CFAS (Lecture Vid #1) – Overview of Accounting PDF

CFAS (Lecture Vid #1) – Overview of Accounting Definition of Accounting Accounting is “the process of identifying, measuring, and communicating economic information to permit informed judgment and decisions by users of information.” (American Association of Accountants) Three Important Activities...

CFAS (Lecture Vid #1) – Overview of Accounting Definition of Accounting Accounting is “the process of identifying, measuring, and communicating economic information to permit informed judgment and decisions by users of information.” (American Association of Accountants) Three Important Activities 1. Identifying – the process of analyzing events and transactions to determine whether or not they will be recognized. Only accountable events are recognized. * Recognition – refers to the process of including the effects of an accountable event in the SFP and SCI through a journal entry. * An accountable event, also known as economic activity, is one that affects the assets, liabilities, equity, income and expenses of an entity. * Non-accountable events if relevant to accounting – because of disclosure; can be in the notes to financial statements * Disclosure – additional information, additional explanation 2. Measuring – involves assigning numbers, normally in monetary terms, to the economic transactions and events. 3. Communicating – the process of transforming economic data into useful accounting information, such as financial statements and other accounting reports, for dissemination to users. * Reporting IDENTIFYING Types of Events 1. External events – events that involve an external party. (not within the company) a. Exchange (reciprocal transfer) – reciprocal giving and receiving i. Example: sales – you give goods, you receive cash b. Non-reciprocal transfer – “one-way” transaction (unilateral) i. Example: donation, gifts, payment of taxes by the company to the government c. External event other than transfer – an event that involves changes in the economic resources or obligations of an entity caused by an external party or external source but does not involve transfer of resources or obligations. i. Example: changes in fair value/price level, obsolescence (sa sobrang tanda na, di na pwede magamit), technological changes 2. Internal events – events that do not involve an external party.  a. Production – the process by which resources are transformed into finished goods. b. Casualty – an unanticipated loss from disasters or other similar events. MEASURING Measurement The several measurement bases used in accounting include, but not limited to, the following: 1. Historical cost, a. Magkano nabenta from the past 2. Fair value, a. Nakadepende sa kung ano yong nasa market 3. Present value, a. Involves the recognition of time 4. Realizable value, a. Magkano yung nabenta mo from selling that 5. Current cost, and 6. Sometimes inflation-adjusted costs The most commonly used is historical cost. This is usually combined with the other measurement bases. Accordingly, financial statements are said to be prepared using a mixture of costs and values. Valuation by Fact or Opinion When measurement is affected by estimates, the items measured are said to be valued by opinion. When measurement is unaffected by estimates, the items measured are said to be valued by fact. Mostly estimates tayo palagi sa accounting COMMUNICATING Basic Purpose of Accounting The basic purpose of accounting is to provide information about economic activities intended to be useful in making economic decisions. * Economic entity is a separate identifiable combination of persons and property that uses or controls economic resources to achieve certain goals and objectives Types of Accounting Information classified as to Users’ Needs General purpose accounting information – designed to meet the common needs of most statement users. This information is governed by the Philippine Financial Reporting Standards (PFRSs).  ○ For the general public ○ Kung saan maiintindihan ng karamihan ng statement users Special purpose accounting information – designed to meet the specific needs of particular statement users. This information is provided by other types of accounting, e.g., managerial accounting, tax basis accounting, etc. ○ Managerial accounting – kung ano yung gusto o kailangan na information ng management Basic Accounting Concepts Double-entry system – each accountable event is recorded in two parts – debit and credit. ○ Developed by Luca Pacioli Going Concern – the entity is assumed to carry on its operations for an indefinite period of time. ○ Opposite → Liquidating concern Separate entity – the entity is treated separately from its owners. Stable monetary unit – amounts in the financial statements are stated in terms of a common unit of measure; changes in purchasing power are ignored. Time Period – the life of the business is divided into series of reporting periods. Materiality concept – information is material if its omission or misstatement could influence economic decisions. Cost-benefit – the cost of processing and communicating information should not exceed the benefits to be derived from it Accrual Basis of Accounting – effects of transactions are recognized when they occur (and not as cash is received or paid) and they are recognized in the accounting periods to which they relate. Historical cost concept – the value of an asset is determined on the basis of acquisition cost Concept of Articulation – all the components of a complete set of financial statements are interrelated. Full disclosure principle – financial statements provide sufficient detail to disclose matters that make a difference to users, yet sufficient condensation to make the information understandable, keeping in mind the costs of preparing and using it. ○ Information must be significant; enough detail (not too much) and costs must be minimal Consistency concept – financial statements are prepared on the basis of accounting policies which are applied consistently from one period to the next. ○ Why? For comparability Matching – costs are recognized as expenses when the related revenue is recognized.  Residual equity theory – this theory is applicable where there are two classes of shares issued, ordinary and preferred. The equation is “Assets – Liabilities – Preferred Shareholders’ Equity = Ordinary Shareholders’ Equity.” Fund theory – the accounting objective is the custody and administration of funds. Realization – the process of converting non-cash assets into cash or claims for cash. Prudence (Conservatism) – the inclusion of a degree of caution in the exercise of the judgments needed in making the estimates required under conditions of uncertainty, such that assets or income are not overstated and liabilities or expenses are not understated. Common Branches of Accounting Financial accounting – focuses on general purpose financial statements. ○ General purpose – addresses the common needs of external users Management accounting – focuses on special purpose financial reports for use by an entity’s management. Cost accounting – the systematic recording and analysis of the costs of materials, labor, and overhead incident to production. Auditing – the process of evaluating the correspondence of certain assertions with established criteria and expressing an opinion thereon. Tax accounting – the preparation of tax returns and rendering of tax advice, such as the determination of tax consequences of certain proposed business endeavors. Government accounting – refers to the accounting for the government and its instrumentalities, placing emphasis on the custody of public funds, the purposes for which those funds are committed, and the responsibility and accountability of the individuals entrusted with those funds. Four Sectors in the Practice of Accountancy 1. Practice of Public Accountancy – involves the rendering of audit or accounting related services to more than one client on a fee basis. 2. Practice in Commerce and Industry – refers to employment in the private sector in a position which involves decision making requiring professional knowledge in the science of accounting and such position requires that the holder thereof must be a CPA. 3. Practice in Education/Academe – employment in an educational institution which involves teaching of accounting, auditing, management advisory services, finance, business law, taxation, and other technically related subjects. 4. Practice in the Government – employment or appointment to a position in an accounting professional group in the government or in a government-owned and/or controlled corporation where decision making requires professional  knowledge in the science of accounting or where civil service eligibility as a CPA is a prerequisite. Accounting Standards in the Philippines Philippine Financial Reporting Standards (PFRSs) are Standards and Interpretations adopted by the Financial Reporting Standards Council (FRSC). They comprise: ○ Philippine Financial Reporting Standards (PFRSs); ○ Philippine Accounting Standards (PASs); and ○ Interpretations If there’s a conflict with the standard and the conceptual framework, standard ang mananaig. The standard will prevail. The Need for Reporting Standards Entities should follow a uniform set of generally acceptable reporting standards when preparing and presenting financial statements; otherwise, financial statements would be misleading. The term “generally acceptable” means that either: ○ The standard has been established by an authoritative accounting rule-making body; or ○ The principle has gained general acceptance due to practice over time and has been proven to be most useful. The process of establishing financial accounting standards is a democratic process in that a majority of practicing accountants must agree with a standard before it becomes implemented.