Chapter 1 - 4 Accountancy Prelims FAR Flashcards
is a process of identifying, recording and communicating economic information that is useful in making economic decisions.
Accounting
The accountant analyzes each business transaction and identifies whether the transaction is an “accountable event” or “non-accountable event.” This is because only “accountable events” are recorded in the books of accounts. “Non-accountable events” are not recorded in the books of accounts.
Identifying
The accountant recognizes (i.e., records) the “accountable events” he has identified. This process is called “journalizing.” After journalizing, the accountant then classifies the effects of the event on the “accounts.” This process is called “posting.”
Recording
At the end of each accounting period, the accountant summarizes the information processed in the accounting system in order to produce meaningful reports. Accounting information is communicated to interested users through accounting reports, the most common form of which is the financial statements.
Communicating
is a process with the basic purpose of providing information about economic activities intended to be useful in making economic decisions.
Accounting
Types of information provided by accounting
Quantitative Information
Qualitative Information
Financial Information
those who are directly involved in managing the business.
Internal Users
– those who are not directly involved in managing the business.
External Users
Types of Business According to Activities
- Service business
- Merchandising (Trading)
- Manufacturing
The business is viewed as a separate entity, 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.
Separate entity concept
assets are initially recorded at their acquisition cost.
Historical cost concept (Cost principle)
The business is assumed to continue to exist for an indefinite period of time.
Going concern assumption
Some costs are initially recognized as assets and charged as expenses only when the related revenue is recognized.
Matching
income is recorded in the period when it is earned rather than when it is collected, while expense is recorded in the period when it is incurred rather than when it is paid.
Accrual Basis of accounting
The observance of some degree of caution when exercising judgments under conditions of uncertainty. Such that, if there is a choice between a potentially unfavorable outcome and a potentially favorable outcome, the unfavorable one is chosen. This is necessary so that assets or income are not overstated and liabilities or expenses are not understated.
Prudence
The life of the business is divided into series of reporting periods.
Reporting Period
Assets, liabilities, equity, income and expenses are stated in terms of a common unit of measure, which is the peso in the Philippines. Moreover, the purchasing power of the peso is regarded as stable. Therefore, changes in the purchasing power of the peso due to inflation are ignored.
Stable monetary unit
An item is considered material if its omission or misstatement could influence economic decisions. Materiality is a matter of professional judgment and is based on the size and nature of an item being judged.
Materiality concept
The costs of processing and communicating information should not exceed the benefits to be derived from the information’s use.
Cost-benefit
Information communicated to users reflect a balance between detail and conciseness, keeping in mind the cost-benefit principle.
Full disclosure principle
Like transactions are accounted for in like manner from period to period.
Consistency concept
are Standards adopted by the Financial and Sustainability Reporting Standards Council (FSRSC), the official accounting standard-setting body in the Philippines, from the International Financial Reporting Standards (IFRSs).
Philippine Financial Reporting Standards (PFRS)
Fundamental Qualitative Characteristics
i. Relevance (Predictive Value, Confirmatory Value, Materiality)
ii. Faithful Representation (Completeness, Neutrality,
Free from error)
Enhancing Qualitative Characteristics
i. Comparability
ii. Verifiability
iii. Timeliness
iv. Understandability
are the characteristics that make information useful to users.
fundamental qualitative characteristics
are the characteristics that enhance the usefulness of information
enhancing qualitative characteristics
Information is ________ if it can affect the decisions of users.
Relevance
the information can be used in making predictions
Predictive value
– the information can be used in confirming past predictions
Confirmatory value
is an ‘entity-specific’ aspect of relevance.
Materiality
means the information provides a true, correct and complete depiction of what it purports to represent.
Faithful representation
all information necessary for users to understand the phenomenon being depicted is provided.
Completeness
information is selected or presented without bias.
Neutrality
there are no errors in the description and in the process by which the information is selected and applied.
Free from error
the information helps users in identifying similarities and differences between different sets of information.
Comparability
different users could reach consensus as to what the information purports to represent.
Verifiability
the information is available to users in time to be able to influence their decisions.
Timeliness
users are expected to have:
- reasonable knowledge of business activities; and
- willingness to analyze the information diligently.
Understandability
are the economic resources you control that have resulted from past events and can provide you with economic benefits.
Assets
are your present obligations that have resulted from past events and can require you to give up economic resources when settling them.
Liabilities
is assets minus liabilities.
Equity
is increases in economic benefits during the period in the form of increases in assets, or decreases in liabilities, that result in increases in equity, excluding those relating to investments by the business owner.
Income
are decreases in economic benefits during the period in the form of decreases in assets, or increases in liabilities, that result in decreases in equity, excluding those relating to distributions to the business owner.
Expenses
An _____ is the basic storage of information in accounting. It is a record of the increases and decreases in a specific item of asset, liability, equity, income or expense.
Account
is a list of all the accounts used by a business.
Chart of Accounts
- Cash
- Accounts receivable
- Allowance for bad debts
- Notes receivable
- Prepaid supplies
- Prepaid rent
- Prepaid insurance
- Land
- Building
- Accumulated depreciation - Building
- Equipment
- Accumulated depreciation - equipment
Assets
(Balance Sheet)
- Accounts payable
- Notes payable
- Interest payable
- Salaries payable
- Utilities payable
- Unearned
Liabilities
(Balance Sheet)
- Owner’s capital (or Owner’s equity)
- Owner’s drawings
Equity
(Balance Sheet)
- Service fees
- Sales
- Interest income
- Gains
Income
(Income Statement)
- Cost of sales (or Cost of goods sold)
- Freight-out
- Salaries expense
- Rent expense
- Utilities expense
- Supplies expense
- Bad debt expense
- Depreciation expense
- Advertising expense
- Insurance expense
- Taxes and licenses
- Transportation and travel expense
- Interest expense
- Miscellaneous expense
- Losses
Expenses
(Income Statement)
