What is accounting?

Definition

- A service activity

- Function is to provide quantitative information, primarily financial by nature

- Can also be used on nonprofit entities, such churches, foundations

- Intended to be used in making economic decisions and reasonable choices among alternative courses
of action

- All definitions based on Accounting Standards Council

Revenue

- The amount that business earns, deducted by cost of goods sold.

Expenses

- What the company pays to do business operations

Nature of Accounting

1. Accounting is an art

- designed process that gives an output

2. Accounting is financial in nature

- talking about “how much”

3. Accounting is a process

- because of a step-by-step procedure

4. Accounting is an information system

- Record keeping that gives data to users

Functions of Accounting

1. Maintenance of systematic records

- Accounting is record-keeping

2. Communicates financial results

- Accounting is the language of the business

3. Meeting legal requirements

- Requirements to taxation authorities on Securities of Exchange Commissions

4. Protect the assets of the business

- The record keeping methodology can keep track

5. Assistance to management

History of Accounting

- Can be traced on ancient civilizations

- Found in Mesopotamia 7000 years ago

- The Roman Empire had access to detailed financial information seen in The Deeds of the Divine
Augustus

- Records of cash, commodities, and transactions were kept by Roman army

Father of Accounting (Luca Bartolomeo de Pacioli)

- Italian mathematician

- Franciscan friar

- Published in 1949 “Summa de arithmetica, geometria, proportioni, proportionalita

- Though a book of mathematics, there is a chapter for details of calculation recordings

- It describes accounting methods used by Italian merchants

Branches of Accounting (fields of accounting)

1. Financial Accounting

- Recording of business transactions up to financial statements

- Following the accounting process

- Focus on financial

- The classic

2. Management Accounting

- Managerial decision making

- The accountant will decide for the managers and owners of the company

- Financial accounting tackles about the totality of account of a financial statements, while management
accounting is the breakdown of account

- Understanding the reason on business operations, providing solutions to the management

3. Cost accounting

- Tackles the company’s cost, sacrifices, expenses of the company

- Cost of goods sold, cost of expenses

- Used for income statements (cost of goods sold) and management reports for decision making

- Used in both financial accounting and management accounting

4. Government accounting

- deals with receipt and disposition of public finance

- Deals with public funds (unfamously known as taxes)

- Classic step-by-step preparation like financial accounting

- The accountant will prove that the funds/taces were used appropriately

5. Auditing

- Checking and verification of business operation is appropriate

- Two kinds of auditing: internal auditing and external auditing

- Internal auditing: Checking the operations of a company if aligned with management policies
- External auditing: Verification if the financial statements is accurate and in line with financial reporting
framework, which were used by the users. External is called because it is a third-party (not employee) by
auditor.

- This is related to the BIG 4 accounting and auditing services: (1) SGV COS Vallejo and Company (2) RG
Manabe and Company/KPMG (3) East Alabama and Company Pricewaterhousecoopers (4) Nevada
Opera Company/Annoyance

6. Tax Auditing

- Computation of tax of the business

- Filing taxes

- How to properly report tax information

7. Accounting Education

- Teaching accounting and finance, ABM subjects

- Requirements: CPA license, Master’s degree in related field like Masters of Business Administration
and Masters of Accountancy

8. Accounting Research

- Creation of new knowledge in accountancy, - Development of accounting profession

- Two kinds of accounting research: (1) Academic, (2) Industrial/Economic

- Academic – related to academia, students, passing rate

- Industrial – New accounting methods, procedures, focus

Users of Accounting Information

Accounting Information provided:

1. Resources (found at Statement of Financial Position)

2. Obligations (found at Statement of Financial Position)

3. Profitability (found at Statement of Financial Performance)

4. Capital (found at Statement of Changes in Owner’s Equity)

5. Cash inflows and outflows (Statement of Cash Flow)

- inside of the company

- makes decisions

(1) Owners – for the capital and need for additional funding

(2) Managers – for planning and organizing firm, especially in terms of financial

2. External Users

- outside the company

(1) Investors – for them to know if the company is worthy to be invest

(2) Creditors – for them to know if the company can pay obligations, including interest, before or on
deadlines

(3) Customers – for them to know if the business will continue to prosper or be stable in the future, to
strengthen their loyalty to that company

(4) Employees (considered external because they do not make decisions) – for them to know if the
company that they’re in is stable

(5) Suppliers – for them to know if the business can pay the goods and services on time

(6) Tax authorities – for them to know if the company is complying to the tax regulations or paying tax
on time. They are the Bureau of Internal Revenue

(7) Government – for them to know if the business follows the rules and regulations, like salary

(8) General Public – for them to know the business trends

Forms of Business Organizations

1. Sole Proprietorship

- aka. Sole trader

- one owner

- easy to create or dismantle (due to lack of government involvement

2. Partnership

- contract between two or more persons to contribute money, property, and industry to a common fund
- divides the profit among themselves

3. Corporation

- artificial being created by operation of law

- there is a succession of power, attribute, and properties

- double taxation (income tax and tax to division to shareholders), independent management, and costs
more to form

4. Cooperatives

- people-centered

- run by their members

- to sustain their economic, social, cultural needs

MEASURING THE INCOME GENERATED IN THESE COMPANIES

1. Service

= Revenue – Operating Expenses

2. Merchandising and Manufacturing

= Revenue/Sales – Cost of Goods Sold – Operating Expenses

ACCOUNTING CONCEPTS AND PRINCIPLES

- The rules and guidelines in recording and doing accounting

- Based on Financial Accounting Standards Board (FASB)

- In Filipino, it is Philippine Financial Reporting Standards (PFRS) or Philippine Accounting Standards

- to maintain consistency and uniformity in reporting accounting information

Accounting Concepts
1. Economic Entity or Accounting Entity

- The personal transactions of the owner are separate from business transactions.

2. Accrual Basis of Accounting

- Revenue is recorded when earned (regardless of when the cash is received or paid)

- Expenses is recorded when it happens (regardless of when the cash is received or paid)

- Even if the revenue is received by the next following month but is expected on the current month, it is
recorded on the current month

- Ganoon din sa expenses. Kahit na dumating ang bill ng end of January pero nabayaran mo na ng
February, recorded siya sa January (hindi sa February kasi sa January pa rin yon)

Words to Use:

Cash Accrual Revenue Received Earned Expenses Paid Incurred

3. Going Concern

- Assuming that the business will not close in the future, not shutting down, or not bankrupt (even
though it happened in reality)

- You will record transactions assuming that the business will continue forever or indefinitely (not
minding that it may close soon)

4. Monetary Unit

- Transactions are expressed in monetary units

- This includes depreciation, supplies bought and others

- Always consider the currency (e.g. Philippines peso)

5. Time Period

- Transactions are summarized and reported at regular time intervals

- Follows the appropriate timeframe which is annually

- It can be: Calendar Year (January 1 – December 31) [strict on January 1]

- It can be: Fiscal Year (Any month + 12 months) [January 2 to December 31]
ACCOUNTING PRINCIPLES

1. Cost Principles

- The amounts shown in financial reports are historical costs

- Kung magkano ang natanggap mo o magkano ang ipinambili mo, ganoon ka-saktong amount ang
irerecord mo

- Ganoong amount not considering the inflation on that year

- UNLESS, on hyper inflation

2. Full Disclosure Principle

- Sufficient information for informed judgements

3. Matching Principle

- Listing revenue and expenses should not be separated

- To know if the business is earning profits or experiencing net loss

- Revenue > Expenses = Net Income

- Revenue < Expenses = Net Loss

4. Revenue Recognition Principle

- Just the same as Accrual Basis of Accounting concept

- Kung kailan nagawa ang pagtanggap ng pera, doon irerecord hindi doon sa month kung kailan mismong
natanggap ang pera

5. Materiality Principle

- the impact of error in financial statements to the decision making of the accounting users

- Kung ang pagkakamali sa financial statament or accounting in general (let’s say nagkaroon ng kulang na
5000), tapos nakaapekto ito aa desisyon ng owner (or accounting users), ibig sabihin, material ang
item/transaction.

- Sukatan kung gaano maaapektuhan o magbabago ang desisyon ng accounting user based sa error na
nagawa
- Based on judgement or professional judgement ang materiality, no logical basis

- Materiality is commonly used in audit and not accounting

6. Conservatism Principle

- If there are two options/alternatives presented, choose the alternative that will cost lesser income or
resource

- Cheapness > Quality

7. Objectivity

- recording with no bias