Overview of Accounting Flashcards
What is Accounting?
It is the process of identifying, measuring, and communicating economic information to permit informed judgments and decisions by users of the information. (American Association of Accountants)
Three Important Activities in the Definition of Accounting
Identifying, Measuring and Communicating
Identifying
The process of analyzing events and transactions to determine whether or not they will be recognized.
Recognition
Refers to the process of including the effects of an accountable event in the statement of financial position or the statement of comprehensive income through a journal entry.
Accountable event
Affects all the accounting elements (A, L, OE, I and E), also known as economic activity.
Only economic activities are emphasized and recognized in accounting.
Sociological and psychological matters are not recognized.
Non-accountable events are not recognized but disclosed in the notes if they have accounting relevance in the_____
Memorandum Entry
External events
Events that involve an entity and another external party.
Exchange (reciprocal transfer)
Giving and Receiving of economic resources or discharging of economic obligations between an entity and an external party.
Sale, Purchase, Payment of Liabilities, Receipt of N/R in exchange for A/R
Exchange or Reciprocal Transfer
Non-reciprocal transfer
One way transaction
Donations, Gifts, Charitable Contributions, Payment of Taxes, Imposition of Fines, Theft, Provision of Capital by Owners
Non-reciprocal transfer
External event other than transfer
Changes in the economic resources or obligations of an entity that does not involve transfer of resources or obligations
Changes in fair values and price levels, obsolescence, technological changes, vandalism
External event other than transfer
Production
Resources are transformed into finished goods
Conversion of raw materials into finished products, production of farm products
Production
Casualty
Unanticipated loss from disasters or other similar events
Measuring
Assigning numbers to the economic transactions in monetary terms
Most commonly used measurement bases
Historical cost
Financial statements are said to be prepared using ________
A mixture of costs and values
Costs include
Historical cost and current cost
Values include
Other measurement bases
When measurement is affected by estimates,
Valued by Opinion
Examples of items valued by Opinion are ____
- Estimates of uncollectible amounts of receivables
- Depreciation and Amortization Expenses
- Estimated Liabilities (Provisions)
- Retained Earnings
Measurement is unaffected by estimates
Items are valued by Fact
Examples of items valued by Fact ____
- Ordinary share capital valued at par value
- Land stated at acquisition cost
- Cash measured at face amount
Communicating
Process of transforming economic data into useful accounting information for dissemination to users. It also involves interpreting the significance of processed information.
Three aspects of Communicating (RCS)
Recording, Classifying and Summarizing
Process of systematically committing into writing accountable events in journal
Recording
Grouping of similar and interrelated items into respective classes through postings in the ledger
Classifying
Putting together in condensed form the classified transactions, including the preparation of financial statements
Summarizing
Computation of financial statement ratios
Interpreting the processed information in communicating
Which regulatory body requires certain financial ratios to be disclosed in the notes to financial statements
BSP (Bangko Sentral ng Pilipinas)
The basic purpose of accounting
Provide information useful in making economic decisions
Various sources of information are used such as ____
Other sources like current events, industry publications, internet resources, professional advice and expert systems
Economic entities use accounting to record _______, process data, and disseminate information intended for making economic decisions
Economic Activities
Separately identifiable combination of persons and property that uses or controls economic resources to achieve certain goals
Economic Entity
Entity - Carries out some socially desirable needs of the community and not directed towards making profit
Not-for-profit entity
Entity - Operates primarily for profit
Business Entity
Economic activities include (PECISI)
Production, Exchange, Consumption, Income distribution, Savings, Investment
EA - Process of converting economic resources into outputs
Production
EA - process of trading resources or obligations for other
Exchange
EA - process of using final output of production
Consumption
EA - process of allocating rights to the use of output among individuals
Income distribution
EA - process of setting aside rights to present consumption in exchange to future consumption
Savings
EA - process of using current inputs to increase stock of resources
Investment
Types of information provided by accounting
Quantitative
Qualitative
Financial
Financial information is also ____ because monetary amounts are normally expressed in numbers
Quantitative Information
Types of accounting information classified to users’ needs
General purpose (financial accounting)
Special purpose (other types other than financial accounting)
Accounting as S and A - Accounting is a body of knowledge that has been systematically gathered, classified, and organized
Accounting as a Social Science
Accounting as S and A - Accounting requires the use of creative skills and judgment
Accounting as a Practical Art
Accounting identifies and measures economic activities, and processes information into financial reports, and communicates these reports to decision-makers
Accounting as an Information System
Accounting is often referred to as ___ because it is fundamental to the communication of financial information
Language of Business
Creative or Critical - Involves the use of imagination and insight to solve problems, most important in identifying alternative solutions
Creative
Creative or Critical - Involves the logical analysis of issues, most important in evaluating alternative solutions
Critical thinking
Steps in problem-solving with creative skills and judgment (RIESI
- Recognizing a problem
- Identifying alternative solutions
- Evaluating the alternatives
- Selecting a solution from among alternatives
- Implementing the solution
AC - Accountable event is recorded in debit and credit
Double-entry system
AC - entity is assumed to carry on operations for an indefinite period of time
Going concern assumption
AC - Measurement basis involving mixture of costs and values is appropriate only when entity is _____
a going concern
AC - If the entity is a liquidating concern,the appropriate measurement basis is ____
Realizable value (estimated selling price - estimated costs to sell for assets and expected settlement amount for liabilities)
AC - Entity is viewed separately from its owners
Separate Entity / Business Entity Concept
AC - Accounting information should be stated in a common denominator. The purchasing power of the peso is regarded as stable or constant
Stable monetary unit
AC - The life of the entity is divided into series of reporting periods
Time Period
AC - Information is material if its commission or misstatement could influence economic decisions and is a matter of professional judgment
Materiality concept
AC - The cost should not exceed benefits
Cost-benefit
AC - Effects of transactions are recognized when they are earned and incurred
Accrual basis of accounting
AC - The value of an asset is determined on the basis of the acquisition cost
Historical cost concept
AC - all of the components of a complete set of financial statements are interrelated
Concept of Articulation
AC - Nature and amount of information included in the financial statements reflect a series of judgmental trade-offs
Full disclosure principle
AC - Financial statements are prepared on the basis of accounting principles that are applied consistently from one period to the next
Consistency Concept
AC - costs are recognized as expenses when the related revenue is recognized
Matching Concept
AC - Proper income determination, proper matching of costs against revenues is the ultimate end and is exemplified by A = L + OE
Entity Theory
AC - Proper valuation of assets, emphasizes the importance of the balance sheet (A-L = OE)
Proprietary Theory
AC - Two classes of shares issued (ordinary and preferred) and applied in the computation of book value per share and return on equity (A- L - PSE = OSE)
Residual Equity Theory
AC - Objective is the custody and administration of funds and exemplified by the formula (Cash inflows -Cash outflows = Fund), used in government accounting and fiduciary accounting
Fund theory
AC - Processing of converting non-cash assets into cash or claims for cash
Realization
AC -Use of caution when making estimates under conditions of uncertainty such that A & I are not overstated and L & E are not understated
Prudence / Conservatism
AC (Expense) - costs are direcly related to the earning of revenue are recognized as expenses in the same period the related revenue is recognized
Matching concept
AC (Expense) - indirect costs related to the earning of revenue are initially recognized as assets and recognized as expenses over the period their economic benefits are consumed
Systematic and Rational Allocation
AC (Expenses) - Costs that do not meet the definition of an asset or ceases to are expensed immediately (casualty and impairment losses)
Immediate Recognition
Financial Accounting vs. Financial Reporting
They both focus on general purpose financial statements but FA endeavors to promote principles that are also useful in other financial reporting
Other financial reporting ___
comprises information provided outside the financial statements that assists in the interpretation or improves ability to make efficient economic decisions1
Other financial reporting ___
comprises information provided outside the financial statements that assists in the interpretation or improves ability to make efficient economic decisions1
Financial reporting is the provision of financial information about an entity that is useful to external users, primarily the investors, lenders and other creditors, in making investment and credit decisions
Primary: To provide information about an entity’s economic resources, claims to those resources and changes in those resources
Secondary: To provide information in assessing the entity’s management stewardship
Branch of accounting that focuses on general purpose financial statements
Financial Accounting
Accumulation and communication of information for use by internal users or management
Management Accounting
Systematic recording and analysis of the costs
Cost Accounting
Evaluating the correspondence of certain assertions with established criteria and expressing an opinion thereon
Auditing
Preparation of tax returns and rendering of tax advice
Tax accounting
Accounting for the government and its instrumentalities
Government Accounting
Handling of accounts for fiduciaries who wind up the affairs of a deceased person
Estate Accounting
Refers to the handling of accounts managed by a person entrusted with the custody and management of property for the benefit of another
Fiduciary accounting
Communicating the social and environmental effects of an entity’s economic actions on the society
Social Accounting
For non-profit entities other than the government
Institutional accounting
Installation of accounting procedures for the accumulation of financial data and designing of accounting forms to be used in data gathering
Accounting systems
Careful analysis of economic events and other variables
Accounting Research
Process of recording the accounts of transactions of an entity
Bookkeeping
Profession or practice of accounting
Accountancy
The practice of accounting can be broadly classified into
Public Practice and Private Practice
Four sectors in the Practice of Accountancy
- Practice of Public Accountancy
- Practice in Commerce and Industry
- Practice in Education/Academe
- Practice in the Government
PFRSs
Philippine Financial Reporting Standards
PASs
Philippine Accounting Standards
PFRSs comprise of
a. Philippine Financial Reporting Standards
b. Philippine Accounting Standards
c. Interpretations
The process of establishing financial accounting standards
The democratic process in that a majority of practicing accountants must agree with a standard before it becomes implemented
Hierarchy of Reporting Standards
- PFRSs
- Judgement
- Conceptual Framework
- Accounting Literature
Philippine Accountancy Act of 2004
RA 9298
Financial Reporting Standards Council (FRSC)
official accounting standard setting body composed of fifteen individuals
Philippine Interpretations Committee (PIC)
Role of reviewing the interpretations for approval and adoption
Board of Accountancy (BOA)
professional regulatory board to supervise the registration, licensure and practice of accountancy
Securities and Exchange Commission
Government agency tasked in regulating corporations and partnerships
Bureau of Internal Revenue
administers the provisions of the National Internal Revenue Code
Bangko Sentral ng Pilipinas
influences the selection and application of accounting policies by banks and other entities performing banking functions
Cooperative Development Authority (CDA)
influences the selection and application of accounting policies by cooperatives
Regulatory accounting principles
Accounting policies prescribed by a regulatory body
International Financial Reporting Interpretations Committee (IFRIC)
prepares interpretations of how specific issues should be accounted for under the application of IFRS
IFRS Advisory Council / Standards Advisory Council
advising on priorities within the IASDB’s work program
International Federation of Accountants (IFAC)
non-profit, non governmental, non-political organization that represents the worldwide accountancy profession. Its mission is to develop and enhance the profession to provide services of consistently high quality in the public interest
International Organization of Securities Commissions (IOSCO_
international body of security commissions
Norwalk Agreement
the FASK and IASB formalized their commitment to the convergence of US GAAP and IFRSs by agreeing to use their best efforts
