REVIEWER IN ACCOUNTING 1

ACCOUNTING 1

ACCOUNTING- is the process of identifying, measuring and calculating economic transactions that permit informed judgment and information to the users of information

THREE PROCESSES OF ACCOUNTING

1.    Identifying-this process is the recognition and non-recognition of accountable business transactions

2.    Measuring-this process is assigning of peso amount on the accountable business transactions/events

3.    Communicating-this process is the preparation and distribution of accounting reports to potential users of accounting information

USERS OF ACCOUNTING

1.    Owner. interested to know whether he is getting fair return on his investment

2.    Management. Interested in the accounting information that serve as the measure for making future decisions and measure of effectiveness.

3.    Investors. Interested in the accounting information to determine whether to acquire ownership on the business/firm

4.    Creditors.Interested in the accounting information whether the company will grant a loan.

5.    Employees.Interested in the accounting information whether the company can provide the benefits.

6.    Government. Interested in the accounting information for tax purposes.

FIVE PHASES OF ACCOUNTING

1.    Recording-technically called bookkeeping.

2.    Classifying-items are sorted and grouped.

3.    Summarizing-

4.    Interpreting

BOOKKEEPING- is chronologically and systematically recording of business transactions.

 

FIELDS OF ACCOUNTING

1.    Public Accounting-render their service to the public for a fee

2.    Private Accounting-render their service to the private businesses

COMPONENTS OF FINANCIAL STATEMENTS

1.    Income Statement-shows the financial performance of an enterprise.

2.    Balance Sheet-shows the financial standing of an enterprise.

3.    Statement of Changes In Equity-shows the changes of financial position or standing of an enterprise

4.    Statement of Cash Flow-shows the inflows and outflows of cash operating, investing and financing activities of an enterprise. It shows the flexibility of the enterprise to use cash

5.    Notes to Financial Statements-disclosure of methosh.ds and bases of accounting information.

BUSINESS-different things to different people/is the process of producing goods and services and distributing them to those who desire for a profit.

TYPES OF BUSINESS ACCORDING TO OWNERSHIP

1.    Sole Proprietorship-owned by only by one person. The owner is also the manager of the business. The owner called himself or herself as proprietor.

2.    Partnership- owned by two or more owners. The owners called themselves as partners.

3.    Corporation-Not less than five persons. It is organized by operation of law.

TYPES OF BUSINESS ACCORDING TO NATURE

1.    Service-Businesses rendered service/s to the customers

2.    Trading/Merchandizing-buying and selling of goods and selling the same goods for a profit.

3.    Manufacturing-purchase of raw materials and converting these raw materials into finished products.

THREE ACCOUNTING ELEMENTS

1.    Assets-economic resources owned by the business

a. Current Assets-can be easily or reasonably converted into cash within the short period of time

1. Cash-this are currencies, paper money, unrestricted bank deposits immediately   available for the current operations

2. Receivables-collectible from customer arising from sale of goods in performance of service.

                                                                                       i.      Accounts Receivables-Claims from the customers arising from or good sold or rendered service on credit.

                                                        ii.    Notes Receivables- Claims from the customers arising from or good sold or rendered service on credit. Such claims are evidence by promissory note.

                                                                                    iii.      Interest Receivables – interest earned on notes on hands which have been received in cash

3. Allowance for Bad Debts – Contra-Asset account to provide for amounts having uncertain collection

            4. Inventories-tangible personal properties

                                                                                       i.      Raw Materials-to be currently consumed in the production of goods or services to  be available for sale

                                                        ii.    Goods-in-process-in the process of production of goods or services

                                                                                    iii.      Finished Goods-held for resale in the ordinary course of business

5. Supplies – these are materials have been bought for office use but are still unused as of the balance sheet

            5. Prepaid Expenses-already paid before they used or consumed

b. Non-Current Assets

            1. Long Term Investments - An account on the asset side of a company's balance sheet that represents the investments that a company intends to hold for more than a year. They may include stocks, bonds, real estate and cash.

            2. Property, Plant and Equipment-these are equipment’s, office supplies, service supplies, tables and chairs, tools, computers, furniture and fixtures, warehouses, land, buildings and other tangible assets.

            3. Accumulated Depreciation – contra-account that contains the sum of the periodic depreciation charges.

            3. Intangible Assets-goodwill

2.    Liability - OBLIGATION OR DEBT

a. Current Liability-due for payment within a short period or within one year

            1. Accounts Payable-Amount due to creditors for the goods or services bought on credit

            2. Notes Payable- Amount due to creditors supported by promissory note.

            3. Accrued Liabilities-Expenses already incurred but not yet paid as of the balance sheet date

            4. Unearned Revenues - Payments received from customers in advance before providing services or goods.

b. Non-Current Liability- due for payment beyond one year from the balance sheet date.

            1. Bonds Payable- Contract between the issuer and the lender specifying the terms of repayment and the interest to be charge.

            2. Mortgage Payable-Long term debt of the business for which the entity has pledge certain assets as security to the creditor

            3. Loans Payable-Long-term debt of the business which may or may not have collateral given to the creditor

3.      Owners’ Equity -represents the owners’ equity or investment in the business

                        1. Capital - Used to record the original investments and additional            investments of the owner of the enterprise.

                        2. Withdrawals-represents when the owner withdraws certain amount of             his investments

     4. Income – revenues earned by the business

                        1. Service Income - revenue earned by rendering services for a customer

                        2. Sales Income- revenue earned as a result of sale of merchandise or    goods

                        3. Interest Income-revenue generated from additional payments of the business debtors’

                        4. Rent Income-revenue earned from rentals of the business’ assets to     others

                        5. Dividend Income-interest generated from profits of other companies of          which the business has share of ownership

     5. Expenses

                       

                        1. Cost of Sales-Cost incurred in purchasing products sold to products

                        2. Salaries and Wages Expense-payment as a result of an employer-        employee relationship which include salaries and wages, 13^TH month pay, COLA       and other benefits given to the employees

                        3. Utilities Expense-these are telephone Expense, Light and Water,            Fuel/Gasoline Expense, Transportation Expense and Internet Expense

                        4. Rental/Rental Expense-expenses for space, equipment or other assets                        rentals

                        5. Supplies Expense-Expense using supplies in the conduct of daily            business

                        6. Insurance Expense-portion of premiums paid on insurance coverage which has expired

                        7. Depreciation Expense-portion of the cost of tangible asset allocated or          charged as expense during an accounting period

                        8. Bad Debts Expense-amounts of receivables estimated to be doubtful of         collection and charged as expense during an accounting period

Accounting concepts

 Entity

Accounts are kept for entities and not the people who own or run the company.  Even in proprietorships and partnerships, the accounts for the business must be kept separate from those of the owner(s).

Money-Measurement

For an accounting record to be made it must be able to be expressed in monetary terms.  For this reason, financial statements show only a limited picture of the business.  Consider a situation where there is a labor strike pending or the business owner’s health is failing; these situations have a huge impact on the operations and financial security of the company but this information is not reflected in the financial statements. 

Going Concern

Accounting assumes that an entity will continue to operate indefinitely.  This concept implies that financial statements do not represent a company’s worth if its assets were to be liquidated, but rather that the assets will be used in future operations.  This concept also allows businesses to spread (amortize) the cost of an asset over its expected useful life. 

Cost

An asset (something that is owned by the company) is entered into the accounting records at the price paid to acquire it.  Because the “worth” of an asset changes over time it would be impossible to accurately record the market value for the assets of a company.  The cost concept does recognize that assets generally depreciate in value and so accounting practice removes the depreciation amount from the original cost, shows the value as a net amount, and records the difference as a cost of operations (depreciation expense.) 


Look at the following example:

Truck                 10,000   purchase price of the truck
Less depreciation    1,000   amount deducted as a depreciation expense
Net Truck:            9,000   net book-value of the truck

The 9000 simply represents the book value of the truck after depreciation has been accounted for.  This figure says nothing about other aspects that affect the value of an item and is not considered a market price.

Assets = Liabilities + Equity

1. Assets are what the company owns.
2. Liabilities are what the company owes to creditors against those assets
3. Equity is the difference between the two and represents what the company owes to its investors/owners. 

All accounting transactions must keep this equation balanced so when there is an increase on one side there must be an equal increase on the other side or an equal decrease on the same side. 

Objectivity

The objectivity concept states that accounting will be recorded on the basis of objective evidence (invoices, receipts, bank statement, etc…). This means that accounting records will initiate from a source document and that the information recorded is based on fact and not personal opinion. 

Time Period

This concept defines a specific interval of time for which an entity’s reports are prepared.  This can be a fiscal year (Mar 1 – Feb 28), natural year (Jan 1 – Dec 31), or any other meaningful period such as a quarter or a month.

Conservatism

This requires understating rather than overstating revenue (income) and expense amounts that have a degree of uncertainty.  The rule is to recognize revenue when it is reasonably certain and recognize expenses as soon as they are reasonably possible.  The reasons for accounting in this manner are so that financial statements do not overstate the company’s financial position.  Accounting chooses to err on the side of caution and protect investors from inflated or overly positive results. 

Realization

Revenues are recognized when they are earned or realized.  Realization is assumed to occur when the seller receives cash or a claim to cash (receivable) in exchange for goods or services.  This concept is related to conservatism in that revenue (income) is only recorded when it actually occurs and not at the point in time when a contract is awarded.  For instance, if a company is awarded a contract to build an office building the revenue from that project would not be recorded in one lump sum but rather it would be divided over time according to the work that is actually being done.  

Matching

To avoid overstatement of income in any one period, the matching principle requires that    revenues and related expenses be recorded in the same accounting period.  If you bill $20,000 of services in a month, in order to accurately represent the income for the month you must report the expenses you incurred while generating that income in the same month. 

Consistency

Once an entity decides on one method of reporting (i.e. method of accounting for inventory) it must use that same method for all subsequent events.  This ensures that differences in financial position between reporting periods are a result of changed in the operations and not to changes in the way items are accounted for.  

Materiality

Accounting practice only records events that are significant enough to justify the usefulness of the information.  Technically, each time a sheet of paper is used, the asset “Office supplies” is decreased by an infinitesimal amount but that transaction is not worth accounting for. 

By understanding and applying these principles you will be able to read, prepare, and compare financial statements with clarity and accuracy.  The bottom-line is that the ethical practice of accounting mandates reporting income as accurately as possible and when there is uncertainty, choosing to err on the side of caution. 

ACCOUNT GROUP	INCREASE	DECREASE
ASSETS	DEBIT	CREDIT
LIABILITY	CREDIT	DEBIT
CAPITAL	CREDIT	DEBIT
EXPENSES	DEBIT	CREDIT
INCOME	DEBIT	CREDIT

Charts of Accounts-List of account titles used in the business. It serves as the guide to the bookkeeper.

Account-is an accounting device use to summarize the increase and decrease of the Assets, Liabilities and Capital

T-Account-is an example of Account

Accounting Cycle-is segment of time in which statements are prepared in order to know the results of the business operation during the particular period.

Accounting Events-economic occurrence that causes changes in an enterprise’s assets, liabilities or capital

STEPS IN ACCOUNTING CYCLE

1.    Journalizing

2.    Posting

3.    Preparation of Trial Balance

4.    Adjusting the Entries

5.    Preparation of the Worksheet

6.    Preparation of the Financial Statements

7.    Closing Entries

8.    Reversing Entries

Journalizing- is the first step in the accounting cycle.

Journal - book of accounts wherein business transactions are recorded chronologically. BOOK OF ORIGINAL ENTRY

Two types of Journal

General Journal-simplest form of journal

Special Journal-these are cash payment journal, sales journals and purchases journal

Journal Entry-record of business transactions in the journal

Two types of Journal Entry

Simple Journal Entry-contains only one debit and one credit

Compound Journal Entry-contains-contains either two or more credits, debits.