the organization or business. - ***OWNERS*** need to assess how well their business is performing. Owners are also interested in knowing how risky their business is. - ***DIRECTORS*** make the strategic and operational decisions of the company and are responsible for ensuring that the company meets its statutory obligations. - ***MANAGERS*** need to allocate the financial, human and capital resources towards competing needs of the business through the budgeting process. - ***OFFICERS*** are responsible for the management and day-to-day operations of a corporation, and are appointed by the board of directors. - ***INTERNAL DEPARTMENTS*** refer to the members of a company\'s management and other individuals who use financial information in running and managing the business. - ***EMPLOYEES*** are interested in the information about the stability & profitability of their employers. Employees are interested in knowing how well a company is performing as it could have implications for their job security and income. - ***INTERNAL AUDITOR (IA***) is a trained professional employed by companies to provide independent and objective evaluations of financial and operational business activities, including corporate governance. **[External Users]** - are those individuals who take interest in the account information of an organization but they are not part of the organization's administrative process. External users have a direct or indirect interest in accounting information. - ***INVESTORS*** are the providers of risk capital & their advisers are concerned with the risk inherent in & return provided by their investments. - ***LENDERS*** are interested in information that enables them to determine whether their loans, the interest attaching to them will be paid when due. - ***SUPPLIERS & OTHER TRADE CREDITORS*** are interested in information that enables them to determine whether amounts owing to them will be paid when due. - ***CUSTOMERS*** have an interest in information about the continuance of an entity, especially when they have long-term involvement with, or are dependent on entity. - ***TAX AUTHORITIES*** determine whether a business declared the correct amount of tax in its tax returns. - ***GOVERNMENT & THEIR AGENCIES*** are interested in the allocation of resources & therefore, the activities of entities. They also require information in order to regulate the activities of entities, determine taxation policies & as basis for national income & similar statistics. - ***PUBLIC ENTITIES*** affect members of the public in a variety of ways. Financial statements may assist the public by providing information about the trends & recent developments in prosperity of the entity & the range of its activities. **\ ** **BASIC ACCOUTING PRINCIPLE AND CONCEPTSA** **Fundamental Concepts** Several fundamental concepts underlie the accounting process. In recording business transactions, accountants should consider the following: - **ENTITY CONCEPT** - The most basic concept in accounting. - An accounting entity is an organization or a section of an organization that stands apart from other organizations and individuals as a separate economic unit. - Each entity should be evaluated separately. - **PERIODICITY CONCEPT** - Entity's life can be meaningfully subdivided into equal time periods for reporting purposes. - This concept allows the users to obtain timely information to serve as a basis on making decisions about future activities for the purpose of reporting to outsiders, one year is the usual accounting period. - **STABLE MONETARY UNIT CONCEPT** - The Philippine peso is a reasonable unit of measure, and its purchasing power is relatively stable. **CRITERIA FOR GENERAL ACCEPTANCE** **OF AN ACCOUNTING PRINCIPLE** - **Generally Accepted Accounting Principle** - Encompasses the conventions, rules, and procedures necessary to define accepted accounting practice at a particular time. - The general acceptance of an accounting principles usually depends on how well it meets three criteria: relevance, objectivity, and feasibility. - A principle has **relevance** to the extent that it results in information that is meaningful and useful to those who need to know something about a certain organization. - A principle has **objectivity** to the extent that the resulting information is not influenced by the personal bias or judgment of those who furnish it. - Objectivity connotes reliability and trustworthiness. - It is also connoting verifiability, which means that there is some way of finding out whether the information is correct. - A principle has **feasibility** to the extent that it can be implemented without undue complexity or cost. - **BASIC PRINCIPLE** - **OBJECTIVITY PRINCIPLE** - Reliable data are verifiable when they can be confirmed by independent observers. - Ideally, accounting records are based on information that flows from activities documented by objective evidence. - Without this principle, accounting records would be based on whims and opinions and is therefore subject to disputes. - **HISTORICAL COST --** states that acquired assets should be recorded at their actual cost and not at what management thinks they are as at reporting date. - **REVENUE RECOGNITION PRINCIPLE --** revenue is to be recognized in the accounting period in when goods are delivered, or services are rendered or performed. - **EXPENSE RECOGNITION PRINCIPLE --** expenses should be recognized in the accounting period in which goods and services are used up to produce revenue and not when the entity pays for those goods and services, - **ADEQUATE DISCLOSURE --** requires that all relevant information that would affect the user's understanding and assessment of the accounting entity be disclosed in the financial statement. - **MATERIALITY --** it depends on the size and nature of the item judged in the particular circumstances for its omission, in deciding whether an item or an aggregate of items is material, the nature and size of the item are evaluated together. - **CONSISTENCY PRINCIPLE --** the firms should use the same accounting method from period to period to achieve comparability over time within a single enterprise. - **MATCHING PRINCIPLE-** cost should be matched with the revenue generated. - **CONSERVATISM PRINCIPLE-** also known as prudence. In case of doubt, assets and income should not be overstated while liabilities and expenses should not be understated. - **ACCRUAL ACCOUNTING PRINCIPLE-** revenue should be recognized when earned regardless of collection and expenses should be recognized when incurred regardless of payment. On the other hand, the cash basis principle in which revenue is recorded when collected and expenses should be recorded when paid. Cash basis is not the generally accepted principle today. **\ ** **THE ACCOUNTING EQUATION** - **THE ACCOUNTING EQUATION** - The most basic tool of accounting is the **accounting equation.** - This equation presents the resources controlled by the enterprise, the present obligations of the enterprise and the residual interest in the assets. - It states that assets must always equal liabilities and owner's equity. The basic accounting model is: **ASSETS = Liabilities + Owner's Equity** - The equation explains why liabilities and owner's equity follow the same rules of debit and credit. a. Investment is an asset or item acquired with the goal of generating income or appreciation. b. Withdrawal occurs when funds are removed from an account for personal use. c. Revenue is the total amount of income generated by the sale of goods or services related to the company's primary operations. d. Expenses is the cost of operations that a company incurs to generate revenue. - **TYPES AND EFFECTS OF TRANSACTIONS** - **Source of Assets (SA)-** an assets increases and a corresponding claims (liabilities or owner's equity) account increases. - Increase in Assets = Increase in Owner's Equity - - **Exchange of Assets (EA)-** one asset account increases another asset account decreases. - Increase in one Asset = Decrease in another Asset - **Use of Assets (UA)-** an asset account decreases and corresponding claims (liabilities or owner's equity) account decreases. - Decrease in Assets = Decrease in Liabilities - - **Exchange of Claims (EC)-** one claims (liabilities or owner's equity) account increases and another claims (liabilities or owner's equity) account decreases. Example: Received utilities bill but did not pay. - Increase in Liabilities = Decrease in Owner's Equity **Transactions** **ASSETS** **LIABILITIES** **EQUITY** **TYPE OF TRANSACTION** ---------------------------------------------------------- -------------- ----------------- -------------- ------------------------- Eg. Owner withdrew cash for personal use **Decrease** **Decrease** **Use of Asset** 1\. Invested cash in the business 2\. Purchased equipment on a cash basis 3\. Billed a customer for a spa service 4\. Paid employee\'s salary 5\. Purchased supplies on account 6\. Paid an advertisement for the company\'s new product 7\. Paid the rent in advance 8\. Received cash from customers 9\. Withdrew cash for some personal use 10\. Invested a vehicle on the company