ACC10 Introduction to Accounting C.

Gomez Discussion and Illustrations Fundamentals of Accounting

What is Accounting?
Textbook ( Principles of Accounting, 19th Edition Wild, Shaw, Chiappetta) Accounting is an information and measurement system that identifies, records, and communicates __________, ____________, and _____________ information about an organizations business activities. American Institute of Certified Public Accountants (AICPA) Accounting is the art of ______________, _______________, and ______________ in a significant manner and in terms of __________, _______________, and __________ which are in part at least of a financial character and interpreting the results thereof.

Components of accounting
1. Identifying process by which business activities are recognized or not recognized as accountable events 2. Measuring process of assigning amounts to the events which have been identified as accountable 3. Communicating process of preparing and distributing accounting reports to potential users of accounting information

What are the purposes of Accounting?

1. To provide an effective means of recording the transactions of a company 2. To provide decision-makers with information useful in making economic decisions a. Financial position (balance sheet) b. Results of operations (income statement)

Users of Accounting Information

accounting information is most often embodied in a companys _________________________, that is why the more common term is users of financial statements accounting information is useful to the users if such information have the following qualitative characteristics: _______________, _______________, _______________, and _______________.

1. External users o Lenders o Shareholders/Investors o Customers o Suppliers o External auditors o BIR 2. Internal users o Board of directors o Managers o Employees o Internal auditors acc10_l1_01_fundamentals of accounting_cgomez_bc.doc Page 1 of 6

ACC10 Introduction to Accounting C. Gomez Discussion and Illustrations Fundamentals of Accounting

Areas of Accounting
1. 2. 3. 4. 5. Financial accounting Managerial accounting Taxation Audit Government accounting

Generally Accepted Accounting Principles (GAAP)

What is GAAP?
The GAAP represent/s the __________,__________,__________, and __________ followed in the preparation and presentation of financial statements. The GAAP constitute/s the laws that must be followed in accounting, more specifically in financial reporting. If the legal system has the Civil Code, the Revised Penal Code, and the Corporation Code, accounting has the GAAP. GAAP may differ from country to country or from region to region. US Companies, for instance, adhere to the US GAAP. Here in the Philippines, we have our own Philippine Accounting Standards (PAS), which, in effect, are based on International Accounting Standards (IAS).

IAS vs. PAS

The IAS is formulated and published by an international body called the __________________________________________________ (IASB). The IASC issues these statements with the aim of harmonizing or bringing to uniformity the different accounting regulations, standards, and procedures around the world. The PAS is formulated and published by a local body called the __________________________________________________ (FRSC). The FRSC was established by the Board of Accountancy in 2006 to assist the Board in promulgating accounting standards in the Philippines and to establish GAAP in the Philippines. The FRSC succeeded the ________________________________________ (ASC) which had previously had the same powers and functions. The PAS is actually largely based on the IAS if not entirely identical with.

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ACC10 Introduction to Accounting C. Gomez Discussion and Illustrations Fundamentals of Accounting

Underlying Assumptions
__________ notions or _______________ premises on which the accounting process is based. These serve as the foundation of accounting in order to avoid misunderstanding and to further enhance the understanding and usefulness of the financial statements. These are ____________________ GAAP which have been made effective not by formal standard-making processes, but by mere __________ or __________ practice.

1. Accrual Business transactions are recorded using accrual accounting. It means that: Income is recognized when earned regardless of when the payment for it is received (Revenue recognition) Expense is recognized when incurred regardless of when it is to be paid (Expense recognition) o Example: The New Directions, an up and coming show choir, was hired by a private school to perform in their seniors graduation ball to be held on March 31, 2011. On March 1, 2011, the school paid the choir P20,000 for their scheduled show. Under accrual accounting, the revenue of P20,000 should be recognized/recorded on: a. March 1, 2011 b. March 31, 2011

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ACC10 Introduction to Accounting C. Gomez Discussion and Illustrations Fundamentals of Accounting

Example: On January 2, 2011, Starbucks received its MERALCO bill for the month of December 2010 amounting to P10,000. It was only able to settle its bill on January 10, 2011. Under accrual accounting, Starbucks expense on electricity should be recognized/recorded on: a. December 2010 b. January 2, 2011 c. January 10, 2011

2. Going concern assumption the business, whether actually profitable or not, is assumed __________________________________________________ for an indefinite period of time o o When the going concern assumption is applicable, all other GAAP are applicable. When this assumption is no longer used, certain GAAP will no longer apply (historical cost concept).

3. Accounting/Business entity concept the business/enterprise/company has a personality ________________________________________ from its owner/s and the employees that compose it. o The transactions of the business entity shall be recorded and kept separately from the transactions of its owner/s and employees.

Example: Nigel Barker, a freelance photographer, established a modest enterprise to engage in the business of providing various photography services and named it Top Model Photos. Mr. Barker in buying his current residence, a posh apartment in New York, obtained a loan from the bank amounting to $10,000. Under the legal entity concept, the $10,000 loan is a liability of _________________ and not of _______________________.

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ACC10 Introduction to Accounting C. Gomez Discussion and Illustrations Fundamentals of Accounting

4. Time period or periodicity the life of a company may be divided into segments called accounting periods. o o For reporting purposes, it is necessary to make distinctions as to the different accounting periods. An accounting period is usually composed of twelve (12) months: a. Calendar year accounting period which begins on January 1 and ends on December 31. b. Fiscal year accounting period also runs for twelve months, but begins on a date other than January 1 (e.g. April 1) An accounting period of 12 months may be broken down further to shorter periods for reporting (e.g. semi-annually, quarterly, monthly) An accounting period is different from an accounting/operating cycle such that the latter is the average period of time that it takes for an enterprise to acquire the merchandise inventory, sell the inventory to customers and ultimately collect cash from the sale.

o o

5. Stable monetary unit the transactions of a business are measured using only _______________________. o o o o It is possible for a company to enter into transactions that are denominated in different monetary units or currencies. A company may sell products to US clients who pay in US Dollar, but it may also buy its inventory or stocks from local suppliers who require payment in Philippine Peso. The concept of stable monetary unit requires a company, for reporting purposes, to express all of its transactions using only one currency. _______________________ is the accounting parlance for the stable monetary unit of a company. All other transactions which are originally expressed different foreign currencies are required to be translated into the functional currency using the applicable foreign exchange rates.

6. Historical cost It is a basis of measurement of business transactions in which activities are recognized and recorded in the books. o o Historical cost is the amount of _______________________ involved in a certain transaction. Example: A Company decides to purchase a truck on January 1, 2010 for P1 million. Six (6) months later, the Company paid P20,000 for repairs and maintenance of the said truck. Historical cost in this case will be P___________, the purchase price of the truck. It __________ include the amount spent on repairs as the same was not involved in the original transaction. 7. Matching principle All costs associated with a particular item of revenue should be recorded in the same period as the revenue is recorded.

Conceptual Framework Qualitative Characteristics

Conceptual framework summary of the terms and concepts that underlie the _______________ and _______________ of the financial statements. Qualitative characteristics attributes that make financial information __________ to the users.

1. Relevance capacity of information to influence a decision. acc10_l1_01_fundamentals of accounting_cgomez_bc.doc Page 5 of 6

ACC10 Introduction to Accounting C. Gomez Discussion and Illustrations Fundamentals of Accounting

2. Reliability degree of confidence users place upon the truthfulness of the representations in the financial statements. o Factors that enhance the reliability of financial information: a. Faithful representation the actual effects of the transactions should be properly accounted and reported in the financial statements. b. Substance over form transactions should be recorded in accordance with their substance and reality and not merely their legal form. c. Neutrality Financial information must be free from bias and partiality. d. Conservatism The company shall anticipate profit and provide for all losses. In a situation wherein several alternatives for income are available, the alternative which will yield the least benefit (least income) should be given higher regard. Everything that can go wrong will go wrong. Dont count your chicks until the eggs hatch. e. Completeness (Adequate disclosure principle) - A business entity should report or disclose all of its transactions. Reporting the amount involved in a transaction is usually not enough. Full disclosure requires the company to explain, in detail, the events that have transpired and all other information related to a transaction. These details are embodied in the ______________________________. 3. Understandability Financial information must be comprehensible or intelligible if it is to be useful. Technical jargon should be communicated in a way that general users, even non-accountants, will be able to understand the transaction. 4. Comparability Financial information must be presented in a manner that will allow the users to compare the information of: one period to previous or future accounting period one enterprise with other competing enterprises o Consistency In order to be comparable, financial information should be consistent. Accounting methods and practices should be applied on a uniform basis from period to period.

5. Materiality Although, adequate disclosure requires a company to report all of its transactions, this concept limits such reporting only to those transactions and information which are: Material Significant Important o o It will be impracticable and cumbersome for a company to divulge every little detail in its operations. A transaction or a piece of information is considered material if it is capable of altering a business decision which is based upon it.

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