Acctg 101 Prelim Discussion_Chapter 1 to 3.pdf

Chapter 1 Accounting & Its Environment Instructor: Ms. Ann Christine C. Chua, CPA, CMA (U.S.) Introduction Accounting Is the system that measures business activities, processes that information into reports and communicates the results to decision-makers. It is the language of business....

Chapter 1 Accounting & Its Environment Instructor: Ms. Ann Christine C. Chua, CPA, CMA (U.S.) Introduction Accounting Is the system that measures business activities, processes that information into reports and communicates the results to decision-makers. It is the language of business. Is the art of recording, Is a service activity. classifying and Is the process of Its function is to provide Is an information system summarizing in a identifying, measuring quantitative that measures, significant manner and and communicating information, primarily processes and in terms of money, economic information financial in communicates financial transactions and events to permit informed nature, about economic information which are, in part at judgments and entities that is intended about an economic least, of a financial decisions by users of the to be useful in making entity. character, and information economic decisions. interpreting the results thereof. History of Accounting Luca Pacioli He is a Franciscan Friar and a celebrated mathematician. is regarded as the father of double-entry accounting. He did not invent bookkeeping but rather described what were prevalent accounting practices of the day. He stated that the purpose of bookkeeping was “ to give the trader without delay information as to his assets and liabilities” He said that it is always good to close the book each year, especially if you are in a partnership with others. Frequent accounting makes for long friendship. Fundamental Business Model The business model is built on five activities: the cash inflow The cash in the The sale of a from collections will the investors business can be: product or service be used to pay the provide the generates an asset debt required capital for -converted into The combination of called receivable. The rest of the cash the business. another type of asset business resources can be sent back to that will be used in provides the basis This asset once the cycle by being The cash the business or sold ; for producing the or collected will converted into investment will product or services. - spent on operating provide a cash other assets or then be held in a costs such as salaries, inflow for the spent on operating bank account. rentals and utilities. business. cost. In the normal course of business, this whole process will earn profits on which tax will have to be paid. Any profits after tax can continue to be reinvested in the cycle or paid out to the owners as ROI Activities in Business Organizations Financing Activities Investing Activities Operating Activities methods an organization uses to obtain managers uses capital from financing involves the use of resources to design, financial resources from financial activities to acquire other resources produce, distribute and market goods markets and how it manages these used in the transformation process. and services. resources (to transform resources from one form to a different form) primary sources of financing for most selection and management including it includes research and development, businesses are owners and creditors disposal and replacement of long-term design and engineering, purchasing, (e.g. banks and suppliers.) resources that will be used to develop, human resources, production, produce, and sell goods and services. distribution, marketing and selling, and servicing. repaying the creditors (interest) and example: buying land, equipment, organizations compete in supplier and paying a return to the owners buildings and other resources that are labor market for resources used in (dividends) needed in the operation of the business these activities and selling these resources when they are no longer needed. also, in product markets to sell the goods and services created by operating activities. Purpose and Phases of Accounting Accounting handles the financial operations of the Business transactions are the business but also provides economic activities of a information and advice to business. other departments. Accounts are produced to aid management in planning, Before the effects of control and decision-making transactions can be recorded, and to comply with they must be measured regulations. An accounting information will An accounting information will be useful; it must be expressed be useful; it must be expressed in terms of common financial in terms of common financial denominator- money. denominator- money.  To measure a business transaction, accountant must decide: - when the transaction occurred To be useful in making Money serves as both a medium {recognition issue} decisions, the recorded data of exchange and a measure of - what value to place on the must be classified and value. transaction {valuation issue} summarized - how the components of the transaction should be classified {classification issue} The result of the Classification reduces the Summarization of financial data is summarization phase is to be effects of numerous achieved through the preparation of interpreted or analyzed to financial statements. transactions into useful groups evaluate the liquidity, These summarize the effects of all business or categories. transactions that occurred during some period. profitability and solvency of the business organization Fundamental Concepts in the Accounting Process PERIODICITY STABLE MONETARY GOING CONCERN CONCEPT UNIT CONCEPT equal time periods PHP is a reasonable unit Reporting entity will ENTITY CONCEPT continue in operation (reporting purposes) of measure and that its An accounting entity for the foreseeable allows the users to purchasing power is is an org or a section of obtain timely relatively stable future. an organization that information (for decision- allows accountants to the entity has neither stands apart from other making) add/subtract peso the intention nor the org and individuals as a One year is the usual amounts as though each need to enter separate economic unit. accounting period for peso has the same liquidation or to external reporting purchasing power as any (Calendar/Fiscal Year) other peso at any time. cease trading Accountancy in the Philippines Philippine Accountancy as a recognized profession was on March 17,1928 Act No. 3105 was approved by the Sixth Legislature: “An Act Regulating the Practice of Public Accounting; Creating the Board of Accountancy; Providing for Examination, for the Granting of Certificates, and the Registration of Certified Public Accountants; for the Suspension or Revocation of Certificates; and for Other Purposes” Big Five (now Big Four) Accounting Firms in the World A BIG FOUR - The nickname used to refer to the four largest accounting firms in the United States (or around the world), as measured by revenue Biggest Local Firm The first to offer services outside the country and initiated the establishment of the SGV Group composed of the leading national accounting firms in East and Southeast Asia.  Philippines’ Board of Accountancy BOARD OF ACCOUNTANCY Under the stewardship of PRC, it discharges its mandate of supervising, controlling, and regulating the practice of accountancy with authority and distinction; raise standards of the profession to a very high level of excellence as seen in the following developments: 1) Full computerization of CPA licensure exams 2) Upgrading the quality of accounting education 3) Regulation of CPA firms and partnerships 4) Requirement of CPAs the civil service Philippine Institute of Certified Public Accountants (PICPA) PHILIPPINE INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS Accountancy (PICPA) is the first among the PH professions to be included under - accredited by PRC in 1975 as the bona fide the World Trade Organization's professional organization representing CPAs policy of liberalization of services; in the country to further strengthen the freely compete globally profession Philippine Accountancy Act of 2004 - R.A. 9298; signed into law by President Gloria Macapagal- Arroyo on May 13, 2004; - repealed Presidential Decree No. 692 in 1975 (Revised Accountancy Law) Section 4. Scope of Practice: Practice of Public Accountancy Practice in Commerce & Industry Practice of in Education/Academe Practice in Government Philippines’ Board of Accountancy Section 6. Qualifications of Section 13. The CPA Examinations Section 5. The Professional Regulatory Board of Accountancy Members of the Professional and its Composition Regulatory Board All applicants are required to undergo a licensure examination composed of a chairman and six Natural-born citizen and PH subject to compliance with the resident requirements of the Commission members appointed by the Duly registered CPA with 10 years in accordance with R.A. 8981 President of the Philippines from of experience a list of three recommendees for (PRC Modernization Act of Good moral character; not each position and ranked by the convicted of crimes involving moral 2000) commission, from a list of five turpitude nominees for each position No pecuniary interest with any Section 14. Qualifications of submitted by the accredited institution conferring an academic Applicants for Examinations national professional organization degree in accountancy, conducting review classes for CPALE; shall not Filipino citizen of certified public accountants. be a member of Good moral character faculty/administration thereof Holder of the degree of BSA The board shall elect a vice- Shall not be a director/officer of Not convicted of crimes chairman from among its Accredited National Professional involving moral turpitude members for a term of one year. Organization of CPAs Philippines’ Board of Accountancy Section 6. Qualifications of Section 13. The CPA Examinations Section 5. The Professional Regulatory Board of Accountancy Members of the Professional and its Composition Regulatory Board All applicants are required to undergo a licensure examination composed of a chairman and six Natural-born citizen and PH subject to compliance with the resident requirements of the Commission members appointed by the Duly registered CPA with 10 years in accordance with R.A. 8981 President of the Philippines from of experience a list of three recommendees for (PRC Modernization Act of Good moral character; not each position and ranked by the convicted of crimes involving moral 2000) commission, from a list of five turpitude nominees for each position No pecuniary interest with any Section 14. Qualifications of submitted by the accredited institution conferring an academic Applicants for Examinations national professional organization degree in accountancy, conducting review classes for CPALE; shall not Filipino citizen of certified public accountants. be a member of Good moral character faculty/administration thereof Holder of the degree of BSA The board shall elect a vice- Shall not be a director/officer of Not convicted of crimes chairman from among its Accredited National Professional involving moral turpitude members for a term of one year. Organization of CPAs Philippines’ Board of Accountancy Section 15 - Scope of Examination Section 16 - Rating in the Licensure Examination CPALE coverage (7): (1) Theory of Accounts, A candidate must obtain a general average of 75%, with no grades lower than 65% in any given subject (2) Business Law and Taxation, (3) Management Services, Conditional credit (4) Auditing Theory, (5) Auditing Problems, Section 18 - Failing Candidates to Take a (6) Practical Accounting Problems I, and Refresher Course (7) Practical Accounting Problems II Any candidate who fails 2 complete CPALE shall be Subjects Tested: disqualified to take again, unless he/she completed at least 24 units of subject given in the exam (1) Financial Accounting and Reporting, (2) Taxation, Examination in which the candidate was conditioned (3) Regulatory Framework for Business Transactions, together with the removal examination on the failed (4) Advanced Financial Accounting and Reporting, subject is counted as one complete examination (5) Management Advisory Services, and (6) Auditing Philippine Accounting Standards Accounting Standards Council (ASC) Financial Reporting Standards Council (FRSC) Created by PICPA on November 18, 1981 to As per Section 9(A) of the Rules and Regulations establish and improve accounting standards that will Implementing R.A. 9298, this shall be the new be generally accepted accounting standard setting body in the Philippines; substantial authoritative support Composed of 15 members with a Chairman, who from interested parties had been or presently a senior accounting Supported by: Securities and Exchange Commission practitioner in any of the scope of accounting (SEC), Central Bank of the Philippines (CB), practice and 14 representatives from the following: Professional Regulation Commission (PRC), Financial Executives Institute of the Philippines (FINEX) (a) BOA – 1 (b) SEC – 1 (c) BSP – 1 (d) BIR – 1 Composed of 8 members (4 from PICPA and one (e) A major organization composed of preparers and each from: SEC, PB, PRC, FINEX) users of financial statements - 1 Standards based from: existing practices in the PH; (f) COA - 1 research/studies of the Council; international (g)Accredited National Professional Organization of literature; statements, recommendations, studies, or CPAs: Public Practice – 2; Commerce and Industry – 2; standards from IASB and FASB Academe/Education – 2; Government - 2 Core Competencies Frameworks for Accountants Bridge the gap between requirements of the workplace and the academic preparation of professionals Competency-based approach to education Strategic goal: Produce technically competent and ethical professional accountants ready to compete internationally Knowledge Skills Values ❑ General Knowledge ❑ Organization and ❑ Intellectual ❑ Professional Ethics Business Knowledge ❑ Interpersonal ❑ Moral Values ❑ Information Technology ❑ Communication Knowledge ❑ Accounting Knowledge Code of Ethics for Professional Accountants in the PH Fundamental Principles Approved by the Board of Integrity - straightforward and Directors of PICPA and PRC as Professional accountant - an honest; part of the rules and regulations Objectivity - should not allow bias individual who holds a valid of the BOA for the practice of or conflict of interest certificate issued by the BOA, Professional Competence and the accountancy profession whether he/she be in public Due Care - continuing duty to Adopted from the revised Code practice, industry, commerce, the maintain professional knowledge and of Ethics of IFAC effective June public sector or education; should skill; exercise of sound judgment; 30, 2008 observe and comply with the ethical phases: attainment and maintenance; requirements of the Code International Federation of diligence; make customers aware of Accountants (IFAC) - limitations inherent in the services 3 Parts of the Code: Confidentiality - should not international body representing A. Fundamental Principles of all the major accountancy bodies disclose information to third parties Professional Ethics and Conceptual without proper and specific authority across the world Framework unless there is legal right or duty to B. Professional Accountants in Public do so. Distinguishing mark of the Practice Professional Behavior - comply profession: Acceptance of the C. Professional Accountants in with relevant laws and regulations; responsibility to act in the public Business should not bring the profession into interest disrepute The Accountancy Profession Characteristics All members earned a degree and passed a licensure exam Own body of language Career Opportunities (cont’d) Adhere to a Code of Ethics c) Government Service – State Accounting Examiner; Member of a national organization, PICPA, for the State Accountant; LGU Accountant; Revenue Officer; Audit profession’s continued improvement Examiner; Budget Analyst; Financial Services Specialist; State Accountant V; Director III and Director IV; Government Career Opportunities Accountancy and Audit; Financial Services Manager; Audit a) Public Practice - Audit Staff; Tax Staff; Management Services Manager; Senior Auditor; National Treasurer; Vice Services/Consulting Staff; Audit Manager; Tax Manager; President for Finance/CFO; Commissioner; Associate Consulting Manager; Partner; Senior Partner; Senior Commissioner; Assistant Commissioner (COA, BIR, BOC) Consultant/Financial Advisor b) Commerce and Industry – Financial Accounting and d) Education/Academe – Junior Accounting Instructor; Reporting Staff; Management Accounting Staff; Tax Senior Faculty; Accounting Department Chair; Vice Accounting Staff; Internal Audit Staff; Financial Analyst; President for Academic Affairs; Dean Budget Analyst; Credit Analyst; Cost Accountant; Comptroller; Senior Information Systems Auditor; Senior Fraud Examiner; Senior Forensic Auditor; Chief Financial Officer; Chief Information Officer Branches of Accounting AUDITING BOOKKEEPING External audit – Mechanical task of FINANCIAL ACCTG independent examination collecting financial data; Focused on recording that ensures the fairness routinary COST ACCTG of business and reliability of reports Procedures end when Cost bookkeeping transactions and the that management submits the basic data have been Costing periodic preparation to external users; result entered to the books of Cost Accounting of reports on embodied in the accounts and checked financial position and independent auditor's for accuracy, which is results of operations report (External vs. Internal) taken over by acctg. FINANCIAL TAXATION GOVT ACCTG MANAGEMENT MANAGEMENT ACCTG Preparation of tax Concerned with Setting financial Incorporates cost returns and proper custody and objectives, making plans accounting data and consideration of tax disposition of public based on those adapts them for specific consequences of decisions of funds objectives, obtaining the proposed business finance needed to management transactions or Identification of achieve the plans, and Utilizes both financial alternative courses of sources and uses of generally safeguarding all and nonfinancial action resources consistent the financial resources information Comply with tax with provisions of the of the entity statutes law  Chapter 2 Accounting Equation & Double Entry System Instructor: Ann Christine C. Chua, CPA, CMA (U.S.) To God be the Glory!  or Assets = Liabilities + Initial Investment + Addt’l Investment - Withdrawals + Income – Expenses The Accounting Equation - most basic tool of accounting - it states that assets must always equal liabilities and owner’s equity. Elements of Financial Statements  DEBITS AND CREDITS The Account or “T” Account THE DOUBLE ENTRY SYSTEM the basic summary device of accounting is the Accounting is based on a double-entry system account. which means that the dual effects of a business transaction are recorded. A separate account is maintained for each element that appears in the balance sheet Each transaction affects at least two accounts. (assets, liabilities, and equity) and in the income statement (income and expenses). The total debits for a transaction must always equal the total credits. The simplest form of the account is known as the “T” account abbreviation for debit are Dr (from Latin debere) and credit Cr (from Latin credere) Normal Balance Account Normal Balance refers to the side of the account debit or credit where increases are recorded.  Types and Effects of Transactions Source of Assets Exchange of Assets Use of Assets Exchange of Claims ❑ liabilities or owner’s ❑ increase in assets, equity increases, ❑ increases in assets, ❑ decrease in asset, increases in liabilities or liabilities or owner’s decrease in assets. decrease in liabilities owner’s equity equity decreases. ❑ Example: Acquired ❑ Example: Paid salaries ❑ Example: Purchase on ❑ Example: Received equipment for cash. of employees. account utilities bill but did not pay. Typical Account Title Used (Statement of Financial Position) Typical Account Title Used (Statement of Fin. Performance) Sample Problem Prepare a) journal entries b) T-account c) effects on elements of fin. statements (A, L, OE, I, E) A small company named KAYAKUNI. The transactions are stated in chronological order: (1) P10,000 Owner‘s Investment to start up the business (2) Purchase of equipment for P6,000 paid in cash (3) Purchase of supplies on credit for P700 (4) P600 payment of a liability (accounts payable resulting from delivery of supplies) (5) P7,000 revenues earned on credit (6) P5,000 collection of accounts receivable (7) Incurring expenses of P700 for rent (cash) and P400 (on credit) for utility and prepaid insurance of P1,500 (8) reception of a down payment of P2,600 for services to be performed (unearned revenue or deferred revenue), and (9) Owner‘s withdrawal of P1,000. Example: A small company named KAYAKUNI. The transactions are stated in chronological order: (1) P10,000 Owner‘s Investment to start up the business Effect on Elements of Accounting a) Dr Cash P10,000 c) (Assets, Liabiiities, O. Equity, Income, Expense) Cr Capital P10,000 b) O A E Chapter 3: Accounting for a Service Business To God be the Glory! Instructor: Ms. Ann Christine C. Chua, CPA, CMA(U.S.)  LEARNING OBJECTIVES 1. DESCRIBE 2. RECORD 3. POST 4. PREPARE A 5. PREPARE 6. COMPLETE THE NATURE TRANSACTION TRANSACTION TRIAL ADJUSTING THE OF OF A SERVICE IN THE LEDGER. BALANCE. ENTRIES. ACCOUNT TRANSACTION BUSINESS IN CYCLE. IN A SERVICE THE GENERAL BUSINESS. JOURNAL.  Transactions and events are the starting points in the accounting cycle. Source documents can identify and describe transactions and events entering the accounting process. SOURCE DOCUMENTS The original written evidence contain information about the nature and the amounts of transactions. (which are the bases for journal entries) Bank statements Common Source DocumentsChecks include: Purchase orders Sales invoices Cash register tapes Official receipts Bank deposit slips  Step 1 Identification of Step 3 Journal entries Step 2 Transactions are events to be recorded. Accounting Cycle (Identifying and recorded in the journal. are posted to the ledger. (Journalizing) (Posting) analyzing) Step 4 Preparation of trial Step 5 Preparation of the Step 7 Adjusting journal Step 6 Preparation of the balance. (Unadjusted worksheet including entries are journalized and financial statement trial balance) adjusting entries posted. Step 8 Closing journal Step 9 Reversing journal entries are journalized and entries are journalized and posted. posted. STEP 1 Identifying and analyzing This is the first step in the accounting cycle. It involves identifying a business transaction and analyzing whether or not that transaction affects the assets, liability, equity, income or expenses of the business. A transaction that has an effect on the accounts is an accountable event, which needs to be recorded in the books of accounts. On the other hand, a transaction that has no effect on the account is a non-accountable event which is not recorded in the books of accounts. The General Journal *the book of original entry *process: journalizing *shows all the effects of a transaction in terms of DR and CR The Ledger *a grouping of accounts *process: posting *used to classify and summarize transactions and to prepare data for basic financial statements Trial Balance (Unadjusted and Adjusted) *listing of all ledger accounts, in order, with their respective debit or credit balances. *Assets, Liabilities, OE, Revenues, Expenses  STEP 2 Journalizing After an accountable event is identified and analyzed, The journal is a This recording process is the second step is to chronological record of the called journalizing. record it in the journal by entity’s transactions. means of journal entry. A journal entry shows all Each transaction is the effects of a business initially recorded in a A journal is called the transaction in terms of journal rather than book of original entry. debits and credits. directly in the ledger. Journal Entry Format 2. Account Titles and Explanation. The account to be debited is 3. P.R. (posting reference). This will 1. Date. The year and month are entered at the extreme left of the be used when the entries are not rewritten for every entry unless first line while the account to be posted, that is, until the amounts the year or month changes a new credited is entered slightly indented are transferred to the related ledger page is needed. on the next line. Generally, skip a accounts. line after each entry. 4. Debit. The debit amount for each account is entered this column. 5. Credit column. The credit amount for each account is entered in this Simple and Compound Entries a. Simple journal entry – Simple and Compound one which contains a single journal entries. debit and a single credit element. The illustrated journal A journal entry may have one entry above is an example of a of the following formats: simple journal entry. b. Compound journal entry - one which contain two or more debits and credits.  ON YOUR OWN. Transaction Analysis and Journal Entry  ON YOUR OWN. Transaction Analysis and Journal Entry  The Ledger General Ledger: is the The Ledger “reference book” of the accounting system and is used - A grouping of the entity’s to classify and summarize accounts transactions and prepare data for basic FS The Ledger Balance Sheet or Income Statement or Permanent Accounts Temporary Accounts (Assets, Liabilities, and (Income and Expenses) Owner’s Equity) Temporary or Nominal Accounts - used to gather information for a particular accounting period - At the end of the period, the balances of these accounts are transferred to a permanent owner’s equity  STEP 3 Posting More specifically, posting is Posting is the process of done by transferring the transferring data from the amounts of debits and journal to the appropriate credits in a recorded journal accounts in the ledger. entry to the ledger account. The purpose of posting is to classify the effects of transactions on specific assets, liability, equity, income and expense accounts in order to provide more meaningful information.  STEP 3 Posting Activity 1 Journalize the transactions using the journal entry format STEP 3 Posting STEP 3 Posting