FUNACC MIDTERM REVIWER

LESSON 1:INTRODUCTION TO ACCOUNTING

What is Accounting?

Accounting is the process of IDENTIFYING, RECORDING, and COMMUNICATING economic events of an organization to
interested users.

Nature of Accounting

Accounting is a systematic process. Process is a series of actions that produce something or that lead to a particular result. As
such, the performance of the four aspects of accounting, which are recording, classifying, summarizing, and interpreting, leads
to communicating to its users the relevant financial information needed by the parties interested.

Accounting is an art.

Art is skill acquired by experience, study, or observation. It is also defined as an occupation requiring knowledge or skill. The
four aspects of accounting require both knowledge and skill through experience, study, or observation as a means to produce
the key end product which are the financial reports.

Accounting is a service activity.

Service is the occupation or function of serving. Activity is something that is done as work or for a particular purpose.
Combining the meaning of the two words, accounting is a work or occupation for serving a particular purpose. Hence, since its
purpose is to provide financial information, the data that it will process in terms of the four aspects of accounting should be
expressed in monetary terms.

Function of Accounting in Business

● Accounting is the means by which business information is communicated to business owners and stakeholders.

● The role of accounting in business is to provide information for managers and owners to use in operating the business.

● In addition, accounting information allows business owners to assess the efficiency and effectiveness of their business
operations.

● Prepared accounting reports can be compared with industry standards or to a leading competitor to determine how the
businessis doing.

● Business owners may also use historical financial accounting statements to create trends for analyzing and forecasting future
sales.

History of Accounting

Accounting is as old as civilization itself. It has evolved in response to various social and economic needs of men.
Accounting started as a simple recording of repetitive exchanges. The history of accounting is often seen as
indistinguishable from the history of finance and business.

Evolution of Accounting

The Cradle of Civilization

Around 3600 B.C., record-keeping was already common from Mesopotamia, China, and India to Central and South America. The
oldest evidence of this practice was the “clay tablet” of Mesopotamia which dealt with commercial transactions at the time
such as listing of accounts receivable and accounts payable.

14th Century - Double-Entry Bookkeeping

The most important event in accounting history is generally considered to be the dissemination of double entry bookkeeping by
Luca Pacioli (‘The Father of Accounting’) in 14th century Italy. Pacioli was much revered in his day, and was a friend and
contemporary of Leonardo da Vinci. The Italians of the 14th to 16th centuries are widely acknowledged as the fathers of
modern accounting and were the first to commonly use Arabic numerals, rather than Roman, for tracking business accounts.
Luca Pacioli wrote Summa de Arithmetica, the first book published that contained a detailed chapter on double-entry
bookkeeping.

French Revolution (1700s)

The thorough study of accounting and development of accounting theory began during this period. Social upheavals affecting
government, finances, laws, customs and business had greatly influenced the development of accounting.

The Industrial Revolution (1760-1830)

Mass production and the great importance of fixed assets were given attention during this period.

19th Century – The Beginnings of Modern Accounting in Europe and America

The modern, formal accounting profession emerged in Scotland in 1854 when Queen Victoria granted a Royal Charter to the
Institute of Accountants in Glasgow, creating the profession of the Chartered Accountant (CA). In the late 1800s, chartered
accountants from Scotland and Britain came to the U.S. to audit British investments. Some of these accountants stayed in the
U.S., setting up accounting practices and becoming the origin of several U.S. accounting firms. The first national U.S. accounting
society was set up in 1887. The American Association of Public Accountants was the forerunner to the current American
Institute of Certified Public Accountants (AICPA).In this period rapid changes in accounting practice and reports were made.
Accounting standards to be observed by accounting professionals were promulgated. Notable practices such as mergers,
acquisitions and growth of multinational corporations were developed. A merger is when one company takes over all the
operations of another business entity resulting in the dissolution of another business. Businesses expanded by acquiring other
companies. These types of transactions have challenged accounting professionals to develop new standards that will address
accounting issues related to these business combinations.

The Present - The Development of Modern Accounting

Standards and Commerce

The accounting profession in the 20th century developed around state requirements for financial statement audits. Beyond the
industry's self-regulation, the government also sets accounting standards, through laws and agencies such as the Securities and
Exchange Commission (SEC). As economies worldwide continued to globalize, accounting regulatory bodies required accounting
practitioners to observe International Accounting Standards. This is to assure transparency and reliability, and to obtain greater
confidence on accounting information used by global investors. Nowadays, investors seek investment opportunities all over the
world. To remain competitive, businesses everywhere feel the need to operate globally. The trend now for accounting
professionals is to observe one single set of global accounting standards in order to have greater transparency and
comparability of financial data across borders.

LESSON2: BRANCHES OF ACCOUNTING

Branches of Accounting

Accounting is divided into several branches to better serve the needs of different users with varying information needs. These
branches sometimes overlap and they are often closely intertwined.

• Financial Accounting • Tax Accounting

• Management Accounting • Cost Accounting

• Government Accounting • Accounting Education

• Auditing • Accounting Research

Financial Accounting

Financial accounting is the broadest branch and is focused on the needs of external users. Financial accounting is primarily
concerned with the recognition, measurement and communication of economic activities. This information is communicated in
a complete set of financial statements. It is assumed under this branch that the users have one common information need.
Financial accounting conforms with accounting standards developed by standard-setting bodies. In the Philippines, there is a
Council created to set these standards.

Examples of these financial reports include:

• the balance sheet (statement of financial condition)

• income statement (the profit and loss statement, or P&L)

• statement of cash flows

Financial accounting is primarily concerned with processing historical data. Although financial accounting generally meets the
needs of external users, internal users of accounting information also use these information for their decision-making needs.

Management (or Managerial) Accounting

Management accounting emphasizes the preparation and analysis of accounting information within the organization. The
objective of managerial accounting is to provide timely and relevant information for those internal users of accounting
information, such as the managers and employees in their decision-making needs. Oftentimes, these are sensitive information
and is not distributed to those outside the business - for example, prices, plans to open up branches, customer list, etc.
Managerial accounting involves financial analysis, budgeting and forecasting, cost analysis, evaluation of business d cisions and
similar areas.

Government Accounting

Government accounting is the process of recording, analyzing, classifying, summarizing, communicating and interpreting
financial information about the government in aggregate and in detail reflecting transactions and other economic events
involving the receipt, spending, transfer, usability and disposition of assets and liabilities. This branch of accounting deals with
how the funds of the government are recorded and reported. Government accounting deals with these transactions, the
recording of inflow and outflow of funds of the government.

Auditing

There are two types of auditing: external and internal auditing. External auditing refers to the examination of financial
statements by an independent CPA (Certified Public Accountant) with the purpose of expressing an opinion as to fairness of
presentation and compliance with the generally accepted accounting principles (GAAP). The audit does not cover 100% of the
accounting records but the CPA reviews a selected sample of these records and issues an audit report.

Internal auditing deals with determining the operational efficiency of the company regarding the protection of the company’s
assets, accuracy and reliability of the accounting data, and adherence to certain management policies. It focuses on evaluating
the adequacy of a company's internal control structure by testing segregation of duties, policies and procedures, degrees of
authorization, and other controls implemented by management.

Tax Accounting

Tax accounting helps clients follow rules set by tax authorities. It includes tax planning and preparation of tax returns. It also
involves determination of income tax and other taxes, tax advisory services such as ways to minimize taxes legally, evaluation of
the consequences of tax decisions, and other tax-related matters.

Cost Accounting

Sometimes considered as a subset of management accounting, cost accounting refers to the recording, presentation, and
analysis of manufacturing costs. Cost accounting is very useful in manufacturing businesses since they have the most
complicated costing process. Cost accountants also analyze actual and standard costs to help managers determine future
courses of action regarding the company’s operations. Cost accounting will also help the owner set the selling price of his
products. For example, if the cost to produce one can of sardines is PHP50, then the owner can set the selling price at PHP60.

Accounting Education

This branch of accounting deals with developing future accountants by creating relevant accounting curriculum. Accounting
professionals can become faculty members of educational institutions. Accounting educators contribute to the development of
the profession through their effective teaching, publications of their research and influencing students to pursue careers in
accounting. Accounting teachers share their knowledge on accounting so that students are informed of the importance of
accounting and its use in our daily lives.

Accounting Research

Accounting research focuses on the search for new knowledge on the effects of the economic events on the process of
summarizing, analyzing, verifying, and reporting standardized financial information, and on the effects of reported information
on economic events. Researchers typically choose a subject area and a methodology on which to focus their efforts. The subject
matter of accounting research may include information systems, auditing and assurance, corporate governance, financials,
managerial, and tax.Accounting research plays an essential part in creating new knowledge. Academic accounting research
"addresses all aspects of the accounting profession" using a scientific method. Practicing accountants also conduct accounting
research that focuses on solving problems for a client or group of clients. The Accounting research helps standard-setting
bodies around the world to develop new standards that will address recent issues or trend in global business.

LESSON 3:USERS OF ACCOUNTING INFORMATION

There are two broad categories of users of financial information: INTERNAL USER & EXTERNAL USERS

Internal users

Internal users of accounting information are those individuals inside a company who plan, organize, and run the business.
These users are directly involved in managing and operating the business. These include marketing managers, production
supervisors, finance directors, company officers and owners. Accounting information is presented to internal users usually in
the form of management accounts, budgets, forecasts and financial statements. This information will support whatever
decision of the internal users.

Management

Information need: income/earnings for the period, sales, available cash, production cost

Decisions supported: analyze the organization's performance and position and take appropriate measures to improve the
company results. sufficiency of cash to pay dividends to stockholders; pricing decisions

Employees

Information need: profit for the period, salaries paid to employees

Decisions supported:job security, consider staying in the employ of the company or look for other employment opportunities

Owners

Information need: profit or income for the period, resources or assets of the business, liabilities of the business

Decisions supported: considerations regarding additional investment, expanding the business, borrowing funds to support any
expansion plans.

External users

External users are individuals and organizations outside a company who want financial information about the company. These
users are not directly involved in managing and operating the business. The two most common types of external users are
potential investors and creditors. Potential Investors use accounting information to make decisions to buy shares of a company.

Creditors

(such as suppliers and bankers) use accounting information to evaluate the risks of granting credit or lending money. Also
included as external users are government regulatory agencies such as Securities and Exchange Commission (SEC), Bureau of
Internal Revenue (BIR), Department of Labor and Employment (DOLE), Social Security System (SSS), and Local Government
Units (LGUs).Creditors For determining the credit worthiness of an organization. Terms of credit are set by creditors according
to the assessment of their customers' financial health. Creditors include suppliers as well as lenders of finance such as
banks.Tax Authorities (BIR) For determining the credibility of the tax returns filed on behalf of a company.

Investors

For analyzing the feasibility of investing in a company. Investors want to make sure they can earn a reasonable return on their
investment before they commit any financial resources to a company.

Customers

For assessing the financial position of its suppliers which is necessary for them to maintain a stable source of supply in the long
term.

Regulatory Authorities (SEC, DOLE)

For ensuring that a company's disclosure of accounting information is in accordance with the rules and regulations set in order
to protect the interests of the stakeholders who rely on such information in forming their decisions.

SUMMARY OF THE DIFFERENCES BETWEEN INTERNAL AND EXTERNAL USERS

Internal users of accounting information are those who are involved in planning, organizing and running the business. They
need more detailed information on a timely basis in order to support their decisions. Examples of these internal users are
managers, employees and owners.

External users of accounting information are those individuals or organizations outside a company who are interested in its
financial information. Examples of these external users are potential investors, suppliers and government agencies.

LESSON 4:FORMS OF BUSINESS ORGANIZATIONS

Sole/single proprietorship

A form of business is owned by one person; the simplest, and the most common form of business organization that is not
separate from the owner. The business and the owner are inseparable.

Advantages of Sole/Single Proprietorship Disadvantages of Sole/Single

√ The owner keeps all the profits. √ The life of the business is limited to the life of the owner. Once
√ The owner makes all the decisions. the owner dies, the business will cease to operate under the name of the
proprietor.
√ It is easy to form and operate. √ The amount of capital is limited only by the wealth of the .
proprietor.
Partnerships

A form of business owned by two or more persons. The details of the arrangement between the partners are outlined in a
written document called articles of partnership. Profits are divided among partners based on their agreed sharing. The owner is
called a partner.

Advantages of Partnership Disadvantages of Partnership

√ Higher capital because two or more persons will √ The profits are divided among the partners.

contribute to the common fund. √ A partner can be held liable for the acts of the other partners.

√ It is easy to operate like a sole/single proprietorship √ In a lawsuit, the personal properties of the partners can be

held beyond their contributions and may be used to answer for

any liability of the partnership.

Corporation

A business organized as a separate legal entity (artificial person) under the corporation law with ownership divided into
transferable shares of stocks. It is the law (Corporation Code of the Philippines) that creates a corporation. It begins its
existence from the date the Articles of Incorporation is approved by the Securities and Exchange Commission (SEC).

√ The SEC (Securities and Exchange Commission) is the government agency primarily tasked to regulate private corporations in
the Philippines.

√ The owners are called stockholders or shareholders.

√ The word ‘Corporation/Incorporation/Corp./Inc.’ appears in the name of the entity.

√ The voting rights of a shareholder is generally based on the percentage of ownership.

√ The management of the business is delegated by the shareholders to the Board of Directors

√ The ownership is divided into shares and the value of one share may be denominated at a smaller amount, for example at
PHP10 per share.

√ The proof of ownership is evidenced by a stock certificate.

Advantages of Corporation

√ Can easily raise additional funds by selling shares of stocks to the public.

√ Shareholders are not personally liable for the debts of the corporation. The extent of their liability is limited to their equity
(ownership) in the corporation.
Disadvantages of Corporation
√ It is relatively complicated to set up.
√ Subject to several legal restrictions as listed in the Corporation Code of the Philippines.
Cooperatives

√ It is a duly registered association of persons with a common bond of interest, voluntarily joining together to achieve their
social, economic and cultural needs.
√ The owners are called members who contribute equitably to the capital of the cooperative.
√ The members are expected to patronize their products and services.
√ The word “cooperative” appears in the name of the entity.
√ This form of business organization is regulated by the
Cooperative Development Authority (CDA)
Advantages of Cooperative
√ Enjoys certain tax exemption privilege
√ Promotes the concept of sharing resources
Disadvantages of Cooperative
√ Limited distribution of surplus √ Requires continuous education programs for members.
√ The members have active and direct participation in the business of the cooperative
LESSON 5: TYPES OF BUSINESS ACCORDING TO ACTIVITIES

3 types of business organizations

√ Service Business
√ Merchandising Business
√ Manufacturing Business
Service Business

This type of business offers professional skills, advice and consultations.

Merchandising Business

This type of business buys at wholesale and later sells the products at retail. They make a profit by selling the merchandise of
products at prices that are higher than their purchase costs. This type of business is also known as "buy and sell".

Manufacturing Business

This type of business buys raw materials and uses them in making a new product, therefore combining raw materials, labour
and expenses into a product for sale later on.

Identify if it is a service, merchandising, manufacturing business or hybrid:

1. Provides services to customers
2. Sells goods to customers
3. Raw materials are available
4. Goods to be sold are purchased from a supplier
5. Goods to be sold are produced by the company itself
6. Supplies are used, no goods to be sold
7. Bakery
8. Barber shop
9. Cellphone store
10. Abenson appliances
LESSON 6:ACCOUNTING CONCEPTS AND PRINCIPLES
FUNDAMENTAL CONCEPTS
√ Entity Concept
√ Going Concern
√ Periodicity
Entity Concept
- regards the business entity as separate and distinct from its owners and from other business enterprises.
Going Concern
- is a concept which assumes that the business enterprise will continue to operate indefinitely.
Periodicity
- is the concept behind providing financial accounting information about the economic activities of an entity for specified time
periods. For reporting purposes, one (1) year is usually considered as one accounting period.

- Classification of Accounting Period:

- Calendar Year: a twelve-month period that starts on January 1 and ends on December 31

- Fiscal Year: a twelve-month period that starts on any month of the year other than January and ends twelve months after
the start period, e.g. starts May 1, 2022 and ends April 30, 2023
BASIC ACCOUNTING PRINCIPLES
√ Objectivity principle √ Monetary Unit Principle
√ Historical Cost √ Matching Principle
√ Adequate Disclosure √ Conservatism Principle
√ Materiality √ Accrual Principle
√ Consistency
Objectivity principle

- states that all business transactions that will be entered on the accounting records must be duly supported by verifiable
evidence.
Historical cost
- means that all properties and services acquired by the business must be recorded at their original acquisition cost.
Adequate disclosure
- states that all material facts that will significantly affect the financial statements must be indicated.
Materiality
- means that financial reporting is only concerned with information significant enough to affect decisions. This refers to the
relative importance of an item or event. An item is considered significant if knowledge of it would influence users of the
financial statements.

Consistency

- means that approaches used in reporting must be uniformly employed from period to period to allow comparison of results
between time periods. Any changes must be clearly explained.

Monetary Unit Principle

- means that money is used as a unit measurement and only business transactions that has monetary value are recorded using
a single currency.

Matching principle

- means that expenses are matched to the income earned during the period.

Conservatism principle

- means that in situations where there are two possibilities, choose the one that will have the least favorable effect on the
financial statement. This principle is also called Prudence.
Accrual principle

- states that income should be recognized at the time it is earned such as when goods are delivered or when services has been
rendered.

- states as well that expenses should be recognized at the time they are incurred such as when goods and services are actually
used and not at the time when the entity pays for those goods and services.

LESSON 8:TYPES OF MAJOR ACCOUNTS

DEFINITION OF TERMS
ASSETS are the resources owned and controlled by the firm.
LIABILITIES are obligations of the firm arising from past events which are to be settled in the future.
EQUITY or OWNER’S EQUITY are the owner’s claims in the business. It is the residual interest in the assets of the enterprise
after deducting all its liabilities.

INCOME is the increase in economic benefits during the accounting period in the form of inflows of cash or other assets or
decreases of liabilities that result in increase in equity. Income includes revenue and gains.

EXPENSES are decreases in economic benefits during the accounting period in the form of outflows of assets or incidences of
liabilities that result in decreases in equity.

CURRENT ASSETS are assets that can be realized (collected, sold, used up) one year after year-end date. Examples include Cash,
Accounts Receivable, Merchandise Inventory, Prepaid Expense, etc.

NON-CURRENT ASSETS are assets that cannot be realized (collected, sold, used up) one year-end date. Examples include
Property, Plant and Equipment (equipment, furniture, building, land), long term investments, etc.

TANGIBLE ASSETS are physical assets such as cash, supplies, and furniture and fixtures.

INTANGIBLE ASSETS are non-physical assets such as patents and trademarks.

CURRENT ASSETS

CASH is money on hand, or in banks, and other items considered as medium exchange in business transactions.

ACCOUNTS RECEIVABLE are amounts due from customers arising from credit sales or credit services.

NOTES RECEIVABLE are amounts due from clientssupported by promissory notes.

INVENTORIES are assets held for resale.

SUPPLIES are items purchased by an enterprise which areunused as of the reporting date

PREPAID EXPENSES are expenses paid in advance. They are assets at the time of payment and become expenses through the
passage of time.

ACCRUED INCOME are revenue earned but not yet collected.

SHORT-TERM INVESTMENTS are the investments made by the company that are intended to be sold immediately.

NON-CURRENT ASSETS

PROPERTY, PLANT AND EQUIPMENT are long-lived assets which have been acquired for use in operations.

LONG-TERM INVESTMENTS are the investments made by the company for long-term purposes

INTANGIBLE ASSETS are assets without a physical substance. Examples include franchise and copyright.

CURRENT LIABILITIES are liabilities that fall due (paid, recognized as revenue) within one year after year-end

date. Examples include Accounts Payable, Utilities Payable and Unearned Income.

NON-CURRENT LIABILITIES are liabilities that do not fall due (paid, recognized as revenue) within one year after year-end date.
Examples include Notes Payable, Loans Payable, Mortgage Payable, etc.

CURRENT LIABILITIES
ACCOUNTS PAYABLE is amounts due, or payable to, suppliers for goods purchased on account or for services received on
account.

NOTES PAYABLE are amounts due to third parties supported by promissory notes.

ACCRUED EXPENSES are expenses that are incurred but not yet paid (examples: salaries payable, taxes payable)

UNEARNED INCOME are cash collected in advance; the liability is the services to be performed or goods to be delivered in the
future.

NON-CURRENT LIABILITIES

LOAN PAYABLE is a liability account listing the amount of any loan debt you've taken out and haven't repaid.

MORTGAGE PAYABLE is the liability of a property owner to pay a loan that is secured by property.

OWNER’S EQUITY

CAPITAL is the value of cash and other assets invested in the business by the owner of the business.

DRAWING is an account debited for assets withdrawn by the owner for personal use from the business.

INCOME is the increase in resources resulting from performance of service or selling of goods.

√ increases equity

Example:

- Service revenue for service entities

- Sales for merchandising and manufacturing companies

EXPENSE is the decrease in resources resulting from the operations of business.

√ decreases equity

Example:

- Salaries Expense

- Interest Expense

- Utilities Expense

CHART OF ACCOUNTS - a listing of the accounts used by companies in their financial records

- helps to identify where the money is coming from and where it is going

- the foundation of the financial statements.