Basic Acounting

Accounting- language of business

DEFINITION OF ACCOUNTING

1. IS A SERVICE ACTIVITY. ITS FUNCTION IS TO PROVIDE A QUANTITATIVE INFO. PRIMARILY FINANCIAL IN

NATURE, ABOUT EONOMIC ENTITIES THAT IS INTENDED TO BE USEFUL IN MAKING ECONOMIC
DECISIONS.

2. IS AN INFO. SYSTEM THAT MEASURES, PROCESS AND COMMUNICATES FINANCIAL INFORMATION

ABOUT AN ECONOMIC ENTITY

3. IS A PROCESS OF IDENTIFYING, MEASURING AND COMMUNICATING ECONOMIC INFOS TO PERMIT

INFORMED JUDGEMENTS AND DECISIONS BY USERS OF THE INFO.

4. IS THE ART OF RECORDING, CASSIFYING 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.

 LUCA PACIOLI- FATHER OF ENTRE-BOOKKEEPING/ ACCOUNTING

 AMATINO MANUCCI- INVENTOR OF DOUBLE ENTRY-BOOKKEEPING.

TYPES OF BUSINESS

 SERVICES- SEELING PEOPLES TIME

 TRADER- BUYING AND SELLING PRODUCTS
 MANUFACTURE- DESIGNING PRODUCTS, AGGREGATING COMPONENTS AND ASSEMBLING
FINISHED PRODUCTS
 RAW MATERIALS- GROWING OR EXTRACTING RAW MATERIALS
 INFRASTRACTURE- SELLING THE UTILIZATION OF INFRASTRUCTURE
 FINANCIAL- RECEIVING DEPOSITS LENDING AND INVESTING MONEY
 INSURANCE- POOLING PREMIUMS OF MANY TO MEET CLAIMS OF A FEW

FORMS OF BUSINESS ORGANIZATIONS

 SOLE PROPRIETORSHIP- SINGLE OWNER CALLED THE PROPRIETOR WHO GENERALLY THE
MANAGER.
 PARTNERSHIP- BUSINESS OWNED AND OPERATED BY TWO OR MORE PERSONS BIND
THEMSELVES TO CONTRIBUTES MONEY PROPERTY OR INDUSTRY TO A COMMON FUND WITH
THE INTENTION OF DIVIDING THE PROFITS AMONG THEMSELVES.
 CORPORATION- IS A BUSINESS OWNED BY ITS STOCKHOLDERS

ACTIVITIES IN BUSINESS ORGANIZATIONS

 FINANCING ACTIVITIES- METHODS OF ORGANIZATION USES TO OBTAIN FINANCIAL RESOURCES
FROM FINANCIAL MARKETS AND HOW IT MANAGES THESE RESOURCES.
 INVESTING ACTIVITIES- MANAGERS USE CAPITAL FROM FINANCING ACTIVITIES TO ACQUIRE
OTHER RESOURCES USED IN THE TRANSFORMATION PROCESS.
1. EFFICIENT BUSINESS- IS ONE THAT PROVIDES GOODS AND SERVICES AT LOW
COSTS RELATIVE TO THEIR SELLING PRICES
2. EFFECTIVE BUSINESS- IS ONE THAT IS SUCCESSFUL IN PROVIDING GOODS AND
SERVICES DEMANDED BY CUSTOMERS.
 OPERATING ACTIVITIES-INVOLVE THE USE OF RESOURCES TO DESIGN, PRODUCE, DISTRIBUTE
AND MARKET GOODS AND SERVICES
PURPOSE AND PHASES OF ACCOUNTING
 RECORDING HISTORICAL EVENTS IS A SIGNIFICANT FUNCTION OF ACCOUNTING.
 ACCOUNTS ARE PRODUCED TO AID MANAGEMENT IN PLANNING, CONTROL AND DECISION
MAKING AND TO COMPLY WITH REGULATIONS.
 BEFORE THE EFFECTS OF TRANSACTIONS CAN BE RECORDED, THEY MUST BE MEASURED. IN
ORDER THAT ACCOUNTING INFORMATION WILL BE USEFUL IT MUST BE EXPRESSED IN TERMS
OF A COMMON FINANCIAL DENOMINATOR-MONEY. MONEY SERVES AS BOTH A MEDIUM OF
EXCHANGE AND A MEASURE OF VALUE.

PACIOLI’S DOUBLE-ENTRY BOOKKEEPING AND ITS EVOLUTION

 SUMMA- FRA LUCA PACIOLI’S BOOK, THERE ARE 36 SHORT CHAPTERS ON BOOKKEEPING.
 EVERY MERCHANT NEEDS 3 ESSENTIAL THINGS:
1. SUFFICIENT CASH OR CREDIT
2. A GOOD BOOKKEEPER
3. AN ACCOUNTING SYSTEM
 3 BOOKS IN SUMMA- MEMORANDUM
JOURNAL
LEDGER
 MEMORANDUM- BOOK WHERE ALL TRANSACTIONS ARE RECORDED, IN THE CURRENCY IN
WHICH THEY ARE CONDUCTED, AT THE TIME THEY ARE CONDUCTED. IT IS PREPARED
CHRONOLOGICAL ORDER, NARRATIVE DESCRIPTION OF BUSINESS’S ECONOMIC EVENTS THE
MEMMORANDUM IS NECESSARY BEACAUSE THERE ARE NO DOCUMENTS TO
SUPPORTTRANSACTIONS.
 JOURNAL- MERCHANTS PRIVATE BOOK, ENTRIES MADE HERE ARE IN ONE CURRENCY, IN
CHRONOLOGICAL AND IN NARRATIVE FORM
 LEDGER- IS AN ALPHABETICAL LISTING OF ALL THE BUSINESS’S ACCOUNTS ALONG WITH THE
RUNNING BALANCE OF EACH PARTICULAR ACCOUNT.
 3 BASIC QUESTIONS: 1. WHAT PROFIT HAS THE BUSINESS MADE
2.HOW MUCH DOES THE BUSINESS OWE
3.HOW MUCH IS OWED TO IT
 FINANCIAL ACCOUNTING- CONCERNED WITH THE SUPPLY OF INFORMATION TO THE OWNERS
OF AN ENTITY
 MANAGEMENT ACCOUNTING- CONCERNED WITH THE SUPPLY OF INFORMATION TO THE
MANAGERS OF AN ENTITY.
FUNDAMENTAL CONCEPTS
 ENTITY – THE MOST BASIC CONCEPT IN ACCOUNTING. EACH ENTITY SHOULD BE EVALUATED
SEPARATELY.
 PERIODITY- AN ENTITY’S LIFE CAN BE MEANINGFULLY DIVIEDE INTO EQUAL TIME PERIODS FOR
REPORTING PURPOSES.
 STABLE-MONETARY UNIT- PHIL. PESO IS A REASONABLE UNIT OF MEASURE AND THAT IS
PURCHASING POWER IS RELATIVELY STABLE
 GOING CONCERN- FINANCIAL STATEMENTS ARE NORMALLY PREPARED ON THE ASSUMPTION
THAT THE REPORTING ENTITY IS A GOING CONCERN AND WILL CONTINUE IN OPERATION FOR
THE FORESEEABLE FUTURE.
CRITERIA FOR GENERAL ACCEPTANCE OF AN ACCOUNTING PRINCIPLE:
 GAAP- GENERALY ACCEPTED ACCOUNTING PRINCIPLES- ENCOMPASSES THE CONVENTIONS,
RULES AND PROCEDURES NECESSARY TO DEFINE ACCEPTED ACCOUNTING PRACTICE AT A
PARTICULAR TIME
 GAAP 3 CRITEARIA:
 1. RELEVANCE- EXTENT THAT IT RESULTS IN INFORMATION THAT IS MEANINGFUL AND USEFUL
TO THOSE WHO NEED TO KNOW SOMETHING ABOUT A CERTAIN ORGANIZATION

 2. OBJECTIVITY- EXTENT THAT THE RESULTING INFORMATION IS NOT INFLUENCED BY THE

PERSONAL BIAS OR JUDGEMENT OF THOSE WHO FURNISH IT

 3. FEASIBILITY- EXTENT THAT IT CAN BE IMPLEMENTED WITHOUT UNDUE COMPLEXITY OR

COST.

BASIC PRINCIPLES

 OBJECTIVITY PRINCIPLE= STATEMENTS ARE BASED ON THE MOST RELIABLE DATA AVAILABLE SO
THAT THEY WILL BE AS ACCURATE AND AS USEFUL AS POSSIBLE.
 HISTORICAL COST- STATES THAT ACQUIRED ASSETS SHOULD BE RECORDED AT THEIR ACTUAL
COST AND NOT AT WHAT MANAGEMENT THINKS THEY ARE WORTH AS AT REPORTING DATE.
 REVENUE RECOGNITION PRINCIPLE-REVENUE IS TO BE RECOGNIZED IN THE ACCOUNTING
PERIOD WHEN GOODS ARE DELIVERED OR SERVICES ARE RENDERED OR PERFORMED
 EXPENSE RECOGNITION PRINCIPLE- Expenses should be recognized in the accounting peRIOD IN
WHICH GOODS AND SERVICES ARE USED UP TO PRODUCE REVENUE AND NOT WHEN THE
ENTITY PAYS FOR THOSE GOOD AND SERVICES.
 ADEQUATE DISCLOSURE- REQUIRES THAT ALL RELEVANT INFPRMATION THAT WOULD AFFECT
THE USERS UNDERSTANDING AND ASSESMENT OF THE ACCOUNTING ENTITY BE DISCLOSED IN
THE FINANCIAL STATEMENTS.
 MATERIALITY-FINANCIAL REPORTING IS ONLY CONCERNED WITH INFORMATION THAT IS
SIGNIFICANT ENOUGH TO AFFECT EVALUATIONS AND DECISIONS.
 CONSISTENCY - THE FIRMS SHOULD BE USE THE SAME ACCOUNTING METHOD FROM PERIOD TO
PERIOD TO ACHIEVE COMPARABILITY OVER TIME WITHIN A SINGLE ENTERPRISE.

 ACCOUNTANCY ACT OF 2004-R.A NO. 9298 SIGNED INTO LAW BY PRESIDENT GLORIA
MACAPAGAL ARROYO ON MAY 13, 2004
SCOPE OF PRACTICE 4
 PRACTICE OF PUBLIC ACCOUNTANCY
 PRACTICE IN COMMERCE AND INDUSTRY
 PRACTICE IN EDUCATION/ACADEME
 PRACTICE IN GOVERNMENT
 PICPA- phil. INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS THESE ARE THE INTEGRATED
NATIONAL PROFESSIONAL ORGANIZATION OF CPA IN THE PHILIPPINES ACCREDITED BY BOA
AND THE PRC PER PRC CERTIFICATE OF ACCREDITATION.
 ASC- ACCOUNTING STANDARDS COUNCIL TO ESTABLISH AND IMPROVE ACCOUNTING
STANDARD THAT WILL BE GENERALLY ACCEPTED IN THE PHILIPPINES.