Chapter 1 Overview of Accounting

(Intermediate Financial  Accounting 1A) LECTURE AID 2016 ZEUS VERNON B. MILLAN

Chapter 1 Overview of Accounting Learning Objectives • Define accounting and understand its  basic purpose. • Understand the basic concepts applied in accounting. • Know the branches of accounting and sectors in the practice of accountancy. • Understand the need for financial reporting standards and how they are developed. •  Appreciate the reason for the adoption of International Financial Reporting Standards. IFA PAR !A" #eus $ernon %. &illan

Definition of Accounting

•  Accounting is the process of identifying' measuring' and communicating econo(ic infor(ation to per(it infor(ed )udg(ent and decisions by users of infor(ation.  AAA (American Association of Accountants)

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Tree im)ortant acti*ities inc+uded in te definition of accounting

1, 2, -,

Identifying % the process of analy*ing events and transactions to deter(ine whether or not they will be recogni*ed in the boo+s. ,nly accountable events are recogni*ed in the boo+s. $easuring % involves assigning nu(bers' nor(ally in (onetary ter(s' to the econo(ic transactions and events. Communicating % the process of transfor(ing econo(ic data into useful accounting infor(ation' such as financial state(ents and other accounting reports' for disse(ination to users.

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TYPES OF EVENTS 1. External events – events which involve an entity and an external  party . a. Exchange (reciprocal transfer) – reciprocal giving and receiving  b. Non-reciprocal transfer – “one way” transaction c. External event other than transfer  – an event that involves changes in the economic resources or obligations of an entity caused by an external party or external source but does not involve transfers of resources or obligations. 2. Internal events – events which do not  involve an external party. d. roduction – the process by which resources are transformed into finished goods. e. !asualt"  – an unanticipated loss from disasters or other similar events. (OTIO!AL ALICATIO!" RO#LE$ 1%2" &-' IFA PAR !A" #eus $ernon %. &illan

$easurement .ases  1.  Historical Cost - price based on past echange  2. Current Cost – price based on current echange  3.  Realizable (settlement) value – net cash that could currently  be obtained by selling the asset in an orderly disposal.  4.  Present value / price based on future echange  5.  Fair value - the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between (ar+et participants at the (easure(ent date. 6.  Fair value less costs to sell  / Costs to sell are the incre(ental costs directly attributable to the disposal of an asset' excluding finance costs and inco(e ta epense. 7.  Revalue amount is the asset0s fair value at the date of the revaluation less any subse1uent accu(ulated depreciation and subse1uent accu(ulated i(pair(ent losses. !.  "n#lation$a%uste costs / a(ounts ad)usted to the (easuring unit current at the reporting date. (OTIO!AL ALICATIO!" RO#LE$ 1%2" &/' IFA PAR !A" #eus $ernon %. &illan

#asic )ur)ose of accounting

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he basic purpose of accounting is to provide infor(ation about econo(ic activities intended to be usefu+ in maing economic decisions.

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Ty)es of accounting information c+assified as to users needs

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&eneral 'ur'ose accounting infor(ation - designed to (eet the common needs of (ost state(ent users. his infor(ation governed by the  Philippine Financial  Reporting Standards (PFRSs).

•

 'ecial 'ur'ose accounting infor(ation - designed to (eet the specific needs  of particular state(ent users. his infor(ation is provided by other types of accounting' e.g.' (anagerial accounting' ta basis accounting' etc.

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%asic Accounting 2oncepts • &oin concern assum'tion - the entity is assu(ed to carry • • • • •

on its operations for an indefinite period of ti(e.  e'arate entit* / the entity is treated separately fro( its owners.  table monetar* unit - a(ounts in financial state(ents are stated in ter(s of a co((on unit of (easure3 changes in purchasing power are ignored. +ime Perio  / the life of the business is divided into series of reporting periods.  ,aterialit* conce't / infor(ation is (aterial if its o(ission or (isstate(ent could influence econo(ic decisions. Cost$bene#it 4Reasonable assurance5 Pervasive constraint5 2ost constraint6 / the cost of processing and co((unicating infor(ation should not eceed the benefits to be derived fro( it.

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%asic Accounting 2oncepts - 2ontinuation •  -ccrual asis o# accountin / effects of transactions are recogni*ed • • •

• •

 when they occur 4and not as cash or its e1uivalent is received or paid6 and they are recogni*ed in the accounting periods to which they relate.  Historical cost conce't  42ost principle6 / the value of an asset is to be deter(ined on the basis of ac1uisition cost. Conce't o# -rticulation / all of the co(ponents of a co(plete set of financial state(ents are interrelate .  Full isclosure 'rinci'le / financial state(ents provide sufficient detail to disclose (atters that (a+e a difference to users' yet sufficient condensation to (a+e the infor(ation understandable' +eeping in (ind the costs of preparing and using it. Consistenc* conce't  / financial state(ents are prepared on the basis of accounting principles which are followed consistently fro( one period to the net.  ,atc/in (Associating cause and effect) – costs are recogni*ed as epenses when the related revenue is recogni*ed.

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%asic Accounting 2oncepts - 2ontinuation • •

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 0ntit* t/eor* / the accounting ob)ective is geared towards the 'ro'er income etermination. It e(phasi*es the income statement and is ee(plified by the e1uation “   -ssets  iabilities  Ca'ital .   Pro'rietar* t/eor* / the accounting ob)ective is geared towards the  'ro'er valuation o# assets! It e(phasi*es the i(portance of the balance s/eet  and is ee(plified by the e1uation “   -ssets  iabilities  Ca'ital !   Resiual euit* t/eor* / this theory is applicable where there are two classes of shares issued' ordinary and preferred. he e1uation is “   -ssets   iabilities  Pre#erre /are/olers 0uit*  rinar*  /are/olers 0uit*!   Fun t/eor* / the accounting ob)ective is the custody and ad(inistration of funds.  Realization / the process of converting non-cash assets into cash or clai(s to cash.  Pruence 42onservatis(6 / the inclusion of a degree of caution in the eercise of the )udg(ents needed in (a+ing the esti(ates re1uired under conditions of uncertainty ' such that assets or inco(e are not overstated and liabilities or epenses are not understated.

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Common .rances of accounting

•  Financial accountin8 Financial Re'ortin - focuses on general purpose financial state(ents. •  ,anaement accountin / focuses on special financial reports geared towards the needs of an entity0s (anage(ent. • Cost accountin - the syste(atic recording and analysis of the costs of (aterials' labor' and overhead incident to production. •  -uitin " a syste(atic process of ob)ectively obtaining and evaluating evidence regarding assertions about econo(ic actions and events to ascertain the degree of correspondence between these assertions and established criteria and co((unicating the results to interested users. • +a9 accountin - the preparation of ta returns and rendering of ta advice' such as deter(ination of ta conse1uences of certain proposed business endeavors. • &overnment accountin - the accounting for the national govern(ent and its instru(entalities' focusing attention on the custody of public funds and the purpose or purposes to which such funds are co((itted. (OTIO!AL ALICATIO!" RO#LE$ 1%2" &4'

5our sectors in te )ractice of accountancy

 1.

 Practice o# Public -ccountanc* " involves the rendering of audit or accounting related services to (ore than one client on a fee basis.  2.  Practice in Commerce an "nustr*  - refers to e(ploy(ent in the private sector in a position which involves decision (a+ing re1uiring professional +nowledge in the science of accounting and such position re1uires that the holder thereof (ust be a certified public accountant.  3.  Practice in 0ucation8-caeme / e(ploy(ent in an educational institution  which involves teaching of accounting' auditing' (anage(ent advisory services' finance' business law' taation' and other technically related sub)ects.  4.  Practice in t/e &overnment / e(ploy(ent or appoint(ent to a position in an accounting professional group in govern(ent or in a govern(ent/owned and5or controlled corporation' including those perfor(ing proprietary functions' where decision (a+ing re1uires professional +nowledge in the science of accounting' or  where a civil service eligibility as a certified public accountant is a prere1uisite. (OTIO!AL ALICATIO!" RO#LE$ 1%2" &'

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 Accounting standards in te i+i))ines •

i+i))ine 5inancia+ Re)orting 7tandards (5R7s' are  Standards and #nterpretations adopted by the Financial Reporting Standards 2ouncil 4FRS26. hey co(prise" 1, i+i))ine 5inancia+ Re)orting 7tandards (5R7s'8 2, i+i))ine Accounting 7tandards (A7s'8 and -, Inter)retations

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OPEN FORUM 

QUESTIONS???? REACTIONS!!!!!

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