TOUR 603 - Chapter 1 - Accounting and Financial Statements PDF

Introducing Accounting and Financial Statements Liezyl B. Avancena, MBA Tour 603 Instructor Topics: What is Accounting Who uses Accounting Information Financial Statements What is Accounting...

Introducing Accounting and Financial Statements Liezyl B. Avancena, MBA Tour 603 Instructor Topics: What is Accounting Who uses Accounting Information Financial Statements What is Accounting Accounting is the language of business. It is the process of recording, classifying, and summarizing economic events through certain documents or financial statements. It has its own terms and rules. What is Accounting?  The purpose of Accounting is to What is provide information that will help you make correct financial Accounting? decisions. The accountant’s job is to provide the information needed to run a business as efficiently as possible while maximizing profits and keeping costs low.  Bookkeeping differs from Accounting Bookkeeping – is the process of recording “systematically” the business transactions in a “chronological manner”. It is systematic because “it follows procedures and principles”. It is chronological because the transactions are recorded in “order of the date of occurrence”. Accounting – it is the art of recording, classifying, summarizing in a significant manner and in terms of money, transactions, and events which are in part at least, of a financial character, and interpreting the results thereof. This requires complete and accurate bookkeeping records necessary in the performance of its responsibility which is the analysis and interpretation of the financial reports. Bookkeeper vs Accountant Bookkeeper – does the “how accounting is done” which refers to the mechanical aspects. The responsibility for recording and maintaining the business financial transactions. Accountant – does the “why accounting is done” which refers to the analytical and interpretative aspects of accounting. Responsible in analyzing and preparing financial statements. Traditional works of an accountant to determine how much is the business profit and the corresponding correct amount of taxes due and payable to the government. Certified Public Accountant or Professional Accountant – is a holder of a baccalaureate degree in Bachelor of Science in Accountancy (BSA), who has taken and passed the difficult and competitive licensure examination for Certified Public Accountants and carries the title as “CPA”, vested by the laws of the Republic to practice Public Accounting in general under the supervision of the Professional Regulation Commission. CPA’s has to comply with the accreditation requirements with both the professional Regulation Commission and Board of Accountancy before they can be allowed to practice public accountancy. This Photo by Unknown Author is licensed under CC BY  Book of Accounts - these are record that be kept by the business of all the activities for the day and even for a year. What has been recorded in books of accounts are data that are financial in character which are processed and transformed into report form call What is Financial “Financial Statements”. Statements? *It is also a government requirement specifically the Bureau of Internal Revenue that all business establishments should maintain their records for accurate determination of internal revenue taxes due to the government. It is done in compliance with municipal or city ordinances regarding local business taxation.  The preparation of the financial statements is governed and guided by the Generally Accepted Accounting Principles (GAAP). Generally These are uniform set of accounting rules, procedures, practices, and standards that are followed in preparing the financial Accepted statements. They serve as the “ground rules” that guides accounting practitioners in recording (identifying, analyzing and measuring) Accounting and reporting financial information of a business entity. Here in the Philippines, the development of GAAP Is formalized Principles through the creation of the Accounting Standards Council, now Philippine Financial Reporting Standards Council (PFRSC), a standard-setting body with its pronouncements contained (GAAP) previously in the Statement of Financial Accounting Standards (SFAS), now Philippine Accounting Standards (PAS) used as the primary source of GAAP.  Cost Principle – this principle requires that assets should be recorded at original or acquisition cost. Example: If we buy a land today the cost is 1 GAAP Million Pesos, three years after, the current value of the land is approximately 2.5 Million Principle Pesos. What will prevail in the record is the 1 Million Pesos and not the 2.5 Million Pesos because cost is definite and verifiable.  Objectivity Principle – this principle requires that accounting records should be based on reliable and verifiable data as evidence of transactions. GAAP Materiality Principle – this principle dictates practicability to rule over theory Principle in determining the valuation of an item. To determine whether the item is material or not, it is a matter of professional judgment on the part of the accountant. GAAP Principle Matching Principle – this is the combined of Revenue Recognition and Expenses Recognition Principles. Revenue should be recognized when earned and corresponding expense should be recognized when incurred during the same period as revenue is earned. Proper matching of revenue and expense are called for. Consistency Principle - this principle requires that accounting methods and procedures should be applied on a uniform basis from period to period to achieve comparability in the financial statements. Adequate Disclosure Principle – this principle requires that financial statements should be free from any misstatement; that there is any, proper disclosure should be made. What are Financial Statements? Financial Statements are structured representation of financial position and financial performance of an entity. Its objective is to provide information about the financial position, financial performance, and cash flows of an entity that is useful to a wide range of users in making sound economic decisions. These also shows the results of management’s stewardship of the resources entrusted to it. In layman’s language, FS are the ”end products” of the accounting process. These refer to the accountant’s reports based on the data gathered, accumulated and processed in financial accounting that are periodically communicated to the variety of users particularly the owners and creditors. The Basic Financial Statements Statement of Financial Position (Balance Sheet) Statement of Profit or Loss (Income Statement) Statement of Cash Flows Statement of Changes in Owner’s Equity Statement of Financial Position (Balance Sheet) The statement represents the Assets of the company (those assets owned by the company), Liabilities (those It is a financial statement which items owed to others by the shows the financial position of company), and Owner’s Equity company as of a particular date. (capital, what the owner has invested and the accrued expenses or losses). Statement of Profit or Loss (Income Statement) It is a financial statement which shows the performance of the enterprise for a given period of time. The income performance used to be known as the “results of the operations” of the company. Shows all the Revenues of the company less the Expenses, to arrive at the “bottom line”, the Net Income. The information presented in an income statement is usually considered the most important information provided by financial accounting because profitability is a paramount concern to those interested in the economic activities of the company. This Photo by Unknown Author is licensed under CC BY-SA-NC Statement of Cash Flows It is a supporting document that shows the sources and purpose of cash payments during an accounting period. It shows how much cash we started the period with, what additions and subtractions were made during the period, and how much cash we have left over at the end of the period. Statement of Changes in Owner’s Equity It is a financial statement that summarizes the changes in equity for a given period of time. The beginning equity of the owner is increased by the additional investment and profit. Correspondingly, it is decreased by withdrawal or loss. Who uses Accounting Information? You as an individual – areas need accounting knowledge are stock market, applying for a home loan, evaluating a potential job, balancing a checkbook, and starting a personal savings plan, and among others. Managers – use accounting information daily to make decisions, although most of the managers are not accountants. Areas might in which managers use accounting information: Marketing (Which line of goods or services should the company emphasize?) Production (Should the company offer new service or produce new products?) Research and Development (How much money should be set aside for new product development?) Sales (Should the company expand the advertising budget and take money away from some other part of the marketing budget?)  Bankers – continually use accounting Who uses information. Accounting is fundamental to their decision-making process. Areas Accounting which bankers use accounting information Information? Granting loans to individuals and companies Investing client’s money Setting interest rates Meeting federal regulations for protecting your money Government agencies - such as Internal Revenue Service, Securities and Exchange Commission