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- Accounting is the art of recording, classifying 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. (New York: AICPA, 1953)
CONCEPTUAL FRAMEWORK OF ACCOUNTING (OLD VERSION)
Scope:
C = Concept of capital and capital maintenance
O = Objectives of Financial Statement
Q = Qualitative characteristics of Financial Statement
E = Definition, Recognition, and Measurement of the Element of Financial Statement
QUALITATIVE CHARACTERISTICS OF FINANCIAL STATEMENT
Form/Presentation: C = Comparability
U = Understandability
Content/Substance: R = Relevance
1. Predictive Value
2. Feedback Value
3. Timeliness
Ry = Reliability
1. Faithful Representation
2. Substance over Form
3. Prudence or Conservatism
4. Neutrality
5. Completeness
CONCEPTUAL FRAMEWORK OF FINANCIAL REPORTING (NEW 2010 VERSION)
Scope:
C = Concepts of capital and capital maintenance
O = Objectives of financial reporting
Q = Qualitative characteristics of useful financial information
R = Reporting entity
D = Definition, Recognition of measurement of the elements from which financial statement are
constructed
QUALITATIVE CHARACTERISTICS OF FINANCIAL STATEMENTS (NEW)
Fundamental: R = Relevance – capable of making a difference in the decisions made by users.
1. Confirmatory Value – when it provides feedback about previous
evaluations.
2. Predictive Value – when it can be used as an input to processes
employed by users to predict future outcome.
3. Materiality – information is material “ if omitting it or misstating it
could influence decisions that users make on the basis of financial
information about a specific reporting entity”
FR = Faithful Representation
1. Completeness – all information necessary for a user to understand
the phenomenon being depicted, including all necessary descriptions
and explanations.
2. Neutrality – free from bias or “ unbiased in the selection or
presentation of financial information”
3. Freedom from error – there are no errors or omissions for the
reported information.
Enhancing: V = Verifiability – means that different knowledgeable and independent
observers could reach consensus, although not necessarily complete agreement,
that a particular depiction is a faithful representation.
C = Comparability – enables users to identify and understand similarities in,
and differences among, items.
U = Understandability - “classifying, characterizing and presenting information
clearly and concisely” makes it understandable.
T = Timeliness – means that “ information is available to decision-makers in
time to be capable of influencing their decisions.”
The objective of financial statements is to provide information about the financial position,
performance, and changes in financial position of an entity that is useful to a wide range of users
in making economic decisions.
Information is material if its omission or misstatement could influence economic decisions of users.
It is a threshold or cut-off point rather than primary qualitative characteristic of information.
The objective of financial reporting is to provide financial information about the reporting entity
that is useful to existing and potential investors, lenders and other creditors in making decisions
about providing resources to the entity.
TYPES OF BUSINESS
SERVICES
- A service type of business provides intangible products (products with no physical form).
Service type firms offer professional skills, expertise, advice, and other similar products.
Examples: salons, repair shops, schools, banks, accounting firms, and law firms.
MERCHANDISING
- This type of business buys products at wholesale price and sells the same at retail price. They
are known as "buy and sell" businesses. They make profit by selling the products at prices
higher than their purchase costs.
- A merchandising business sells a product without changing its form.
Examples: grocery stores, convenience stores, distributors, and other resellers.
MANUFACTURING
- Manufacturing business buys products with the intention of using them as materials in
making a new product. Thus, there is a transformation of the products purchased.
- A manufacturing business combines raw materials, labor, and factory overhead in its
production process. The manufactured goods will then be sold to customers.
Partnership
- Two or more persons bind themselves to contributed money, property, or industry to a common
fund, with the intention of dividing the profit among themselves. Two or more persons may
also form a partnership for the exercise of a profession. (Civil Code of the Philippines, Article
1767)
- Each owner is called a partner.
Corporation
- Is an artificial being created by operation of law, having the right of succession and the powers,
attributes and properties expressly authorized by law or incident to its existence.
- A corporation is a business owned by its stockholders.
Cooperatives
- A cooperative is an autonomous and duly registered association of persons, with a common
bond of interest, who have voluntarily joined together to achieve their social, economic, and
cultural needs and aspirations by making equitable contributions to the capital required;
patronizing their products and services and accepting a fair share of the risks and benefits of
the undertaking in accordance with universally accepted cooperative principle. The entity is
registered with the Cooperative Development Authority.
TYPES OF TRANSACTION
1. SOURCE OF ASSET
A = L + OE
↑ = ↑ ↑
2. USE OF ASSET
A = L + OE
↓ = ↓ ↓
3. EXCHANGE OF ASSET
A = L + OE
↑/↓ ↑/↓ = no effect no effect
4. EXCHANGE OF CLAIMS
A = L + OE
no effect = ↑/↓ ↑/↓ ↑/↓ ↑/↓
ACCOUNTING CYCLE
STEP 1: Identification of events to be recorded.
STEP 2: Transaction are recorded in the journal.
STEP 3: Journal Entries are posted to the ledger.
STEP 4: Preparation of a Trial Balance
STEP 5: Preparation of a Worksheet including Adjusting Entries
STEP 6: Preparation of Financial Statement
STEP 7: Adjusting Journal Entries are Journalized and Posted
STEP 8: Closing Journal Entries are Journalized and Posted
STEP 9: Preparation of a Post-Closing Trial Balance
STEP 10: Reversing Entries are Journalized and Posted.