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Modules 1

This document provides an overview of key accounting concepts and principles: 1. It defines accounting and describes its main phases: recording, classifying, summarizing, and interpreting transactions and financial information. 2. It distinguishes the roles of bookkeeping, accounting, and auditing and outlines the main parties that use financial information both internally and externally. 3. It introduces the different types of business organizations and operations and the main branches of accounting. 4. It describes generally accepted accounting principles and the objectives and qualitative characteristics of useful financial statements according to the accounting framework.

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JT Gal
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966 views4 pages

Modules 1

This document provides an overview of key accounting concepts and principles: 1. It defines accounting and describes its main phases: recording, classifying, summarizing, and interpreting transactions and financial information. 2. It distinguishes the roles of bookkeeping, accounting, and auditing and outlines the main parties that use financial information both internally and externally. 3. It introduces the different types of business organizations and operations and the main branches of accounting. 4. It describes generally accepted accounting principles and the objectives and qualitative characteristics of useful financial statements according to the accounting framework.

Uploaded by

JT Gal
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd

MODULES 1: FUNDAMENTALS ACCOUNTING CONCEPT AND PRINCIPLES

Definition of Accounting: ASC: a service activity whose function is to provide quantitative information, primarily financial in nature, about economic entities, that is intended to be useful in making economic decisions. It is the "Language of Business". AICPA: 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 AAA: the process of identifying, measuring and communicating economic information to permit informed judgement and decisions by users of the information.

FOUR PHASES OF ACCOUNTING: 1. Recording this is technically called bookkeeping. Business transactions are recorded systematically and chronologically in the proper accounting books. 2. 3. 4. Classifying - items are sorted and grouped. Summarizing - after each accounting period, data recorded are summarized through financial statements. Interpreting - usually, due to the technicality of accounting reports, the accountant's interpretation on the financial statement is needed.

BOOKKEEPING vs ACCOUNTING vs AUDITING Bookkeeping is the initial activity or clerical part of accounting. It is primarily concerned with procedures in the making and keeping of accounting records. Accounting is the developed form of bookkeeping. It is the conceptual and logical part of the service activity. It decides the methodology of such recording. Accounting starts where bookkeeping ends. As the bookkeeper records transactions in the book of accounts, the accountant classifies, summarizes and prepares financial statements from the recorded transactions. The accountant also designs, analyses, and interprets such records and financial statements. Auditing is the critical part of accounting. It is performed after the accounting work ends. After the financial statements are prepared, the auditor examines them to verify their truthfulness and compliance with generally accepted accounting principles.

PARTIES INTERESTED IN THE FINANCIAL INFORMATION INTERNAL USERS - are those who own and/ or manage and control the business entity. It is also known as Direct Users Owners - He is interested to know whether the business should be maintained, increased, decreased, or disposed of completely.

Management - financial information serves as a measure for making future financial decision and a measure of its effectiveness EXTERNAL USERS - do not own and/or manage and control the business entity. They have no access to the management of the business. It is also known as Indirect Users Investors - to assess the risk of investments portfolio, investors need information to help them determine whether they should buy, hold or sell their investment. Employees - workers are interested in the financial statement to determine the employer's stability and profitability. Lenders - Financial statements are used by lenders to borrowers can pay their loans and interest attached to them when due. Suppliers and other trade creditors - they are interested in the information that enables them to determine whether debts owed to them will be paid when due. Customers - to insure the availability of supplies that will sustain their business operation. Government - is interested in the financial statements of an enterprise for statistics, income taxes and other regulatory policies.

TYPES OF BUSINESS ORGANIZATION Single/sole proprietorship a business entity owned by one person called a sole proprietor. A practice of profession (CPA, Lawyer or Physician) owned by an individual practitioner is also an examples of a single proprietorship business. Partnership - is owned & managed by 2 or more person bind themselves to contribute money, property & industry to a common fund with the intention of dividing the profits among themselves Corporation - is an artificial being created by operation of law, having the right of succession and the powers, attributes and properties expressly authorized by law or incident to its existence.

TYPES OF BUSINESS OPERATIONS Service to earn revenue, this business renders services to clients in exchange for a fee. Therefore, the primary product of this business is service. EX: dental clinic, beauty shop, wellness & spa center, and freight services. Trading or Merchandising this business engages in the buying and selling of goods. Its earnings are primarily derived from the markup it adds to the cost of goods it sells to the customer. EX: groceries, sari-sari store, fashion boutiques, and electronic shops Manufacturing - this business converts raw materials into finished goods that are to be sold at selling price EX. shoe manufacturing, food processing, garment factories

BRANCHES OF ACCOUNTING: Management Accounting They are concerned with the provisions and use of accounting information to managers within the organization. This would be the process of preparing management reports and accounts that provide accurate and timely financial and statistical information which is required by managers in order to make daily and short-term decisions. Financial Accounting This is a field of accounting that treats money as a means of measuring economic performance instead of as a factor of production. The main purpose of financial accounting is to prepare financial reports that provide information about a firms performance to external parties such as investors, creditors, and tax authorities. Tax Accounting This is the method of accounting that focuses on tax issues. This would include the preparation of tax returns and the consideration of the tax consequences of proposed business transactions. Cost Accounting Emphasizes the determination and the control of costs particularly the costs of manufacturing processes and of the manufactured products. Government Accounting Non-commercial accounting in which budgets and encumbrances form parts of the accounts, and assets are restricted for specified purposes. It mainly focuses on the proper custody of government funds and their purposes.

Generally Accepted Accounting Principles -are rules, procedures, practice and standards followed in the preparation and presentation of financial statements SCOPE OF THE FRAMEWORK Focusing on the information needs of the users, the Framework deals with 1. 2. 3. 4. The objective of financial statements; The qualitative characteristics that determine the usefulness of information in financial statements; The definition, recognition and measurement of the elements from which the financial statements are constructed; and Concepts of capital and capital maintenance

The Objective of Financial Statements - Is to provide information about the financial position, performance and changes in financial position of an enterprise that is useful to a wide range of users in making economics decisions. EVALUATION OF OBJECTIVE OF FS: Liquidity - refers to the availability of cash in the near future after taking account of financial commitments over the current period. Solvency - is the availability of cash over the longer term to meet financial commitments as they fall due. Profitability - is the ability of the enterprise to generate cash flows from its existing resource base.

Flexibility - is the economic environment in which it operates or to take advantage of profitable investment opportunities as they arise. TWO UNDERLYING ASSUMPTIONS: Going Concern - assumes that the business will continue to operate indefinitely. Accrual Principle - states that income should be recognized at the time it is earned (delivered/rendered). Likewise, expenses should be recognized at the time they incurred or used. FOUR (4) QUALITATIVE CHARACTERISTICS OF FINANCIAL STATEMENTS Understandability - is the linkage between the information and the economic decision to be made by the user. Relevance - Relevant financial information bears on the economic decision to be made by the user. Information is considered relevant if knowledge of such information would affect the decision or evaluation of the user. Reliability - Information is considered reliable if it is free from error and bias and can be depended upon by users to represent faithfully that which it intends to represent. Comparability - is a quality of information that enables users to identify similarities and differences between at least two sets of economic circumstances. FUNDAMENTAL CONCEPTS: 1. Entity Concept - the business enterprise as separate & distinct from its owners & from other business enterprises. 2. Periodicity - Financial accounting information about the economic activities of an enterprise for specified time periods. For reporting purposes, one year is usually considered as one accounting period. 3. Objectivity - states that all business transactions that will be entered in the accounting records must be duly supported by verifiable evidence. 4. Historical cost - all properties & services acquired by the business must be recorded at its original acquisition cost. 5. Adequate Disclosure - all material facts that will significantly affect the financial statements must be indicated. 6. Materiality -means that financial reporting is only concerned with information significant enough to affect decisions. An item is considered as material regardless of its value if it can influence prudent users of the Financial Statements. 7. 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

Common questions

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The phases of accounting—recording, classifying, summarizing, and interpreting—support economic decision-making by systematically transforming raw financial data into structured financial statements and analyses. Recording ensures accurate bookkeeping of all transactions, providing the foundational data needed. Classifying organizes this data to allow for more efficient analysis and review. Summarizing compiles the data into comprehensive financial statements that reflect the economic activities of an entity. Finally, interpreting provides context to the financial statements, enabling users to make informed judgments regarding the entity's financial performance and direction .

GAAP ensures the consistency and reliability of financial statements through standardized rules and principles that govern financial reporting. These principles, such as historical cost, materiality, and consistency, ensure that financial statements are prepared uniformly, allowing stakeholders to compare financial data across different periods and entities. By adhering to GAAP, businesses ensure that their financial statements are reliable and free from bias or error, thereby facilitating trustworthy economic decision-making .

The entity concept is significant in financial reporting as it defines the business enterprise as distinct and separate from its owners or other businesses. This separation is crucial for ensuring that the financial transactions and statements accurately reflect the business activities alone without interference from personal or other business activities. It enables clear and precise financial accounting and reporting, enhancing reliability and comparability, which is fundamental for stakeholders' economic decision-making .

The qualitative characteristic of comparability enhances financial analysis by providing users with the ability to identify similarities and differences between sets of economic data over time or across entities. It ensures that financial information is reported consistently, facilitating the evaluation of performance trends and the making of informed decisions. By using standardized practices, such as GAAP, comparability allows investors, analysts, and other stakeholders to assess financial health and make more accurate predictions about future performance .

The going concern assumption affects the presentation of financial statements by presuming that the company will continue its operations into the foreseeable future. This assumption permits deferrals of some expenses, like depreciation, and affects how liabilities and assets are classified, impacting their valuation. It influences users' assumptions about the sustainability of the entity’s operations, guiding their investment and financial decisions based on the expectation of continued market presence and potential recovery of investments .

The accrual principle provides a more accurate portrayal of a company's financial health by ensuring that revenues and expenses are recorded when they are earned or incurred, not necessarily when cash is exchanged. This matching of income to the period it is earned, and expenses to the period they are incurred, allows stakeholders to see a more realistic picture of current financial performance and the actual economic activities of the period. It enhances comparability and prevents misrepresentation of financial status due to timing discrepancies .

Internal users, such as owners and management, use financial statements to make decisions about managing, growing, or adjusting operations within the business. These decisions include financial planning, performance evaluation, and operational adjustments. External users, including investors, lenders, and regulators, utilize financial statements primarily to assess the firm's financial health and investment potential. Their focus is often on risk assessment, compliance, and growth potential .

Management accounting differs from financial accounting primarily in its purpose and audience. Management accounting is designed to provide detailed financial and statistical information to internal users, such as managers, for day-to-day and strategic decision-making within an organization. In contrast, financial accounting focuses on preparing financial reports for external users, such as investors and creditors, to evaluate the firm's financial performance and position. Management accounting is more flexible and detailed, while financial accounting follows strict regulatory standards .

The principle of adequate disclosure is important in financial reporting because it ensures that all material information relevant to a firm’s financial position and performance is clearly communicated in the financial statements. This principle prevents the omission of significant facts that could impact the economic decisions made by users, such as investors and creditors. Adequate disclosure enhances transparency and trustworthiness, allowing stakeholders to make informed judgments based on comprehensive and accurate representations of the company's financial status .

A sole proprietorship faces different financial risks compared to a corporation because it lacks the same legal protections and resources. The sole proprietor is personally liable for all debts, meaning personal assets can be at risk in cases of financial distress. In contrast, a corporation is a separate legal entity, which limits the liability of its owners (shareholders) and allows for easier capital accumulation through the sale of shares. This structure provides a buffer against the impact of financial risks on personal wealth .

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