L1 - FUNDAMENTALS OF ACCOUNTING.pptx.pdf

ABM 005 FUNDAMENTALS OF ACCOUNTING LESSON 1 Learning Outcomes 01 Define and describe the nature of accounting. Explain the functions of accounting in business. 02 03 Narrate the history/origin of accounting. Learning Outcomes 04 Differentiate the branches of accounting. 05 E...

ABM 005 FUNDAMENTALS OF ACCOUNTING LESSON 1 Learning Outcomes 01 Define and describe the nature of accounting. Explain the functions of accounting in business. 02 03 Narrate the history/origin of accounting. Learning Outcomes 04 Differentiate the branches of accounting. 05 Explain the kind/type of services rendered in each of these branches. WHAT IS ACCOUNTING, BUSINESS, AND MANAGEMENT? ACCOUNTING Accounting is the process of recording financial transactions pertaining to a business. The accounting process includes summarizing, analyzing, and reporting these transactions to oversight agencies, regulators, and tax collection entities. BUSINESS The term business refers to an organization or enterprising entity engaged in commercial, industrial, or professional activities. The purpose of a business is to organize some sort of economic production of goods or services. Businesses range in scale and scope from sole proprietorships to large, international corporations. MANAGEMENT Business management is the process of planning, organizing, directing, and controlling the activities of a business or organization to achieve its goals and objectives. It involves overseeing all aspects of a business, from finance and operations to marketing and human resources. WHAT IS THE CORRELATION AND THE DIFFERENCES OF THESE THREE? A B M LET’S FOCUS ON ACCOUNTING! “It is a system that measures business activities, processes given information into reports, and communicates findings to decision makers.” PHILIPPINE INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS (PICPA) “It is an 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 financial character and interpreting the result thereof.” AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS (AICPA) “Accounting is a service activity. Its function is to provide quantitative information, primarily financial in nature, about economic entities that is intended to be useful in making economic decisions, and in making reasoned choices among alternative course of action.” ACCOUNTING STANDARD COUNCIL THE FUNCTION OF ACCOUNTING IS TO PROVIDE QUANTITATIVE INFORMATION, PRIMARILY FINANCIAL IN NATURE. UNDERSTANDING ACCOUNTING Accounting is one of the key functions of almost any business. The reports generated by various streams of accounting, such as cost accounting and managerial accounting, are invaluable in helping management make informed business decisions. The financial statements that summarize a large company's operations, financial position, and cash flows over a particular period are concise and consolidated reports based on thousands of individual financial transactions. HISTORY OF ACCOUNTING Accounting history dates back to ancient civilizations in Mesopotamia, Egypt, and Babylon. For example, during the Roman Empire, the government had detailed records of its finances. However, modern accounting as a profession has only been around since the early 19th century. HISTORY OF ACCOUNTING Luca Pacioli is an Italian mathematician and considered “The Father of Accounting and Bookkeeping”. Pacioli published a book on the double-entry system of bookkeeping in 1494. The book was called Summa de Arithmetica, Geometria, Proportioni et Proportionalita (The Collected Knowledge of Arithmetic, Geometry, Proportion and Proportionality). By 1880, the modern profession of accounting was fully formed and recognized by the Institute of Chartered Accountants in England and Wales. The formation of the institute occurred in large part due to the Industrial Revolution. Merchants not only needed to track their records but sought to avoid bankruptcy as well. BRANCHES OF ACCOUNTING Financial accounting involves recording and clarifying business transactions along with preparation and presentation of financial statements. For example, a financial accountant may analyze the financial records of the previous quarter to make recommendations for changes in the next quarter. It analyses the company's balance sheet and prepares profit and loss statements that advise management or stakeholders in regards to loans, investments, or acquisitions. Financial accounting provides vital economic business information for: Creditors, Banks or financial institutions, Regulators, Suppliers, Tax professionals Managerial accounting provides information to a company's internal structure, namely management. Managerial accounting places the focus on the needs of management and doesn't necessarily follow Generally Accepted Accounting Principles (GAAP) accounting rules. The Chartered Institute of Management Accountants developed a set of accounting principles, known as Global Management Accounting Principles (GMAP) that relate directly to this discipline. Managerial accounting works to improve the company's administration, enhance its profit, and provide management with financial reports that influence planning and budgets. Managerial accounting includes conducting internal examinations through cost to volume profit (CVP) or break-even point (BEP) analysis. Cost accounting, considered a subset of management accounting, focuses on evaluating costs. This branch considers all factors of manufacturing to accurately determine the cost of a project or venture. Cost accounting analyzes manufacturing costs to prepare and present reports that inform decision-makers on how to reduce cost, or when to spend more. It monitors projects for waste and cost control. Cost accounting regularly analyzes actual costs over budget to determine future monetary actions. OTHER FIELDS OF ACCOUNTING Auditing is a branch of accounting that is usually done internally and externally. Auditors examine and monitor a business for accurate reporting, compliance with tax laws and regulations, and financial integrity. There are two specializations for auditors: EXTERNAL AUDITOR i. State or federal auditing takes place with an independent, outside auditor who examines a company's financial statements for accuracy. Auditing complies with GAAP and evaluates the adequacies of a company's internal controls. External auditors may test the company's segregation of duties, policies, authorizations and other management controls for efficacy and integrity. INTERNAL AUDITOR i.Internal auditing identifies and prevents tax issues or prepares the business for an outside audit. Auditors in this branch are typically chosen by shareholders so their role doesn't present a conflict of interest and ensures their objectivity. Tax accounting follows state and federal tax rules during tax planning or in the preparation of tax returns. This branch reports on the effect of taxes on a business and may offer advisory services on minimizing taxes or the consequences of tax decisions.  Tax accountants calculate income and other taxes depending on the structure of the business. Since taxes and income brackets vary from entity to entity, tax accounting is well-versed in tax laws surrounding sole proprietorships, corporations and limited liability corporations (LLC). Fiduciary accounting handles the accounts entrusted to the person responsible for custody or management of property. The branch tracks and reports receipts and disbursements from accounts to ensure proper fund allocations and is frequently used by guardians or custodians. Fiduciary accounting typically serves: Trusts, Receiverships, Estates. Project Accounting - Some industries, such as construction or engineering, work on large projects that require a dedicated accountant. Project accounting falls under the project management umbrella. This accounting analyzes costs and prepares reports at regular intervals to track a project's financial progress. It provides historical data to inform future project decisions including cost-saving measures or budget adjustments. Forensic accounting, also known as legal accounting, handles legal matters related to bankruptcy, fraud or mismanagement. This branch conducts investigations for court and litigation cases, calculates damages, and oversees dispute resolutions. Forensic accounting serves: Lawyers, Law enforcement, Insurance companies, Government organizations, Financial institutions. Fund accounting works with non-profit organizations (NPO) to ensure the correct and accurate allocation of funds. Fund accountants ensure NPO funds go where intended through the separation and distribution of funds according to the company's policies or in accordance with laws governing NPOs. Fund accounting is frequently used by: Charities, Churches, Educational institutions, Hospitals, Government agencies, Clubs Government accounting oversees and records state and federal fund allocation and disbursement. This can include aspects of social accounting and the measurement of cost to humans as it relates to federal land use, climate change or the use of welfare funds. Government accounting tracks the movement of money through various agencies and ensures budget requirements are kept or met. Government accountants work in state and federal programs such as healthcare, housing and education. Political campaign accounting oversees the development and implementation of a political campaign's finance systems. This may include transaction accounting or donation monitoring to ensure compliance with federal and state laws governing political campaigns. Political campaign accounting is practiced in local, state or nationwide political races. International accounting - As global business expands, so do international markets and the need for international accounting. This branch of accounting serves to learn laws and regulations in other countries in order to conduct business honestly and fairly. International accountants not only follow GAAP, but are well-versed in International Financial Reporting Standards (IFRS), the accounting standard followed in most global economies. WHAT IS GAAP? Generally accepted accounting principles (GAAP) comprise a set of accounting rules and procedures used in standardized financial reporting practices. By following GAAP guidelines, compliant organizations ensure the accuracy, consistency, and transparency of their financial disclosures. Publicly traded companies, businesses operating in regulated industries, registered nonprofit groups, government agencies, and organizations that receive federal funding awards from the U.S. government are required to follow GAAP. Other businesses may also adopt the standards on a voluntary basis. HISTORY OF GAAP Without regulatory standards, companies would be free to present financial information in whichever format best suits their needs. With the ability to portray a company's fiscal standing in a favorable light, investors could be easily misled. The Great Depression in 1929, a financial catastrophe that caused years of hardship for millions of Americans, was primarily attributed to faulty and manipulative reporting practices among businesses. In response, the federal government, along with professional accounting groups, set out to create standards for the ethical and accurate reporting of financial information. HISTORY OF GAAP According to accounting historian Stephen Zeff in The CPA Journal, GAAP terminology was first used in 1936 by the American Institute of Accountants. Federal endorsement of GAAP began with legislation like the Securities Act of 1933 and the Securities Exchange Act of 1934, laws enforced by the U.S. Securities and Exchange Commission (SEC) that target public companies. Today, the Financial Accounting Standards Board (FASB), an independent authority, continually monitors and updates GAAP. All 50 state governments prepare their financial reports according to GAAP. The Governmental Accounting Standards Board (GASB) estimates that about half of the states officially require local and county governments to adhere to GAAP. WHY ACCOUNTING IS IMPORTANT? IMPORTANCE OF ACCOUNTING Accounting is a back-office function where employees may not directly interface with customers, product developers, or manufacturing. However, accounting plays a key role in the strategic planning, growth, and compliance requirements of a company. IMPORTANCE OF ACCOUNTING Accounting is necessary for company growth. Accounting is necessary for funding. Accounting is necessary for owner exit. Accounting is necessary to make payments. Accounting is necessary to collect payments. Accounting may be required. FUNDAMENTAL PRINCIPLES OF ACCOUNTING FUNDAMENTAL PRINCIPLES OF ACCOUNTING Integrity A professional accountant should not only be honest but should also be fair, straightforward, and truthful in performing services for his or her clients. Objectivity Professional accountants should be unequivocal in rendering opinions without prejudice, bias, ambiguity, conflict of interest, or influence of others as they do their work Professional Competence and Due Care All professionals have the duty of care for the things that they are responsible for, and they must do so with utmost competence and due diligence. FUNDAMENTAL PRINCIPLES OF ACCOUNTING Confidentiality An exercise of discretion is expected of accountants since they are allowed to access sensitive information that is vital to the operation of the business. Professional Behavior Professionalism is reflected in how one conducts himself or herself in dealing with clients, in handling difficult situations, and in performing his or her duties. FUNDAMENTAL PRINCIPLES OF ACCOUNTING Technical Standards Professional accountants have to ensure that they are rendering services in accordance to the GAAP (generally accepted accounting principles) and in compliance with laws and statutes where they are practicing. Professional Skepticism The International Auditing and Assurance Standard Boards (IAASB) states that, “the need for professional skepticism cannot be overemphasized” and that “adopting and applying a skeptical mindset is ultimately a personal and professional responsibility to be embraced by every auditor”.