ACCOUNTING

· Art of recording, classifying, and summarizing.

· Service activity.

· Provide quantitative information.

· “Language of business”

USERS OF ACCOUNTING

Owners or investor

· The one who puts in capital in a business endeavor.

Manager

· the one who is responsible for running the business.

Lender or Creditor

· assesses the paying ability of the business borrower.

Supplier

· offers goods or merchandise on cash basis or on credit term.

Government

· is the business paying the right taxes?

· Is it filing all the required documents?

Employee

· It will assess the ability of the business to grant higher wages, benefits, good working
conditions and security of tenure through financial reports.

Customer

· It assesses the company’s ability to continuously supply the goods they need at the
price and right quality.

FORMS OF BUSINESS ORGANIZATIONS

Sole proprietorship

· A business set up and managed by one person.

Partnership

· A business owned by two or more persons called who contribute partners money,
property, and talent into a common fund for the purpose of sharing profit among
themselves.
Corporation

· A business organization as a separate legal entity from the owners. It means that it
can conduct business by itself-enter contracts, buy and sell properties and stocks.

TYPES OF BUSINESS OPERATION

Service

· One which provides service for a fee to clients or customers.

Merchandising

· One which buys and sells goods or merchandise.

Manufacturing

· One who buys raw materials, process these into goods and then sells these
customers.

FINANCIAL STATEMENT

· Statement of Financial Position

· Is a progress report showing a list of assets and liabilities.

· Income Statement

· Is a performance report of revenues against cost and expenses.

· Statement of Changes in Equity

· Is a progress report showing changes in your wealth.

· Statement of Cash Flows

· Is a cash report showing where the money came from and where the was
used.

RELATIONSHIP OF THE FINANCIAL STATEMENTS

FORMULA: Statement of Profit or Loss and Other Comprehensive Income

Revenue - Expenses=Net Income

FORMULA: Statement of Cash Flows

Operating cash flows

Investing cash flows

Financing cash flows

Net increase (decrease) in cash + Beginning cash= Ending cash

FORMULA: Statement of Changes in Owner’s Equity

Begging Capital + Additional Investments – Withdrawals= Ending Capital

FORMUILA: Statement of Financial Position or Balance Sheet Statement

Asset= Liabilities + Owner’s Equity

Liabilities= Assets – Owner’s Equity

Owner’s Equity= Assets – Liabilities

BRANCHES OF ACCOUNTING

· Basic Accounting for bookkeeping

· Is the rout8ine activity of recording, classifying, and summarizing

transactions in a systematic manner.

· Financial Accounting

· Involves the preparation and interpretation of financial statements

primarily intended for external user such as investors, lenders, suppliers,
government, and customers.

· Cost Accounting

· Deals with recording, classifying, and summarizing the details of

materials, labor and overhead necessary to produce, and sell a product or
service.

· Management Accounting

· Deals with financial and non-financial information primarily for managers

and other internal users to assist them in planning, directing, and
controlling the affairs of the business.

· Auditing

· Deals with the independent verification and examination of the accounting

records for the purpose of giving credibility to the financial statements.

· Government and non-profit accounting

· Deals with recording, classifying, and summarizing the details of

materials, labor and overhead necessary to produce and sell a product or
service.

· Tax Accounting

· Deals with tax matters affecting firms, individuals, trust, and estates,
analyzing tax effect on firm or individuals project or plans.

· Forensic accounting

· Integrates accounting, auditing, and investigate skills.

· Professional regulation commission

 · Is a government body in charge of regulating and licensing the practice of
a profession like accounting.

FUNDAMENTAL CONCEPTS AND PRINCIPLES OF ACCOUNTING

· Business entity

· In the field of business, the entity has a completely different meaning that
is separated from the business accounting must be separated from the
owner’s equity.

· Money management

· It is essential to express the financial accounting details in the terms or

transitory details.

· Cost

· The price at which an asset is bought is the actual price by which entry
will be made in the records. You can’t be dependent on the product as it
will change with time and the market value.

· Time period

· It is about the time taken for the preparation of an entity report. The
format followed by the company depends on the decision of the owner.

· Realization

· Earning is done when the product is sold to the customer at a reasonable

price, it will be recorded at the time of selling and not before it.

· Consistency

· If you are using a method to maintain a record, then you must follow the
same concept for the future.

· Matching

· To ensure that the income is not overstated at any time, you need to
record the expenses and revenue at the same time.

· Dual resources

· Resources= Accountability + Impartiality

ACCOUNTING ASSUMPTION

· Monetary unit assumption

· Requires that companies include in the accounting records only

transaction data that can be expressed in terms of money.

· Economic entity assumption

 · Requires that activities of the entity be kept separate, and distinct from
the activities of its owner and all other economic entities.

ANALYZING TRANSACTIONS

QUALITATIVE CHARACTERISTICS OF FINANCIAL INFORMATION

· Understandability

· Requires that users have a reasonable knowledge of finance accounting,

and economics to come up with a good assessment, and sound
judgement, terminologies must be clear, and presentation of report must
be orderly.

· Relevance

· Prescribes the quality of information that will make a difference and

influence a statement user to make a meaningful decision.

· Reliability

· Means that information must be objective, and free form material errors or
misstatements.

· Compatibility

· Helps one identify changes taking place in the entity between two or more
periods so users will be able to determine the change or trend of trend of
its performance or position.

· The accounting equation

· The accounting equation is a formula that shows the sum of a company’s

liabilities and shareholder’s equity are equal to its total assets.

ELEMENTS OF FINANCIAL STATEMENTS

· Assets

- This consists of current assets, and fixed assets. Assets also contain
the tangible and intangible assets that the company owns.

· Liabilities

- The resources that the company owes to individuals or companies. It

consists of short term and long-term liabilities.

· Equity

- It is the money within a company that was either contributed by the

owners or is owed to the owners.

· Revenue

- It reflects all the company’s income for a specified period.

 · Expenses

- All the costs that to pay out. Like revenue, expenses are only
included for a specified frame.

ACCRUAL CONCEPT OF RECOGNIZING REVENUES AND EXPENSES

· Recognizes revenue when it’s earned.

· Recognizes expenses when they’re billed.

TRANSACTION ANALYSIS

Asses (Debit, Increase), (Credit, Decrease)

Liability (Debit, Decrease), (Credit, Increase)

Equity (Debit, Decrease), Credit, Increase)

THE ACCOUNTING TRANSACTION ANALYSIS PROCESS IN 5 STEPS

1. Identify the accounts involved.

- The first is to determine which accounts are affected by the

transaction. For example, if a business owner invests $10,000 in cash
into the business in exchange for common stock, the accounts
involved would be the cash account and the common stock.

2. Establish the nature of the accounts.

- Review the transaction to determine whether the accounts involved

are assets, liabilities, or equity.

3. Determine which account increase and which one decreases.

- Debits increase asset accounts, and credits increase liability or equity

accounts. Debit simply means recording the transaction on the left
side, while credit means recording the transaction on the right side.

4. Apply the rules of debit and credit on accounts.

- To keep the account equation in balance every transaction recorded

must have an entry in an opposite but related account. Every debit
must have a corresponding credit. This method, knows as double-
entry accounting, is enforced to keep the accounting equation
balanced.

5. Record the transaction your journal entry.

- Once you’re done analyzing the transactions and have determined

the accounts involved and where the transaction need to be debited
and credited, you’re ready to record your transactions in chronological
order to ensure your books stay organized.

CLASSIFICATION OF ASSETS
 1. Fixed assets (Tangible, Intangible, Wasting assets)

- Are the assets acquired for beneficial used and help permanently in
the business. The business can earn profits by using these assets.

2. Floating assets (short-term investment, long-term investment)

- Investments in short-term marketable securities that can quickly be

converted into cash and currents assets, while investments in long-
term marketable securities can be treated as semi-fixed assets.

3. Current assets (cash, bank balance, accounts receivables)

- Current assets are expected to be sold or otherwise used up in the

near future. These assets available for discharging an enterprise’s
liabilities.

CLASSIFICATION LIABILITIES

1. Fixed liabilities

- Are due to the owners/partners/shareholders of an enterprise, and

they are payable only on dissolution/liquidation of the enterprise.

2. Long-term Liabilities

- These are long-term loans (e.g., 5-10 yrs) or debentures that are
payable on or after the lapse of the term consented to in the borrowing
agreement/document.

3. Current liabilities (accounts payable, short-term loan)

- These are short-term obligations payable within the next accounting

period/year or payable within a very short period (e.g., 1-3 mos)

4. Contingent liabilities (compensation claim)

- It arises depending on the happenings of certain events. Such

liabilities may or may not arise. However, it is important to be cautious
about them.

Accounting period

- An accounting period is the time frame for which a business prepares

its financial statements and reports its financial performance and
position to external stakeholders. This could be after three, six or,
twelve months.

Calendar year

- Usually, the accounting period follows the Gregorian calendar year

that consists of twelve months starting from January 1 to December
31. The accounting period follows this natural sequence of months.

Fiscal year
 - The fiscal year refers to an annual period that does not end on
December 31. The International Financial Reporting Standard allows
52 weeks as an accounting period. There are many companies that
follow the 52- or 53-weeks fiscal calendar for their financial tracking
and reporting.

Operating cycle

- An operating cycle refers to the days required to a business to

receive inventory and collect cash from the sale of the inventory. This
cycle plays a major role in determining the efficiency of a business.

· The inventory period is calculated a follow:

Inventory period = 365 / Inventory Turnover

· Where the formula for Inventory Turnover is:

Inventory Turnover = Cost of Goods Sold / Average Inventory

· The Account Receivable Period is calculated as follows:

Accounts Receivable Period = 365 / Receivables Turnover

· Where the formula for Receivable Turnover is:

Receivable Turnover = Credit Sales / Average Accounts Receivable