HISTORICAL BACKGROUND: BACKGROUND: accounting came about because of man’s need to keep records present day recording system for business activities can be traced from the book of Luca Pacioli in November 1494, it contained primarily principles of mathematics and incidentally a set of accounting procedures
work may be divided into the following fields of specialization: General Accounting, Cost Accounting, Budgeting, Internal Auditing c. Government Accounting: government officials, like private business firms, rely on accumulated accounting data the accountant in government prepares budgets, gathers and records transactions, audit governmental units, and examines/audit the income, payroll and tax returns submitted to the government d. Accounting Education and Research: Research: the accountant accountant in education seeks to bridge the gap between practice and theory; as for research, it helps to make the profession alive, relevant and interesting
WHAT IS ACCOUNTING: it is considered to be the language of business an art of recording , classifying , summarizing in a significant manner and in terms of money, transactions and events, which are in part, at least, of financial character and interpreting the interpreting the results thereof - according to the Committee on Terminology of the American Institute of Accountants
PURPOSE OF ACCOUNTING: accounting provides a record of business transactions in transactions in financial terms, these transactions and other important events should be recorded to serve as reference for future recall provides the management with information necessary for efficient operation of the business
DIRECT USERS OF ACCOUNTING: a. OWNER interested to know whether the business should be maintained, increased, decreased, disposed of completely and whether he is getting a fair return of his investment b. MANAGEMENT financial information serves as a measure for making future financial decisions and a measure of its effectiveness c. PROSPECTIVE INVESTORS interested in the financial statement to determine whether to acquire ownership in the firm d. CREDITORS they use financial statements as a basis in granting loans e. EMPLOYEES interested in information enable them to assess the ability of the firm to provide compensation and other benefits f. GOVERNMENT it needs accounting information to regulate the firm’s activities and determine the basis for taxation policies
Fields of Accounting: a professional accountant may pursue a career in any of the following four major fields: a. Public Accounting: the accountant accountant in public public accounting is one who offers accounting services to the public for a fee. these services may include: include: Auditing, Management Advisory Services, Services, Tax services b. Private Accounting: enterprises of private ownership ownership employ as many accountants as they may find necessary
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BUSINESS ORGANIZATION:
business organizations can be classified into two: According to ownership and ownership and nature of the business
Elements of Financial Statements: Balance Sheet it is a statement of the total assets and liabilities of an organization at a particular date - usually the last date of an accounting period. measurement of financial position elements of a balance sheet: sheet: assets, lliabilities, lliabilities, capital Income Statement is a historical record of the trading of a business over a specific period (normally one year) measurement of performance (shows (shows the profit or loss ) elements of an income income statement: income, expenses Cash Flow Statement measurement of changes in financial position shows the amount of cash generated and used by a company in a given period
Types of Ownership: Single or Sole Proprietorship: the business organization is owned by one person, who is also the manager of the business Partnership: the business organization is owned by two or more persons (called partners) the owners agree on the capital contributions (money, property or industry), management or the firm, distribution of profits and losses Corporation: a corporation is formed when five or more investors agree to engage in business, whose capital is divided into shares of stock this is organized by operation of law
Business as an Accounting Entity: in accounting, the business is treated as an entity or person distinct and separate from the owner or owners the personal assets and liabilities of the owner/s are different from the assets and liabilities of the business •
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Types of Nature of Business: Service Concern: this deals with the rendering of services to the customers such as tailoring, barber shops, firms of CPAs, lawyers, doctors, etc. Trading or Merchandising: this deals with the buying of goods and selling the same goods in the same form for profit examples: sari-sari stores, department department stores, grocery stores Manufacturing Concern: this involves purchase of raw materials and converting these materials into finished products ex: textile manufacturing manufacturing firms, paper manufacturing firms
Accounting Elements or Values: Assets: these are economic resources owned by the business they include properties and other things of the value the ownership title of which is in the name of the business Current Assets: assets which can be reasonably converted to cash within a short period of time a. Cash/Cash on Hand Hand and In Banks b. Receivables (amounts (amounts due from customers arising arising from credit sales or credit services) c. Inventories (work-in-process goods and completely finished goods that are considered to be the portion of a business's assets that are ready or will be ready for sale) d. Prepayments (expenses (expenses paid in advance) advance) Noncurrent Assets: assets which are not classified as current they include property, plant and equipment these are tangible assets used in the operation of the business, have useful life that exceeds beyond one year and are not intended for sale Liabilities: these are debts or obligations of the business to a party other than its owner Current or short-term Liabilities: these are debts which are due for payment within a short period of time or within one year from the balance sheet date •
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a. Accounts Payable (amounts due to third parties for purchases on credit) b. Notes Payable (amounts due to third parties supported by promissory notes) c. Accrued Expenses (recognized (recognized in the books before it is paid for) Fixed or Long-term Liabilities: these are debts which mature beyond one year from the balance sheet date examples: mortgages payable, bonds payable, notes payable due beyond a year Capital: value of cash and other assets contributed to the business by the owner of the business. it represents the owners’ equity or investment in the business other terms of capital are Owner’s Equity and Proprietorship •
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Recording technically called bookkeeping it is in this phase where business transactions are recorded systematically & chronologically in the proper accounting books Types of Bookkeeping: a. Single Entry Bookkeeping Bookkeeping (it shows only the the debit or the credit of each transaction ) b. Double Entry Entry Bookkeeping (reflects the two-fold effects of business transactions, transactions, it has a debit and a credit ) Classifying items are sorted and grouped wherein similar transactions and events are classified under the same name. Summarizing involves grouping together the various accounts referred to in the classifying process they may be classified as asset accounts, liability accounts, capital accounts, revenue accounts, cost and expense accounts the classification is useful to the needs of the management Reporting involves the preparation of financial summaries called financial statements : Balance sheet, Income statement and Cash Cash flow statement these are written reports submitted to users of information Interpreting involves the computation of relationships of figures from the financial reports and schedules it is a combination of figures and narrations based on the figures presented. The relationships may be in percent or in ratios; and may be within the financial report or one report in • •
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TRANSACTIONS: transactions are the data we record in the accounting books, they are also the economic activities of the firm external transactions transactions are activities involving the enterprise enterprise and another enterprise internal transaction is an activity within the enterprise in every transaction, there is always a value received and a value parted with, which may either be money, property or services •
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Increase in assets = Increase in Owner’s Equity Increase in one form of asset = Decrease in another form of asset Increase in one form of liability = Decrease in another form of liability
