Accounting In Action Flashcards
3 basic activities of accounting
identifying, recording, communicating
What is identifying
- identifying economic events relevant to its business
What is recording
relevant economic events are recorded in order to provide a history of financial activities
- it is the act of keeping a SYSTEMATIC CHRONOLOGICAL DIARY OF EVENTS that are measured in monetary units
- economic events are also CLASSIFIED and SUMMARIZED in the recording process
What is communicating
COMMUNICATES the collected information to interested users by means of ACCOUNTING REPORTS
2 vital elements in communicating economic events — explain
Analysis
- involves ratios, percentages, graphs, and charts to highlight significant financial trends and relationships
Interpretation
- explaining the uses, meaning, and limitations of reported data
What is bookkeeping
ONLY part of the recording process because it ONLY RECORDS ECONOMIC EVENTS
- part of only ONE accounting process
Who uses accounting data?
- Internal users
2. External users
Define internal users of accounting information
MANAGERS who plan, organize, and RUN the businesses
- marketing managers, production supervisors, finance directors, company officers
Define external users of accounting information
individuals and organizations OUTSIDE a company who want financial information about the company
- do not participate in the day to day operations of the business
What is managerial accounting?
- part of internal users
- provides internal reports to help users make decisions about their companies
Give examples of external users
owners creditors investors supplies customers BIR audit tax authorities
What is financial accounting?
- part of external users
- provides economic and financial information for investors, creditors, and other external users
2 measurement principles of IFRS
Historical cost and fair value
Define fair value
assets and liabilities are reported at fair values (price received to sell an asset or settle a liability)
commonly used where assets are actively traded
define historical cost principle
- companies record assets at their COST
- what is in its accounting records is continued to be reported at that same amount
2 main assumptions that provide foundation for the accounting process
Monetary unit and economic entity assumption
define monetary unit assumption
companies only record events that can be measured in money
the only thing included in accounting records are transaction data that can be expressed in money terms/ QUANTIFIABLE UNITS only
define economic entity assumption
ACTIVITIES of the entity is KEPT SEPARATE from the activities of its owners and all other economic entities
owner’s activities is kept separate from the company
what is the basic accounting equation?
assets = liability + owner’s equity
what is the expanded accounting equation
assets = liabilities + owner’s capital - owner’s drawings + revenues - expenses
define assets
- resources a business owns
- capacity to provide = FUTURE services or BENEFITS
- items that contain service potential or future economic benefit that eventually results in cash inflow
define LIABILITIES
- claims AGAINST assets
- BORROWED CAPITAL
- existing debts and obligations
- ACCOUNTS PAYABLE
- NOTES PAYABLE
- SALARIES AND WAGS PAYABLE
- SALES AND REAL ESTATE TAXES PAYABLES
- creditors = person/entities owed by the business -> yung inutangan
define OWNER’S EQUITY
- INVESTED CAPITAL
- ownership claim on total assets
- capital invested by proprietors, partnerships, and shareholders
what is owner’s equity equal to
assets - total liabilities
what causes an INCREASE in owner’s equity
- investments by owner (owner’s capital)
- increase in revenues
increase in revenue increase owner’s equity
increase in revenue increases assets
increase in revenue decreases liabilities
what causes a DECREASE in owner’s equity
drawings - withdrawing cash for personal use
expenses - decrease in equity that results from operating the business -> cost of assets that are consumed/services used in the process of earning revenue
what is the effect of expenses
a decrease in equity results in a decrease in assets or an increase in liability
expanded equation
assets = liabilities + (owners capital- owners drawings) + (revenues - expenses)
enumerate the accounting cycle
- journalizing
- posting
- trial balance
- adjusting entries
- adjusted trial balance
- financial statements
- closing statements
- post-closing trial balance
define accounting transaction
business’ economic events that are recorded by accountants
2 types of accounting transactions
external & internal transaction
define external transaction
economic events between the company and an OUTSIDE enterprise
ex. purchase of cooking equipments from a supplier, payment of monthly rent to a landlord
define internal transaction
economic events that occur entirely WITHIN the company
examples of NON-BUSINESS /accounting transactions
hiring employees
responding to emails
engaging with customers
placing merchandise orders
effect of an investment in cash by owner
increase in OE, increase in assets
effect of purchase of equipment by cash
increase, decrease in asset
increase in equipment account
decrease in cash account
effect of purchase of supplies on credit
increase in assets, increase in liabilities
effect of services performed for cash
increase in asset (cash account)
increase in owner’s equity (revenue account)
purchase of advertising on credit
increase in liabilities
decrease in owner’s equity (expenses account)
services performed for cash and credit
increase in assets (cash account and accounts receivable)
increase in owner’s equity (revenue account)
effect of payment expenses
decrease in cash (assets)
decrease in owner’s equity (increase in expenses)
effect of payment on accounts payable
decrease in liabilities
decrease in assets (cash account)
effect of receipt of cash ON ACCOUNT
increase in cash (assets)
decrease in accounts receivable (assets)
effect of withdrawal of cash by owner
decrease in cash (decrease in asset)
increase in owner’s drawings (decrease in OE)
what does an income statement present
revenues and expenses resulting in net income or net loss for a specific PERIOD of time
what does a statement of financial position report
assets, liabilities, and owner’s equity at a SPECIFIC date
