Basic Financial Accounting and Reporting Textbook PDF

Here is the converted markdown format: # Basic Financial Accounting & Reporting ## The Accounting Equation and the Double-Entry System ### Learning Objectives: After studying this chapter, you should be able to: 1. Describe the parts of an information system. 2. Explain how an accounting info...

Here is the converted markdown format: # Basic Financial Accounting & Reporting ## The Accounting Equation and the Double-Entry System ### Learning Objectives: After studying this chapter, you should be able to: 1. Describe the parts of an information system. 2. Explain how an accounting information system helps the decision makers. 3. Define the elements of financial statements. 4. Describe the account (the simple T-Account) and its uses. 5. Understand what is meant by the accounting equation and prove the validity of the "mirror image" concept. 6. Understand what is meant by the double-entry system. 7. Explain how the double-entry system follows the rules of the accounting equation. 8. Define debits and credits. 9. Summarize the rules of debit and credit as applied to balance sheet and income statement accounts. 10. Describe the nature of the typical account titles used in recording transactions. 11. Analyze and state the effects of business transactions on an entity's assets, liabilities and owner's equity and record these effects in accounting equation form using the financial transaction worksheet and the T-Accounts. 12. Distinguish between revenue and receipts. Companies like Microsoft use Vervex's EnGage 2.0 to manage projects. The software enables progress reports via corporate intranet and invoice/timesheet generation. Intranet is a company-specific version of the Internet. Vervex Technologies, established in 1994 and owned by Price Givens, develops database and corporate intranet applications. Geographic distance interfered with efficient collaboration. Givens knew an intranet could be the solution, Vervex's newest. ## Parts of an Information System An information system comprises people, procedures, software, hardware, and data, working together to provide essential organizational information. * **People**: Competent end users increase productivity, using hardware and software for problem-solving. * **Procedures**: Manuals and guidelines instruct users on software and hardware use. * **Software**: Programs instructing the computer on data processing, including system software and application software. * **System Software**: Background software managing computer resources (e.g., Windows, Linux). * **Application Software**: Performs useful work, with basic (browsers, word processors) and advanced applications. * **Hardware**: Consists of input devices, the system unit, secondary storage, output devices, and communication devices. * **Input Devices**: Translate data (keyboard, mouse, etc.). * **The System Unit**: Electronic circuitry with a central processing unit (CPU) and memory. * **Secondary Storage**: Stores data (flash drive, hard disk, etc.). * **Output Devices**: Displays information (monitor, printer). * **Communication Devices**: Sends and receives data (modem). * **Data**: Raw material for data processing, including numbers, letters, and symbols related to facts. ## Accounting Information System Every business organization needs an accounting information system to generate reliable financial data for decision-makers. A system must consider its users and decisions. The system depends size, operations, transaction volumes, structure, business form and extent of government regulation. An accounting information system combines personnel, and procedures to meet financial information needs. Diagram: The text describes a diagram showing how economic activities flow into the accounting processes, which produces accounting information. This is then used by decision makers in making economic decisions and taking specific actions, resulting in the continuation of economic activities in an ongoing cycle. An effective accounting information system should: * Process information efficiently at the least cost (cost-benefit principle). * Protect assets, ensure data reliability, and minimize fraud (control principle). * Align with the entity's organizational and human elements (compatibility principle). * Accommodate transaction volume and organizational changes (flexibility principle). ## Types of Accounting Information Systems Companies use manual systems, computer-based transaction systems, and database systems to record transactions. Manual systems are less efficient and prone to error while computer-based systems and database systems are more efficient. Manual systems use paper-based journals and ledgers, while computer-based systems use computer records. Database systems embed accounting data in business event data. Computer-Based Transaction System. Many companies have computerized their processes. The user fills in a computer screen that looks and acts like source document. Some advantages are: * Transactions are posted to the appropriate accounts quickly. * Detailed lists can be printed for review * Internal controls are used ro detect errors. * Variety of reports ## Database Systems Relational database systems (ERP) depart from the "accounting equation" method of organizing data. Systems such as SA, Oracle and People Soft capture store data in a warehouse. Database systems reduce inefficiencies ans redundant data. Database systems recognize events, reduce inefficiencies, and eliminate redundant data. ## Stages of Data Processing Processing of the raw data to accounting summarized reports follows the usual input-processing-output progression. Each transaction into the accounting system is supported by documents like customer inversions , Vendor inversions , deposit slips and memos with use of accounting software. Manual systems are inferior in computer is systems in terms of productivity and accessibility. ## Elements of Financial Statements The elements of financial statements defined in the March 2018 Conceptual Framework for Financial Reporting are: * assets, liabilities and equity - relate to a reporting entity's financial position; and * Income and expense - relate to a reporting entity's financial performance. In summary, the elements of financial statements are defined as follows: | Element | Definition or Description | | :------- | :------------------------------------------ | | Asset | A present economic resource controlled by the entity as a result of past events. | | Liability | A present obligation of the entity to transfer an economic resource as a result of past events. | | Equity | The residual interest in the assets of the entity after deducting all its liabilities. | | Income | Increases in assets, or decreases in liabilities, that result in increases in equity. | | Expenses | Decreases in assets, or increases in liabilities, that result in decreases in equity. | ### Financial Position #### Asset Per March 2018 Conceptual Framework for Financial Reporting, asset is a present economic resource controlled by the entity as a result of past events. An economic resource is a right that has the potential to produce economic benefits. Rights that have the potential to produce economic benefits take many forms, including: **(a) rights that correspond to an obligation of another party, for example:** (i) rights to receive cash; (ii) rights to receive goods or services; (iii) rights to exchange economic resources with another party on favorable terms. \(iv) rights to benefit from an obligation of another party to economic resource if a specified uncertain future event occurs. **(b) rights that do not correspond to an obligation of another party, for example:** (i) rights over physical objects, such as property, plant and equipment or inventories; (ii) rights to use intellectual property. An economic resource could produce economic benefits for an entity by entitling or enabling it to do, for example, one or more of the following: * receive contractual cash flows or another economic resource; * exchange economic resources with another party on favorable terms; * produce cash inflows or avoid cash outflows by, for example: (i) using the economic resource either individually or in combination with other economic resources to produce goods or provide services; (ii) using the economic resource to enhance the value of other economic resources; or (iii) leasing the economic resource to another party; (d) receive cash or other economic resources by selling the economic resource; or (e) extinguish liabilities by transferring the economic resource. #### Liability A liability is a present obligation of the entity to transfer an economic resource as a result of past events. For a liability to exist, three criteria must all be satisfied: (a) the entity has an obligation; (b) the obligation is to transfer an economic resource; and (c) the obligation is a present obligation that exists as a result of past events. Obligations to transfer an economic resource include, for example: * obligations to pay cash; * obligations to deliver goods or provide services; * obligations to exchange economic resources with another party on unfavorable terms; * obligations to transfer an economic resource if a specified uncertain future event occurs; * obligations to issue a financial instrument if that financial instrument will oblige the entity to transfer an economic resource. Equity is the residual interest in the assets of the enterprise after deducting all its liabilities. Equity may pertain: * Sole proprietorship: one owner's equity account. * Partnership: an owner's equity account exists per partner. * Corporation: consists of share capital, retained earnings and reserves. ### Financial Performance Income results from increases in assets, or decreases in liabilities while expenses result from decreases in assets, or increases in liabilities. Users need balance sheets and income statements. ## The Account The account is a device of accounting. A separate account is maintained for each element that appears in the balance sheet (assets, liabilities and equity) and in the income statement (income and expenses). The account has three parts: * Account Title * Left Side or Debit Side * Right side or Credit side ## The Accounting Equation Financial statements tell us how a business is performing. The accounting equation presents the resources controlled by the enterprise, the present obligations of the enterprise and the residual interest in the assets as: $\text{Accets} = \text{Liabilities} + \text{Owner's Equity}$ Note that the assers are on the left side of the equaltion with increases and decreases in assests are recorded in the opposite manner. Diagram: A simple diagram shows an "Assets" box on the left of an equal sign which has a "Liabilities" box plus an "Owner's equity" box on the right of the equal sign. Underneath the "Assets" box is a triangle that rests on a line that connects the "Liabilities" and "Owner's equity" boxes. ## Debits and Credits - The Double-Entry System Accounting is based on a double-entry system, which means 2 effects of a bsiness transaction is recorded. * Asset = One asset account increases and another decreases * Liabilities = One liability account increases and another decreases * Equity = Increases in asset/decreases in liability An account is debited when an amount is entered on the left side and credited when an amount is entered on the right side. The account type determines how increases or decreases in it are recorded. Increases in assets are recorded as debits. Increases in liabilities and owner's equity are recorded by credits. The rules of debit and credit are: ### Balance Sheet Accounts | Account | Debit (+) | Credit (-) | Normal Balance | | :----------------------- | :----------------- | :----------------- | :------------- | | Assets | Increases | Decreases | Debit | | Liabilities/Owner's Equity | Decreases | Increases | Credit | ### Income Statement Accounts | Item | Debit (+) | Credit (-) | Normal Balance | | :--------------------------------- | :----------------- | :----------------- | :------------- | | Expenses | Increases | Decreases | Debit | | Income | Decreases | Increases | Credit | ## Accounts Credits vs Debits | Account Type | Debit | Credit | | :------------------------ | :--------------------------------------- | :--------------------------------------- | | Assets | Increases in assets and expenses | Decreases in liabilities and capital | | Liabilities/Owner's Capital | Decrease in account | Increase in accounts | The normal balance: * Asset - Debit * Liability - Credit * Equity - Credit ## Accounting Events and Transaction An accounting event is an economic occurrence that causes changes in an enterprise's assets, liabilities, and/or equity. Accounting can be classified into one of four types, namely: 1. **Source of Assets (SA)**: An asset account increases and a claims account increases. 2. **Exchange of Assets (EA)**: One asset account increases and another asset account decreases. 3. **Use of Assets (UA)**: An asset account decreases and corresponding claims decrease. 4. **Exchange of Claims (EC)**: One claims account increases and another claims account decreases. These may be further expanded: 1. Increase in Assets = Increase in Liabilities (SA). 2. Increase in Assets = Increase in Owner's Equity (SA). 3. Increase in one Asset = Decrease in another Asset (EA). 4. Decrease in Assets = Decrease in Liabilities (UA). 5. Decrease in Assets = Decrease in Owner's Equity (UA). 6. Increase in Liabilities = Decrease in Owner's Equity (EC). 7. Increase in Owner's Equity = Decrease in Liabilities (EC). 8. Increase in one Liability = Decrease in another Liability (EC). 9. Increase in one Owner's Equity = Decrease in another Owner's Equity (EC). ### Typical Account Titles Used #### Statement of Financial Position (Assets) Assets classify into current assets and non-current assets. An entity classifies assets as current when a. It expects to realize the asset, or intends to sell or consume it, in its normal operating cycle. b. It holds the asset primarily for the purpose of trading. c. It expects to realize the asset within twelve months after a reporting period, d. the asset is cash or equivalent. All other assets should be classified as non-current assets. Operating cycle is the time between the acquisition and realization. When the entitys operating cycle is not identifiable, it is assumed to be twelve months. #### Current Assests * **Money**: Money is a medium of any exchange * **Short term**: Short-term, highly liquid investments * **Receivables**:A note receivable is a written pledge Inventories: These are assets which are in the ordinary course of business. Expenses - paid in advance #### Non-currents Assests Assets for use in production. Depreciation - periodic depreciation charges. There assets without physical substance hold in production **Statement of Financial Position (Liabilities)** * Liabilities - classified by non-current or current * Current - expected to be settled in the entitys operating cycle Accounts Payables: Account represent receivables Liabilities are amounts to others that are required. revenues - payment before its customers given goods. ##### Non - currents Liabilities Mortage payback is a debt that had pledged certain assets to the credit ## Owner's Equity Capital used to record to show the owners business ## Income statement Service - service revenue performing Expense - loss in cost Telecommunications - cost using water and telecommunication ### Accounting for Business Transaction Accountants use the measure events in financial terms. A transaction affects financial position #### Financial Transacion Worksheet Analyzed in terms of its financial position and analyze means increases Galicano Del Mundo had a graphics design. Named Del Mundo Graphic Design * drawing * laying and typing * photography March 2018 * Del Mundo started his business in deposited 3500,000 BPI Plan branch. * Entity personal distinct * Equity of resource is the contribution * effects of equation or to zero increase * Computer equipment costing and is on the basic equation has to remain intact. * Amounts supplies of P accounted from purchased on account * Del graphic Design to collect cash on interactive Diagram: A depiction of a financial transaction worksheet is given for the Del Mundo Graphics Design. | | Assets | Liabilities | Owner's Equity | | :----------------------- | :---------- | :---------- | :----------------------- | | Cash(1) | \$350,000 | | | | Del Mundo CApital | | | \$350,000 | | Balance (5) | | | | | Equipment | \$145,000 | | | | Balance(9) | | | | | Payment | \$25,000 | | | | Bill | | \$25,000 | | | Del Mundo Graph Design | | | | | Cash(11) | | | | | for two exporters | | | | | balance(16) | | | | | Expenses Cash | | | |