FAR Reviewer PDF
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Tinubdan Integrated School
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This document details types of business and their roles within financial systems. It also touches upon general accounting concepts, such as the accounting equation, debits and credits.
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TYPES OF BUSINESS Reviewer for FAR Services - selling people's time Lesson 1 - hiring skilled stuff and selling their time...
TYPES OF BUSINESS Reviewer for FAR Services - selling people's time Lesson 1 - hiring skilled stuff and selling their time Accounting – A service activity, It provide quantitative - Examples: software development, accounting, information primarily financial in nature, about economic legal entities that is intended to be useful in making Trader - buying and selling products economic decisions. it is an information system that - buying a range of raw materials and measures processes and communicates financial manufactured goods and consolidating them. information about an economic entity. - Examples: wholesaler, retailer - “Language of the Business” Manufacturer - designing products, aggregating - it is a process of identifying measuring, and components and assembling finished products. communicating economic information to permit - taking raw materials and using equipment and informed judgments and decision by users of stuff to convert them into finished goods the information - Examples: vehicle assembly, constructions, - it is the art of recording, classifying and engineering, electricity, water, food and drinks, summarizing in a significant manner and in chemicals, media, pharmaceuticals. term of money, transactions and events which Raw Materials - growing or extracting raw are, in part at least, of a financial character, and materials interpreting the results thereof. - buying blocks of land and using them to provide Evolution of Accounting - accounting history is the raw materials “study of evolution in accounting thought, practices and - Examples: farming, mining, oil institution in response to change in the environment Infrastructure - selling the utilization of and societal needs. it also considers the effect that this infrastructure evolution has worked on the environment. “ - buying and operating assets and selling ASEAN Economic Community – The ASEAN occupancy often in combination with services Community is comprised of three pillars, namely: the - example transport ( airport, operator, airlines, ASEAN Political Security Community, ASEAN trains, ferries, buses) hotels, telecoms, sport Economic Community, and ASEAN Socio – Cultural facilities, property management. Community. Financial - receiving deposits, lending and Four Pillars of ASEAN Economic Community: investing money. a.) single market and production base - it - accepting cash from depositors and paying measures to ensure the free flow of goods, them interest services, investment, capital, skilled labor, and - Examples: bank, investment house priority integration sectors. Insurance - pooling premiums of many to meet b.) competitive economic region - actions on claims of a few. competition policy, consumer protection, - collecting cash from many customers; investing intellectual property right, infrastructure the money to pay the losses experienced by a development, taxation, e-commerce. few customers c.) equitable economic development – SME - Examples: insurance development, initiative for ASEAN integration FORMS OF BUSINESS ORGANIZATIONS d.) integration into the global economy - coherent a.) Sole Proprietorship - this business approach towards external economic relations, organization has a single owner called the enhanced participation in global supply proprietor who generally is also the manager networks. - the owner receives all profits, observes all Priority Integration Sectors: losses and is solely responsible for all deaths of a.) Goods – agro- based goods, automotive the business. products, electronics/electrical, fisheries, rubber b.) Partnership - a partnership is a business - based goods, textiles/clothing, and would - owned a operated by two or more persons who based products. bind themselves to contribute money, property, b.) Services - air transportation, e – ASEAN, or industry to a common fund healthcare services, logistic, tourism. - each partner is personally liable for any debt incurred by the partnership c.) Corporation - a corporation is a business goods and services created by operating owned by its stockholders. activities. - the stockholders are not personally liable for Purpose and Phases of Accounting - the accounting the corporations debts, the corporation is a function is part of the broader business system, and separate legal entity. does not operate in isolation. it handles the financial MICRO, SMALL, AND MEDIUM ENTERPRISES operations of the business but also provides information (MSMEs) and advice to other departments. business transactions - support industries as inciliary units, thereby are the economic activities of a business. contributing enormously to the overall industrial Memorandum - a book where all transactions are development of the country recorded, in the currency in which they are conducted, Micro enterprises are those with assets, before at the time they are conducted. it prepared in financing, of P3.0 (before 1.5 million) or less and chronological order, is a narrative description of the employee not more than nine workers. business’s economic events. Small enterprises are those with assets, before - memorandum is necessary because there are financing, of above P3.0 (before P1.5 million) to P15 no documents to support transactions million and employee 10 to 99 workers. Journal – it is the merchant’s private book, the entries Medium enterprises have assets, before financing, made here are in one currency, in chronological order, above P15 million to P100 million and employed 100 to and a narrative form 199 workers Other definiton of journal - a detailed account that ACTIVITIES IN BUSINESS ORGANIZATION records all the financial transactions of a business, to 3 TYPES OF ORGANIZATIONAL ACTIVITIES be used for the future reconciling of accounts and the a.) financing activities - organizations require transfer of information to other official accounting financial resources to obtain other resources records, such as the general ledger. used to produce goods and services. they Ledger - it is an alphabetical listing of all the compete for this resources in financial markets business’s accounts along with the running balance of - financing activities are the methods an each particular account. organization used to obtain financial resources Other definition of ledger - also called as general from financial markets and how it manages ledger, it is a record of a business financial these resources transactions. it summarize all the revenue and - primary sources of financing for most expenses of the business, plus the death owned and businesses are owners and creditors, such as assets owned. banks and suppliers. FUNDAMENTAL CONCEPT - repaying the creditors and paying a return to a.) Entity Concept - it is the most basic concept in the owners are also financing activities accounting, an accounting entity is an b.) investing activities - managers use capital organization or a section of an organization that from financing activities to acquire other stands apart from other organizations and resources used in the transformation processes individuals as a separate economic unit. Simply – that is, to transform resources from one form put, the transactions of different entities should to a different form, which is more valuable, to not be accounted for together. Each entity meet the needs of the people. should be evaluated separately. Efficient Business - the one that provides b.) Periodicity Concept - an entity's life can be goods and services at low costs relative to their meaningfully subdivided into equal time periods selling prices for reporting purposes. it will be aimless to wait Effective Business - a one that is successful in for the actual last day of operations to perfectly providing goods and services demanded by the measures the entities profit. this concept allow customers the users to obtain timely information to serve c.) operating activities - it involve the use of as a basis on making decisions about future resources to design, produce, distribute, and activities. for the purpose of reporting to market goods and services outsiders, 1 year is the usual accounting - organizations compete in suppliers and labor period. market for resources used in this activities. also c.) Stable Monetary Unit Concept - the philippine they compete in product market to sell the peso is a reasonable unit of measure and that its purchasing power is relatively stable. it Adequate Disclosure - requires that all relevant allows accountants to add and subtract peso information that would affect the users understanding amount as though each peso has the same and assessment of the accounting entity be disclosed in purchasing power as any other peso at any the financial statement. time. This is the basis for ignoring the effect of Materiality - financial reporting is only concerned with inflation in accounting records. information that is significant enough to affect d.) Going Concern - financial statements are evaluation and decisions. materiality depends on the normally prepared on the assumption that the size and nature of the item george in the particular reporting entity is going concern and will circumstances of its omission. in deciding whether an continue in operating for the foreseeable future. item or an aggregate of item is material, the nature and Hence, it is assumed that the entity has neither size of the item are evaluated together. depending on the intention nor the need to enter liquidation or the circumstances, either the nature or the size of the to cease trading. this assumption underlies the item could be the determining factor. depreciation of assets over their useful lives. Consistency Principle - the firms should use the same CRITERIA FOR GENERAL ACCEPTANCE OF AN accounting method from period to period to achieve ACCOUNTING PRINCIPLE comparability over time within a single enterprise. - A principle has relevance to the extent that is However, change or permitted if justifiable and disclose result in information that is meaningful and in the financial statement. useful to those who need to know something ROLE OF ETHICS IN BUSINESS about a certain organization. - Ethics is concerned with right and wrong and - A principle has objectivity to the extent that how conduct should be judged to be good or the resulting information is not influenced by bad. the personal bias or judgment of those who Business ethics tells what is right or wrong in a furnish it. objectivity connotes reliability, business situation while professional ethics tell trustworthiness and verifiability, which means the same thing regarding profession. ethical that there is some way of finding out whether conflict can arise, however, when what might the information is correct. be best for the company is wrong morally or - A principle has feasibility to the extent that it professionally. can be implemented without undue complexity - Ethical Dilemma is a situation in which there is or cost. this criteria often conflict with one no obvious right or wrong decision but rather a another. in some cases, the most relevant right or right answer. solution may be the least objective and the Some other ethical dilemmas follow: least feasibility. - white collar crime BASIC PRINCIPLE - with a blowing Objectivity Principle - accounting records and - conflicts of interest statements are based on the most reliable data - fiduciary responsibilities available so that they will be as accurate and as useful - sexual harassment as possible. reliable data or verifiable which they can be - discrimination confirmed by independent observes. without this FUNDAMENTAL PRINCIPLES principle accounting records would be based on whims Integrity - a professional accountant should be and opinions and is therefore subject to disputes. straightforward and honest in all professions and Historical Cost - this principle states that acquired business relationship, integrity also implies fair dealing assets should be recorded at their actual cost and not and truthfulness. at what management things they are worth as at Objectivity - a professional accountant should not reporting date. allow bias, conflict of interest or undue influence of Revenue Recognition Principle - revenue is to be others to override professional or business judgements. recognized in the accounting period when goods are delivered or service are rendered or performed. Auditing - it is the accountancy professions most Expense Recognition Principle - expenses should be significant service to the public. an external audit is the recognized in the accounting period in which goos and independent examination that ensures the fairness and services are used up to produce revenue and not when reliability of the reports that management submits to the entity pays for those goods and services. users outside the business entity. the result of the examinations is embodied in the independent auditor’s Taxation - tax accounting includes the preparation of report. tax returns and the consideration of the tax Bookkeeping - it is a mechanical task involving the consequences of proposed business transactions or collection of basic financial data. the data are first alternative courses of action. As typically known, entered in the accounting records or the book of accountants involved in tax work or responsible for accounts, and then extracted, classified and computing the amount of tax payable by both business summarized in the form of income statement, balance entities and individual but their work is really more sheet and cash flows statement. complex. bookkeeping is a routine operation, while accounting - if tax expert attempt to reduce their clients tax requires the ability to examine a problem using both liabilities strictly in accordance with the law, this financial and non-financial data. is known as tax avoidance. Difference between bookkeeping and auditing - tax avoidance is a perfectly legitimate -auditors are unbiased specialists that evaluate exercise, but tax evasion (the non declaration financial statements, whereas bookkeeper are internal of sources of income on which tax might be workers or external service providers who record and due) is a very serious offense. organized financial data. Government Accounting - it is concerned with the COST BOOKKEEPING, COSTING, COST identification of the sources and uses of resources ACCOUNTING consistent with the provisions of city, municipal, Cost bookkeeping is the process that involves the provincial or national laws. The government collects recording of cost data in book of accounts. it's similar to and spend huge amount of public funds annually so it is bookkeeping except that data are recorded in very necessary that there is proper custody and disposition much greater detail of these funds. Cost accounting - It makes use of those data once they have been extracted from the cost books in providing information for managerial planning and control. -cost accounting deals with the collection, allocation, and control of the cost of producing specific goods and services -Accountants are now discouraged from using the term costing unless it is qualified in some way, referring to some branch of costing (such as standard costing), but even so you will still find the term costing in general use. Financial Accounting - it focused on the recording of business transactions and the periodic preparation of reports on financial position and results of operation. Financial accounting is the more specific term applied to the preparation and subsequent publication of highly summarized financial information. Financial Management - it is a relatively new branch of accounting that has grown rapidly. Financial managers are responsible for setting financial objectives, making Reviewer for FAR plans based on those objectives, obtaining the finance Lesson 2 needed to achieve the plans, and generally The Accounting Equation and the Double – Entry safeguarding all the financial resources of the entity. System Management Accounting - it incorporats cost accounting data and adapts them for specific decisions Information System - it is a collection of people, which management may be called upon to make. a procedure, software, hardware, and data which work management accounting system is on corporate all together to provide information essential to running an types of financial and non-financial information from a organization. wide range of sources. PARTS OF AN INFORMATION SYSTEM a.) People - are competent end users working to Central Processing Unit (CPU) – controls and increase their productivity. Ends users are used manipulates data to produce information. hardware and software to solve information Memory (Primary Storage) – temporarily holds related or decision making problems. data, program instructions, and processed b.) Procedures - are manuals and guidelines that data. instruct end users on how to use the software g.) Secondary Storage - it stores data in program. and hardware. three most common storage media are: flash c.) Software - it is the another name for programs drive, hard disk, and optical disk. - instructions that tell the computer how to h.) Output devices - an output processed process data. There are basically two kinds of information from the CPU. Two important outut software devices are: monitor and printer. 1.)System Software - it is the background i.) Communication Devices – these send and software that helps a computer manage its internal receive data and programs from one computer resources. An example is the operating system. to another. A device that can connect a Window and Linux are popular operating system microcomputer to a telephone is a modern 2.) Application Software - it performs useful j.) Data - it is the raw material for data processing. work on general purpose problems. The two types of Data consist of numbers, letters, and symbols application software are basic applications and advance and relates to facts, events and transactions. application. Data describe something and is typically stored Basic Applications include: electronically in a life. A file is a collection of Browsers – navigate, explore, find information on the characters organized as a single unit. Common internet types of files are: document, worksheet, and Word processor – prepare written documents database. Spreadsheet – analyze and summarize numerical data ACCOUNTING INFORMATION SYSTEM Database management system – organize and manage - it is the combination of personal, records and data and information procedures that a business uses to meet its Presentation graphics – communicate a message or needed for financial information. pursued other people TYPES OF ACCOUNTING INFORMATION SYSTEM Advance application include: a.) Computer Based Accounting System - a Multimedia – integrate, music, voice, and graphic to manual system rely on human processing so create interactive presentations. they are labor intensive and maybe inefficient in Web Publishers – create interactive multimedia pages today's complex business environment. Graphic Programs – create professional publication, because manual system rely only one draw, edit and modify images. processing, they may be prone to error. Virtual reality – create realistic three dimensional virtual - a computer based transaction system or simulated environments. maintains accounting data separately from Artificial intelligence – simulated human thought other operating data. That is, the accounting processes and actions. records are kept separately from the records Project managers – plan projects, schedule, people, required for the expenditures, revenue and and control resources conversion processes. Advantages: d.) Hardware - consists of input devices, the - transactions can be quickly posted to the system, secondary storage, output devices, appropriate accounts, bypassing the and communication devices. journalizing process. e.) Input devices - translate data and program - detailed listing of transactions can be printed that human can understand into a form that for reviews at any time. computer can process. the more common are - a wide variety of reports can be prepared. the keyboard, mouse, scanner, digital camera, b.) Databased System - rational database system and microphone. such as enterprise resource planning (ERP) f.) The system units - consist of electro electronic depart from the “accounting information” security with two parts: method of organizing data. - database system reduce inefficiencies and redundancies that often exist in transaction INCOME STATEMENT ACCOUNTS based system. Debit for decreases in Credit for Increases in Advantages: owner’s equity owner’s equity a.) the system recognizes business rather than just accounting events. EXPENSES INCOME b.) the system supports reduction in operating Debit Credit Debit Credit inefficiencies. (+) (-) (-) (+) c.) the system eliminates redundant data. Increases Decreases Decreases Icreases STAGES OF DATA PROCESSING - processing of raw data into useful accounting Normal Normal information then finally into summarize reports Balance Balance follows the usual input – processing – output ELEMENTS OF FINANCIAL STATEMENTS Assets, Liabilities, and Equity - relate to a ACCOUNTS reporting entities financial positions; and Debit Credit Income and Expenses - relate to a reporting entities financial performance. Increases in Increases in Asset - a pressure economic resources controlled by Assets Liabilities the entity as a result of past events. An economic Expenses Owner’s Capital resources is a right that has a potential to produce Infom economic benefits. Decreases in Liability - a present obligation of the entity to transfer Liabilities Decreases in an economic resources as a result of past events. Owner’s Capital Assets Equity - the residual interest in the asset of the entity Income Expenses after deducting all its liabilities. Income - increases in assets, or increases in liabilities, that result in increases in equity, other than those NORMAL BALANCE OF AN ACCOUNT relating to contributions from holders of equity claims. - the normal balance of any account refers to the Expenses - decreases in assets, or increases in side of the account debit or credit where liabilities, that result in decrease in equity, other than increases are recorded. Asset, owners those relating to distributions to holders of equity withdrawal and expense accounts normally claims. have debit balances; liability, owner's equity, DEBIT AND CREDITS – DOUBLE-ENTRY SYSTEM and income accounts normally have credit - an account is debited when an amount is balances. this result occur because increases entered on the left side of the account and in an account are usually greater than or equal credited when an amount is entered on the to decreases. right side ACCOUNTING EVENTS AND TRANSACTIONS Dr - the abbreviation for debit (from the latin debere) - an account event is an economic occurrence Cr – the abbreviation for credit (from the latin credere) that causes changes in an enterprises, asset, liabilities, and/or equity. Events maybe internal BALANCE SHEET ACCOUNTS actions, such as the use of equipment for the production of goods and services. it can also be ASSETS LIABILITIES AND an external event such as the purchase of raw OWNER’S EQUITY materials from a supplier. Debit Credit Debit Credit - a transaction is a particular kind of event that (+) (-) (-) (+) involves the transfer of something of value Increases Decreases Decreases Icreases between two entities. example of transactions include acquiring asset from owners, borrowing Normal Normal Balance Balance funds from creditor, and purchasing or selling goods and services. TYPES AND EFFECTS OF TRANSACTIONS a.) Source of Assets (SA) - an asset account Cash - cash is any medium of exchange that a bank increases and a corresponding claims will accept for deposit at face value. it includes coin, (liabilities or owner’s equity) account increases. currency, checks, money orders, bank deposits and Ex: (1) purchase of supplies on account; (2) drafts. sold goods on cash on delivery basis. Cash Equivalent - these are short term, highly liquid b.) Exchange of Assets (EA) - one asset account investment that are rapidly convertible to known increases and another asset account amounts of cash and which are subject to an decreases. insignificant risk of changes in value. Ex: acquired equipment for cash Notes Receivable - a note receivable is a written c.) Use of Assets (UA) - an asset account pledge that the customer will pay the business a fixed decreases and a corresponding claims amount of money on a certain date. (liabilities or equity) account decreases. Accounts Receivable - there are claims against Ex: (1) Settled accounts payable; (2) Paid customers arising from sale of services or goods on salaries of employees. credit. this type of receivable offers less security than a d.) Exchange of Claims (EC) – (liabilities or promissory note. owner’s equity) accounting crisis and another Inventories - these are assets which are held for sale claims (liabilities or owners equity) account in the ordinary course of business; in the process of decreases. production for such sale; or in the form of materials or Ex: received utilities bill did not pay supplies to be consumed in the production process or in Every accountable event has a dual but soft balancing the rending of services. effect on the accounting equation. Recognizing this Prepaid Expenses - these are expenses paid for by event will not in any manner affect the equality of the the business in advance it is an asset because the basic accounting model. The four types of transaction business avoids having to pay cash in the future for above may be further expanded into nine types of effect specific expense. as follows: Non – Current Assets Property, Plant and Equipment - these are tangible 1. Increase in Assets = Increase in Liabilities (SA) assets that are held by an enterprise for use in the 2. Increase in Assets = Increase in Owner’s production or supply of goods and services, or for rental Equity (SA) to others, or for administrative purposes and which are 3. Increase in one Assets = Decrease in another expected to be used during more than one period. Assets (EA) included or such items as land, building, machinery and 4. Decrease in Assets = Decrease in Liability equipments, furniture, fixtures, motor vehicles, and (UA) equipment. 5. Decrease in Assets = Decrease in Owner’s Accumulated Depreciation - it is a contra account that Equity (UA) contains the sum of the periodic depreciation charges. 6. Increase in Liabilities = Decrease in Owner’s the balance in this account is deducted from the cost of Equity (EC) the related asset - equipment or buildings - top obtain 7. Increase Owner’s Equity = Decrease in book value. Liabilities (EC) Intangible Assets - these are identifiable, non- 8. Increase in Liability = Decrease in another monetary assets without physical substance held for Liability (EC) use in the production or supply of goods or services, for 9. Increase in one Owner’s Equity = Decrease in rental to others, or for administrative purposes. This another Owner’s Equity (EC) include goodwill, patents, copyrights, licenses, franchises, trademarks, brand names, secret processes, subscription list and non-competition agreements. TYPICAL ACCOUNT TITLES USED STATEMENT OS FINANCIAL POSITION Liabilities Assets Current Liabilities - assets are should be classified only into two: Accounts Payable - disappoint represent the reverse current asset and non-current asset. relationship of the accounts receivable. By accepting Current Asset the goods or services, the buyer agree to pay for them Income Summary - It is a temporary account used at in the near future. the end of the accounting period to close income and Notes Payable - a notes payable is like a note expenses. This account shows the profit or loss for the receivable but in reverse sense. In the case of a period before closing to the capital account. payable, the business entity is the maker of the note; that is, the business entity is the party who promises to INCOME STATEMENT pay the other party a specified amount of money on a Income specified future date. Service Income - Revenues earned by performing Accrued Liabilities - amounts owned to others for services for a customer or client; for example, unpaid expenses. This account includes salaries accounting services by a CPA firm, laundry services by payable, utilities payable, interest payable, and taxes a laundry shop. payable. Sales - Revenues earned as a result of sale of Unearned Revenues - When the business entity merchandise; for example, sale of building materials by receives payment before providing its customers with a construction supplies firm. goods or services, the amounts received are recorded Expenses in the unearned revenue account (liability method). Cost of Sales - The cost incurred to purchase or to When the goods or services are provided to the produce the products sold to customers during the customer, the unearned revenue is reduced and period; also called cost of goods sold. income is recognized. Salaries or Wages Expense - Includes all payments Current Portion of Long-Term Debt - These are as a result of an employer-employee relationship such portions of mortgage notes, bonds and other long-term as salaries or wages, 13th month pay, cost of living indebtedness which are to be paid within one year from allowances and other related benefits. the balance sheet date. Telecommunications, Electricity, Fuel and Water Non-current Liabilities Expenses - Expenses related to use of Mortgage Payable - This account records long-term telecommunications facilities, consumption of electricity, debt of the business entity for which the business entity fuel and water. has pledged certain assets as security to the creditor. In Rent Expense - Expense for space, equipment or other the event that the debt payments are not made, the asset rentals. creditor can foreclose or cause the mortgaged asset to Supplies Expense - Expense of using supplies (e.g. be sold to enable the entity to settle the claim. office supplies) in the conduct of daily business. Insurance Expense - Portion of premiums paid on Bonds Payable - Business organizations often obtain insurance coverage (e.g. on motor vehicle, health, life, substantial sums of money from lenders to finance the fire, typhoon or flood) which has expired. acquisition of equipment and other needed assets. Depreciation Expense - The portion of the cost of a They obtain these funds by issuing bonds. The band is tangible asset (eg, buildings and equipment) allocated a contract between the issuer and the lender specifying or charged as expense during an accounting period the terms of repayment and the interest to be charged. Uncollectible Accounts Expense - The amount of receivables estimated to be doubtful of collection and Owner’s Equity charged as expense during an accounting period Capital - (from the Latin capitolis, meaning “property”). Interest Expense - An expense related to use of This account is used to record the original and borrowed funds additional investments of the owner of the business entity. It is increased by the amount of profit earned during the year or is decreased by a loss. Cash or other assets that the owner may withdraw from the business ultimately reduce it This account title bears the name of the owner. Withdrawals - When the owner of a business entity withdraws cash or other assets, such are recorded in the drawing or withdrawal account rather than directly reducing the owner’s equity account.