ACCOUNTING -the medium of communication is through

financial reports.
Accounting Standard Council -it interprets and communicate the true
-a service activity status of the business in terms of its operating
-its function is to provide quantitative information, results and financial condition.
primarily financial in nature, about economic entities, Profitability- is the increase in capital as a
that is intended to be useful in making economic result of business operations.
decision. Liquidity- the available funds to finance the
Service- intends to supply financial reports to be business operation.
used be economic decision makers. Solvency- the ability of the business to pay its
Economic decision making- the main reason why long-term obligations to others.
accounting records and reports are prepared. Stability- the ability of the business to sustain
American Institute of Certified Public its long-term profitability and cash flow.
Accountants Capital Structure- the amount of borrowed
-the art of recording , classifying, and summarizing in capital and owner’s capital are invested in the
a significant manner in the terms of money business.
transactions and events in which are in part at least Financial Flexibility- the ability of the
of financial character and interpreting the results business to have excess cash for investment
thereof. opportunities and other uncertainties.
American Accounting Association 4. The Eyes of the Business
-the process of identifying, measuring, and Bookkeeping records- initial part of
communicating economic information to permit accounting activities. It enables the owner of
informed judgments and decisions by users of the a business to check his financial progress.
information. Accountants- economic detectives.
Process- through accounting cycle to summarize the Auditing- verifies the truthfulness of the
voluminous and repetitive business transactions into financial reports concerning the business
organized and understandable financial reports. results of operation and financial condition.
Information system- financial reports then turned
over to decision makers. Functions of Accounting
Nature of Accounting
1. A service activity Primary Function- prepare financial reports and
-provides assistance through financial provide them to economic decision makers.
reports. Basic Function- the process of identifying,
-helps users to understand financial reports measuring, and communicating economic
from which to draw sound economic information to permit informed judgments and
decisions. decisions by users of the information.
Economic Entities- they need financial Advanced or critical Function- (audit function) to
report to evaluate r not to see if they are test the reliability of the financial reports.
performing well or not. Purpose of Accounting
2. A Process, an Art, and a Discipline -to help financial users see the true picture of the
-involves identifying, measuring, and business.
communicating economic information to
effect informed economic judgment. Objectives of Accounting
Process- to follow certain guidelines. -to provide useful information for economic decision
Art- expressing of ideas, knowledge, making.
information, and critical thinking. a. to ascertain the results of the business operations
b. to ascertain the financial position of the business
3. The Language of Business
c. to assist financial users in predicting the c. Managerial Advisory Services
enterprise’s financial capacity regarding future cash -gives financial advice to different companies
flows, financial conditions and results of operation. -operations and finance clients
- to asses if the business earned profit or suffered loss -consulting services
during the accounting period. Private Accounting
Income Statement- contains all the revenues and -internal part of accounting.
expenditures of the business for a certain period. -they are part of a certain company.
Statement of Financial Position (Balanced Sheet) a. Financial Accounting
Assets – Liabilities= Owner’s Equity -record/ classify business transactions that performs
-know the financial condition. to the preparation of the financial statement.
History of Accounting i. Balance Sheet
Cradle Civilization ii. Income Statement (operating results)
-started in Mesopotamia around 3600 BC iii. Cashflow Statement
-they used clay tablets. b. Internal Auditing
Double-Entry System -working in a specific company
-it has Italian influence in the 13th to 15th century -deals with determining the operational efficiency of
Genoa- has the oldest double-entry books (Massari the company.
Treasury Officials) Ledgers of Commune of Genoa) c. Tax Accounting
1340. -preparations of tax returns (company tax)
Florentine Method- Journal Entries -to minimize the impact of tax in the firm.
Venetian Method- Ledger Postings d. Cost Accounting
Luca Pacioli (1447-1517) -inventory records of all the supply expenses
-Father of Accounting incurred by the company.
-wrote the Summa de Arithmetica the bible of -used for planning and controlling purposes.
accounting.(1494) e. Budgeting
3 Important Books of Record -management of cash
1. Memorandum Book- for all information and -predicting monetary objectives in the future period
transactions -allocating=dividing
2. Journal Book- for original entry f. Accounting System Design
3. Ledger Book- for final entry(posting) - evaluation of the company’s control system
-designs the accounting forms
CHED Memo Order No. 3 s.2007 -accumulation of accounting data
-indicates the 4 fields of accounting g. International Accounting
-specialize on international transaction of a business.
Branches of Accounting h. Not-for-Profit Accounting
- their ultimate purpose is to help the community
Public Accounting i. Socio-Economic Accounting
-perform service for a fee - concerns the measurement of the impact of the
-intended for public business in helping the society.
-employee of your own company Government Accounting
Branches of Accounting under Public -custody of government funds
a. External Auditing Accounting Education
-inspect or determine financial statements -involves teaching accounting, taxation, and some
 Rectify errors business subjects.
 Verifying the financial statements Chapter III: Users of Accounting Information
 Correcting errors -can be classified based on the extent of their
 Issues that have problems will be participation in the affairs of the business.
bringing to the Auditor. Internal Users
b. Tax Services -direct access to the financial statement
-prepares the clients income tax return, business, and -internal financial reports are usually prepared
tax transfers. External Users
Income tax- earnings of individuals/employee -do not own the business
Transfer tax- the tax of the original owner will be -no direct access to the management of the business.
transferred to the buyer. - uses the financial statements to satisfy some of their
Tax- is the life blood of the government. different needs.
 Forms of Business Operations
Business
-any economic activity conducted primarily for profit.
The Financing Group and Public Group -to supply goods and services to earn profit or
a. Investors income.
-to assess the risk investments portfolio 1. Sole Proprietorship
-to help them determine whether they should -business entity owned by one person
buy, hold, or sell their investments -called as a sole proprietor
-to assess their return on investment -ownership can’t be transferred.
b. Employees -ownership is different from property.
-to determine the employer’s stability and Advantages
profitability -easiest to start and set up
c. Lenders -needs few legal requirements.
-to determine whether the borrowers can pay -only one owner decides for the business.
their loans and interest attached to them -all profits are for the owner.
when due. -the owner is the one being taxed.
d. Suppliers and other trade creditors -easy to dissolve.
-suppliers use the financial statements of Disadvantage
their customer to determine the continuity of -unlimited liability, the owner is liable for the
the latter’s business. businesses’ debts
-debts owed to them will be pad when due. -limited resources (capital, managerial skills and etc.)
e. Customers -all losses are borne by owner
-to assess the latter’s continuity in business -limited life, automatically terminated due to owner’s
because some customers are dependent on death, insanity, or imprisonment.
the existence of their suppliers to insure the
availability of supplies that will sustain their 2. Partnership
business operation. -founded through trust and confidence which is
f. Government and its agencies called fiduciary relationship
-financial statements of an enterprise for -owned by two or more persons that are called
statistics, income taxes, and other regulatory partners.
policies. -agreed to contribute money, property, and industry
g. Public to a common fund.
-providing information for the trends and -dividing the profits among themselves.
recent developments in the prosperity of the -register it to Securities and Exchange
enterprise and the range of its activities. Commission.
Advantages
-easy to form, by mere agreement
-joint resources
-lesser government supervision
-tax-exempt if professional, but subject to tax
corporate tax if commercial partnership.
Disadvantages
-unlimited liability
General partnership- invest money and
personal property. Can be liable for the
business debt.
Limited Partnership- invest money only.
-all partners may be held liable for the action of one
partner.
-consensual and restricted transfer of ownership.
-limited life, disagreement or change of partner may
dissolve the partnership. Incapacity, insanity, or
death of the partner terminates it.

3. Corporation
-registered as an artificial person under the Job: prepare financial reports
operation of the law. - to draw sound, consistent and profitable economic
-has the right of succession decisions.
-it has power, attributes, and properties expressly
- a user must have a basic knowledge of concepts,
authorized by the law or incident to its existence.
-powered by the legislative department convections and principles which serve as guidelines
-special or general incorporation law in the practice accountancy.
-Board of Directors are the elected group of - use over the years
individual that represent shareholders. Accounting Concepts
-income received by the shareholders are called - important assumptions or ideas which accountants
dividends. observe in recording business transactions in the
- Juridical persons- the personality given by the law
books of accounts.
to corporations
Profit corporation- issues shares equity to - refer to an assumption, or an abstract idea that
shareholders. governs accounting practice.
Nonprofit-does not issue shares equity. - Bedrock of Accounting/ Postulates
-incorporators, are founders, composed of -separate entity -accrual
stockholders. - going concern - monetary unit
Advantages - time period
-limited liability, shareholders are not legally liable
Accounting Conventions
for the corporate unpaid liabilities.
-power of succession, it can continue to exist inspite -accounting practices that practitioners accept
of death, withdrawal, or changes of officers and because of their long existence and use.
shareholders. -example is debit and credit or dual aspect concept.
-unrestricted power of ownership -a value received has a corresponding value given.
-renewable and perpetual life, a corporation may Accounting Principles
renew its life every 50 years. -actions that will best accomplish the objectives of
Disadvantages
accounting.
-only the BOD and other authorized officers can bind
contracts. -a doctrine, a basis of all other rules, procedures and
-shareholders have limited access and control over methods used in accounting practice.
management and operations. -continually evolving and developing to meet the
-more stringent government supervision and changing needs and conditions.
restrictions. The Generally Accepted Accounting Principles
-regular tax is 30% of the income rate. -governing body of accountancy formulated standard
-if incurred loss in its 4th year of operation it will have
principles, assumptions, and procedures.
a tax of 2% in its gross income.
-guide in measuring, recording, and reporting
Primary Activities of Business financial activities of the enterprise.
Servicing -developed based on experience, research, and
-renders service to earn revenue careful study.
Merchandising Objectve: to fairly present financial statements in
-engages in the buying and selling of goods.
conformity with GAAP.
-earnings are primarily derived from the markup
(profit) it adds to the cost of goods it sells to the Basic Accounting Concepts Assumptions
customers. -foundation for the rational and systematic
Wholesale- large formulation of principles and the development of
Retail- small procedures for the application of such principles.
Manufacturing Underlying Assumptions
-raw materials to finish goods that are sold at selling a. Accrual Basis
price.
-financial statements except statement of
Hybrid
-the combination of servicing, merchandising, and cash flow.
manufacturing.
Accounting Concepts, Conventions and Principles
 -net profit of the business is the difference of -it shows the financial effects of transactions and
the revenue and expense for an accounting other events by grouping them into broad classes
period. according to their economic characteristics. Also
b. Going Concern called as elements of financial statements.
-accountants assume that the business entity 1. Statements of Financial Position
will continue operating indefinitely. -formerly known as Balance Sheet.
Objectivity- must be both definite and -shows the financial position of the business.
verifiable -the elements are assets, liabilities, and owner’s
Historical cost- helps attain objectivity. Only equity.
purchased price as the value of an asset. 2. Income Statement
Accounting Entity -shows the operating performance of the business.
-business transaction -the elements are revenue and expenses.
-personal and business transaction must not 3. Statement of Change in Equity
combine. It can create confusion and -shows the movements in the various elements of the
unorganized report of an accountant. owner’s capital
-also called as separate entity concept or Basic components of this statement.
business entity concept. a. Owner’s investments to the business
Inherent Assumptions b. Profit or loss for the period
a. Monetary Unit c. Owner’s personal withdrawals
-assumptions on quantifiability and peso d. Prior period adjustments
stability. 4. Cash flow statements
Quantifiability- common unit of -changes of cash and cash equivalents.
measurement. (money) Currency used in Cash Equivalent –short-term, easy to convert in cash
a country they’re working for. Components of cash flow statement
Peso stability- accountants assume that a. Operating- the inflows and outflows of cash
the monetary unit retains its purchasing from the normal operating activities of the
power regardless of fluctuation in money business.
value. b. Investing- the inflows and outflows of cash
b. Time Periods from the sale or purchase of assets other than
-accountants divide economic life of the inventory.
business into relatively short period of c. Financing- the inflows and outflows of cash
time. from the owners and creditors of the
Importance: users of financial enterprise.
information need to make decisions at 5. Notes to the financial statements
many points in the life of business. -to achieve proper understanding of the financial
-also called as accounting period. reports.
i. Calendar year Definition, Classification and Examples of
-12 month period. Starts in January 1 to Accounts
December 31. Real Accounts
ii. Fiscal Year -assets, liabilities, and owner’s equity.
-also composed of 12 months but starts -reported in the SFP.
any month of the year other than January. The Assets Accounts
iii. Interim Period Assets
-business period within an accounting -owned and controlled by the enterprise.
period. Physical form- cash and inventory
Basic Financial Statements and their Elements No physical form- patents and copyrights.
Financial statements -short term in nature.
-formal reports prepared by accountants.
Current Assets are: SSS Premium Payable- representative amount
1. It is a cash or cash equivalent which is not of employee and employer contribution to SSS
restricted for current use. which are not yet remitted.
2. It is expected to be realized, is held for sale or Withholding Tax Payable- unpaid tax to the BIR
consumption in the normal course of the
enterprise’s operating cycle. The Owner’s Equity Accounts
3. It is held primarily for trading purposes or for Owner’s Equity- residual amount after deducting
short-term and expected to be realized within liabilities from assets.
12 months of the SFP date. -capital contribution and withdrawals by the
Operating cycle of an enterprise owner.
-time between the acquisition of materials Owner’s Capital= Sole Proprietorship
entering into a process and its realization in cash Partners’ Capital= Partnership
or an instrument that is readily convertible into Shareholders’ Equity= corporation
cash. Drawing- amount taken by the owner from the
Cash-on hand monetary value business
Accounts Receivable- oral promise to the Nominal Accounts- comprise the element of the
business. Income Statement
Notes Receivable- written promise to the -closed or put to zero balance at the end of the
business accounting period
Accrued Interest Receivable- interest earned Nominal Accounts- earning portion of the firm
on note receivable. Sales- sale of goods of a trade or a merchandising
Inventories- process of production sale. business.
Prepaid Supplies- materials used in the office thet Service Income- earnings from service
are unused. Professional Fees- earning from service by a
Noncurrent Assets professional servicing firm to its client.
-long-term in nature Interest Income- earning from time value of
Land- site owned by the business money derived from promissory notes.
Building- used in the operation of the business Gain on Sale of other Assets- earning from
Furniture and Fixture- long-lived items used in selling assets of the business.
the business
Equipment- machinery used in a business. The Expense Accounts
Expenses- cost incurred in conducting the
The Liability Accounts business activities.
Liabilities Cost of Sales- value of merchandise sold
-present obligations to pay cash or cash Supplies Expense- supplies consumed
equivalents by an entity. Insurance Expense- amount of insurance policy
Current Liability incurred during the current period
1. It is expected to be settled in the normal Taxes and License Expense- cost of paying the
course of the enterprise’s operating cycle. tax and renewing or registering the business.
2. It is due to be settled within the 12 months of Accrued income- income which has been earned but
the Statement of Financial Position date. not yet received.
Accounts Payable- oral promise of the business Accrued expense- expense which has been incurred
but not yet paid.
to the creditor
Accrued revenue- a sale that has been recognized by
Notes payable- written promise of the business the seller, but which has not yet been billed to the
to the creditor customer.
Accrued Interest payable- interest incurred to
the notes payable