ACCOUNTING CHAPTER 1 Business is a legally characterized organizational entity existing within an economically free country designed to sell goods

and/or services. Profit-oriented enterprise aims to earn income or profit. Non-profit-oriented enterprise aims to achieve socio-civic or charitable aims. Accounting helps a business enterprise to be accountable for its decision and activities. Service business is the simplest form of business. Provide services in exchange for fees, rent, interest or royalties. Merchandising business purchase goods from suppliers and sell at a higher price. Manufacturing business produces the goods that they sell to the customers. Sole proprietorship is the most basic legal form of business. One owner called the proprietor. -easier to form, uncomplicated business transactions, decisions in less time, enjoys all profits earned, limited ability to raise capital, unlimited personal liability. Partnership is composed of two or more persons. It is governed by the Civil Code of the Philippines. -easier to organize than corporation, burden of management is shared, more ideas, can raise more capital, may result to disagreement, unlimited personal liability. Corporation is the most complex. A person who invests in a corporation is called a shareholder. -greatest capacity to raise capital, may exist not linger than 50yrs, limited liability, subject to greater scrutiny, high income rate. Economic decisions affect the resources it controls and the obligation of the business to other enterprises. Accounting is the process of identifying, measuring and communicating economic information to permit informed judgment and decision by users of the information. -supplies financial information to users of the information. -the language of business. -interpretation of information recorded under bookkeeping. Bookkeeping involves set-up, update and maintenance of accounting records. Republic Act No. 9298 is the Philippine Accountancy Act of 2004 which includes: 1. Regulation of accounting education, 2. Examination for registration of CPA s, 3. Supervision, control and regulation of the practice of accountancy. Article II creates the Professional Regulatory Board of Accountancy tasked to enforce the provisions of the RA 9298. It has the right to issue, suspend, revoke, and reinstate CPA certificates. It is composed of 6 members appointed by the President. CPA Board Exams are required in order to join the accountancy profession. Must obtain an average of 75% with no grades lower than 65%. SECTORS OF ACCOUNTING Public practice includes individual practitioners, small accounting firms. y Auditing involves independent examination of financial statements for the purpose of expressing an opinion on the fairness of these statements. y Tax services include preparation of tax returns for various clients, provisions of advice on tax matters, and representation of clients in tax cases. y Management consulting services involves providing advisory services to clients on matters of accounting, finance, business policies. Commerce and Industry accountants assist management in planning and controlling a company s operation. Comptroller is the highest accounting officer in business organization. Education accountants take steps to clarify and address emerging accounting issues encountered by accountants in other sectors. Government accountants may be as staff, auditor, budget officer, or counsultants. Middle East region tradesmen use clay objects to represent commodities during 8500 BC. Papyri were used as the medium for record keeping. Double-entry records first appeared in Genoa in 1340 AD. Friar Luca Pacioli wrote the book Summa de Arithmetica, Geometria, Proportioni et Proportionalita which is a summary of the existing mathematical knowledge at that time. He is the Father of Double Entry Bookkeeping. FIELDS OF ACCOUNTING 1. Financial Accounting focuses on the preparation and presentation of general-purpose financial statements for external users.

2. Management Accounting is concerned with financial reporting for internal users. 3. Cost Accounting measures a business costs to help management in controlling expenses. 4. Tax Accounting aims: compliance with the tax laws and minimizing company s tax bill. It provides tax planning and tax consultancy services. 5. Government Accounting encompasses the process of analyzing, classifying, summarizing and communicating all transactions. It is the proper custody, disposition, and accounting for public funds. ACCOUNTING CHAPTER 2 Generally Accepted Accounting Principles (GAAP) set of principles that governs the preparation and presentation of financial statements. It comprises the accounting principles and processes, standards and underlying assumptions that are used in preparing the financial statement. Financial Reporting Standards Council (FRSC) issues standards which constitute Philippine GAAP. BASIC ACCOUNTING CONCEPTS Business Entity Principle states that the business is considered distinct and separate from the owners of the business. Accounting Entity is an organization that is accounted for as a separate economic unit. Dual-effect of business transactions states that the value received is equal to the value given up. Matching Principle states that profit or loss can only be measured if a proper matching of the income earned and the expenses incurred within one accounting period. Accrual Basis states that income is recognized when it is earned, regardless of when cash is received. Cash Basis states that income is recognized when cash is received. Stable Monetary Unit is concerned with information which can be quantified and expressed in terms of money. Periodicity assumes that the operating life of an enterprise may be conveniently divided into time periods of equal length (accounting period) Going Concern assumes that an enterprise will continue for the foreseeable future. Framework sets out the concepts that underlie the preparation of financial statements for external users. Financial statements are information accumulated in and processed by financial accounting. It is the end product of the financial accounting process. USERS OF FINANCIAL STATEMENTS Investors are providers of risk capital and are concerned with the risk inherent in and return provided by their investments. Employees are interested in information about the stability and profitability of their employers. Lenders are interested in information that enables them to determine whether their loans and the interest attaching to them will be paid when due. Suppliers are interested in information that enables them to determine whether amounts owing to them will be paid when due. Customers have interests in information about the continuance of an enterprise especially when they have a long-term involvement with the enterprise. Government have an interest in the allocation of resources and the activities of the enterprise. Public is affected by the enterprise in variety of ways. Financial Position refers to the condition of the a business. Liquidity is the availability of cash in the near future to cover currently maturing liabilities or obligations. Solvency is the availability of cash over the long term to meet obligations when they fall due. Capacity for adaptation is the ability of the enterprise to use its available cash for unexpected requirements. Profitability refers to whether a company is able to generate profit or incur a loss during a particular accounting period. General purpose financial statements are financial statements that meet most of the needs of other users. Interim financial statements are shorter-period financial statements. Underlying assumptions refer to concepts which are assumed to have been applied in preparing financial statements. ELEMENTS PERTAINING TO FINANCIAL POSITON Assets are resources owned/controlled by the enterprise. They are expected to provide future economic benefits y Cash is the money in hand. y Accounts receivable are valid claims from customers arising from the provision of services or delivery of goods. y Supplies refers to supplies purchased by an enterprise which are unused as of the reporting date.

y Merchandise inventory are bought from suppliers for resale. y Property, plant and equipment are long-lived assets which have been acquired for use in operations. Liability is a present obligation of the enterprise arising from past events which are to be settled in the future. y Accounts payable are amounts due to suppliers for goods purchased y Salaries payable are salaries due to employees which are unpaid as of reporting date. y Utilities payable are amounts due to utility companies for bills. y Advances from customers are amounts received from customers in advance. y Loans payable are obligations of an enterprise to lenders to be paid on demand or at a specified future date. Equity means claim. It is the residual interest in the assets of the enterprise after deducting all its liabilities. ELEMENTS PERTAINING TO PERFORMANCE Income refers to increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decrease of liabilities. Revenue arises in the course of the ordinary activities of an enterprise. Gain is like an income and may or may not arise in the course of the ordinary activities of an enterprise. Expenses refer to decrease in economic benefits during the accounting period in the form of outflows ar depletions of assets. Losses are like the expenses but may or may not arise in the course of the ordinary activities of the enterprise. RECOGNITION OF THE ELEMENTS OF THE FINANCIAL STATEMENTS Recognition is the processes of incorporating in the statement of financial position. Measurement is the process of determining the monetary amounts at which the elements of the financial statements are to be recognized and carried in the financial statements. MEASUREMENT BASES Historical cost, assets are recorded in the amount of cash paid and liabilities are provided at the amount of proceeds received in exchange for the obligation. Current Cost, assets are carried at the amount of cash that would have been paid if the equivalent asset is acquired currently and liabilities are carried at the undiscounted amount of cash. Realizable value, assets are recorded in the amount of cash that could currently be obtained by selling the asset in an orderly proposal and liabilities are carried at their settlement values. Present value, assets are carried at the present discounted value of the future net inflows and liabilities are carried at the present discounted value of the future net cash outflows. QUALITATIVE CHARACTERISTICS OF FINANCIAL STATEMENTS Qualitative characteristics are the attributes that make the information provided in financial statements useful to users. Relevance influences the economic decisions of users by helping them evaluate past, present, or future events. y Predictive role is used to make predictions y Confirmatory role is used to confirm of correct earlier expectations y Materiality is omission or misstatement that could influence economic decisions of users. Reliability is being free from material error and bias y Faithful representation means that the actual effects of the transactions should be properly accounted for and reflected in the financial statements. y Substance over form requires that transactions and other accountable events are accounted for and presented in accordance with their substance and economic reality and not merely their legal form. y Neutrality means that it s free from bias. y Prudence or conservatism is the inclusion of a degree of caution in the exercise of judgment needed in making the estimates requires under conditions of uncertainty. y Completeness is being complete within the bounds of materiality and cost. Understandability means that words and other accounting terminology being used are those expected to be known and understood by users of the financial statements. Comparability requires that users are able to compare the financial statements of an enterprise across accounting periods(intra-comparability) and must be able to compare the financial statements of different enterprises in order to evaluate their relative financial position(inter-comparability) CONSTARINTS ON RELEVANT AND RELIABLE INFORMATION Timeliness means that it must be reported before all aspects of transaction are known.

Cost-benefit include the cost of maintaining financial records should not exceed the benefits of having these information available for decision makers. Balance between qualitative characteristics aims to achieve an appropriate balance among the characteristics in order to meet the objective of financial statements. ACCOUNTING CHAPTER 3 Business Transactions is an exchange of values involving two parties or within the enterprise. External Transactions include the sale of goods to customers ir the provision of services to clients. Internal Transactions include the manufacture of goods for sale and incurrence on losses by the company resulting from fire or flood. Source document is the original record of a business transaction. It usually is filed in chronological or sequential order. y Sales invoice is issued to evidence a sale for cash y Delivery receipt prepared by the enterprise and signed by the customer to evidence the acceptance of goods delivered to the customer. y Official receipt evidences the receipt of cash from customers. y Vendor s invoice is issued to the enterprise by the enterprise s suppliers. y Purchase requisition forms evidences an employee s request for the purchase of needed goods. y IOUs are notes acknowledging indebtedness to the enterprise. y Promissory notes are unconditional promise in writing made by a person to another. y Bank statements are summary of all financial transactions occurred over a certain period on a bank account. y Minutes of meetings are written record of a meeting. y Business letters are business correspondence with government agencies y Job time tickets are forms containing information on time spent working at a job. y Certificated of stock evidences ownership of shares y Time records shows time in and time out of employees y Check voucher is a form used to facilitate the authorization of cash disbursement transaction. y Journal voucher is used for transactions and journal entries for which there is no other source document. Accounting equation is the most basic tool of accounting. Net assets is the remaining assets of an enterprise after the liabilities are paid. Expenses are decreases in equity that occur from using assets. These are the cost of doing business and are the opposite of income. COMMON EXAMPLES OF ACCOUNT TITLES USED Asset Accounts: Cash is the medium of exchange for business transactions. Held for trading Securities are temporary investments of excess cash. It is technically known as investments at fair value through profit or loss. Loans and Receivables are claims against others which arise in the ordinary course of doing business. Trade notes receivable is a written promise from the customer to pay a fixed amount of money on a certain future date. Non-trade receivables represent all other claims which are not trade. Inventories are held for sale in the ordinary course of business. Prepaid expenses are expenses paid for the business in advance. Long-term investments are held by an enterprise for the accretion of wealth. Property, plant, and equipment are tangible assets held by an enterprise for use in the production of supply of goods. Intangible assets are identifiable, non-monetary assets without substance. Liability Accounts: Accounts payable include purchasing goods or receiving services for which the buyer agrees to pay in the near future. Notes payable is a note stating that the enterprise is the one who promises to pay. Accrued liabilities are amounts owed to others for unpaid expenses. Unearned revenues are payments received by the enterprise before providing its customers with goods or services. Mortgage payable is used for recording long-term debt of an enterprise. Bonds Payable