ACCOUNTING CONCEPTS

CHAPTER 1: The Basic Accounting Environment

 accountants BUSINESS 30%
Earliest Accounting - established in 1929 ORGANIZATION (except
System professional
- 2000 B.C in Business 1. Sole Proprietorship partnership)
Babylonia, Greece, and - economic activity of - organized by one
Egypt. buying and selling in person 3. Corporation
- 3500 B.C in Assyria order to obtain profit - has to be registered w/ - organized as a
the DTI and BIR after separate legal entity
Cotrugli in Naples MAJOR CONCERN getting a permit from from the owners
- wrote the first OF BUSINESS the City/ Municipal - comes from Latin
accounting book - machines needed Hall word corpus
- labor skills required meaning body
Fr. Luca Pacioli - no. of men needed to DISADVANTAGE - can conduct business
- Italian mathematician employ - unlimited liability in its name, enter into
- Father of Accounting - fixed and working - difficulty in contracts, buy and sell
- 1494 - double entry capital expanding/selling property and stocks.
bookkeeping different product/ - has its own rights,
- Summa de - raw materials to be service duties and
Aritmetica, Geometria, used responsibilities as a
Proportioni et 2. Partnership juridical person
Proportionalita Profit - owned by two/more - has to be registered
- Model of Venice - measures the success individuals who with and its Articles of
in business contribute money, Incorporation approved
Debtor - obtained when the property and talent into by SEC
- one who borrows amount you receive is common fund - must be registered w/
money or buys goods more than the amount - partners share in the BIR
and services on credit you paid for goods and management of - investor is called
services you sold. business and share shareholder
Creditor profits among - managed by Board of
- one who lends money Owner/ Investor themselves Directors
or sells services or - primary source of - must be registered w/ ADVANTAGE
goods on credit capital and its Articles of Co- - limited liability
Partnership approved - huge amount of
Spaniards Entrepreneur by SEC capital can be obtained
- introduced - one who takes the risk - must be registered w/ - large volume of
bookkeeping in the of putting up a business BIR product/ service can be
Philippines to produce and sell sold w/c would
goods/ services ADVANTAGE mean high amounts of
Tenedor de Libro - more money and profit
- bookkeeper Microfinance skills are pooled - high profit would
- means of providing a - different mean high return on
1923 range of financial managerial position can shareholders
- first licensure services to low income easily be filled up investment
examination was given entrepreneurs - more stable than
for CPAs DISADVANTAGE partnership
Risk - unlimited liability - has indefinite life
Philippine Institute of - element of uncertainty - can easily be - can operate for 50
Accountants in an outcome dissolved/terminated years and renew for
- professional - liable to pay taxes another 50 years
association of FORMS OF on its profit at a rate of
 DISADVANTAGE expenses to evaluate alternative financial in nature,
- more legal and ways to solve it about economic entities
tax requirements to be Management MANAGERS OF that is intended to be
complied - art of managing and DIFFERENT useful in making
directing people and DEPARTMENT economic decisions
TYPES OF resources as efficiently
BUSINESS as possible with a view 1. Production Accounting as the
OPERATIONS of accomplishing the Manager Language of Business
goal of the organization - makes a study, draws
1. Service Business a plan based on this 1.Company
- provides services for a Efficient study and directs the - accumulates
fee to clients/customers - when its resource activities of the accounting information
inputs are used at the production department through its various
2. Merchandising least time, effort and transactions
Business cost to produce the 2. Marketing
- buys and sells goods/ required output Manager 2.Accountant
merchandise - makes a study of the - processes the
Effective market - place, product, financial information
3. Manufacturing - when it is able to price, people and prepares the
Business achieve its goal as - a market plan is financial reports
- buys raw materials, stated in its strategic drawn based on the
forms this into a plan study 3.Stakeholders/Users
finished product and - study the reports
then sells this to the FOUR 3. Sales Manager prepared before making
customers MANAGEMENT - draw a plan on how to economic decisions
FUNCTIONS distribute the
TYPES OF products/services at the Accounting Matters to
BUSINESS 1. Planning least time and cost Users
ACTIVITIES - starts w/ goal setting
and from these 4. Finance Manager Stakeholder
1. Financing Activities activities are lined up - takes charge of the - person who has a
- financing the business companys financial stake or interest in
w/ a start up capital 2. Organizing resources the business such as the
- include withdrawals - defines the company owner, manager, lender,
made by the structure upon w/c the 5. Personnel Manager supplier, customer,
owner/investor as well management will work - takes charge of government and the
as loans repaid to out its plans employees and workers public
lenders
3. Directing and Managerial Owner/ Investor
2. Investing Activities Controlling Accounting - one who puts in
- involve the acquisition - management will - accounting money/property(called
of properties such as oversee the day to day information system capital) in a business
land, furniture, operation of carrying where managerial venture
machineries and out the planned reports are processed
equipment activities Manager
Accounting - responsible for
3. Operating Activities 4. Decision making - service activity w/c organizing, planning,
- day to day activities - required whenever a function is to provide directing and
related to earning of problem crops up quantitative controlling the
income and incurring of requiring management information, primarily operation of the
business w/c are prepared for efficient operation taking place in business
management use w/c is expressed in
Lender 2. Cost- Benefit terms of money
- assesses the ability of 2. Financial Principle
the business-borrower Accounting - prescribes that the
to pay the principal - makes use of the advantages enjoyed Business Document
debt and an additional financial reports or the from installing the - describes in words
charge called interest so called general system must outweigh and amounts the nature
purpose financial its cost of the transaction
Supplier statements w/c are the - Ex. Receipt, cash
- offers main source of 3. Relevance Principle voucher and invoice
goods/merchandise on information of - prescribes that the
cash basis or on credit stakeholders information must be Input Device
term depending on the reported promptly and - used to record the
paying ability of the Tax Returns that information must data captured in the
business - Ex. Income Tax, VAT, be useful to enable documents
Percentage Tax statement users to reach
Government a conclusion and make Journal Entry
- investigates tax Special Reports a decision - data input, be it
returns, assesses - Ex. Banks prepare manual or
truthfulness of the monthly, quarterly and 4. Compatibility computerized
reported profit and the annual reports to be Principle
tax liability to be paid submitted to BSP - prescribes a system Records
by the business, and designed to fit the - books of accounts that
verifies if one is unique characteristics must be maintained by
complying w/ the rules Accounting of the company- its the accounting
and regulations Information System personnel, activities department
- involves an orderly and structure
Employee way of accumulating Journal
- wants higher wages, and reporting business 5. Flexibility Principle - book where
benefits, good working transactions and from - prescribes that the accounting data are
conditions and security w/c reports are companys system gathered and recorded
of tenure generated for proper should be changed, if
communication to change is needed to Ledger
Customer decision makers come up w/ timely and - another book where
- assesses the updated information data that has been
companys ability to FUNDAMENTAL organized and
continuously supply the SYSTEM COMPONENTS OF classified into related
goods they need at the PRINCIPLES AN ACCOUNTING groups are stored
right price and quality INFORMATION
1. Control Principle SYSTEM Bookkeeping
Two Types of - prescribes that the AIS - involves analyzing,
Accounting and its of the firm must 1.People measuring and
Reports possess internal control 2.Documents recording(Phase 1);
Internal Control 3.Records classifying, storing and
1. Management - enumerates the 4.Methods summarizing(Phase 2)
Accounting methods and 5.Equipment
- makes use of internal procedures necessary to Methods
reports called monitor the activities of Transaction - involve the
managerial reports the business and ensure - is an activity/ event procedures of
processing captured - solvency is the ability changed over a period outflow of resources
data from the of the business to pay of time from the enterprise
documents for its liabilities - makes a listing of the
- journalizing, - liquidity shows the cash inflow Net Assets/Net Worth
classifying, ability of the activities(cash receipts) - determined by
summarizing, reporting, enterprise(through its and the cash outflow deducting the total
interpreting assets) to pay for its activities(cash liabilities from the total
short term payments) of the assets
COMPUTERIZED obligations(payable business - also called owners
ACCOUNTING w/in a year) as it falls equity
SYSTEM due
3. Equity
Input 2. Income Statement CHAPTER 3: - residual right/interest
- from the source - reports the financial Starting Up a of the owner in the
documents, data are performance of the Business entitys net assets
analyzed and encoded business and is also
by the employees called profit or loss ACCOUNTING Accounting Equation:
statement of earnings ELEMENTS ASSETS=
Process - lists down the income LIABILITIES +
- the data are measured, earned as well as the 1. Assets OWNERS EQUITY
recorded, classified, expenses incurred by - economic resources
summarized and stored the business owned by the business Account
by the computer - profit/ net income - resource obtained and - device used to record
results when income controlled by the the changes(increases
Output exceeds expenses enterprise as a result of or decreases) in the
- reports come out from - loss occurs when a past event and from accounting elements
the processed data expenses exceed w/c probable future
revenues economic benefits are Accounts used in:
- business enterprise is expected to flow to the Assets
a term used for any enterprise 1. Cash(On Hand/In
business venture or - claimable by two Bank)
undertaking parties: creditors and 2. Accounts receivable
FINANCIAL owners 3. Notes receivable
STATEMENTS 3. Statement of - Ex. Land, building, Current
PREPARED IN Changes in Owners cash, furniture and Assets
ACCOUNTING Equity fixtures, equipment, 4. Merchandise
- explains the activities supplies 5. Supplies
1. Statement of for a period of time that 6. Land
Financial Position caused the owners Economic Benefit 7. Equipment
- formerly called equity to change - ability of the asset to 8. Furniture & Fixture
balance sheet - 4 activities affecting produce future cash Non-
- shows how healthy/ owners equity: flows for the business current
robust the enterprise is contribution, entity 9. Building
when it shows a listing withdrawal, profit or Liabilities
of the accumulated loss 2. Liabilities 1. Accounts payable
resources(cash and - obligation to do/pay 2. Notes payable
properties) owned and a 4. Statement of Cash - present obligation 3. Loans payable
listing of the Flows arising from past event, 4. Mortgage payable
accumulated liabilities - explains why the the settlement of w/c is
owed by the business amount of cash expected to result in an Owners Equity
1. Owners capital QUALITATIVE reality of the contract is
2. Owners drawing ATTRIBUTES not consistent w/ the
legal form, the
Accounts Payable 1. Understandability economic reality should
- used for a liability - requires that users prevail
represented by an oral have a reasonable - neutrality - requires
promise to pay knowledge of finance that the information
accounting and should be useful to all
Notes Payable economics to come up users and must not
- liability supported by w/ a good assessment show bias for a
a promissory note and sound judgment; particular user
terminologies used - prudence - requires
Owners Capital must be clear; the accountant to
- represents investments presentation of report exercise caution when
made by the owner must be orderly using
estimates/information
Owners Drawing 2. Relevance that is marked by
- recovery of - prescribes the quality uncertainty
investment/ withdrawal of information that will
of business assets for make a difference and
personal use by the influence a statement
owner user to make a
meaningful decision
Transaction - affected by materiality
- exchange of values and timeliness
between two parties - materiality depend
expressed in monetary on whether an item(by
terms its nature/ size) will
influence users
Double Entry decision or not
Bookkeeping/ - timeliness - reports
Venetian Model must be given
- bookkeeping system promptly/ within the
that shows the dual period it is needed to
effect of a business form judgment else it
transaction loses its usefulness
- requires that for every
value received there is 3. Reliability
an equal value parted - there are 4 ingredients
with to be considered:
- faithful presentation
Principle of Period of - information represent
Time faithfully what they
- statement of financial purport to be, that the
position is usually information should not
prepared yearly w/ mislead users to think
balances shown only at that it is when it is not
the end of the particular - substance over form
year - if the
substance/economic