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ACC 124 - Assignment 1

The document provides an overview of key accounting concepts including the four main financial statements (income statement, balance sheet, statement of changes in owner's equity, and statement of cash flows), recognition principles, elements of financial statements, accounting assumptions, definitions of accounting, and qualitative characteristics of accounting information. It also discusses the role of the Philippine Financial Reporting Standards Council in setting accounting standards in the Philippines to promote consistency with International Financial Reporting Standards.

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116 views7 pages

ACC 124 - Assignment 1

The document provides an overview of key accounting concepts including the four main financial statements (income statement, balance sheet, statement of changes in owner's equity, and statement of cash flows), recognition principles, elements of financial statements, accounting assumptions, definitions of accounting, and qualitative characteristics of accounting information. It also discusses the role of the Philippine Financial Reporting Standards Council in setting accounting standards in the Philippines to promote consistency with International Financial Reporting Standards.

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Ruzui
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Name: Louise Justin S.

Tabanao Subject and Code: ACC 124 – 8716

1. Financial statements
Financial statements are written documents that describe an entity’s commercial
activity and financial performance. This is mostly prepared by government authorities,
accountants, and corporations to verify accuracy and for tax, financing, or investing
purposes. These are prepared to provide useful information to a wide range of users,
for example, investors. There are 4 financial statements and these are Income
Statement, Statement of Financial Position or Balance Sheet, Statement of Changes
in Owner’s Equity, and Statement of Cash Flows.

The Income Statement shows the performance of the business for a given period.
This is where the summary of Income and Expenses are reflected for a given period.
The performance of an enterprise is measured in terms of the level of income
generated by the enterprise. This is considered the most important information
because profitability is the main concern to those who are focused on the economic
activities of the entity.
The Balance Sheet shows the financial position of the business as of a given date.
This has two forms; Account Form and Report Form. The Account Form shows the
assets are on the left and liabilities and owner’s equity are on the right which are
arranged in a horizontal order. Then the Report Form is arranged in a vertical order
where the assets are on top followed by liabilities then owner’s equity on the bottom.

Statement of Changes in Owner’s Equity is a financial statement that shows the


summarized changes in equity over a period of time. The beginning equity will be
increased through additional investments of the owner and profit. Meanwhile, it will be
decreased by profit loss and withdrawals.
Statement of Cash Flows is a financial statement that summarizes the movement of
cash and cash equivalents that come in and go out of a company. The inflows and
outflows of cash are classified into Operating activities which are the movement of
cash from the normal operating activities of the business like the sale of a product,
Investing Activities are from the sale or purchase of assets except cash and lastly,
Financing Activities are cash from owners and creditors of the business.

2. Recognition Principles
These are some of the recognition principles that are followed:
• Cost Principle – this principle requires assets to be recorded at original or
acquisition cost.
• Revenue Principle – revenue should only be recognized when earned.
• Expense Principle – expenses should only be recognized when incurred.
• Matching Principle – this is the combination of Revenue Recognition and
Expense Recognition Principles. Proper matching of revenue and expenses is
paramount.
3. Elements of Financial Statements

• Assets - these are resources controlled by the entity as a result of past events
and from which future economic benefits are expected to flow to the entity.
Examples include cash, accounts receivable, inventory, property, plant, and
equipment. This is classified into two;
▪ Current Assets –refers to all assets that are expected to be sold or
consumed within the business’s operating cycle. Normally, an operating
cycle would be a year or 12 months. Examples are; Cash Accounts
Receivable, Cash Equivalents, Inventories Accrued Income, Prepaid
Expenses, etc.
▪ Non-Current Assets – these are assets that are expected to be sold or
used for a long period or more than a year. Examples are; Property,
Equipment, Land, Buildings, etc.
• Liabilities - are obligations of the entity arising from past events, the settlement
of which is expected to result in an outflow of resources embodying economic
benefits. Examples include accounts payable, loans, and accrued expenses.
▪ Current Liabilities – these are financial obligations that need to be settled
within 1 year or the operating cycle of the business. Examples are;
Accounts Payable, Notes Payable (short-term), Unearned Income, and
Accrued Expenses.
▪ Non-current liabilities – are long-term financial obligations that are due
and payable for more than 1 year. Examples are; Mortgage Payable and
Notes Payable (long-term).
• Equity – this represents the residual interest in the assets of the entity after
deducting liabilities. It is the ownership interest of the shareholders or owners.
Common components of equity include common stock, retained earnings, and
additional paid-in capital.
• Revenue - also referred to as income, is the inflow of economic benefits during
a period arising from the ordinary operating activities of the entity. It includes
sales revenue, service revenue, interest income, and other sources of revenue.
• Expenses - these are outflows of economic benefits during a period that arise
in the course of ordinary operating activities. Examples include cost of goods
sold, salaries and wages, rent, utilities, and depreciation.

4. Accounting Assumptions

These are the five basic accounting assumptions:

• Accounting Entity or Business Entity Assumption – this assumes that in the


view of accounting, the business is an entity that is separate and different from
the owner, The ownerships of the assets are shifted to the business itself from
the owner.
• Going-concern Assumption – it is assumed that the business will continue to
operate for an indefinite period.
• Periodicity Concept or Time Period Assumption – the life of a business entity
is divided into equal periods called accounting periods where at the end of the
period, financial statements are prepared by the business.
• Unit-of-measure or Stable Monetary Unit – Under this assumption, the peso
is considered to have a stable value which means that the purchasing power of
the peso is steady regardless of the inflation rates.
• Accrual Assumption - Transactions are documented on an accrual basis,
which means that revenues are recognized as earned whether or not cash is
received, and expenses are recognized when incurred whether or not cash is
paid. If this assumption is not relevant, a company can utilize the cash basis of
accounting to create financial statements based on cash flows.
5. Accounting Definitions

The Accounting Standards Council (ASC) in its old Statement of Financial Accounting
Standards (SFAS) No.1 defines accounting as “It is a service activity. Its function is to
provide quantitative information, primarily financial in nature, about economic entities
that are intended to be useful in making economic decisions.”.

The American Accounting Association (AAA) defines accounting as “It is the process
of identifying, measuring and communicating economic information to permit informed
judgments and decisions by users of the information.”.

Meanwhile, the Committee on Accounting Terminology of the American Institute of


Certified Public Accountants (AICPA) defines accounting as “It is an art of recording,
classifying, summarizing in a significant manner and in terms of money, transactions,
and event which are, in part at least, of a financial character, and interpreting the
results thereof.”.

6. Qualitative Characteristics of Accounting

Accounting's qualitative features include basic attributes such as relevance and


Reliability. Relevant information should impact economic decisions and have
predictive or confirmatory value, whereas reliable information is free of material error
and bias and represents economic content faithfully. These characteristics are
enhanced by comparability, which ensures the ability to compare information across
periods and entities; consistency, which maintains uniformity in accounting methods;
verifiability, which allows independent confirmation of accuracy; and timeliness, which
provides information on time. As indicated in the accounting conceptual framework,
these characteristics collectively contribute to the usefulness of financial information
by assisting users in making informed decisions and comprehending an entity's
economic situation and performance.
7. Financial Reporting Standards Council (PFRSC)

Philippine Financial Reporting Standards Council (FRSC) is responsible for setting


financial reporting standards in the Philippines. The FRSC is the body that endorses
accounting standards in the country. It works to align Philippine accounting standards
with International Financial Reporting Standards (IFRS) to promote consistency and
comparability of financial statements globally. The FRSC plays a crucial role in
maintaining and improving the quality of financial reporting in the Philippines. It
collaborates with international standard-setting bodies to ensure that Philippine
accounting standards remain in line with global best practices.

References:

Lopez, R. (2022). FUNDAMENTALS IN ACCOUNTING (Simplified Procedural


Approach) Revised Edition 2022-2023. RS LOPEZ Printing Shop.

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