Overview of Accounting

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. Accounting
Standard Council (ASC)

Accounting is the 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 results
thereof. American Institute of Certified Public Accountants (AICPA)

Accounting is the language of business.

Nature of Accounting:

1. Accounting is a service activity;

2. Accounting is an Art;
3. Financial in nature;
4. Systematic Process;
5. Information System

Key Functions of Accounting:

1. Recording: Documenting all financial transactions in a systematic manner.

2. Classifying: Organizing transactions into categories, such as assets, liabilities, revenues, and
expenses.

3. Summarizing: Compiling data into financial statements, such as the income statement, balance
sheet, and cash flow statement.

4. Interpreting: Analyzing financial data to make informed business decisions.

Users of Financial Information

1. Internal Users:

o Management/Owners: Uses financial data for strategic planning, performance

evaluation, and decision-making. They rely on accounting information to set goals,
forecast future performance, and implement controls.

2. External Users:

o Investors: Use financial statements to assess the profitability and risk of their investments.
They analyze data to make informed decisions about buying, holding, or selling equity.

o Employees: Interested in the financial stability of the organization as it impacts job

security, compensation, and career growth.

o Creditors/Suppliers: Banks and suppliers review financial information to determine the

creditworthiness of a business and its ability to repay loans and fulfill financial obligations.
 o Government: Ensure that businesses comply with financial reporting standards and
regulations.

o Customers: May use financial information to evaluate the stability and reliability of a
business, especially for long-term contracts or partnerships.

o Tax Authorities: Require accurate financial records to ensure proper tax calculation and
compliance with tax laws.

Branches of Accounting

1. Financial Accounting

• Purpose: Focuses on the preparation and presentation of financial statements (like the balance
sheet, income statement, and cash flow statement) that reflect the financial performance and
position of an entity as a whole.

• Audience: Primarily serves external stakeholders such as investors, creditors, regulators, and the
public.

2. Managerial Accounting (Management Accounting)

• Purpose: Provides internal management with the information needed for decision-making,
planning, and control. It focuses on budgeting, forecasting, and various financial analyses.

• Audience: Internal stakeholders, particularly managers and executives.

• Flexibility: Unlike financial accounting, it does not have to adhere to standardized principles and
can be tailored to meet the needs of the organization.

3. Cost Accounting

• Purpose: A subset of managerial accounting, it focuses on capturing the cost of production or

operations. It involves analyzing, tracking, and controlling costs to improve efficiency and
profitability.

4. Tax Accounting

• Purpose: Focuses on preparing tax returns and planning for future tax obligations. It involves
understanding and applying tax laws to minimize tax liability while ensuring compliance.

• Audience: Both internal (management) and external (tax authorities).

• Standards: Governed by tax laws and regulations specific to each country or jurisdiction.

5. Auditing

• Purpose: Involves the independent examination and verification of financial statements to ensure
accuracy and compliance with accounting standards and regulations.
 • Types:

o Internal Auditing: Conducted by employees within the organization to ensure operational

efficiency and internal control.

o External Auditing: Performed by external auditors to provide an opinion on the fairness

of financial statements.

6. Governmental Accounting

a. Purpose: Deals with the accounting systems used by government agencies and public sector
entities. It focuses on budgeting, spending, and financial reporting to ensure public funds are used
appropriately.

Accounting Concepts & Principles

A. Basic Assumptions
1. Business Entity Concept: The business is treated as a separate entity from its owners for
accounting purposes.
2. Going Concern Principle: Assumes that a company will continue to operate indefinitely, and
its financial statements are prepared with this assumption in mind.
3. The Accounting Period Concept: This assumption states that businesses should report their
financial position, results of operations, and cash flows at regular intervals. These intervals
are typically monthly, quarterly, or yearly.
Two Accounting Period
1. Calendar Year – January to December
2. Fiscal Year – an accounting period of 12 months but not necessarily starts on
January
4. The Accrual Concept: Revenue and expenses are recognized when they are earned or
incurred, not necessarily when cash is received or paid.
B. Basic Principles

1. Matching Principle: Expenses should be matched with the revenues they help to generate in
the same period.

2. Full Disclosure Principle: All relevant financial information should be disclosed in the financial
statements and notes.

3. Cost Principle: Assets are recorded at their original cost, not their current market value.

C. Modifying Principles

1. Materiality Principle: Financial information is only significant if its omission or misstatement

could influence the economic decisions of users.

2. Consistency Principle: Once a company adopts an accounting method, it should continue to use
it consistently across periods unless a change is justified and disclosed.
 3. Prudence Principle (Conservatism): Revenues and assets are recognized only when there is a
high degree of certainty, while expenses and liabilities are recognized as soon as they are
reasonably possible.

These principles form the foundation of Generally Accepted Accounting Principles (GAAP) in the Philippine
International Financial Reporting Standards (PFRS) & Philippine Accounting Standard (PAS). They ensure
that financial reporting is reliable, comparable, and transparent.

Forms of Business Organization

1. Sole Proprietorship - is an unincorporated business that has one owner.

2. Partnership- By the contract of partnership two or more persons bind themselves to contribute
money, property or industry to a common fund, with the intention of dividing the profits among
themselves
3. Corporation – is an artificial being created by the operation of law, having the right of succession
and powers, attributes, and properties expressly authorized by law or incidental to its existence
4. Cooperative – are people-centered enterprises owned, controlled and run by and for their
members to realize their common economic, social and cultural needs and aspirations.

Types of business according to activities

1. Service business generates income by providing services (for a fee)

2. Merchandising – buying and selling of goods
3. Manufacturing – purchase raw materials & process it to finished goods

Introduction on Accounting Equation and Key Accounting Terms

Accounting Equation
Assets = Liabilities + Equity
This equation must always be in balance, ensuring that the company's financial statements are accurate
and complete.

Major Accounting Accounts

1. Assets: an asset is defined as any resource controlled by an entity as a result of past events, from which
future economic benefits are expected to flow to the entity.

Asset Accounts Examples:

Current Asset - Assets that are expected to be converted into cash, sold, or consumed within one year or
within the normal operating cycle of the business whichever is longer.

• Cash & cash equivalence – are cash or can be quickly converted to cash

• Accounts Receivable - refers to the money that a company is owed by its customers for goods or
services that have been delivered or used but not yet paid for

• Office Supplies - refer to the items and materials used in the daily operations of an office that are
not part of the company's inventory or fixed assets
 • Merchandise Inventory - refers to the goods and materials a company holds for the purpose of
resale or use in production.

• Short term pre-payments - are expenses that a company pays in advance for goods or services
that will be consumed or utilized within the next 12 months

Noncurrent Assets - These are long-term assets that are not expected to be converted into cash or used
up within one year.

• Long-term receivables - refer to amounts of money that a company expects to collect from
customers or other parties over a period longer than one year from the date of the balance sheet.
• Property, Plant and Equipment (PPE) - refers to a category of long-term tangible assets that a
company uses in its operations to produce goods or services and that are expected to provide
economic benefits over a period longer than one year
1. Land
2. Building
3. Equipment and Machineries
4. Furniture and Fixtures
• Investments in equity securities - refers to the acquisition of stocks, bonds, or other financial
instruments with the intention of earning returns in the form of dividends, interest, or capital
gains.
• Intangible Assets - are non-physical assets that have no physical substance but provide long-term
value to a company.
1. Goodwill: Represents the excess of the purchase price over the fair value of the net
identifiable assets acquired in a business combination. Goodwill is not amortized but is
tested annually for impairment.
2. Patents: Legal rights granted for inventions, providing exclusive rights to produce or sell
the invention for a certain period (usually 20 years).
3. Trademarks: Protects brand names, logos, or symbols that distinguish products or
services. They can be renewed indefinitely as long as they are in use.
4. Copyrights: Legal rights granted for original works of authorship, such as books, music,
and software, typically lasting for the life of the author plus 70 years.
• Long term pre-payments - refer to payments made in advance for goods or services that will be
received or utilized over a period extending beyond one year from the date of the balance sheet.

2. Liabilities: a liability is defined as a present obligation of an entity arising from past events, the
settlement of which is expected to result in an outflow of resources embodying economic benefits.

Current Liabilities - Obligations that are expected to be settled or paid within one year or within the normal
operating cycle, whichever is longer.

• Accounts Payable: Amounts owed to suppliers for goods or services purchased on credit.

• Short-term Notes Payable: Loans or debt that are due within the next yea

• Unearned Revenue - refers to money received by a company for goods or services that have not
yet been delivered or performed
 • Accrued Expenses: Expenses that have been incurred but not yet paid, such as wages or utilities.

• Other short-term Liabilities

Noncurrent Liabilities - These are obligations that are not expected to be settled within one year or the
operating cycle.

• Long term Notes Payable - refers to written promises to pay a specified amount of money at a
future date that extends beyond one year from the balance sheet date
• Bonds Payable - refers to long-term debt instruments issued by a company to raise capital. These
bonds represent a formal promise to pay a specified amount (the face value) at a future date (the
maturity date) along with periodic interest payments to bondholders.
• Deferred Tax Liabilities - refer to taxes that a company will owe in the future due to temporary
differences between its financial accounting and tax reporting.
• Oher Long term Liabilities

3. Equity: the owner's claim on the assets of the business after all liabilities have been deducted.

Equity Accounts

• Common Stock: Equity investment from shareholders.

• Retained Earnings: Cumulative net income retained in the business after dividends are paid.

• Paid-in Capital: Additional amounts paid by investors over the par value of the stock.

• Treasury Stock: Shares that were issued and later reacquired by the company.

• Revenue: the income generated from normal business operations, such as sales of goods and
services.

Capital

• Sole Proprietorship
1. Owners’ Capital
2. Owners’ Drawing
• Partnership
1. Partners’ Capital
2. Partners Drawings
• Corporation
1. Share Capital
2. Share premium
3. Retained Earnings

4. Revenue Accounts

1. Sales Revenue: Income from selling goods or services.

2. Service Revenue: Income from providing services.

3. Interest Income: Income earned from interest-bearing accounts or investments.

 4. Rent Revenue: Income from renting out property.

5. Expenses: The costs incurred in the process of earning revenue.

Expense Accounts

1. Cost of Goods Sold (COGS): Direct costs attributable to the production of the goods sold by the
company.

2. Salaries and Wages: Compensation paid to employees.

3. Rent Expense: Payments made for renting property or equipment.

4. Utilities Expense: Costs of utilities such as electricity, water, and gas.

5. Depreciation Expense: The allocation of the cost of tangible assets over their useful lives.

6. Insurance Expense: Costs of insurance premiums.

7. Supplies Expense: Costs of supplies used in the operation of the business.

8. Interest Expense: Costs incurred on borrowed funds.

9. Advertising Expense: Costs incurred for promoting the company’s products or services.

Chart of Accounts – is a listing of the names of the accounts that a company has identified and made
available for recording transactions

Books of Accounts

1. General Journal – a book of account where all transactions are recorded. It is called the
book of original entry.
2. General Ledger – a book of account where all transactions are classified based on their
account title. It is called the book of final entry.
3. Special Journal – journal designed for transactions that are repetitive and recurring, in
which general journal is inefficient
4. Subsidiary Ledger -are ledger that supports the general ledger