FUNDAMENTALS OF ACCOUNTANCY, BUSINESS, AND MANEGEMENT 1
MIDTERMS: THIRD QUARTER REVIEWER
The business records these transactions
ACCOUNTING
and events in a systematic and
“Language of chronological way
Warren Buffett
business” The business communicates the economic
Accounting is the art information gathered in forms of financial
of recording, statements
classifying and
summarizing, in a SCOPE OF ACCOUNTING PROCESS
significant manner,
American Institute of Accounting involves identifying, recording
and in terms of
Certified Public and communicating
money, transactions
Accountants Bookkeeping, on the other hand, only
and events which are
involved recording
in part at least of a
financial character, Therefore, bookkeeping is just a part of the
and interpreting the entire accounting process
results thereof
BRANCHES AND TYPES OF ACCOUNTING
Accounting is the
process of identifying, Primarily concerned
measuring and with preparing and
communicating presenting general-
American Accounting
economic information Financial accounting purpose financial
Association
to permit informed statements such as
judgement and income statement and
decision by users of balance sheet
the information Aims to meet the
Accounting is a needs of internal users
service activity. Its such as managers
function is to provide Management who have the
quantitative accounting accounting system of
information, primarily an organization
Financial Reporting
financial in nature, designed based on
Standards Council
about economic management needs
entities, that is A subset of
intended to be useful management
in making economic accounting, this helps
decisions Cost accounting managers in
controlling expenses
by measuring the
NATURE OF ACCOUNTING PROCESS
costs of the business
Identifies the transactions and events Focuses on taxes, such
that are not only relevant to the business as the preparation of
Tax accounting
but also financial in nature tax returns and tax
planning
FUNDAMENTALS OF ACCOUNTANCY, BUSINESS, AND MANEGEMENT 1
MIDTERMS: THIRD QUARTER REVIEWER
Concerned with the Friar Luca Pacioli, a Venetian
tight control over, monk, wrote a book entitled
Government
disposition of, and Summa de Arithmetica, Geometria,
accounting
accounting for the use Proportioni et Proportionalita or
of public funds "Everything about Arithmetic,
This includes Geometry, Proportions and
inspecting, reviewing, Proportionality which contained his
examining, verifying, discussions about the double-
and evaluating 1494 entry bookkeeping practices
Auditing financial data, records commonly used by the merchants
or transactions of an in Italy (mentioned above).
organization for a According to him, this early system
specified period of helped merchants in keeping their
time records which they could use to
grow their businesses. Pacioli
became the Father of Double-
BRIEF HISTORY OF ACCOUNTING Entry Bookkeeping
Early tradesmen in the Middle East During the Industrial Revolution, the
regions exchanged commodities way goods were produced
such as spices and oil, clothing, changed from the craftsman to
8500 BC the assembly-line method, and
and other goods with clay objects
which are marked with symbols factories became necessary for
that record a transaction large-volume production. With
The ancient Roman, Greek, and this progress, accounting needed
Egyptian civilizations also used 1700-1900 to take off and be professional
clay tablets to record public Methods of double-entry
revenues, religious offerings, bookkeeping and accounting
2500 BC were developed. This then gave
building of temples, etc. Such
records are believed to have been birth to several accounting
used by rulers for decision making organizations and the title of the
purposes Certified Public Accountant was
introduced shortly in 1896
Methods for keeping records
became more systematic as trade With the advent of technology,
and commerce grew Merchants they now use accounting software
from Venice, Florence, and Genoa and computer systems to address
At
1300-1500 used these methods to monitor the changing needs of the users of
Present
their daily transactions. The financial information, while
double-entry method of complying with the accounting
bookkeeping was, in fact, first used standards and principles
in Genoa in 1340
FUNDAMENTALS OF ACCOUNTANCY, BUSINESS, AND MANEGEMENT 1
MIDTERMS: THIRD QUARTER REVIEWER
USERS OF ACCOUNTING INFORMATION GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
Internal Users The Philippine Financial Reporting
Needs financial information to Standards Council (PFRCS) is the official
assess whether or not the accounting standard setting body in the
organization is performing well in Philippines
Managers
the industry, and to take the It sets standards called Philippine
necessary measures to improve Financial Reporting Standards which
its efficiency
constitutes the Philippine GAAP
needs financial information to
analyze whether or not the BASIC ACCOUNTING CONCEPTS AND PRINCIPLES
investment they made in the
This concept states that
Owners organization is viable and
the business is a separate
profitable and, accordingly, to
entity from its owner's.
decide on any future course of Business entity
Therefore, personal
action principle
transactions should not
be included in the records
External Users of the business
like banks need financial Dual-effect of when a value is received,
information to help them decide business the same value should
Creditors whether or not they should let the transactions also be given up
organization borrow money from the expenses incurred
them during a period should be
needs financial information to Matching principle properly matched with the
Investors analyze whether or not they income earned during the
should invest in the organization same period
need financial information to This assumes that the
assess the financial position of its value of peso does not
Stable monetary
suppliers the organization which change significantly over
Customers unit
is important in maintaining a time regardless of the
stable source of goods/raw effects of inflation
materials its operating life may be
Time period
need financial information to divided into equal time
principle
Tax determine whether or not the tax periods
authorities returns filed on behalf of the an enterprise is assumed
organization are credible. to be a 'going concern' or
need financial information to Continuity will remain in business
make sure that the organization assumption/Going unless available evidence
is disclosing its accounting concern is showing it will or will
Regulatory
information according to the have to stop its operations
authorities
rules and regulations set, for in future periods
example, by the Securities
Exchange Commission (SEC)
FUNDAMENTALS OF ACCOUNTANCY, BUSINESS, AND MANEGEMENT 1
MIDTERMS: THIRD QUARTER REVIEWER
Whether or not cash has been Examples of Asset accounts
Accrual basis received, income/revenue is
Cash
recognized when earned
When a transaction presents This refers to the enterprise's money on
two values, the lower-value hand or in banks which is received either
transaction is recorded (or as income from customers or from the
Conservatism
choosing an alternative which
owners for investment
results in higher expense or
lower income) Accounts receivable
The same accounting
This refers to the valid claims of the
principles, process and
enterprise from its customers/clients who
Consistency methods should be used by an
enterprise across accounting have not yet paid for the goods already
periods delivered and/or services already
All facts which are material to rendered
the enterprise should be
Materiality Supplies or supplies on hand
recorded in the accounting
books This refers to the supplies previously
Accountants should include in purchased by the enterprise for its
the financial statements all operations (e.g., envelopes, pencils, bond
Full information (both favorable paper, etc.) which are unused and in stock
disclosure and not favorable) that may
as of the date of the balance sheet
affect how a user understands
them Property, plant and equipment (PPE)
These are long-lived assets acquired by
MAJOR ACCOUNTS: ASSETS the enterprise for its operations
Assets have the following characteristics MAJOR ACCOUNTS: LIABILITIES
These are resources which the enterprise Liabilities have the following characteristics:
owns or controls
These are present obligations resulting
These are acquired by the enterprise from
from a past transaction or event (eg,
a past transaction (eg, acquiring a printer
getting a loan from the bank to acquire a
from a store purchase) and for their future
building)
economic benefits (eg, acquiring a printer
Because these are obligations, they should
for daily office operations)
be settled in the future.
Because these are owned by the
These can be settled by paying cash,
enterprise, it has the right to prevent other
delivering goods, performing or providing
entities or other businesses from using the
services, or in some other form
resources
FUNDAMENTALS OF ACCOUNTANCY, BUSINESS, AND MANEGEMENT 1
MIDTERMS: THIRD QUARTER REVIEWER
Examples of Liabilities Equity has the following characteristics
Accounts payable It starts with the original investment
made by the owner (proprietor, partner, or
This refers to the obligations of an
shareholder) into the business
enterprise to its suppliers for goods/raw
It increases every time the owner invests
materials purchased or services received
additional cash into the business, and
on account or on credit
when the business earns net income
Salaries and wages payable during a period
It decreases every time the owner
This refers to the obligations of an
withdraws money from the business for
enterprise to its employees for salaries not
personal use, or when the business incurs
Utilities payable net loss during a period
This refers to the obligations of an MAJOR ACCOUNTS: INCOME
enterprise to utility companies for payable
Refers to the increases in the economic benefits
Internet, electricity, light and water charges
during a period. This can come int the form of
Advances from customers cash inflows, decreases in liabilities that increase
equity, and enhancement of assets. Income
Also called Unearned revenue, these are
includes both revenues and gains
obligations of an enterprise to its
customers in the form of goods or services a. Revenue-This is income earned from the
which have been paid in advance ordinary activities of an enterprise which
can come in the form of sales, fees,
Loans payable
dividends, rent, interest, or royalties
These are obligations of an enterprise to b. Gain-This is income earned outside the
lenders or creditors such as banks and ordinary activities of an enterprise but
other financial institutions meet the definition income as an increase
in the economic benefits
MAJOR ACCOUNTS: EQUITY
MAJOR ACCOUNTS: EXPENSES
Assets of an enterprise can be claimed by both
the owner's and the creditors. refer to the decreases in economic benefits
during a period.
a. Claim of creditors' equity, or simply,
liabilities (which was discussed in the a. Expenses-Incurred from the ordinary
previous Lesson) activities of the enterprise
b. Claim of outsiders or claim of owners’ b. Losses-These are expenses incurred
owner's equity, or simply, Equity (or capital) outside the ordinary activities of an
enterprise but meet the definition of
expense as a decrease in the economic
benefits
FUNDAMENTALS OF ACCOUNTANCY, BUSINESS, AND MANEGEMENT 1
MIDTERMS: THIRD QUARTER REVIEWER
BASIC ACCOUNTING EQUATION
Assets = Liabilities + Owner’s Equity
BUSINESS TRANSACTIONS
A business transaction is an exchange of
values which may either involve two
parties or within the enterprise
When we analyze a business transaction,
we must remember that the accounting
equation should remain balanced
Increase in Assets Increase in Liabilities
Increase in Assets Increase in Equity
Increase in one Asset Decrease in another
Asset
Decrease in Assets Decrease in Liabilities
Decrease in Assets Decrease in Equity
Increase in Liabilities Decrease in Equity
Increase in Equity Decrease in Liabilities
Increase in one Decrease in another
Liability Liability
Increase in one Equity Decrease in another
Equity
EXPANDED ACCOUNTING EQUATION
Assets = Liabilities + (Owner’s Capital + Revenues
– Owner’s Drawings – Expenses)
