Fundamentals of Accounting

Reviewer
Accounting process by Zenaida Vera Cruz Manuel

CHAPTER 1– Intro to accounting and

business GENERAL PURPOSE FINANCIAL
STATEMENTS:
Budgeting – The process of receiving money,  Statement of financial position – is a
planning and allocating it progress report shows a list of assets and
Revenues – Total amount of money earned liabilities
Expenses – costs a business has to pay to keep  Income statement – a performance
running report of revenues against costs and
Net income – Total profit a business makes after expenses
subtracting all expenses from its revenue  Statement of Cash flows – a cash report
Net worth – it is the value of everything you own showing where we got and where we
(like money, house, car) after subtracting what used the money
you owe (like loans or credit card debt)  Statement of owner’s net worth –
 Represents your wealth and finance progress report showing changes in
which is made up of properties or assets wealth
 The best way to make your money and other
resources grow is to put up a BUSINESS Bookkeeping – keeping track of the revenues and
 If you are using your money for a business expenses as well as the assets and liabilities
venture MAKE A RECORD  First phase of accounting that gathers
 First part of the accounting process is called financial data and keeping a record of this
BOOKKEEPING  ACCOUNTING is more comprehensive
Financial analysis – interpretation of the than bookkeeping
financial reports Business – economic unit that engages in buying
and selling goods or services
6 ACCOUNTING TERMS:  PROFIT generates more resources
 Assets  With more FUNDS the business can
 Liabilities expand
 Net worth
 Revenues SOURCES OF CAPITAL
 Expenses  Primary source – owner or investor
 Profit  Secondary source – relative, friend,
3 ACCOUNTING AREAS bank or a cooperative
 Budgeting
 Bookkeeping Entrepreneur – who organizes, manages and
 Financial analysis takes the risk of putting up a business
Risk – is the element of uncertainty in an
Liquid: Refers to assets (like cash or things that outcome
can quickly be converted to cash) that are easily
available for use. For example, cash in hand or FORMS OF BUSINESSES
money in a bank account is considered liquid 1. Sole Proprietorship – manages by one
because it can be used immediately to pay person (ex: beauty parlors, dress shops,
expenses. barbershops and bakeries) – 3 million
Solvent: Means that a business has enough assets o Advantages:
to cover its debts. In simple terms, if a company  Small amount of capital
is solvent, it has enough money or resources to  Managed easily
pay what it owes.
  Owner gets all the 3. Manufacturing business – buys raw
profits materials, processes these into finished
 Ease in information goods and then sells these to customers
o Disadvantages: TYPES OF BUSINESS ACTIVITIES
 Difficult to expand
1. Financing activities – The owner “finances”
 No indefinite life
the business with a startup capital in cash and
 Unlimited liability
other resources
 Easy to dissolve
 Includes withdrawals of owners
2. Partnership – owned by two or more  Also loans repaid to lenders
persons, the partners are also the 2. Investing activities – acquisition of
managers – SEC – security exchange properties in land, furniture, machineries and
commission – 250 years to renew equipment.
o Advantages: 3. Operating activities – related to earning of
 Ease in managing income by selling goods or services and by
 Management is more incurring expenses
efficient  Paying of wages, rent, utilities, and
 Ease in acquiring transportation
additional capital
o Disadvantages: MANAGING A BUSINESS
 No indefinite life
 Unlimited liability Management – getting things done by using
 Easy to dissolve resources and directing people as efficiently as
3. Corporation – separate legal entity possible to be able to accomplish the goals of the
from the owners, managed by a board of business.
directors  For a business to be successful,
o Advantages: management must be efficient and
 More capital effective
 Can afford to hire 4 PROCESSES:
experts  Planning – determining the goals of the
 Has perpetual existence business
 More stable  Organizing – creating divisions,
 High amounts of profits appointing managers, hiring and defining
 Allows a one-man the roles or duties of each one
corporation  Directing – overseeing the daily
o Disadvantages: operations
 No unlimited liability  Controlling – guarding and guiding
 More legal and tax people to ensure tasks and activities are
requirements done according to plans
 Abuse of power by the DIFFERENT DEPARTMENTS:
boards of directors  Production manager – makes a study on
what products to produce, how to
TYPES OF BUSINESS OPERATION produce these, machines needed, how
many workers will be hired
1. Service business – one which provides
 Marketing manager – draws plan based
business
on a study of the market-place, product,
(ex: beauty parlor, barbershop, travel agency,
price, and people
internet shop, school, airline)
 Finance manager – takes care of the
2. Merchandising business – one which
financial resources
buys and sells goods.
 Sales manager – oversees selling
(ex: shoe store, bookstore or a drugstore)
operation
  Personnel manager – takes care of  Cost-Benefit principle – prescribes that
employees and workers the advantages enjoyed from installing
the system must outweigh its cost
ACCOUNTING;  Relevance principle – information must
 Service activity be reported promptly and that
 To prepare financial reports that will information must be useful
provide relevant information about the  Compatibility principle – system
business designed to fit the unique characteristics
 A process of RECORDING, of the company – its personnel, activities
CLASSIFYING, and SUMMARIZING and structure
transactions  Flexibility principle – company’s
system should allow for changes
Stakeholders – users of financial statement
 Person or entity who has a “stake” or COMPONENTS
interest in the business  People
 Managers, lenders, suppliers,  Documents
employees, government and  Records
customers  Methods
 Equipment
External Users: These are individuals or entities
outside the organization who use financial DATA PROCESS;
information to make decisions about the
1. Data gathering
company.
2. Analyzing, measuring, and recording
(Investors, Creditors, Governments, Consumers, 3. Classifying, storing, and summarizing
Competitors, Manufacturers/suppliers and 4. Reporting and interpreting
Public) 5. Decision making
Transaction – an activity or event taking place in
Internal Users: These are individuals within the business which is expressed in terms of money
organization who use financial information for Business document – describes words and
decision-making and management purposes. amounts the nature of the transaction (ex: official
(Managers, Employees, Owners) receipts, cash voucher, invoice)
 Received by the accounting officer or
Direct users - are individuals or entities who use
clerk
financial information directly to make business Internal Control – enumerates the methods and
decisions. This includes both internal and procedures to monitor the activities of the
external users such as managers and investors business and ensure efficient operation
who directly interact with the financial reports.  Requires that documents be properly
controlled, numbered and stored
Indirect users - are individuals or entities who  Prescribes that only qualified people
use the information that has been prepared for should be hired
direct users to make secondary decisions.
Input device – instrument used to record the data
captured in the documents
ACCOUNTING INFORMATION SYSTEM Journal entry – the data input be it manual or
 Can be classified into MEASUREMENT computerized
SYSTEM or processing phase and Journal – accounting data are gathered and
COMMUNICATION SYSTEM or recorded in this book
reporting phase Ledger – The data is organized and classified into
related groups and stored in this book
AIS PRINCIPLES Bookkeeping – mechanical or procedural phase
 Control principle of accounting
NOTE: CHAPTER 2 – The demands of global e-
 In accounting, information is processed commerce
in a meaningful manner by journalizing,
classifying, summarizing, reporting, and High technology – Technological advances have
interpreting greatly affected the way of doing
 The organized data become meaningful Trade liberalization – flow of goods and
information when summarized and services anywhere around the world
reported in the financial statements Trade interrationalization – when market has
become global-wider and more diverse
Income statement  Goods must suit different cultures, values
 Also called profit or loss statement or and habits of people located around the
statement of earnings world
 Lists down the income (revenues and How do business firms address these
gains) as well as the expenses incurred by challenges?
the business  World class product and services – to
 PROFIT or NET INCOME when change-reinvent, retool, relearn
revenues exceed expenses LOSS when  Mergers and partnerships
expenses exceed revenues  Sustainability – a kin to “survival”
 A firm to survive must address
Statement of Changes in Owner’s Equity three factors: profit skill, people
 Explains the activities for a period of skill, planet skill
time that caused the owner’s equity to What happened to some frauds?
change  Accounting frauds – manipulating net
 Activities affecting owner’s equity: income
investment, withdrawal, profit or loss  Business frauds – deviating business
 Investmeant: increases owner’s equity funds to personal bank accounts
 Personal drawings: decreases owner’s
equity Qualities to be globally competitive
 Effective communication skills
Statement of Cash Flows  Integrity
 What caused the change in the cash  Positive attitude
 Shows cash inflows (investment and  Competency – learn more by attending
sales) and outflows (purchase of machine seminars and getting additional training
and payment of expenses) in your field of expertise
 Financing, investing, and operating  Flexible and Adaptable – aware of the
changes taking place, accept these
Statement of financial position changes and make adjustments
 Formerly called the balance sheet accordingly
 Listing of the accumulated resources  Creative and innovative
(cash and properties)  Critical mind
 Listing of the accumulated liabilities  Interpersonal skills – learn to get along
(debts or obligations to pay) with people
 Shows a balanced financial structure  Intellectual skills
since liabilities and owner’s equity are
more or less the same in amount THE PRESENT-DAY ACCOUNTANT
 Shows whether enterprise is solvent or
liquid
  Accountant is involved in  Electronic data processing head or cost
strategic planning, budgeting, accountant
and control  Bookkeeper
 Accountant is expected to assist  Chief accounting officer
the firm as planner, economic  Internal officer
forecaster, financial analyst, and  Budget officer
systems  Chief information officer
 Objective is to develop  Tax officer
accountants with specialized
skills, practical experience and 3. Government and Not for profit Accounting
mind 4. Research and education
 Students will have more options  Researcher
to choose from  Accounting professor
 BS Internal Auditing
 BS Management ACCOUNTING AREAS
accounting 2 types of accounting – Managerial accounting
 BS Information system and financial accounting
 Required to
take level 1 Courses:
examination 1. Basic accounting or bookkeeping –
 FAR, AFAR, routine activity of recording, classifying
Management and summarizing business transactions in
Advisory a systematic manner
Services, 2. Intermediate accounting – preparation
taxation and and interpretation of financial statements
RFBT intended for external users (investors,
lenders, suppliers government and
Note: Auditing and signing of audit certificates customers)
and teaching accounting can only be performed 3. Cost accounting – recording, classifying
by passers of the level II examination (CPA) and summarizing the details of materials,
 The accountants, before renewing their labor and overhead necessary to produce
professional identification numbers, are and sell a product or service
required to comply RA 10917 known as 4. Management accounting – deals with
the CPD Act of 2017 financial and non-financial information
for managers and other external users to
CAREER OPPORTUNITIES IN assist them in planning, directing and
ACCOUNTING controlling the affairs of the business.
5. Auditing – independent verification and
1. Public Accounting examination of the accounting records to
 Auditor – reviews financial records of give credibility to the financial
the firm, provides assurance services statements.
 Tax consultant – preparing tax returns 6. Government and non-profit
and giving advice concerning tax accounting – use of public or community
consequences funds or community funds to bring out
 Management consultant – management service to the people, use to serve the
on many delicate issues people.
2. Industry Accounting 7. Tax accounting – tax matters affecting
 Financial accountant firms, preparation of tax returns,
 Controller analyzing tax effectson firms or
 Budget officer individual.
 Internal auditor
 8. Forensic accounting – investigative  Guides accountants in preparing
skills, works as a fraud examiner, tracks financial statements
down or reviewing financial records

PROFESSIONAL REGULATORY BODIES

1. Professional regulation commission

(PRC) – in charge of regulating and
licensing the practice, meeting the
required standards
2. Board of Accountancy (BOA-
BOARD) – Sets up and promulgate a set
of professional standards and ethics in
the practice of accounting
3. Philippine Institute of Certified Public
Accountants (PICPA) – to represent the
interest of the Filipino CPAs, regulate the
accounting practice and the CPA board
exams
4. Securities and exchange commission
(SEC) – tasked to safeguard public
interest specially investors in the capital
market and regulates business operations
specifically of partnerships, corporations,
entities granted license/franchise General purpose financial statements – reports
5. Bangko Sentral ng Pilipinas – regulated answer only the common needs of users
the operations of all banks and financing Steward management – secondary objective of
institutions tasked to promote and financial statement preparation
maintain peso stability
6. Bureu of Internal Revenue – exacts tax Good governance – process of directing the
and license compliance from people and affairs of the firm with a view of upholding
business entities earning income standards and protecting the interest of all
stakeholders
THE ACCOUNTANCY ACT OF 2004 Code of professional conduct – set up to guide
businessmen to behave in a professional manner
Accountancy law (R.A No. 9298) – amendment consistent with high ethical standards expected of
to reform the practice of accountancy in the them by the public
Philippines  Key elements of ethical behavior
 To pass the licensure exam candidate o Integrity
must obtain a general average of 75% o Objectivity
with no grades in any subject below 65% o Competence
 Failure to pass after taking twice, the o Confidentiality
candidate must take up a refresher course
before taking again the examination
 Quality review council – review the
quality control measures set up by the
CPAs
Conceptual framework of accounting – made
up of basic rules, objectives and principles setting
the boundaries for the accounting practice.
CHAPTER 3 – Analyzing transactions to start Liabilities – Accounts payable, notes payable,
a business loans payable and mortgage due to land bank
Equity – Owner’s capital owner’s drawing
Financial position – based on three elements  REVENUES and EXPENSES –
ASSETS, LIABILITIES and OWNWER’S representing changes in capital
EQUITY
Financial performance – based on two elements  A transaction either increases or
REVENUES and EXPENSES decreases
 Assets increased when cash was
Assets – economic resources owned by the received and owner’s equity increased
business when owner who invested the cash was
 Ex: land, building, cash, furnitures and given a right over the business
fixtures (tables, chairs, blackboards,  Transactions considered non-financial
cabinets, electric fans), equipment in that there is no exchange of values,
(computers, printers), supplies (paper, should not be recorded
pencils, eraser, printer’s ink and chalk)  Transaction must be stated in terms of
 Obtained and controlled by the enterprise money
 Some assets will come from the creditors
such as cash borrowed from the banks VENETIAN MODEL or DOUBLE ENTRY
and appliances, furniture, equipment, and BOOKKEEPING – requires that for every value
goods purchased on account from the the received there is an equal value parted with
suppliers
 Claimable by 2 parties – creditors and
owners

Liabilities – defined as an obligation to do or pay

 Debts of the business
 Present obligation arising from a past
event
 Usually paid in cash but may also be paid
in the form of property or service

Equity – residual right or interest of the owner QUALITATIVE ATTRIBUTES

 Called partners’ equity and shareholders’
equity Understandability – requires users to have
reasonable knowledge of finance accounting and
THE ACCOUNTING EQUATION economics to come up with a good assessment
and sound judgment, terminologies used must be
 Shows a relationship of balance or clear, and presentation of reports must be orderly
fundamental identity of the three Relevance – quality of information that will
elements: creditors (represented by make a difference and influence a statement user
liabilities) and owner or investor to make a meaningful decision
(represented by the equity)  Must give the past performance of the
business
ASSETS = LIABILITIES + OWNER’S EQUITY  Materiality – depend on whether
an item (by its nature or size) will
THE ACCOUNTS influence user’s decision or not
 Timeliness – quality that will
Assets - Cash, accounts receivable, notes enhance relevance
receivable, merchandise, supplies, land, furniture,
equipment, building and machinery
Reliability  Measurement in terms of money - Only
 Faithful representation – information events and transactions that can be
represents faithfully and should not measured in terms of money (dollars,
mislead users to think that it is when it is pesos, etc.) are recorded in accounting.
not Things like employee morale or customer
 Substance over form – we should focus satisfaction are not recorded because they
on the true nature or reality of a can’t be expressed in monetary terms.
transaction, rather than just its legal or  Accrual assumption - Revenues and
formal structure expenses are recorded when they are
 Neutrality – information should be useful earned or incurred, not when cash is
to all users and not show bias actually received or paid. For example, if
 Prudence – exercise caution when using you perform a service today but get paid
estimates or information that is marked next month, you still record the income
by uncertainty today under this assumption.
 Completeness – when all information are  Objectivity – requires that assets
provided taking into consideration the acquired must be verifiable and
importance of each item to statement substantiated by documents such as
users. invoices, vouchers, or official reciepts
Comparability – changes between two or more  Reporting period - Financial
periods to determine the change or trend of its information is reported for a specific
performance period, usually monthly, quarterly, or
annually. This helps in comparing the
ACCOUNTING PRINCIPLES (GAAP) company’s performance over time and
 Laws or rules that guide the conductand understanding how it's doing financially.
practice of the profession
 Man made laws
 Long-used accounting process
promulgated by an authoritative body
 Depend on the study and pronouncement
made by the PICPA

 Going concern principle – It is expected

that the business will continue to exist
indefinitely
 Therefore, assets and liabilities
are recorded with the expectation
that the company will keep
running.
 Business entity concept - The business
is treated as separate from its owner(s).
The company’s finances are kept apart
from the personal finances of the owners,
meaning only the business’s transactions
are recorded in the company’s accounts.
 Exchange cost or cost principle - Assets
are recorded at their original purchase
price (or cost), not their current market
value. For example, if you buy a piece of
equipment for $10,000, it stays recorded
at $10,000, even if its value changes later.