43049311 Accounting Reviewer[1]

Accounting, defined. processs of identi identifyi fying, ng, measur measuring ing and commun communica icatin ting g econom economic ic Accounting is the proces inform informati ation on to permit permit inform informed ed judgme judgment nt and decisi decision on by users users of the inform informati ation. on. (American Accounting Association) Accounting is 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 a financial character and interpreting the results thereof. (Committee on Accounting Terminology of  t he American Institute of Certified Public Accountants; AICPA) Account Accounting ing is a servic servicee activi activity. ty. Its functi function on is to provid providee quanti quantitat tative ive inform informati ation, on,  primarily financial in nature, about economic entities, that is intended to be useful in making economic decision. SYSTEMATIC PROCESS

1. Identifyi Identifying.[ana ng.[analytic lytical al component] component] The recognitio recognition n or non-recogniti non-recognition on of business business activities as “accountable” events. a. Accountable: Accountable: Borrowing Borrowing of of money money from from a bank; Sales of shares shares of stocks stocks to new new shareh sharehold olders ers/ow /owner nerss of bus busine iness; ss; purchas purchasee of land land and buildi building. ng. The sub subjec jectt matter of accounting is ECONOMIC activity or the measurement of economic resources and economic obligations. ECONOMIC ACTIVITIES: i. ii.

Extern Exte rnal al trans transac acti tion ons: s: borrow borrowin ing g mo mone ney, y, purcha purchase se of merc mercha hand ndis ise, e, paym paymen entt of  salaries to employees. Intern Internal al trans transact action ions: s: Produc Producti tion on (manuf (manufact acturi uring ng goods) goods) and and casua casualty lty loss loss..

 b. Non-accountable: Hiring of new employees; retirement or death of company  president; entering into a contract of sale. 2. Measuring.[technical component] Assigning of peso amounts to the ACCOUNTABLE transactions and events. Financial statements must be express in terms of a common financial denominator. FINANCIAL statements without monetary amounts would be largely unintelligible or incomprehensible. The Philippine peso is the unit of  measuring accountable economic transactions. Measurement bases: a. Histor Historica icall cost. The origin original al monetary monetary value value of an economic economic item. item.[1] Historical cost is based on the stable measuring unit assumption. In some circumstances, assets and liabilities may be shown at their historical cost, as if there had been no change in value since the date of acquisition. The balance The balance sheet value of the item may therefore differ from the "true" value.  b. Current cost. Price of o f replacing an asset identical to an existing one. It should be of the same condition and age as well as have the same service potential. This is releva relevant nt becaus becausee the replac replaceme ement nt cost cost will will mos mostt likely likely be differ different ent than than fair  fair  market value or net realizable value.

c. Net realizable value. The estimated selling price in the ordinary course of   business minus any cost to complete and to sell the goods. NRV is one of the amounts considered when determining the lower of cost or market for items in inventory. d. Present Value. The value on a given date of a future payment or series of future  payments, discounted to reflect the time value of money and other factors such as investment risk . Present value calculations are widely used in business and economics to provide a means to compare cash flows at different times on a meaningful "like to like" basis. 3. Communicating. [formal component] The process of preparing and distributing accounting reports to potential users of accounting information. Implicit in the communicating process are the recording, classifying and summarizing aspects of  accounting. {2nd definition of accounting} a. Recording or journalizing is the process of systematically maintaining a record of  all economic business transactions after they have been identified and measured. Book of Original entry.  b. Classifying is the sorting or grouping of similar and interrelated economic transactions into their respective classes. Classifying is accomplished by posting to the ledger. Posting is transferring of SAME information to their respective LEDGER. Ledger is a group of accounts which are systematically categorized into asset, liability, equity, revenue and expense accounts. c. Summarizing is the preparation of financial statements. Worksheet facilitates the  preparation of balance sheet and income statements. Trial balance is a list of all accounts with their corresponding balances, the total of debit and credit must be equal.

SIGNIFICANCE AND NECESSITY OF ACCOUNTING INFORMATION/ USERS OF ACCOUNTING INFORMATION

1. Investors. The providers of risk capital and their advisers are concerned with the risk inherent in and return provided by their investments. They need information to help them determine whether they should buy, hold or sell their investments. 2. Employees, they are interested in information which enables them to assess the ability of the entity to provide remuneration, retirement benefits and employment opportunities. 3. Lenders. They are interested in information which enables them to determine whether their LOANS and interest thereon will be paid when due. 4. Suppliers and other trade creditors. These users are interested in information which enables them to determine whether amounts owing to them will be paid on maturity. 5. Customers have an interest in information about the continuance of an entity especially when they have a long-term involvement with or are dependent on the entity.

6. Governments and their agencies are interested in the allocation of resources and therefore the activities of the entity. These users require information to REGULATE the activities of the entity, determine TAXATION policies and as a  basis for national income and similar STATISTICS. 7. Public, in general. Entities affect members of the public in a variety of ways. For  example, entities make substantial contributions to the local economy in many ways including the number of people the employ and their patronage of local suppliers.

SPECIALIZED ACCOUNTING SERVICES

1. Financial Accounting. Financial accountancy (or  financial accounting ) is the field of  accountancy concerned with the preparation of financial statements for  decision makers, such as stockholders, suppliers,  banks, employees, government agencies, owners, and other stakeholders. Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power . [1] The fundamental need for financial accounting is to reduce  principal-agent  problem by measuring and monitoring agents' performance and reporting the results to interested users. 2. Auditing. A systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of  correspondence between these assertions and established criteria and communicating the results to the interested users. 3. Tax accounting. It includes the preparation of annual income tax returns and determination of tax consequences of certain proposed business endeavors. The CPA not infrequently represents the client in tax investigations. It also includes formulation of tax strategies like tax avoidance. 4. 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 focus of government accounting is the custody and administration of public funds. 5. Management accounting. Management accounting or managerial accounting is concerned with the provisions and use of  accounting information to managers within organizations, to provide them with the basis to make informed business decisions that will allow them to be better equipped in their management and control functions. Management Accounting is "the process of identification, measurement, accumulation, analysis, preparation, interpretation and communication of information used by management to plan, evaluate and control within an entity and to assure appropriate use of and accountability for its resources. Management accounting also comprises the preparation of financial reports for non-management groups such as shareholders, creditors, regulatory agencies and tax authorities" (CIMA Official Terminology). 6. Accounting (information)system. The set of formal procedures by which data are collected, processed into information and distributed to users. An accounting

information system (AIS) is the system of records a business keeps to maintain its accounting system. This includes the purchase, sales, and other financial  processes of the business. The purpose of an AIS is to accumulate data and  provide Cost accounting. In management accounting, cost accounting establishes  budget and actual cost of operations, processes, departments or product and the analysis decision makers (investors, creditors, and managers) with information. 7. of variances, profitability or social use of funds. Managers use cost accounting to support decision-making to cut a company's costs and improve profitability. As a form of management accounting, cost accounting need not to follow standards such as GAAP, because its primary use is for internal managers, rather than outside users, and what to compute is instead decided pragmatically. Cost accounting is an approach to evaluating the overall costs that are associated with conducting business. Generally based on standard accounting practices, cost accounting is one of the tools that managers utilize to determine what type and how much expenses is involved with maintaining the current business model. At the same time, the principles of cost accounting can also be utilized to project changes to these costs in the event that specific changes are implemented. 8. Accounting education. Practice in education or the academe shall constitute in a  person in an educational in institution which involve teaching of accounting, auditing, management advisory services, the accounting aspect of finance,  business law, taxation, and other technically related subjects.

BUSINESS ORGANIZATIONS

1. FORMS OF BUSINESS ORGANIZATION a. Sole proprietorship  b. Partnership. It is a contract of two or more persons who bind themselves to contribute money, property or industry to a common fun with the intention of  dividing profits among themselves. Two or more persons may also form a  partnership for the exercise of a profession. c. Corporation. A corporation is an artificial being created by operation of law, having the right of succession and the powers, attributes and properties expressly authorized by law or incident to its existence. 2. TYPES OF BUSINESS ORGANIZATION a. Service concern. These types of business provide services to customers. Example: MERALCO, PLDT, MRT, Victory Liner, Hospitals.  b. Merchandising business. The traders or merchandisers purchased goods and sell them to customers. SM supermarket and department stores. c. Manufacturing business. Manufacturing companies buy raw materials and convert them into a finished product. Toyota, Coca-Cola, Colgate- palmolive.

FINANCIAL STATEMENTS

1. Income statements. A formal statement showing the FINANCIAL PERFORMANCE of an entity for a given period of time. The financial  performance of an entity is primarily measured in terms of the level of income earned by the entity through the effective and efficient utilization of its resources. Sources of INCOME: a.  b. c. d.

Sales of merchandise to customers. Rendering of services. Use of entity resources. Includes interest, rent, royalty and dividend income. Disposal of resources other than products. Include gain on sale of investments, gain on sale of property, plant and equipment and gain on sale of intangible assets.

COMPONENTS OF EXPENSE:

a.

Cost of Sales or Cost of goods sold. i.

Cost of sales of merchandising concern:

Beginning inventory: ADD: Net purchases {[gross purchases + freight in] –[purchase returns and allowances, purchase discounts]} = GOOD AVAILABLE FOR SALE LESS: Ending inventory = COST OF SALES  b. Distribution costs or selling expenses.  b. Administrative expenses. Office salaries expenses of general executives and of  the general accounting and credit departments.  b. Other expenses are those expenses which are NOT DIRECTLY related to the selling and administrative function.  b. Income tax expense. 2. Statements of comprehensive income. The statement of comprehensive income starts with the profit or loss as shown in the income statement plus or minus the components of other comprehensive income. The purpose of this statement is to  provide more comprehensive information of financial performance more broadly than the income as traditionally computed.

2. Balance sheet/ statements of financial position. Formal statements showing the three elements comprising financial position, namely assets, liabilities and equity. 2. Statements of cash flows. Show the Cash INFLOWS and OUTFLOWS {receipts and disbursements} ACTIVITIES: a. Operating. Cash inflow from sale of merchandise and rendering of services.  b. Investing. Cash outflow to acquire land and building. c. Financing. Cash flows involving transactions with creditors and owners. 5. Statements of changes in owner’s equity/capital. Basic statement that shows the movements in the elements or components of the shareholders’ equity or capital. Includes: net income for the period, additional investments of the owners, withdrawals of owners or dividend paid to stockholders. 5. Notes, comprising a summary of significant accounting policies and other  explanatory notes.

PRINCIPAL CHARACTERISTICS OF FINANCIAL STATEMENTS (according to conceptual framework )

A.

PRIMARY QUALITIES. Relate to CONTENT of financial statements. 1. Relevance. The capacity of information to make a difference in a decision by helping users form prediction about the outcome of past, present and future events, or confirm and correct prior expectation. Capacity of the information to INFLUENCE a decision. INGREDIENTS: a. Predictive value.  b. Feedback value. c. Timeliness. 2. Reliability is the degree of confidence users place upon the truthfulness of the representation in the financial statements. The quality of information that assures users that the information is free from bias and errors, and faithfully represents what it purports to represent. FACTORS that enhance the reliability of financial statements. a. Faithful representation. It is synonymous with verifiability or objectivity.  b. Substance over form. The economic substance of transactions and events are usually emphasized when economic substance differs from legal form. An example is when the lessee leased property from lessor. The terms of the lease, among others, provide that the lease TRANSFER OWNERSHIP of the asset to the lessee by the end of the lease term.

In legal form, the contract is a lease as popularly understood. But in SUBSTANCE, in reality, if the transfer of ownership provision is to be considered, the REAL INTENT of the parties is an INSTALLMENT PURCHASE of property by the lessee from the lessor. Accordingly, the lease shall be accounted for as a finance lease. Thus, the lessee shall record the finance leases as and asset and a liability. The periodic rental is conceived as an installment payment representing interest and principal. c. Neutrality. It must be free from bias. PRINCIPLE OF FAIRNESS. c. Conservatism. Under it, when alternatives exist, the alternative which has the least effect on equity should be chosen. Managers, investors and accountants have generally preferred that possible errors in measurement be in the direction of  understatement rather that overstatement of net income and net assets{total assetstotal liabilities} Synonymous to PRUDENCE. Expressions of conservatism and  prudence. i. ii.

iii.

Anticipate no profit and provide for probable and estimable loss. In the matter of income recognition, the accountant takes the position that no matter how sure the businessman might be in capturing the bird in the bush, he, the accountant, must see it in the hand. Don’t count your chicks until the eggs hatch.

e. Completeness. It requires that relevant information shall be presented in a way that facilitates understanding and avoids erroneous implication. Completeness is the result of the adequate disclosure standard or the principle of full disclosure. The accountant shall disclose a MATERIAL fact known to him which is not disclosed in the financial statements but disclosure of which is necessary in order  that the statements would not be misleading. B. SECONDARY QUALITIES. It relates to the PRESENTATION of financial statements. 1. Understandability. The information should be presented in a form and expressed in terminology that a user understands. But the complex economic activities make it impossible to reduce the financial information to the simplest terms. Accordingly, users are assumed to have a reasonable knowledge of the complex economic activities and accounting and a willingness to study the information with reasonable diligence. 2. Comparability. The ability to bring together for the purpose of noting points of  likeness and difference. a. Intracomparability/horizontal comparability- within the entity, from one period to another.  b. Intercomparability/dimensional comparability between and across entities.

Implicit in the qualitative characteristic of comparability is the principle of  consistency. This principle requires that the accounting methods and practices should be applied on a UNIFORM basis from period to period. For example, the use of First in, first out (FIFO) in 2010, and the entity will use Average Method of accounting inventory in 2011, and in 2012, the use of FIFO method again. It is inconsistent of application of accounting methods, there will be no comparability. However, it is inappropriate for an entity to leave its accounting policies unchanged when more relevant and reliable alternative exist. An important implication of comparability is that users are informed of the accounting policies employed, any changes in those policies and the effects of  such changes. ACCOUNTING CONTSTRAINTS

1. Timeliness. Timeliness requires that the accounting information must be available or communicated early enough when a decision is to be made. Information furnished after a decision has been made is of no value. To provide information on a timely basis it may often be necessary to report before all aspects of a transaction or event are known, thus impairing reliability. Conversely, if  reporting is delayed until all aspects are known, the information maybe highly reliable but of little value to users who have to make decisions in the interim. 2. Cost benefit. It is a consideration of the cost incurred in generating information against eh benefit to be obtained from having the information. The benefit derived from the information should EXCEED the cost incurred in obtaining the information. 3. Materiality. Materiality is really a quantitative threshold constraint linked very closely to the qualitative characteristic of relevance. The relevance of information is affected by its nature and materiality.

Materiality is a practical rule in accounting which dictates that strict adherence to GAAP is not required when the items are NOT SIGNIFICANT ENOUGH to affect the evaluation, decision and fairness of the financial statements. This concept is also known as the DOCTRINE OF CONVENIENCE. INFORMATION IS MATERIAL IF IT’S OMISSION OR MISSTATEMENTS COULD INFLUENCE THE ECONOMICE DECISION OF THE USERS TAKEN ON THE BASIS OF THE FINANCIAL STATEMENTS. For example, small expenditures for tools are often expensed immediately rather than depreciated over their useful lives to save clerical costs of recording depreciation  because the effect on the financial statements is not large enough to affect the economic decision. Another example is the common practice of large entities of rounding amounts to the nearest thousand pesos in their financial statements. Small entities may round

off to the nearest peso. When all payments out of petty cash are debited to miscellaneous expense, materiality is applied. FACTORS: a.

Size of an item.  b. Nature of the item. An item may be inherently material because by its very nature it affects economic decision. For instance, the discovery of a P20000 bribe is a material event even for a very large multibillion entity.

4. Balance between relevance and reliability. There is tradeoff between providing relevant information but subject to uncertainty, for example, the fair value of trading securities and available for sale investment, and providing reliable information but not necessarily relevant information, for example, the historical cost of such investment.

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The 'basic accounting equation' is the foundation for the double-entry bookkeeping system. For each transaction, the total debits equal the total credits. Assets = Liabilities + Capital

[1]

In a corporation, capital represents the stockholders' equity. How it works

For example: A student buys a computer for $945. This student borrowed $500 from his  best friend and saved another $445 from his part-time job. Now his assets are worth $945,liabilities are $500, and equity $445. The formula can be rewritten: Assets - Liabilities = (Shareholders or Owners equity or Capital)[1]  Now it shows owner's interest is equal to property (assets) minus debts (liabilities). Since in a company owners are shareholders, owner's interest is called shareholder's equity. Every accounting transaction affects at least one element of the equation, but always  balances. Simplest transactions also include:[2]

Transaction Assets Number

1

Liabilities

Shareholder's Explanation Equity

6,000

+ 6,000

+ 2

10,000 +

3

900 −

4

1,000 +

5

+

−

+

10,000

900

400

+ 600

Issuing stocks for cash or other  assets Buying assets by borrowing money (taking a loan from a bank or simply buying on credit) Selling assets for cash to pay off  liabilities: both assets and liabilities are reduced Buying assets by paying cash by shareholder's money (600) and by borrowing money (400)

700

+ 700

Earning revenues

200

− 200

Paying expenses (e.g. rent or  professional fees) or dividends

− 100

Recording expenses, but not paying them at the moment

+ 6 − 7

+

8

500 −

9

0

−

100 500

Paying a debt that you owe

0

Receiving cash for sale of an asset: one asset is exchanged for another; no change in assets or liabilities

0

These are some simple examples, but even the most complicated transactions can be recorded in a similar way. This equation is behind debits, credits, and journal entries. This equation is part of the transaction analysis model, for which we also write Owners equity = Contributed Capital + Retained Earnings Retained Earnings = Net Income − Dividends and  Net Income = Income - Expenses

The equation resulting from making these substitutions in the accounting equation may  be referred to as the expanded  accounting equation, because it yields the breakdown of  the equity component of the equation.