What is Accounting?

recording, classifying, summarizing, and

It is the process of identifying, recording, and communicating all transactions
communicating the economic events of an
organization to interested users. - Responsible for the safekeeping of the
national funds
IDENTIFYING - involves selecting economic
events that are relevant to a particular business - New Government Accounting System:
transaction. enhances responsibility accounting in all
agencies
TRANSACTIONS – economic events of an - General Appropriations Act: states how
organization much an agency can spend for the year
- COA – responsible for the keeping of the
RECORDING – keeping a chronological diary of government’s general accounts
events that are remeasured in pesos. T
Auditing Accounting – unbiased examination and
Ex: Journals and ledgers evaluation of the financial statements of an
organization
COMMUNICATING – occurs through the
preparation & distribution of financial& other  Internal auditing is a management tool
accounting reports. used to improve processes and internal
control.
 Accounting is a systematic recording of  An accounting firm is commonly used to
the financial transactions and the perform an external audit. It includes a
presentation of the related information review of the company's financial
to appropriate persons statements as well as its internal controls.
The audit report includes the auditor's
 Accounting is a service activity. opinion.
 IRS audit: A review of an organization's
 Accounting is a process. financial information to ensure that it has
been reported correctly in accordance with
 Accounting is both an art and a discipline tax laws.

 Accounting deals with financial and Tax Accounting – collect taxes that differ from
transactions. the amount

 Accounting is an information system - The Internal Revenue Code governs it,

and it must be strictly followed when
Functions of Accounting in Business: individuals and businesses prepare their
 Keeping systematic record of business tax returns.
transactions
 Protecting properties of the business Cost Accounting – provides information for
 Communicating results to various parties management accounting and financial accounting.
in or connected with business Helps measure the cost of a certain item. Cost
 Meeting the legal requirements accounting is classified into four types:

Financial Accounting- Primarily handling the - Standard Cost Accounting

recording of financial transactions. Uses financial - Activity-based cost accounting
statements to record, summarize, and report a - Lean Accounting
company's business transactions. - Marginal Cost Accounting

Government accounting - an accounting system - Cost: the resource sacrifices to achieve an

which encompasses the process of analyzing, objective
 - Cost Object – anything that you wish to Lean Accounting
find the cost Marginal Cost Accounting
- Cost Driver – an activity that is cause or
the incurrence of cost An accounting information system (AIS)- is a
- Direct Cost – can economically be traced structure used by a company to collect, store,
to a cost object manage, process, retrieve, and report financial data
- Indirect Cost – cannot be traced to a cost so that accountants, consultants, business analysts,
- Fixed Cost – cost do not change within managers, chief financial officers (CFOs),
the relevant range of activity auditors, regulators, and tax agencies can use it.
- Variable Cost – change as the level of
activity of production increase The following professionals may require the use of
an organization's AIS:
Accounting Research – deals with the creation of Accountants
new knowledge Consultants
Business analysts
Managerial Accounting- The primary goal of Managers
managerial accounting is to maximize profit while Chief financial officers
minimizing losses. It is responsible for identifying, Auditors
measuring, analyzing, interpreting, and
communicating financial information to Internal users- people who use financial
management. This data assists business owners information within a company. Owners, managers,
and managers in making sound decisions. Here are and employees are examples of internal users.
some examples of managerial accounting External users- are people who use accounting
techniques: information and are not part of the business entity
(organization). Suppliers, banks, customers,
 Margin analysis: This technique investors, potential investors, and tax authorities
investigates production optimization. It are examples of external users.
entails determining the break-even point
and the best sales mix for the company's Sole Proprietorships – businesses formed by a
products. single individual, and do not have a separate legal
 Constraint analysis: This analysis aids in existence.
the identification of inefficiencies and
their impact on the ability of the company - Advantages: Easy information, the owner
to generate profits. has full control, can mix personal and
 Capital budgeting: This technique business assets, have all the profits for
analyzes information needed to make themselves, simple taxation
necessary expenditure decisions. - Disadvantages: unlimited liability,
Managerial accountants present their difficulty of raising additional capital,
findings to owners and managers in order owner’s bias
to assist them with budgeting decisions.
 Trend analysis and forecasting: Trend Partnership – two or more persons bind
analysis and forecasting identify patterns themselves to contribute
and trends in product costs as well as
unusual deviations from forecasted values. - Separate legal existence
Cost accounting-is the process of recording, - Mutual agency
- Unlimited liability
analyzing, and reporting all of a company's costs
- Limited life
(both variable and fixed) associated with the - Co-ownership of partnership property
production of a product. Cost accounting is - Partnership Agreement
classified into four types:
- Advantages – easier to create than a
Standard Cost Accounting corporation, beter ability to acquire
Activity-based cost accounting
 additional capital than sole proprietorship, basis. It is a company that buys finished goods
large pool of human capital and resells them to customers.
- Disadvantages – unlimited liability,
mutual agency, limited life Manufacturing company- is one that uses parts,
- Limited Partnership – one partner has components, or raw materials to create finished
unlimited liability and at least one partner
goods. These finished goods are sold either
has limited liability
- Unlimited liability Partnership – aims to directly to consumers or to other manufacturing
protect innocent partners from the companies that use them as a component part
malpractice to create a finished product. Diehard, for
- Limited liability company – have example, makes automobile batteries that are
features of both a corporation and
sold directly to consumers by retailers such as
partnership
AutoZone, Costco, and Advance Auto.
Corporation – artificial being created by
operation law
Accrual Principle- an accounting concept that
- Separate legal existence requires transactions to be recorded in the time
- Limited liability period in which they occur. It does not matter
- Transferable ownership rights when the actual cash flows for the transactions
- Virtually unlimited life are received. This principle can provide an
- Government regulation accurate picture of a company's financial
- Double taxation situation.
- Dividends
- Advantages – ability to acquire Consistency Principle- This principle states that
additional capital, transferable once an organization adopts a specific
ownership rights, limited liability of accounting method of reporting or
stockholders, virtually unlimited life, documentation, it must adhere to that method.
large pool of human capital
Conservatism Principle- The principle provides
- Disadvantages – heavily regulated by
a realistic view of unexpected situations. This
the government, double taxation, not
principle states that expenses and liabilities
easy to form, more expensive to form
should be recognized early on, even if the
than proprietorship and partnership
outcome is uncertain.
Cooperatives – duly registered association of
Cost Principle- The cost principle refers to this
persons, with a common bond of interest
value. According to the principle, businesses
keep track of their tangible assets without
taking into account their market value.
Service business- is a company that provides Companies can assess the actual cost of using
intangible goods; traditional service businesses financial services for calculating the historical
are frequently provided by individuals or cost principles of the company's assets using
groups. However, with technological this principle.
advancements, services can also be provided by
online businesses or apps. Economic Entity Principle- This is an accounting
concept that requires businesses to be treated
Merchandising business- also known as a as a distinct financial and legal entities. This
merchandiser, is one of the most common types means that the business entity's recorded
of businesses with which we interact on a daily
activities must be kept separate from the 1. The Principle of Consistency- As a standard,
owner's and other entities' recorded activities. the accountant followed GAAP rules and
These can be a sole proprietorship, a limited regulations.
liability partnership, or a general partnership.
2. Consistency Principle Accountants- agree to
Matching Principle- The material principle apply the same standards throughout the
states that if the end result is minor, the reporting process, from one period to the next,
accounting standard can be ignored. It is a to ensure financial comparability. Accountants
crucial principle for determining whether a are expected to fully disclose and explain the
transaction should be recorded as part of the reasons for any changed or updated standards
closing process. in the financial statements' footnotes.

3. Sincerity Principle- The accountant works

hard to provide an accurate and unbiased
Full Disclosure Principle- It is critical to only
representation of a company's financial
disclose information about events that have a
situation.
material impact on an entity's financial position.
It may also include items that cannot be 4. Methods' Permanence Principle- Financial
quantified, according to the full disclosure reporting procedures should be consistent,
principle. Businesses must also report existing allowing for a comparison of the company's
accounting policies as well as any changes to financial information.
them.
5. Non-Compensation Principle- Both negatives
Going Concern Principle- This accounting and positives should be reported completely
principle states that a company will complete its transparently and without regard for debt
recent plans, meet its financial obligations, and repayment.
utilize its existing assets. This process of
6. Prudence Principle- This refers to a focus on
indefinite operation must continue until the
fact-based financial data representation that is
company has evidence to the contrary.
free of speculation.
Monetary Principle- This principle states that
7. Continuity Principle- When valuing assets,
business transactions should be recorded only
the assumption should be that the business will
when they can be expressed in currency. Non-
continue to operate.
quantifiable entities should not be recorded in
financial accounts by accountants. 8. Periodicity Principle- Entries should be
spread out over the appropriate time periods.
Reliability Principle- This principle ensures that
Revenue, for example, should be reported in
every transaction, business activity, event, and
the relevant accounting period.
so on is trustworthy when presented in a
financial statement. Information should be 9. Materiality Principle- Accountants must work
accompanied by objective evidence and be hard to ensure that all financial data and
checkable, reviewable, and verifiable. accounting information is fully disclosed in
financial reports.
10 Key Principles of GAAP (Generally Accepted
Accounting Principles) 10. The Principle of Absolute Good Faith- The
term is derived from the Latin phrase uberrimae
fidei, which is used in the insurance industry. It
assumes that all parties are truthful in all
transactions.