FABM 1

Lesson 1
Introduction to Accounting
Basic Financial Statements

Financial statements are one of the most important documents in starting your own
business.
It helps fulfill the Stewardship function of the owners and managers.
Stewardship function means that the businesses should be transparent on the performance
and standing of the business to its stakeholder.
Financial statements or reports reflect the financial standing and economic activities of the
business. These economic activities may relate to transactions that can affect the financial
position, financial performance, and cash flows of the business.

A complete set of financial statements being prepared periodically by a business is

composed of the following:
1. Statement of Financial Position
2. Income Statement
3. Statement of Changes in Equity
4. Statement of Cash Flows
5. Notes, comprising of a summary of significant accounting policies and other explanatory
information.

The objective of financial statements is to provide information about the financial position,
financial performance, and cash flows of a business that is useful to key personalities who
are making economic decisions.
To meet this objective, financial statements provide information about a business' assets,
liabilities, equity, income and expenses, contributions by and contributions to owners in
their capacity as owners, and cash flows.

Business transactions
Business transactions take place once a business venture starts operation.
Business transactions are the interactions between businesses and other stakeholders.
Stakeholders include, but are not limited to, customers, suppliers, investors, and
government offices.
These transactions can be very simple like buying photocopying supplies or very complex
like applying for a bank loan that requires submission of business and legal documents.
Business transactions have to be identified, measured, and documented through an
accounting process. Doing so can make it easier for the owners and managers to prepare
the financial statements for a particular period or as of a specific time.

Definition of Accounting
1. American Accounting Association (AAA)
Accounting is the process of identifying, measuring, and communicating economic
information to permit informed judgement and decisions by users of the information.

2. American Institute of Certified Public Accountant (AICPA)

Accounting as the art of recording, classifying, and summarizing in a significant manner and
in terms of money, transactions and events which are in part at least of financial character,
and interpreting the result thereof.

3. Accounting Standards Council (ASC)

Accounting as a service activity.

Four Aspects of Accounting

1. Recording
Writing down of business transactions chronologically in the books of account as they
transpire.
2. Classifying
Sorting similar and related business transactions into the three categories of assets,
liabilities, and owner's equity.
3. Summarizing
Preparing the financial statements from the transactions recorded in the books of account
that are designed to meet the information needs of its user.
4. Interpreting
is the analytical phase of accounting.
The analytical phase is performed by answering four basic questions namely:
1. Is the company liquid?
2. Is the company solvent?
3. Is the company stable?
4. Is the company profitable?

Very briefly, Liquidity is synonymous with cash.

How much cash does the company have "conveys whether the company is liquid or illiquid.
Solvency is the ability to pay current obligations.
Stability is the ability to pay long term obligations. Actually, this pertains to "how long" can
a company exist so as to comply with its long term commitments.
Profitabilty is the ability to increase capital not from additional investment, but from the
results of operation.
Representing the qualitative and quantitative financial information about the business
transactions in a language comprehensible to the users of financial statements. By
interpreting the data in the financial statements, users are able to determine the financial
standing of the company as well as its stability and growth potential. Users interpret
financial information relating to specific business decisions.
This makes accounting the language of business.

Nature of Accounting
1. Accounting is a systematic process.
Process is a series of actions that produce something or that lead to a particular result. As
such, the performance of the four aspects of accounting, which are recording, classifying,
summarizing and interpreting, leads to communicating to its users the relevant financial
information needed by the parties interested.
2. Accounting is an art.
Art is a skill acquired by experience, study, or observation. It is also defined as an
occupation requiring knowledge or skill. The four aspects of accounting require both
knowledge and skill through experience, study, or observation as a means to produce the
key end product which are the financial reports.
3. Accounting is a service activity.
Service is the occupation or function of serving. Activity is something that is done as work
or for a particular purpose. Combining the meaning of the two words, accounting is a work
or occupation for serving a particular purpose.
Hence, since its purpose is to provide financial information, the data that will process in
terms of the four aspects of accounting should be expressed in monetary terms. Inshort, it
iis interested in activities that can be measured and expressed in terms of the value of
money.

Basic Purpose of Accounting

The accounting standards council states that the basic purpose or primary function of
accounting is "to provide quantitative financial information about a business enterprise that
is useful to statement users, particularly owners and creditors, in making economic
decision".
The American Accounting Association states that " accounting identifies, measures and
communicates information about entities for use in making informed judgement and
decision".

An accountant's primary task therefore is to supply financial information to statement users

so that they could make informed judgement and better decision
Functions of Accounting in Business
The functions of accounting in business can be attributed to the three fundamental
objectives of an information system.
An information system in itself, accounting performs the following tasks:
1. To fulfill the stewardship function of the management (or Owners)
2. To help interested users come up with informed decisions
3. To support daily operations of the business.

Difference between Bookkeeping and Accounting

Accounting is broader as it includes the bookkeeping functions.
Accounting is conceptual and is concerned with the why, reason, or justification for any
action adopted.
Bookkeeping is just confined with the recording of monetary transactions, which is one part
of the accounting process.
Bookkeeping is procedural and is largely concerned with development and maintenance of
accounting records. It is the "HOW" of accounting.

History and Development of Accounting

"It is believed that the very origins of writing itself may have developed out of early marks
used to keep account of goods at ancient warehouses more than 5,300 years ago. The
notion that pre-numerical counting systems pre-dated even written language, did'nt come
as a surprise to many historians and archaeologists who have long since recognized that the
history of human civilization is largely indistinguishable from the history of commerce.

Highlighting Pacioli (1494)

The origins of "hardcore accounting can be traced from the Renaissance period. Particularly
the Italian monk and mathematician
Frater Luca Bartolomes Pacioli wrote Summa de Arithmetica, Geometria. Proportioni rt
Proportionalita (Everything About Arithmetic Geometry. Proportion, and Proportionality)
which was published in Venice in November 1494. It included a 24-page treatise on
bookkeeping, Particularia de Computi et Scripturz (Details of Calculation and Recording),
specifically on the subjects of recordkeeping and double-entry accounting.
Pacioli was born in Borgo San Sepolcro. He lived in Venice and became the tutor of the three
sons of a rich merchant. Antonio de Rompiasi Pacioli popularized the system of recording
business transactions using memorandum books, journal books, and ledger books. This
system of bookkeeping was largely influenced by how commercial establishments in Venice
kept track of their business transactions This is probably something that he had learned
from his exposure to the Venetian merchants.
Aside from Pacioli, there are also other Italian personalities who wrote about double-entry
accounting during that time. However, it is only his work that had a huge impact on the field
of accounting. It is for this reason that he regarded as the "Father of Modern Accounting"

Lesson 2
Branches of Accounting

1. Public Accounting
2. Private Accounting
3. Government Accounting
4. Accounting Education

Branches of accounting under Public accounting are as follows:

1. External auditing
2. Tax Preparation and Planning service
3. Management Advisory Services

Public Accounting
-the accountant performs or offers to perform any activity that will result to the issuance of
an attest report that is in accordance with professional standards.
Such activities include consulting services, personal financial planning services, the
preparation of tax returns, and advice on tax matters for a fee.

Examples of Public Accounting

1. External Auditing
is the examination and review of accounting reports in order to ascertain their
fairness, propriety, and reliability. The independent auditor's opinion provides
reasonable assurance that the financial statements under examination fairly present
the company's financial position and results of operation in accordance with the
generally accepted accounting principle(GAAP).
In external auditing, public accountants inspect or examine the financial statements in order
to express an opinion on whether statements have been fairly presented or not.
The auditor critically examines the accounting records of the client to check if business
transactions have been properly recorded.
The auditor then issues an independent audit report of his or her findings.
Why do we need an external auditor?
External auditors provide information and valuable insight into the information that exists
within an organisation.
Their findings and audit processes give businesses the confidence and reassurance that their
information and the way they conduct business is suitably kosher (proper or acceptable).
Objective of External Auditing
The objective of an external audit of financial statements is to determine whether, in the
auditor's opinion, the statements present fairly in all material respects-that is, they show a
true and fair view in all material respect of the company's financial position, results of
operations, and cash flows, in conformity with national or international generally accepted
accounting principle (GAAP)

Who chooses the external auditor?

External auditors are appointed by the shareholders of a company, although this usually
comes through discussion with directors.
External auditors must be appointed from a different company independent of their own.

What is the role of an external auditor?

External audit firms are responsible for providing reasonable assurance that the financial
statements are free from material misstatements and prepared according to an accounting
framework.

Is external audit compulsory?

External audit, is an examination and evaluation by the third or the independent body of the
annual statements of accounts of the organization or an entity to give an opinion thereon.
External audit is compulsory.

2. Tax Preparation and Planning Services

Some Certified Public Accountants (CPAs) also offer tax services wherein they advise and
help their clients in tax planning and preparing tax returns.

In this branch of public accounting, the accountant is a tax specialist. He or she is expected
to be knowledgeable about revenue regulations and tax laws. He or she also represents the
client in any tax-related case file by the Bureau of Internal Revenue (BIR).

Tax preparation and tax planning are two sides of the same coin. Having your taxes
thoroughly and carefully planned will ensure that your business continues to thrive.
Careful tax preparation also helps to ensure your business will thrive.

3. Management Advisory Services

Management consulting is an area in public accounting that involves financial planning and
control, and the development of accounting and computer systems.
The accountant advises management on matters such as the installation of an accounting
system, finance, budgeting, business processes, introduction of new products, and other
business activities.

*Management advisory services are consulting services performed by a specialist

organization for its clients. These services are intended to provide advice regarding the
operations and finances of clients.

The services may address any of the following areas:

• Asset evaluation
• Business strategy
• Computer systems
• Litigation support
• Mergers and acquisitions
• Organizational structure
• Process analysis
• Risk management
Note:

A CPA firm may provide management advisory services if this group is separated from the
auditing and tax functions.

Purpose of MAS
Its primary purpose is to help improve the client's use of its capabilities and resources in
order to achieve its objectives.
In conducting MAS, the CPA should function only in the capacity of advisor and not as
decision maker or member of management. MAS are Engagements or Consultations and
not recommendations and comments as direct result of observations during audit or review.

Private Accounting
-involves setting up systems of recording business transactions that are aggregated into
financial statements. It includes the development and interpretation of accounting
information intended to assist management in operating the business.
A private accountant is a salaried employee who deals with the company's day-to-day
accounting needs. He/she is trained in the processing of accounting transactions such as
billings and accounts payables. His or her knowledge may be limited to the areas of
accounting for which they are responsible.

Branches of accounting under Private accounting are as follows:

1. Financial Accounting
2. Cost Accounting
3. Budgeting
4. Accounting information System
5. Tax Accounting
6. Internal Auditing

Financial Accounting
This branch of private accounting provides economic and financial information for investors,
creditors, and other external users.
It uses a system of reporting designed to meet the information needs of external users.
Financial accounting is governed by an established body of standards and principles. It
focuses on the recording and classifying of business transactions while applying generally
accepted accounting princples (GAAP)
Financial accounting end in the preparation and presentation of general purpose financial
statements. These documents should show the business financial position, operating
results, and cash activities. It is also best to include supporting explanatory notes to these
financial statements to further explain its reports or findings.
Information from this branch of accounting helps investors and creditors in deciding where
to place their scarce resources. Such decisions are crucial since it determines which
companies and industries will receive the financial resources needed for economic growth.

Cost Accounting
Focuses on accumulating manufacturing costs for financial reporting and decision-making
purposes. It covers the reporting of financial information relevant to manufacturing
operations. It provides management with the necessary tools and information for planning
and controlling activities.
The primary role of a cost accountant is to determine the inventory cost for financial
reporting purposes.
*Cost accounting includes the collection, determination, allocation, assessment,
interpretation, and control of cost data, particularly the cost of production in a
manufacturing concern. The cost of production includes the raw materials, direct labor,
factory overhead, and all other costs involved incident in each stage of production of the
finished goods.

Budgeting
It provides a detailed collection and reporting of the expenditures and revenues involved in
a business or company operations.
This branch of private accounting tracks the financial details of the firm, including the
money taken in and the money spent by the company and the staff.
It also assists the management in quantifying goals concerning revenue, cost of sales or
services, and operating expenses.
Accounting Information System
Accounting information system collects and processes transaction data. It also disseminates
information to interested parties. It involves the designing of both manual and
computerized data processing systems.
An accounting as an information system is a system of collecting, storing and processing
financial and accounting data that are used by decision makers.
An accounting information system is generally a computer-based method for tracking
accounting activity in conjunction with information technology resources.

What is the purpose of accounting information system?

Is to collect, store, and process financial and accounting data and produce informational
reports that managers or other interested parties can use to make business decisions.

Five fundamental principles of Accounting Information System

A. B.
Control Historical Cost
Accountability Relevance
Relevance Compatibility
Compatibility Flexibility
Flexibility Cost-benefit

Tax Accounting
It deals with the preparation of various tax returns and doing tax planning for the business.
This is similar to the tax services done in public accounting.

Tax services provided by accountants include the preparation of monthly value added tax,
percentage tax, expanded witholding tax returns, quarterly and annual tax returns and any
other tax applicable to business.
Accountants work closely with clients in order to avoid tax problems with BIR and other
local agencies through proper tax compliance while advising clients about ways and
measures to minimize taxes.

Internal Auditing
This branch of private accounting reviews the business operations to check if they are
complying to management policies. It also evaluates the efficiency of business operations.
Normally, an internal auditor is a hired employee of a company.

Is internal audit compulsory?

Internal audit is discretionary which means there is no compulsion.
Government Accounting
Is a system used in government offices to record and report financial transactions.
It is the systematic process of collecting, recording, classifying, summarizing and interpreting
the financial transactions relating to the revenues and expenditures of government offices.
Section 109 of Presidential Decree(PD) No. 1445 states that government accounting
encompasses the process of analyzing, classifying, summarizing, and communicating all
transactions involving the receipt and disposition of government funds and property, and
interpreting the results thereof. The agencies responsible in performing government
accounting functions are the Commission of Audit (COA), Department of Budget (DBM) and
the Bureau of Treasury (BTr).

Accounting Education
This branch of accounting is responsible for training future accountants. It engages in
teaching accounting, financial management, taxation, and other related business course.
As per commission on Higher Education (CHED) Memorandum Order (CMO) No. 3, Series
2007, a CPA in accounting education should possess the educational qualifications,
professional experience, classroom teaching ability, computer literacy, scholarly research
productivity, and other attributes that are essential for the successful conduct of a
professional accounting program.
CPAs are encouraged to be part of the character of the academe and become an integral
force in inspiring learners pursue a career in acounting.
Accounting educators could be teachers, administrators, or researchers.
Accounting research, though a separate discipline, usually falls under this branch.
Accounting research is broader scope and wider coverage. In compasses research interests
in the areas of financial accounting, management accounting, auditing and assurance, and
taxation, among others.

CPAs in Specilized areas

1. Forensic Accounting
2. Information Technology Services
3. environmental Accounting
4. International Accounting

Forensic Accounting
Forensic accountants provide detective work needed to investigate and examine evidence
of white-collar financial crimes such as stealing and fraud.
They often act as expert witnesses in legal proceedings and prepare evidence to be
presented in court.
Information Technology Services
Businesses often seek individuals who can design and implement customized software
systems.
CPAs who possess strong skills in information technology can work with e-commerce
ventures and consult with others to determine which decisions are the most financially and
technologically sound for a company.

Environmental Accounting
CPAs involved in environmental accounting determine how companies can be both
profitable and environmentally responsible.
They do environmental compliance audits and set up preventive systems to ensure
compliance and avoid future environmental released claims or disputes.

International Accounting
International accountants are knowledgeable in international trade rules and regulations,
international mergers, government regulations, tax laws, and overseas transactions.
CPAs who work in this area often travel abroad and can speak and understand different
languages

Lesson 3
Users of Accounting Information

INTERNAL USERS
-are those who make decisions on behalf of the organization.
1. Managers/management
- they plan, organize and run a business.
a. Top-level management - Chief Executive Officer (CEO). Chief Financial Officer (CFO),
Chief Operating Officer (COO), among others. They use the information to oversee
the performance of the whole organization and set its strategic direction.
b. Middle-level management - Department heads, branch managers, and junior
executives, among others. They ensure that their units performances are aligned
with the organization's objectives.
c. Top-level management - Chief Executive Officer (CEO). Chief Financial Officer (CFO),
Chief Operating Officer (COO), among others. They use the information to oversee
the performance of the whole organization and set its strategic direction.

2. Employees/labor unions
- they assess the company's profitability and stability, and their consequence on future
salary and job security.
3. Owners
- they provide the capital to the business. Owners need these accounting information to
help them decide whether they should with draw or increase their investments They are
interested to know the returns on their investment

External Users
-are those who make decisions based on the company’s financial information.
1. Potential and existing investors
-They need information to help them decide whether they should invest or not in the
business.
Through past performances or operating results of the company, they would want to know
potential returns on their investment.
2. Creditors and potential creditor
-They assess the credit worthiness and the capability of the business to pay its obligation
including the related interests on maturity date.
3.Customers
-they assess the financial position of their suppliers which is necessary for them to maintain
a stable source of supply in the long term.
They are interested to know whether the business will continue to honor its product
warranties.
4.Suppliers
-they use the financial statements of their customers to determine whether the debts owed
to them will be paid when due or whether the customer has enough funds or resources to
pay the goods to be delivered or the services to be rendered.
5. Tax authorities
-they use financial reports to determine the credibility of the tax returns filed on behalf of
the company.
They are interested to know if the business paid the correct amount of taxes.
6. Regulatory bodies
-they want to ensure that the company's disclosure of accounting information is in
accordance with the rules and regulations set in order to protect the interest of the
stakeholders who rely on such information.
Example:
These regulatory bodies are the Securities and Exchange Commission (SEC) and the Bangko
Sentral ng Pilipinas (BSP).
7. Public
-they use the financial information to know how the business affects the economy possible
prospects for employment, and/or for educational and research purposes.