ACC 1000_ REVIEWER FOR PRELIMS.pdf

ACC 1000 FOR PRELIMINARY EXAMS CHAPTER 1: INTRODUCTION TO ACCOUNTING I. ACCOUNTING AND ITS ENVIRONMENT A. INTRODUCTION This course helps students understand basic accounting concepts and principles. To develop the capability to perform the basic accounting fun...

ACC 1000 FOR PRELIMINARY EXAMS CHAPTER 1: INTRODUCTION TO ACCOUNTING I. ACCOUNTING AND ITS ENVIRONMENT A. INTRODUCTION This course helps students understand basic accounting concepts and principles. To develop the capability to perform the basic accounting functions: the recognition, valuation, measurement, and recording of the most common business transactions and preparation of accounting Statements. Accounting has evolved in the case of medicine and law. Accounting develops new concepts and techniques to meet the ever-increasing need ia for financial information. No business could operate very long without knowing how much it was earning and how much it was spending BIR -> bureau of internal revenue responsible for collecting more than half of the total tax B. IMPORTANCE m revenues of the government A company can know how much money it is making, where it is coming from, and where it is being spent. Accounting is a business necessity because the government requires gu reporting financial data to the BIR for tax purposes. C. DEFINITIONS OF ACCOUNTING Accounting is a service activity. Provides quantitative information, primarily financial in nature, about economic entities that are intended to be used in making economic decisions. m Accounting is an information system that measures, processes and communicates financial information about an economic entity It is the process of identifying, measuring, and communicating economic information to permit informed judgments and decisions by users of the m information. The art of recording, classifying, and 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. 1  D. FUNDAMENTAL BUSINESS MODEL What is a business model? ○ Describes the rationale of how an organization creates, delivers, and captures value, in economic, social, cultural or other contexts. ○ A plan for a business– It tells you what you're going to sell, how much it costs to make, and how you'll get people to buy it. It's like a roadmap that helps you run your business smoothly. What is the process of a business model? ○ It is also called business model innovation and forms a part of business strategy A business requires investment to enable it to pay for the infrastructure, ia equipment, and personnel. The Model: Figure 2-1 Illustrates how a business is structured to provide a customer proposition. The m business model is built on five (5) activities: 1. First, the investor provides the required capital for the business. The cash investment will then be held in a bank account gu m m 2. The cash in the business can be: Converted into another type of asset that will be used in the business (e.g. equipment) or sold (e.g. inventory); Spent on operating costs such as salaries, rentals, and utilities. 2  ia 3. The combination of business resources provides the basis for producing the products or services. m gu m 4. The sale of a product or service generates an asset called a receivable. This asset m once collected will produce cash inflow for the business. 3  ia 5. If there’s an existing debt from banks, the cash inflow from collections will be used to provide the debt providers with interest on their loans to the company. The rest of the m cash can be sent back to the cycle being converted into other assets or spent on operating costs (back to stage 2) gu m m II. BASIC FINANCIAL ACCOUNTING & REPORTING: ACCOUNTING EQUATION AND DOUBLE ENTRY SYSTEM A. FINANCIAL ELEMENTS a. FINANCIAL STATEMENTS are the backbone of any organization's accounting and reporting system. serve as a vital tool for stakeholders, including investors, creditors, management, and regulators 4  assess a business's financial health and performance. b. ELEMENTS OF FINANCIAL STATEMENTS The fundamental building blocks that provide a structured framework for presenting financial information accurately and comprehensively. ia 1. ASSETS m A present economic resource controlled by the entity as a result of gu past events. An economic resource is a right that has the potential to produce economic benefits Assets include everything controlled and owned by the company that's currently valuable or could provide monetary benefit in the future. m Resources controlled by an entity m Result of past event The expected inflow of future economic benefit 5 2. LIABILITY A present obligation of the entity to transfer an economic resource as a result of past events. You are responsible for something You owe someone money or services Present obligation Resulting from past event The expected inflow of future economic resources to settle ia m gu 3. EQUITY The residual interest in the assets of the entity after deducting all the liabilities. The amount of money the owner of an asset would be paid after selling it and any debts associated with the asset were paid off. m Residual interest = the assets less liabilities m 4. INCOME Increases in assets, or decreases in liabilities, that result in increases in equity, other than those relating to contributions from holders of equity claims. 6 5. EXPENSE Decreases in assets, or increases in liabilities, that result in decreases in equity, other than those relating to distributions to holders of equity claims. INCOME refers to money you earn or receive. Salary or wages: Money you earn for your job. Interest: Money earned on savings accounts or investments. EXPENSES are costs or payments you make Rent or mortgage: Money paid for housing. ia Utilities: Costs for electricity, water, gas, and internet. c. THE ACCOUNT m The basic summary device of accounting. A separate account is maintained for each element that appears in the gu balance sheet (assets, liabilities and equity) and in the income statement (income and expenses). THE “T” ACCOUNT: The simplest form of the account is known as the “T” account because of its similarity to the letter “T” m m 7  d. THE ACCOUNTING EQUATION The most basic tool of accounting The equation presents the resources controlled by the entity ia EX: Imagine you have a lemonade stand. You make lemonade (income) and sell it for money (expenses). m (revenue). But you also need to buy things for your stand, like lemons, sugar, and cups The accounting equation is like a way to keep track of your lemonade stand's money. It says: gu Assets = Liabilities + Owner's Equity Assets are things you own that can give you money, like your lemonade stand, lemons, and cups. Liabilities are things you owe money for, like if you borrowed money to buy your m lemonade stand. Owner's Equity is the money you put into the business yourself, plus any profits you make. m So, if your lemonade stand makes $10 (income) and you spend $3 on supplies (expenses), your owner's equity would be $7. This means you have $7 left over after paying your bills. e. DEBITS AND CREDITS AND THE DOUBLE-ENTRY SYSTEM Also known as “bookkeeping” For every business transaction, amounts must be recorded in a minimum of two accounts. Requires that for all transactions, the amounts entered as debits must be equal to the amounts entered as credits. 8  Debits: Increase assets (like cash or inventory) or decrease liabilities (like loans) and equity (like retained earnings). Credits: Decrease assets or increase liabilities and equity. ia m gu f. ACCOUNTING EVENTS AND TRANSACTIONS ACCOUNTING EVENTS: all incidents or occurrences that relate to the business or have an impact on the business of the entity. TRANSACTIONS: these are events that have an immediate and m measurable monetary impact on the books of accounts of the entity. g. TYPES AND EFFECTS OF TRANSACTIONS all transactions can be classified into one of four types, namely: m 1. Source of Assets (SA) 2. Exchange of Assets (EA) 3. Use of Assets (UA) 4. Exchange of Claims (EC) (1) SOURCE OF ASSETS (SA) An asset account increases and a corresponding claims (liabilities or equity) account increases. Ex. (1) Purchase of supplies on account (2) Sold goods on cash on delivery basis. 9 (2) EXCHANGE OF ASSETS (EA) One asset account increases and another asset account decreases. Ex. Acquired equipment for cash (3) USE OF ASSETS (UA) An asset account decreases and a corresponding claims (liabilities or equity) account decreases. Ex. (1) Settled Accounts Payable (2) Paid salaries (4) EXCHANGE OF CLAIMS (EC) One claims (liabilities or equity) account increases and another claims ia account decreases. Ex. Received utilities bill but did not pay m h. TYPICAL ACCOUNT TITLE USED Statement of Financial Position also known as “Balance Sheet” ASSETS: Current Assets & Non-current Assets gu (1) CURRENT ASSETS All the assets of a company that are expected to be sold or used as a result of standard business operations over the next year. A. CASH any medium of exchange that a bank will accept for deposit at m face value. coins, currency, checks, money orders, bank deposits, and drafts. m may also include your virtual wallet, e.g. Gcash or Maya. B. CASH EQUIVALENT are short-term, highly liquid investments that are readily convertible to known amounts of cash and are subject to an insignificant risk of changes in value. C. NOTES RECEIVABLE a written pledge that the customer will pay the business a fixed amount of money on a certain date. 10  D. ACCOUNTS RECEIVABLE claims against customers arising from the sale of services or goods on credit. offers less security than a promissory note. E. INVENTORIES held for sale in the ordinary course of business; In the process of production for such sale; In the form of materials or supplies to be consumed in the production process or in the rendering of services F. PREPAID EXPENSES ia expenses are paid for by the business in advance. Ex. Prepaid insurance and Prepaid rent (2) NON-CURRENT ASSETS m a company's long-term investments for which the full value will not be realized within the accounting year. A. PROPERTY, PLANT, AND EQUIPMENT (FIXED ASSETS) gu tangible assets held by an enterprise for use in the production or supply of goods or services, or for rental to others, or for administrative purposes expected to be used during more than one period. Ex. Land, Building, Machinery and Equipment, Furniture and m Fixtures, Motor vehicle and equipment… B. ACCUMULATED DEPRECIATION m a contra-asset that contains the sum of the periodic depreciation charges The balance of this account is deducted from the cost of the related assets – equipment or building- to obtain the book value. 11  ia C. INTANGIBLE ASSETS identifiable, non-monetary assets without physical substance. Ex. Goodwill, Patents, Copyrights, Licenses, Franchise, m Trademarks, Brand names, Secret processes, Subscription lists, and Non-competition agreement gu i. LIABILITY a person or company owes, usually a sum of money. settled over time through the transfer of economic benefits including money, goods, or services. An entity shall classify a liability as current when: a. It expects to settle the liability, in its normal operating cycle; m b. It holds the liability primarily for the purpose of trading; c. The liability is due to be settled within 12 months after the reporting period; or m d. The entity does not have an unconditional rights to defer settlement of the liability for at least 12 months after the reporting period. All other liabilities should be classified as non-current liabilities… (1) NON-CURRENT ASSETS: CURRENT LIABILITIES A. ACCOUNTS PAYABLE This account represents the reverse relationship of the accounts receivable. 12  B. NOTES PAYABLE A note payable is like a notes receivable but in a reverse sense. C. ACCRUED LIABILITIES The amount owed to others for unpaid expenses. a. Salaries payable b. Utilities payable c. Interest payable d. Taxes payable D. UNEARNED REVENUE ia The amount received in advance from the customer before providing its customer with goods or services. m E. CURRENT PORTION OF LONG-TERM DEBT portions of mortgage notes, bonds, and other long-term indebtedness are to be paid within one year from the balance sheet date gu (2) NON-CURRENT ASSETS: NON-CURRENT LIABILITIES A. MORTGAGE PAYABLE This account records the long-term debt of the business entity for which the business entity has pledged certain assets as security to the creditor. m If the debt payment is not made, the creditor can foreclose or cause the mortgaged assets to be sold to enable the entity to settle the claim. m B. BOND PAYABLE Business organizations often obtain substantial sums of money from lenders to finance the acquisition of equipment and other needed assets. They obtain these funds by issuing bonds. The bond is a contract between the issuer and the lender specifying the terms of repayment and the interest to be charged. 13  ia j. OWNER’S EQUITY A. WITHDRAWAL When the owner of a business entity withdraws cash or other assets, such are recorded in the drawing or withdrawal m account rather than directly reducing the owner’s equity account. INCOME SALARY: a temporary account used at the end of gu the accounting period to close income and expenses. This account shows the profit or loss for the period before closing to the capital account. k. INCOME STATEMENT INCOME: revenue received for goods or services, or from other m sources, as rents or investments. A. SERVICE INCOME m Revenues earned by performing services for a customer or client. For example, accounting services by a CPA firm, laundry services by a laundry shop. B. SALES Revenues earned as a result of the sale of merchandise. For example, the sale of building materials by a construction supplies firm, and sales from supermarket business. 14  EXPENSES: An expense is the cost of operations that a company incurs to generate revenue. A. COST OF SALES The cost incurred to purchase or to produce the products sold to the customers during the period also called “cost of goods sold” It costs money to make money B. SALARIES OR WAGES EXPENSE Includes all payments as a result of an employer-employee ia relationship such as: a. Salaries or wages b. 13th-month pay m c. Cost of living allowances C. TELECOMMUNICATIONS, ELECTRICITY, FUEL AND WATER gu EXPENSES Expenses related to the use of these facilities. D. RENT EXPENSE Expenses for space, equipment, or other asset rentals m E. SUPPLIES EXPENSE Expenses for using supplies (e.g. office supplies) in the conduct of daily business. m F. INSURANCE EXPENSE A portion of the premiums paid on insurance coverage (e.g. on motor vehicle, health, life, fire, typhoon, or flood) which was expired. 15  G. DEPRECIATION EXPENSE An accounting method used to allocate the cost of a tangible or physical asset over its useful life The portion of the cost of tangible asset (e.g. building and equipment) allocated or charged as expense during an accounting period. H. UNCOLLECTIBLE ACCOUNTS EXPENSE. The amount of receivable is estimated to be doubtful of collection and charged as expense during an accounting period. ia May also be called “Bad Debt Expense” BAD DEBT EXPENSE: A portion of a company’s account receivable that are deemed uncollectable m INTEREST EXPENSE: An expense related to the use of borrowed funds gu m m 16