1ST SEM Flashcards
Brief History of Accounting
More than 10,000 years ago: Methods of record keeping and accounting have been invented.
Accounting has existed for thousands of years, with early examples in Mesopotamia, Babylonia, Egypt, China, and Greece.
Definition of Accounting
Accounting is a process of identifying, recording and communicating economic information that is useful in making economic decisions.
Fra Luca Pacioli is known as the father of modern accounting.
Essential elements of the definition of accounting
Identifying. The process of analyzing each business transaction and identifying whether the transaction is an ‘accountable event’ or ‘non-accountable event.’
‘Accountable events’ are those that affect the assets, liabilities, equity, income, or expenses of a business.
Recording
Journalizing – the process of recognizing (i.e., records) the identified ‘accountable events.’
‘Account’ is the basic storage of information in accounting, e.g., ‘cash,’ ‘land,’ ‘sales,’ etc.
Communicating
The process of summarizing the information processed in the accounting system to produce meaningful reports.
Accounting provides quantitative, qualitative, and financial information for decision-making.
Branches of Accounting
Financial accounting – is the branch of accounting that focuses on general purpose financial statements.
Financial accounting is governed by the Philippine Financial Reporting Standards (PFRSs).
Users of Accounting Information
Internal users – those who are directly involved in managing the business. Examples include business owners and managerial personnel.
External users – those who are not directly involved in managing the business. Examples include investors, lenders, creditors, government agencies, and customers.
Users of accounting information are classified into internal and external users.
External users include:
Existing and potential investors (e.g., stockholders who are not directly involved in managing the business), lenders (e.g., banks) and Creditors (e.g., suppliers), government agencies (e.g., BIR, SEC), non-managerial employees, customers, public
Forms of Business Organizations
Sole or single proprietorship – is a business that is owned by only one individual. It is the most common and simplest form of a business organization. The business owner is called a “sole proprietor.” A sole proprietorship is registered with the Department of Trade and Industry (DTI).
Example: A small bakery owned and operated by a single individual.
Types of Business according to Activities
Service business – is one that offers services as its main product rather than physical goods. A service business may offer professional skills, expertise, advice, lending service, and similar services. Examples of service businesses include: Schools, Professionals (accounting firm, electrician, etc.), Banks and other financial institutions, hotels and restaurants
Example: An accounting firm providing financial advisory services.
Accounting concepts and principles
Separate entity concept – Under this concept, the business is viewed as a separate person, distinct from its owner(s). Only the transactions of the business are recorded in the books of accounts. The personal transactions of the business owner(s) are not recorded.
Example: A business owner using personal funds for groceries should not be recorded in the business’s financial records.
Liquidating concern
The assets of a liquidating concern are measured at net selling price rather than at historical cost. (Going concern - good; Liquidating concern-bad)
Example: A business that is bankrupt and is winding up its operations.
Matching (or Association of cause and effect)
Some costs are initially recognized as assets and charged as expenses only when the related revenue is recognized.
No additional information.
Accrual Basis of accounting
Economic events are recorded in the period in which they occur rather than at the point in time when they affect cash.
Example: Recording income when it is earned, not when it is collected.
Prudence (or Conservatism)
The accountant observes caution when making accounting estimates under uncertainty.
Explanation: Choosing unfavorable outcomes over favorable ones to avoid overstatement of assets or income.
Time Period (Periodicity, Accounting period, or Reporting period concept)
The life of the business is divided into series of reporting periods.
No additional information.
Stable monetary unit
Assets, liabilities, equity, income, and expenses are stated in terms of a common unit of measure.
Explanation: Using the peso in the Philippines as the stable monetary unit.
Materiality concept
Accountant considers materiality when applying accounting principles to material items.
Explanation: Omission or misstatement of material items can influence economic decisions.
Cost-benefit (Cost constraint)
The cost of processing and communicating information should not exceed the benefits.
No additional information.
Full disclosure principle
Information communicated to users reflects judgmental trade-offs for sufficient detail and condensation.
No additional information.
Consistency concept
Business must apply accounting policies consistently and present information consistently.
Explanation: Like transactions must be accounted for in the same manner.
Accounting Standards
Explicit concepts and principles are specifically mentioned in the Conceptual Framework for Financial Reporting and in the Philippine Financial Reporting Standards (PFRSs).
No additional information.
Philippine Financial Reporting Standards (PFRS)
PFRSs are Standards and Interpretations adopted by the Financial Reporting Standards Council (FRSC).
No additional information.
Relevant Regulatory Bodies
Other than the FRSC, the SEC, BIR, BSP, and CDA affect accounting policies and financial reporting.
Explanation: Regulatory bodies like SEC and BIR require specific financial reporting from businesses.
What does the SEC require corporations and partnerships to file?
Audited financial statements
Example sentence: The SEC requires corporations and partnerships to file audited financial statements.
What is the role of the Bureau of Internal Revenue (BIR)?
Collecting national taxes and administering the provisions of the Tax Code
Example sentence: The BIR is tasked in collecting national taxes and administering the provisions of the Tax Code.
What is the role of the Bangko Sentral ng Pilipinas (BSP)?
Regulating banks and other entities performing banking functions
Example sentence: The BSP is tasked in regulating banks and other entities performing banking functions. The BSP influences the selection and application of accounting policies by these businesses.
What is the role of the Cooperative Development Authority (CDA)?
Regulating cooperatives
Example sentence: The CDA is tasked in regulating cooperatives. The CDA influences the selection and application of accounting policies by cooperatives.
What is the Conceptual Framework for Financial Reporting?
A general frame of reference in developing or applying accounting standards
Example sentence: Just like the Standards, the Conceptual Framework for Financial Reporting also prescribes accounting concepts that are relevant to the preparation of financial statements. However, the Conceptual Framework is not a standard. Rather, the Conceptual Framework serves as a general frame of reference in developing or applying the standards.
What are the fundamental qualitative characteristics in accounting?
Relevance and Faithful representation
Example sentence: Fundamental qualitative characteristics are the characteristics that make information useful to users. They consist of Relevance and Faithful representation.
What are the enhancing qualitative characteristics in accounting?
Comparability, Verifiability, Timeliness, and Understandability
Example sentence: Enhancing qualitative characteristics support the fundamental characteristics. They enhance the usefulness of information. As such, they must be maximized. The enhancing qualitative characteristics consist of Comparability, Verifiability, Timeliness, and Understandability.
What is the Basic Accounting Equation?
Assets=Liabilities+Equity
Example sentence: All the processes in an accounting system must observe the equality of the accounting equation, which is basically an algebraic equation.
What is the Expanded Accounting Equation?
Assets=Liabilities+Equity+Income-Expenses
Example sentence: We can expand the basic accounting equation by including two more elements income and expenses. The expanded accounting equation shows all the financial statement elements.
What is an Account in accounting?
Basic storage of information in accounting
Example sentence: An account is a record of the increases and decreases in a specific item of asset, liability, equity, income or expense.
What are the three parts of a ‘T-account’?
Account title, Debit (Dr.) side, Credit (Cr.) side
Example sentence: A ‘T-account’ has three parts, namely: Account title – describes the specific item of asset, liability, equity, income or expense. Debit (Dr.) side – the left side of the account. Credit (Cr.) side – the right side of the account.
What are the five major accounts in accounting?
Assets, Liabilities, Equity, Income, Expenses
Example sentence: The five major accounts, also called the elements of the financial statements, are actually the items in the expanded accounting equation presented in the previous slide.
