Fundamentals of Accounting PDF

observation as a means to produce the Definition, Nature and Functions of key end product which are the financial Accounting, Users of Financial reports. Information...

observation as a means to produce the Definition, Nature and Functions of key end product which are the financial Accounting, Users of Financial reports. Information 3. Accounting deals with transactions Accounting is a service activity. that are Financial in Nature Its function is to provide quantitative information primarily ○ Business transactions must be financial in nature, about economic measured in terms of money. entities that is intended to be Non-monetary transactions are useful in making economic outside the scope of accounting. decisions. (Manila: PICPA, 1983, Relevant non-financial information, par.1) however, may be considered in Accounting is the process of recording transactions. identifying, measuring and 4. Accounting is a means and not an end. communicating economic information to permit informed ○ Accounting merely provides judgments and decisions by users information (e.g. Financial of information. (AAA) Statements/Management The American Institute of Reports/Advice) to the users of Certified Public Accountants such but it does not make the defines accounting as the art of decision itself. It is the users recording, classifying, and themselves that are the summarizing in a significant decision-makers manner and in terms of money, 5. Accounting is an Information System transaction, events, which are in part at least of a financial ○ Accounting is an information character, and interpreting the system as it is a set of result thereof. interrelated components that work together to achieve a common Nature of Accounting purpose. It is also a repository for 1. Accounting is a systematic financial data and information. process. Functions of Accounting in Business ○ A process is a series of actions to produce something to a particular result. American Accounting Association - primary function of accounting is to provide information to users to Four aspects of accounting: permit informed judgment. - recording, classifying, It provides management with the summarizing, and interpreting, information it needs for Informed leads to communicating to its Decision Making. users the relevant information Systematic Recordkeeping - an needed by parties interested. inherent function of accounting, given how reporting, classifying and summarizing are parts of its 2. Accounting is an art. process. ○ Art is a skill acquired by experience, Compliance with Legal Requirements - study, or observation. The four aspects also provided for by accounting, given of accounting require both knowledge how government agencies (e.g. BIR, SEC) and skill through experience, study, or require the periodic submission of Serves as the foundation in order reports. to avoid misunderstanding Enhances the understandability Users of Accounting Information and usefulness of the financial Internal users– the primary users of statement financial information who are inside the reporting entity and are directly involved Fundamental Concepts in managing the company’s daily 1. Business Entity Concept - owners operations and help the entity reach its capital should be separated from overall mission and strategies. the business 2. Periodicity External users – individuals or other An entity’s life can be entities that have current or potential meaningfully subdivided financial interest in the reporting entity into equal time periods for but are not involved in the daily reporting purposes. operations of the entity. Allows the users to obtain timely information to serve INTERNAL EXTERNAL USERS as a basis on making USERS decisions about future activities. Top Management Government & their Usual accounting period is agencies one year. The accounting period can Employees Customers be classified as either of the following: Shareholders Creditors/Suppliers Calendar Year - A twelve-month period that starts Internal Auditors Potential/Current on January 1 and ends on Investors December 31. Fiscal Year Supervisors General Public - A twelve-month period that starts on any month of the year other Accounting Concepts and than January and ends twelve Principles months after the starting period, IFRS - INTERNATIONAL FINANCIAL e.g., a business whose fiscal year REPORTING STANDARDS starts May 1, 2006 ends its fiscal Generally Accepted Accounting year on April 30, 2017. Principles (GAAP) Note: A natural business year is any Rules and procedures twelve-month period that ends when Serves as guide in the practice of business activities are at the lowest accounting point. standards , assumptions, and concepts with general 3. Stable Monetary Unit Concept - acceptability The value of peso is stable over Measurement techniques and time standards used in the presentation - Has inflation and preparation of the financial statements 4. Accrual Basis - Revenue should be 7. Consistency - Accounting methods recognized when earned and procedures should be applied regardless of when collection is on a uniform basis from period to done and expenses should be period. recognized when incurred regardless of when payment is made 5. Going Concern - The financial statements are normally prepared on the assumption that an enterprise is a going concern and “will continue in operation for the foreseeable future. ” Basic Accounting Principles 1. Objectivity - Accounting records should be based on reliable and verifiable data. 2. Cost Principle - Assets should be recorded at the original acquisition cost at the time of purchase 3. Revenue Recognition Principle - Revenue/Income is to be recognized in the accounting period when goods are delivered, or services are rendered or performed, regardless of when the cash is received. 4. Expense Recognition Principle - Expenses should be recognized in the accounting period in which goods and services are used up to produce revenue and not when the entity pays for those goods and services. 5. Adequate Disclosure - Requires that all relevant information that Could affect the user’s understanding and assessment of the accounting entity be disclosed in the financial statements. 6. Materiality - Business Transactions that could affect the decision of users must be reported properly. Those that can't affect decisions may be omitted or an accountant may violate principles for expediency for these types of items  Accounting Equation and the 5 DECREASE IN LIABILITY Major Accounts = DECREASE IN ASSET = INCREASE IN ANOTHER LIABILITY Accounting Event = INCREASE IN OWNER’S EQUITY - An economic occurrence that causes changes in an enterprise’s INCREASE IN OWNER’S EQUITY assets, liabilities, and/or equity = INCREASE IN ASSET = DECREASE IN LIABILITY Transaction - A particular kind of event that DECREASE IN OWNER'S EQUITY involves the transfer of something = DECREASE IN ASSET of value between two entities = INCREASE IN LIABILITY Account The 5 Major Accounts - The basic summary device of 1. ASSET - a present economic accounting resource controlled by the entity a - Detailed record of the increases, a result of past events decreases, and balance of each - Anything owned by the business element that appears in the Economic Resource - a night that has entity’s financial statements the potential to produce economic benefits CURRENT ASSETS 1. Cash and Cash Equivalents Cash - any medium of exchange that a bank will accept for deposit at face value. Cash Equivalents - short term, highly liquid investments that are readily convertible to known ACCOUNTING EQUATION amounts of cash. ASSETS = LIABILITIES + OWNER’S 2. Accounts Receivable - amounts EQUITY due from customers arising from credit sales or credit services. EFFECTS OF TRANSACTIONS 3. Notes Receivable - amounts due INCREASE IN ASSETS from clients supported by = DECREASE IN ANOTHER ASSET promissory notes. = INCREASE IN LIABILITIES 4. Inventories = INCREASE IN OWNER’S EQUITY a. Held for sale in the ordinary course of the DECREASE IN ASSETS business; = INCREASE IN ANOTHER ASSET b. In the process of = DECREASE IN LIABILITIES production for such sale; = DECREASE IN OWNER’S EQUITY c. The form of materials or supplies to be consumed in INCREASE IN LIABILITY the production process or = INCREASE IN ASSET in the rendering of service. = DECREASE IN ANOTHER LIABILITY = DECREASE IN OWNER’S EQUITY 5. Supplies - items purchased by an Notes Payable - like a note receivable enterprise which are unused as of the but in a reverse sense. reporting date - Includes debt arising from the 6. Prepaid Expense - paid in advance purchase of an asset or acquisition of services on account evidenced NON-CURRENT ASSETS by a promissory note. Accrued Liabilities - are the amounts 1. Property, Plant and Equipment - owed to others for unpaid expenses. tangible assets that are held by Unearned Income - cash collected in any enterprise for use in the advance; the liability is the services to be production or supply of goods or performed or goods to be delivered in the services, or for rental others, or future. for administrative purposes and which are expected to be used 3. EQUITY - the residual interest in during more than one period the assets of the enterprise after 2. Long Term Investment - deducting all its liabilities. investments made by the company - They are claims against the for the accretion of wealth entity that do not meet the 3. Intangible Assets - are definition of a liability. identifiable, non-monetary assets without physical substance held EQUITY for use in the production or supply Capital - used to record the original and of goods or service, for rental to additional investments of the owner of others, or for administrative the business entity purpose - It is increased by the amount of profit earned during the year or is ContraAsset Accounts decreased by a loss - Accounts deducted from the Drawing - an account debited for assets related asset accounts withdrawn by the owner for personal use ContraAsset Account from the business 1. Accumulated Depreciation 2. Allowance for Bad Debts 4. REVENUES/INCOME - the inflow Related Assets of money or other assets that 1. Property, Plant, and Equipment results from the sales of goods or 2. Accounts Receivable services for a or from the use of money or property. 2. LIABILITIES - Are present - The result of revenues is obligations of the entity to transfer increase in assets economic resources as a result of past events REVENUES/INCOME - Debt Service Income - revenues earned by performing services for a customer or LIABILITIES client Accounts Payable - represents the Sales - revenue earned as a result of the reverse relationship of the accounts sale of merchandise receivable. - Includes debts arising from the purchase of an asset of the acquisition of services on account  5. EXPENSES - involves the outflow of BOOKS OF ACCOUNTS money, the use of other assets, or - Are a set of books or records kept the incurring of a liability and maintained by the company to keep EXPENSES track of its transactions more Cost of Sales efficiently. Salaries or wages expense - Are records in which all accounts Telecommunications, electricity, and transactions of a business are fuel and water expenses Supplies expense maintained on a regular basis. Rent expense - Serve as a financial memory and Insurance expense comprise of every single business Depreciation expense transaction and financial information of a company. - Crucial in ensuring regulatory The Double Entry and Books of compliance as they serve as proof of Accounts the business transactions reflected in the Financial Statements. RULES OF DEBIT AND CREDIT: THE - Permanently bound books of accounts DOUBLE-ENTRY SYSTEM are required by the BIR for Accounting is Based on a Double-Entry registration and stamping System DEBIT=CREDIT JOURNAL The recording of financial Normal Balance of Accounts - the side information into the journal is that will cause an account to increase known as the process of when recorded in Journalizing It is the chronological record of all the company's transactions listed by date. Book of Original Entry May be a General or Special Journal SPECIAL JOURNALS - Are used to record typical and similar types of transactions by large companies that are often engaged in hundreds of transactions each day. - Include sales journal, cash receipts journal, purchases journal, and cash payments journal. LEDGER Book of Final Entry Used in the Posting Process Grouping of all accounts of a company showing its respective outstanding balances May be a General or Subsidiary Ledger GENERAL LEDGER - Is the “reference Also transfer "the record" to the book” of the accounting system and is explanation field used to classify and summarize 2. Transfer the page number from transactions, and to prepare data for the journal to the Journal basic financial statements. Reference (J.R.) column on the ledger. SUBSIDIARY LEDGER - is an expansion 3. Post the debit figure from the of the General ledger account journal as the debit figure in the ledger and the credit figure from CHART OF ACCOUNTS - is a listing of the journal as credit figure in the all the accounts and their account ledger. numbers in the ledger. 4. Enter the account number in the 1.Assets posting reference column of the 2.Liabilities journal once the figure has been 3.Owner's Equity posted to the ledger. 4.Income 5.Expenses GENERAL LEDGER FORMAT Journalizing Business Transactions JOURNALIZING TWO OR MORE ACCOUNTS ARE AFFECTED BY EACH TRIAL BALANCE TRANSACTION. is a list of all accounts with their THE SUM OF DEBITS FOR respective debit or credit EVERY TRANSACTION EQUALS balances THE SUM OF CREDITS. prepared to verify the equality of THE EQUALITY OF debits and credits in the ledger at ACCOUNTING EQUATION IS the end of each accounting period ALWAYS MAINTAINED. or at any time the postings are A DEBIT SIDE ENTRY SHOULD updated. HAVE A CORRESPONDING is a control device that helps CREDIT SIDE ENTRY. minimizing accounting errors. When the totals equal, the trial balance is in balance. Posting and Unadjusted Trial - This equality provides an Balance interim proof of the accuracy of the records POSTING - means transferring he but it doesn’t signify the amounts in the journal to the appropriate absence of errors accounts in the ledger - Debits in the journal are posted as 1. List the accounts titles in debits in the ledger, and credits in numerical order (based from the the journal as credits in the Chart of Accounts) ledger. 2. Obtain the account balance of each of the account from the 1. Transfer the date of transaction ledger and enter the debit from the journal to the ledger. balances in the debit column and  the credit balances in the credit column. 3. Add the debit and credit columns 4. Compare the totals Locating Errors 1. Error in posting a transaction in the ledger: An erroneous amount was posted to the account. A debit entry was posted as credit or vice versa. A debit or credit posting was omitted. 2. Error in determining the account balances: A balance was incorrectly computed. A balance was entered in the wrong balance column. 3. Error in preparing the trial balance: One of the columns of the trial balance was incorrectly added. The amount of an account balance was incorrectly recorded on the trial balance. A debit balance was recorded on the trial balance as a credit or vice versa, or a balance was omitted entirely