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I. DEFINITION OF ACCOUNTING
1. ACCOUNTING
Is a service activity. Its function is to provide quantitative information, primarily financial in nature, about economic entities that is intended to be useful in making economic decisions. Accounting Standard Council, 1983
KEY WORDS
A SERVICE ACTIVITY: Accountants gives accounting service. QUANTITATIVE INFORMATION , PRIMARILY FINANCIAL IN NATURE- Quantitative means number or “how much?” or financial in nature. ECONOMIC ENTITIES are organizations that uses or controls economic or scarce resources to achieve ECONOMIC DECISIONS- because of the information given, the owner of the business can now be able to make better decisions.
2. ACCOUNTING
Is an information system that measures, process, and communicate financial information about an identifiable economic entity. Financial Accounting Standards Board, 1978
- Measures economic activities: ex.: production, exchange, income distribution, consumption, investment, & savings.
- Process information into financial reports
- Communicate these reports to decision makes
3. ACCOUNTING
Is the process of identifying, measuring, and communicating economic information to permit informed judgement and decisions by users of the information. The American Institute of Certified Accountant (AICPA), 1953
4. ACCOUNTING
Is the art of recording, classifying, and summarizing in a significant manner and in terms of money, transaction and events which are in part at least, of a financial character, and interpreting the result thereof. The American Institute of Certified Accountant (AICPA), 1953
- Art and science An art because it requires the uses of skills and creative judgement. One has to be trained in this discipline to be able to perform accounting functions well. A science because it is a body of knowledge which has been systematically gathered, classified and organized. However, accounting is not an exact science since the rules and principles are constantly changing (improved by standard-setting bodies)
- Recording Pertains to writing down or keeping records of business transactions.
- Classifying Involves grouping similar items that have been recorded.
- Summarizing Putting together or expressing in condensed or brief form the recorded and classified reports which we call financial statements.
- In terms of money, transaction and events and of financial character An event must be measurable in terms of money to be a transaction. The event which is not measurable in terms of money is not a transaction
- Interpreting the results Is part of the phase of accounting. Information is useless if they cannot be interpreted and understood. The amounts, figures, and other data in the financial reports have meaning that are useful to the users.
II. NATURE OF ACCOUNTING
- Art it requires the use of skills and creative judgement.
- Financial “how much?”
- Process it performs the specific task of collecting, processing and communicating financial information. In doing so, it follows some definite steps like collection of data recording, classification summarization, finalization and reporting.
- Information System is a system of collecting, storing and processing financial and accounting data that are used by decision makers.
III. FUNCTION OF ACCOUNTING
To provide quantitative information about economic entities intended to be useful ni making economic decision.
Types of information provided by accounting:
- Quantitative Information - express in numbers, quantities or units
- Qualitative Information- expressed in words or descriptive form
- Financial Information- expressed in terms of money Other Functions:
- Identification. The accounting process of recognition or non-recognition of business activities as accountable events or whether has accounting relevance
- Accountable events -is quantifiable and has effect on assets, liabilities and equity. This is also known as economic activity. Criteria of Accountable events
- It must affect a financial element of accounting (increasing or decreasing asset, liability or equity)
- It is a result of a past activity
- Its cost can be measured reliably.
- Measurement. The accounting process of assigning of peso amounts or numbers to the economic transaction and event The unit of measure of accounting is money, expressed in prices.
- Communication. The accounting process of preparing and distributing accounting reports to potential users of accounting information and interpreting the significance of this processed information.
IV. HISTOR Y AND DEVELOPMENT OF ACCOUNTING
Accounting enjoys a remarkable heritage. The history of accounting is as old as civilization. The seeds of accounting were most likely first sown in Babylonia and Egypt around 4000 B.C. who recorded transactions of payment of wages and taxes on clay tablets. Historical evidences reveal that Egyptians used some form of accounting for their treasuries where gold and other valuables were kept. The in charge of treasuries had to send day wise reports to their superiors known as Wazirs (the prime minister and from there month wise reports were sent to kings. Babylonia, known as the city of commerce, used accounting for business to uncover losses taken place due to frauds and lack of efficiency. In Greece, accounting was used for apportioning the revenues received among treasuries, maintaining total receipts, total payments and balance of government financial transactions. Romans used memorandum or daybook where in receipts and payments were recorded and wherefrom, they were posted to ledgers on monthly basis. (700B.C t o 400 A.D). China used sophisticated form of government accounting as early as 2000 B.C. Accounting practices in India could be traced back to a period when twenty-three centuries ago, Kautilya, a minister in Chandragupta's kingdom wrote a book named Arthashasthra, which also described how accounting records had to be maintained.
BRANCHES OF ACCOUNTING
Different branches of accounting came into existence, keeping in view various forms of accounting information needed by
different classes of people. They may be owners, shareholders, management, suppliers, creditors, taxation authorities,
government agencies, etc. There are three main accounting branches: financial accounting, cost accounting, and management
accounting. Other accounting branches are a result of commercial development and emerging needs of business reporting the
world over.
FINANCIAL ACCOUNTING
Systematic method of recording transactions, main purpose P/L &B/S, useful to creditors, banks, financial institutions, etc, accurate picture of financial position
COST ACCOUNTING
Evaluating cost, cost calculation by considering all factors of both manufacturing& administration, goal price fixation, cost control, pinpoints wastages, leakages
MANAGEMENT ACCOUNTING
Better administration, efficient decision making via MIS, CVP & BEP analysis, etc., profit enhancement, secrecy of records, useful to creditors, shareholders
AUDITING
auditor inspects & certifies the A/Cs for accuracy, internal audit by the co. employee also performed
TAX ACCOUNTING
Preparation & filing of tax returns, compliance of laws, tax reports preparation, reduction of taxes in legal way, verification, considering different aspects of taxes,
FUND ACCOUNTING
Keeping records of funds of NPOs, separate funds maintained for separate works for assurance of usage
GOVERNMENT ACCOUNTING
Keeping records for central & state govt. for allocations &utilization of various budgets to ensure proper usage
FORENSIC ACCOUNTING
Calculates damages or settling disputes in legal matters, investigations carried out, also called legal accounting
FIDUCIAR Y ACCOUNTING
Accounting & evaluation of a third party's business & property maintained under the care of another person.
Bookkeeping Vs Accounting
Meaning, Differences, and Bookkeeper vs Accountant In the financial world, the often-repeated most commonly used words are bookkeeping and accounting. These terms are though very common but are of utmost importance in the financial stream. In an accounting cycle, we could see that every transaction goes through a process of identifying, recording, classifying, summarizing, analyzing, interpreting, and communicating all the monetary transactions. Bookkeeping deals with identifying and recording all such transactions as and when it happens usually. Whereas the rest of the functions and processes are done as part of accounting. So, now as we have a basic understanding of both terms, let us see Bookkeeping vs Accounting in detail.
Bookkeeping
Bookkeeping is simple to understand. As mentioned above, it is a systematic process of identifying and recording financial transactions in the books of accounts. Certainly, it helps the business to record the day-to- day transactions in chronological order for easy accessibility and understanding. It also serves as a base for preparing financial statements. So bookkeeping process is at the entry-level and has a limited scope till the recording.
Accounting
Accounting, on the other hand, is the next level of bookkeeping. It is a systematic process of recording, classifying, analyzing, interpreting, summarizing, and communicating the entire financial transaction. It is a vast term as it includes bookkeeping, or we can say that bookkeeping si a part of the overall accounting process. Moreover, it helps in determining the financial status and strength of the business. Because ti includes analysis and interpretation, besides recording. And this process is crucial for every business. Further, it requires special skills
CONCLUTION
Both bookkeeping and accounting are interrelated. Accounting needs to rely on bookkeeping as it provides basic information for carrying accounting process. Moreover, accounting activity can only start when the bookkeeping work is over. Bookkeeping is a narrow concept and is a part of accounting. On the other hand, accounting is of much more importance to management as they rely on information from accounting rather than bookkeeping. So, we can say that both of them have their importance in business but accounting is more important.
TYPES OF BUSINESS ACTIVITIES
Service Business
- Sells one's expertise; does not deal with tangible products
- Structure: Hires Skilled staff
- Examples: Software Development, Accounting Firms, Law Firms, Clinics
- Outside the business, they are not involved in the operations of the business
- Lack direct access to the information generated by business
- Must rely no general-purpose financial statements to make their investments, credit, and policy decisions.
- concerned with the potential return and risks inherent in their investments.
- Investors want to make sure that they can earn a reasonable return on their investment. *Lenders
- Interested in information that enables them to determine whether the business is able to pay loans and the interest attaching to them when due.
- Suppliers or Trade Creditors
- Interested in information that enables them to determine whether amounts owing to them (utang) will be paid when due. *Government and their Agencies
- Interested in the activities of the enterprise.
- They require information to regulate the activities of the enterprise, determine taxation policies, and as the basis for national income and other similar statistics.
Basic Accounting Concepts/Principles
Generally Accepted Accounting Principles (GAAP)
Refer to a common set of accounting principles, standards, and procedures, issued by the Financial Accounting Standards
Board (FASB)
Is the framework of accounting rules and guidelines used in t h e preparation of financial statements.
GENERALLY ACCEPTED ACCOUNTING STANDARD
As applied in the Philippines Philippine financial reporting standards (PFR S) Philippine accounting standard (PAS) Adopted from international financial reporting standards (IFR S) & international accounting standards (IAS)
WHAT ARE BASIC ACCOUNTING CONCEPTS?
•Commonly known as RULES
•Used as guide to action in the day-to-day dealings of business
entities a n d how these items can be accounted for
Generally Accepted Accounting Principles
Generally Accepted Accounting Principles(GAAP)- A set of rules and practices, having substantial authoritative support, that
the accounting profession recognizes as a general guide for financial reporting purposes.
Standard-setting bodies determine these guidelines:
Securities and Exchange Commission (SEC)
Financial Accounting Standards Board (FASB)
International Accounting Standards Board (IASB)
Partnership
- Owned by two or more persons.
- Generally unlimited personal liability
- Partnership agreement Corporation
- Ownership divided into shares of stock
- Separate legal entity organized under state corporation law
- Limited liability Basic Accounting terms BUSINESS Refers to an organization or enterprising entity engaged in commercial, industrial, or professional activities. The purpose of a business is to organize some sort of economic production (of good or service). CAPITAL The amount of cash, goods or assets which is initially invested by proprietor while commencing business. It is invested to earn profits in other words, the excess of asset over liability. PROPRIETOR the person who invests capital in the business and entitled to have all the profit and losses of the business or the owner of the business PURCHASE goods bought for resale. This may be in form of raw material or finished goods. GOODS the thing which are bought and sold by the business. Goods may be raw materials or work in progress of finished goods. SALES when purchased goods are sold in order to earn profit. Either it is sold in cash or credit. EXPENSE NET INCOME CREDITOR the person, firm, or organization from whom good or service are purchased on credit by the business. The business owes money to them, the amount payable to creditors is a liability of the business. DEBITOR the person, firm, or organization from who takes good or services on credit from the business. The one who owes the business money or money’s worth. TRANSACTIONS An event or occurrence that is financial in nature. It is a completed agreement between a buyer and a seller to exchange good, service, or financial assets in return for money.
WHAT ARE ASSETS?
Anything owned or possessed by the business which is capable of being expressed in terms of money or processing momentary value Resource that a business owns that are expected to provide some future economic benefit to the business.
THE ACCOUNTING EQUATION
SUB-CATEGORIES OF LIABILITIES
CURRENT LIABILITIES
Debts or obligation that are expected to paid or liquidated by the use of current assets within 12 months.
NONCURRENT LIABILITIES
Long term debts or obligation that will become due and payable after one year from statement or financial position date WHAT ARE LIABILITIES? o What a company OWES o These are economic obligation or debts payable to an individual or organization or organization outside of the business. WHAT IS OWNER’S EQUITY? Also called CAPITAL for PROPRIETOR SHIP This represent the claim of an owner of a business over the assets of the business after the claims of the creditors have been satisfied Excess of asset over liabilities COMPOSE OF: CAPITAL and WITHDRAWAL
