FAR
Ethics
are beliefs that distinguish right from wrong. They are accepted standards of good and bad behavior. These beliefs are trusted
Creditors and lenders
are concerned with the ability of the company to repay its debts, and should the loan be granted to them in the first place.
Internal users of Financial Statements
are people within a business organization who use financial information. Examples: owners, managers and employees.
Financial reports
are prepared for users who have a reasonable knowledge of business and economic activities
financial report
includes the financial statements plus other information provided outside the financial statements that assists in the interpretation of a complete set of financial statements or improves users' ability to make efficient economic decisions.
Board of Accountancy (BoA)
is tasked to enforce the provisions of the Philippines Accountancy Act.
Account balance
is the difference between the increases and decreases in an account.
Generally Accepted Accounting Principles (GAAP)
is the set of rules, principles, standards, conventions, and underlying assumptions that are used when preparing the financial statements.
Taxes and licenses expense
represents costs incurred to register the business and acquire rights to operate, as well as taxes incurred
Historical cost
the amount paid for an asset and used as a basis for recognizing it on the balance sheet and carrying it on later balance sheets
General journal
the most basic form of journal
Historical cost
the most common measurement basis of measurement since it provides the most objective information.
Debt Ratio Formula
total liabilities/total assets
Unconsolidated Financial Statements
- It is the separate financial statements prepared by the parent entity. - It provides information about the assets, liabilities, equity, revenue and expenses of parent entity only.
Notes to Financial Statements
- It provides additional information that is significant in decision making which are not presented in the face of entity's financial statements. - It is also known as footnotes. - It is required by the full disclosure principle.
Statement of Cash Flows
- It shows information of how changes in statement of financial position and operation affect cash and cash equivalent. - It is classified into three activities such as Operating, Investing and Financing activities of the company.
Journal
- One of the books of account. - aka "Book of original entry" since all the transactions are recorded in chronological order in this book.
Account receivable
- Open accounts which represent money owed by customers and are collectible in the near future by the business. This usually arises from conducting the ordinary course of business.
Ledger or Book of final entry
- Other books of account - Purpose is to summarize the effects of all business transactions of the company on a specific account.
Notes receivable
- Represents a promise by the customer or other debtor to pay a fixed amount of money evidenced by a written promissory note, and thus offers more security over accounts receivables. A portion of this may be classified as a non-current asset if it is expected to be collected beyond 12 months from the report date.
Prepaid expense
- These are expenses not yet incurred but already paid for by the company. - These assets will eventually be converted into expenses when they are incurred.
Intangible assets
- These are identifiable, non-monetary assets which lack physical substance. Examples:j franchise license, patent, copyrights, and trademarks.
Mortgage Payable
- These are long-term debts with a pledged asset acting as a security or collateral for the debt, to protect the creditor in the event of default by the business. - could be current or non current
Full disclosure principle
- This concept is related to both the concepts of materiality and cost-benefit. - Under this concept, information communicated to users reflect a series of judgmental trade-offs.
Liquidating concern
- This is the case if the business intends to end its operations or if it has no other choice but to do so, (e.g., the business is bankrupt).
Drawings
- This is when the company distributes its assets to the owner.
Consistency concept
- Under this concept, a business shall apply accounting policies consistenily, and present information consistently, from one period to another. - This means that like transactions must be accounted for in like manner.
Prudence (or Conservatism)
- Under this concept, the accountant observes some degree of caution when exercising judgments needed in making accounting estimates under conditions of uncertainty.
Independent Auditor's Report
- a report, prepared by a certified public accountant for the public shareholder, stating an opinion on whether the financial statements present fairly, in conformity with GAAP, the company's financial condition and results of operations and cash flows - most common form of an audit opinion.
Property, plant, and equipment
- are tangible assets held by the business for use in the production process or for administrative purposes, and are expected to be used for more than one accounting period.
Liabilities
- are the claims of creditors in the assets of the entity.
Equity
- are the claims of the owners of the entity in the assets of the entity.
Bonds payable
- can be current or non current - are contracts between the issuer (the borrower) and the lender specifying the terms of repayment which may include maturity date, number of tranches to be paid, interest rates to be paid, and timing of interest payments.
Financial performance
- can be defined as the ability of a company to generate profit or incur a loss during a particular date range or accounting period. - can also be referred to as profitability. - this type of information is presented in the statement of comprehensive income (Income Statement).
Financial position
- can be defined as the status of financial well-being of a company as of a given date. - It can also be an indicator of the capacity of a company to adapt to changes in the environment in which it operates in. - This type of information is presented in the statement of financial position. (Balance Sheet)
Cost of sales
- direct costs attributable to the merchandise sold to the customer
Trial balance
- ensure that all debits are equal to all credits after journalizing and posting. - based on the concept of double entry bookkeeping where debits must always equal credits,
Accountable events
- events only record on the books of account - events that affect the assets, liabilities, equity, income, expenses of a business.
Asset
- is a present economic resource controlled by the entity as a result of past events. - Rights that have the potential to produce economic benefits take many forms, including rights that correspond and not to correspond to an obligation of another party.
economic resource
- is a right that has the potential to produce economic benefits. For potential to exist, it does not need to be certain. It is only necessary that the right already exists and that, in at least one circumstance, it would produce for the entity economic benefits beyond those available to all other parties.
Derecognition
- is the removal of all or part of a recognized asset or liability from an entity's statement of financial position. - normally occurs when that item no longer meets the definition of an asset or of a liability. For an asset, this usually occurs when the company loses control (entirely or in part) of the previously recognized asset. For a liability, this usually occurs when the company no longer has a present obligation (entirely or in part) of the previously recognized liability.
Consolidated Financial Statements
- prepared by the parent entity. - It provides information about the assets, liabilities, equity, revenue and expenses of both parent and subsidiaries as one entity.
Accounting education
- process of facilitating the acquisition of knowledge and skills regarding one or more of the other branches of accounting - teaching accounting and accounting-related subjects in an organized learning environment
Current cost
- refers to the cost of an equivalent asset at the measurement date, comprising the consideration that would be paid at the measurement date plus the transaction costs that would be incurred at that date. - in liability, it is the consideration that would be received for an equivalent liability at the measurement date minus the transaction costs that would be incurred at that date.
Income summary
- temporary account that summarizes the revenues and expenses of the company in a given period and may result to a debit or credit balance, depending on whether the company resulted to a net loss or net gain, respectively.
Managers
- these users generally use the information for assessing how the company resources have been managed. - They use these information to plan, monitor, and make managerial decisions.
Owners and Potential Investors
- these users need to assess how well their business is performing and how risky their business currently - Their concern is mostly profitability and stability of the business.
Equity
- they are claims against the entity that do not meet the definition of a liability.
Verifiability
- this helps assure users that information faithfully represents the economic phenomena it purports to represent. - means that different knowledgeable and independent observers could reach a consensus, although not necessarily complete agreement, that a particular depiction is a faithful representation.
Management Advisory Services (MAS)
-offshoot of management accounting - Consulting services that may provide advice and assistance concerning an entity's organization, personnel, finances, operations, systems, or other activities.
Accounting Cycle Steps
1. Analyze business transactions 2. Journalize the transactions 3. Post to ledger accounts 4. Prepare a trial balance 5. Journalize and post adjusting entries 6. Prepare an adjusted trial balance 7. Prepare financial statements 8. Journalize and post closing entries 9. Prepare a post-closing trial balance 10. Recording reversing entries
Liquidating concern
- The assets of in this concept are measured at net selling price rather than at historical cost.
Drawings
- a contra-equity account - Also known as withdrawals, these are the opposite of capital. - This is when the company distributes its assets to the owner.
Trial Balance
- all open accounts are summarized
Equity
- are claims on the residual interest in the assets of the entity after deducting all its liabilities.
Financial statements
- are the structured representation of an entity's financial position and results of its operations. - the end product of the accounting process
Materiality
- is an 'entity-specific aspect of relevance, meaning it depends on the facts and circumstances surrounding a specific entity.
Transplacement Error
- occur when the decimal point is erroneously placed to the left or right of the correct placement. - known as slide error Ex: recording an amount of ₱1,000 instead of ₱10,000.
Transposition Errors
- occurs when an amount is recorded incorrectly as the result of switching the position of two or more digits. Ex: recording an amount of ₱13,245 instead of ₱12,345
Fulfilment value
- refers to the present value of the cash flows, or other economic resources, that an entity expects to be obliged to transfer as it fulfils a liability.
Types of Business Activities
1. Service 2. Merchandising/Retailing 3. Manufacturing
Forms of Business Organization
1. Sole Proprietorship 2. Partnership 3. Corporation
(a) the entity has an obligation; (b) the obligation is to transfer an economic resource (c) the obligation is a present obligation that exists as a result of past events.
Criteria of Liabilities
Hybrid business
Engage in more than one type of activity.
Financial Accounting
Governed by Philippine Financial Reporting Standards (PFRSs)
Accounting education
Identify the related branch of accounting to the given accounting research topic. Becoming a certified public accountant
Financial accounting
Identify the related branch of accounting to the given accounting research topic. Impact if fair value measurement on the financial statements
both revenue and gain
Income encompasses both __________
sole proprietor
Individual owner and, most often, the manager of a business.
Neutrality
Information are selected or presented without bias. Information must not be manipulated to increase the probability that it will be received favorably or unfavorably by the users.
Predictive value
Information can be used by users as an input in making predictions or forecasts of outcomes of events.
Management Accounting
Involves the accumulation and communication of information for use by internal users.
Credit
Normal balance of equity
capital or net assets.
Sometimes, equity is also referred to as ______________
Monetary Unit Assumption
Transactions and events are expressed in monetary, or money, units.
Conceptual Framework
a system of ideas and objectives that lead to the creation of a consistent set of rules and standards.
Language of Business
Accounting is called the ______________________ because all organizations set up an accounting information system to communicate data to help people make better decisions.
1. Quarterly 2. Monthly 3. Semi-annually 4. Annually
Accounting periods
external users and internal users.
Accounting serves many users who can be divided into two groups
cash, accounts receivable, notes receivable, prepaid accounts, supplies, equipment, buildings, land
Asset accounts
Expanded Accounting Equation
Assets = Liabilities + Owner's Capital - Owner's Drawings + Revenues - Expenses
Communicating
At the end of the accounting period, the accountant summarizes the information processed in the accounting system in order to produce meaningful reports.
permanent accounts (real accounts)
Balance sheet accounts; their balances are not transferred (or closed) to any other account at the end of the accounting period.
1. Separate entity concept 2. Historical cost concept 3. Going concern assumption 4. Matching 5. Accrual Basis 6. Prudence (or Conservatism) 7. Time Period 8. Stable monetary unit 9, Materiality concept 10. Cost-benefit 11. Full disclosure principle 12. Consistency concept
Basic Accounting Concepts
Account
Basic storage of information in accounting
sole proprietorship
Business registered with the Department of Trade and Industry (DTI)
Merchandising business
Buys and sells goods without changing their physical form.
-Financial Accounting -Management Accounting -Government Accounting -Auditing -Tax Accounting -Cost Accounting -Accounting Education -Accounting Research
Common branches of accounting
Transplacement and Transposition Error
Common types of errors
General ledger
Contains all the accounts appearing in the trial balance
artificial being
Corporation is a(n) _____________ or a juridical person, meaning in the eyes of the law, a corporation is like a person, separate from its owners
a. Consolidated Financial Statements b. Unconsolidated Financial Statements c. Combined Financial Statements
Different forms of financial statements
a. Predictive value b. Confirmatory value (or Feedback value) c. Materiality
Elements of Relevance a. b. c.
Opportunity
Envision a way to commit fraud with a low perceived risk of getting caught
+owners capital -owners withdrawal +revenues -expenses
Equity accounts
Debt ratio
Evaluates the level of debt risk.
costs and losses.
Expense encompasses both ____________
decrease
Expenses and Owner withrawals ________________ equity.
Auditing
Expression of an opinion on the correspondence between management assertions and established criteria.
• Lenders • External auditors • Shareholders • Board of directors • Regulators • Customers
External users in Accounting
Rationalization
Fails to see the criminal nature of the fraud or justifies the action
Income Statement
Financial Performance
Balance Sheet
Financial position
Financial accounting
Focuses in the information needs of external users
Management Accounting
Focuses on the information needs of internal users.
Corporation
Formed by operation of law - Registered with SEC
To provide information that is useful in managing the business.
Function of accounting to
To provide information that is useful in making investment or credit decisions
Function of accounting to external users
1. to disclose the complete effects of a transaction 2. to provide a chronological record of the transactions 3. to assist the prevention or location of errors which may have been committed.
Functions of journal
1. Reduced 2. Increased
Historical cost of assets is 1. __________ if they become impaired and historical cost of liabilities is 2. _________ if they become onerous.
Will serve for a term of three years, renewable for another term.
How long is there term for the appointed chairman and all the representatives of FRSC
1 chairperson and 14 representatives, all of whom are appointed by the Bod.
How many are there in FRSC? And who appointed them?
Not be less than 15 individuals. But a cooperative can have many members as its by-laws permits.
How many must be the founding members of a cooperative?
Management accounting
Identify the related branch of accounting to the given accounting research topic. Inventory management and its effect on earnings
Identify the related branch of accounting to the given accounting research topic.
Identify the related branch of accounting to the given accounting research topic. Internal controls and modern technology
Verifiability
Implies consensus among different measurers
there is a greater probability that a company will not be able to pay its debt in the future
In debt ratio, a higher ratio indicates that.....
Will be replaced by "JR (Journal reference)" since it's now trying to link the ledger to the journal.
In ledger, what will happen to the Posting reference?
Verifiability
Information menables different and independent users to reach a general agreement about what the information intends to depict.
Understandability
Information must be presented clearly and concisely in order for users to comprehend
Completeness
Information must be presented with sufficient detail necessary for users to understand them. Important information must not be omitted.
Timeliness
Information must be provided to users on time to be capable of influencing their decisions.
financial reporting
Involves the provision of financial information about an entity that is useful in making economic decisions by external users and assessing management's stewardship.
No
Is comparability and consistency the same?
No. Conceptual framework is not an accounting standard.
Is conceptual framework is an accounting standard.
Merchandising/Retailing
It has goods for sale which is called as INVENTORY
Combined Financial Statements
It provides information about the assets, liabilities, equity, revenue and expenses of two or more entities that have no parent-subsidiary relationship.
Statement of Changes in capital
It shows the changes in the owner's or stockholder's equity throughout the accounting period which is effected primarily of additional investments, net income (loss) and withdrawais of owners.
Non-current assets
Items that a business owns and which it expects to retain for one year or longer.
1. Identify transactions and source documents 2. Analyze transactions using the accounting equation 3. Record journal entry 4. Post entry to ledger
Journalizing and posting transactions
accounts payable, notes payable, accrued liabilities, unearned revenue
Liability accounts
Financial Pressure
Must have some pressure to commit fraud, like unpaid bills
Debit
Normal balance of expense
Credit
Normal balance of liability
Debit
Normal balance of liability
Credit
Normal balance of owner's capital
Credit
Normal balance of revenue
Debit
Normal balance of withdrawals
Materiality
Only information that would influence the decisions of a reasonable person need to be disclosed.
cost-benefit
Only information with benefits of disclosure greater than their cost need to be disclosed.
Accounts payable
Open accounts which represent money owed by the business and are payable in the near future to the vendor / supplier.
Liquidating concern
Opposite of going concern
Going Concern Assumption
Opposite of liquidating concern
Conservatism
Other term for Prudence
PR (posting reference)
Other term for Reference or Ref. which links the journal to the ledger.
Economic events
Other term for accountable events
Book of final entry
Other term for ledger
Association of cause and effect
Other term for matching concept
Footnote
Other term for notes to financial statements..
1. Philippine Accounting Standards (PAS) 2. Philippines Financial Reporting Standards (PFRS) 3. Interpretations published by the Philippine Interpretations Committee (PIC Interpretations)
PFRS includes: 1. 2. 3.
Patronage funds
Pertains to the profit that a cooperative returns to its owners.
1. assist the FRSC to develop PFRS that are based on consistent concepts; 2. assist preparers to develop consistent accounting policies when no standard applies to a particular transaction or other event, or when a standard allows a choice of accounting policy; and 3. assist all parties to understand and interpret the standards.
Purpose of conceptual framework
Inventories
Refers to assets which are either held for sale in the ordinary course of business, in the process of production for sale, or in the form of materials/ supplies to be consumed in the production process of in the rendering of services.
Government Accounting
Refers to the accounting for the government and its instrumentalities, focusing in the attention on the custody of public funds.
Accrued expenses
Represent amounts owed to other parties for expenses already incurred but are yet to be paid. Examples of accrued expenses include salaries payable, interest payable, and taxes payable.
Notes payable
Represents a promise by the business to pay a fixed amount of money to the vendor or other creditor, evidenced by a written promissory note.
Unearned revenue
Represents cash collected by the business for goods or services which are yet to be delivered to or performed for the customer.
business with gross annual sales or receipts exceeding ₱3,000,000
Required amount for a business to have their financial statements audited by an independent Certified Public Accountant
Increases
Revenues and Owner capital ____________ equity.
Cash Basis Accounting
Revenues are recorded when cash is received and expenses are recorded when cash is paid.
Accrual Basis Accounting
Revenues are recorded when products or services are delivered, and records expenses when incurred.
T
T/F Accounting is a science and a practical art.
True
T/F Accounting policies can be changed if it is required by a standard or the change would result in more relevant and more reliable information. Any change in accounting policy must be disclosed.
True
T/F Balance sheet accounts are permanent accounts
True
T/F Generally, the older the information is the less useful it is.
True
T/F Income and expenses are temporary accounts.
True
T/F Only items that meet the definition of an asset, a liability or equity are recognized in the statement of financial position.
False. It's on statement of comprehensive income.
T/F Only items that meet the definition of income or expenses are recognized in the statement of financial position.
True
T/F Only open accounts appear in the trial balance.
F - not part of the accounting scope.
T/F Sociological and psychological matters are inside the scope of accounting.
Identifying
The accountant analyzes each business transaction and identifies whether the transaction is an "accountable event" or "non-accountable event."
recording
The accountant recognizes (i.e., record) the "accountable events" he has identified. This process is called "journalizing"
carrying amount
The amount at which an asset, a liability or equity is recognized in the statement of financial position is referred to as its
Financial Accounting
The branch of accounting that is concerned with recording transactions using generally accepted accounting principles (GAAP) for a business or other economic unit and with a periodic preparation of various statements from such records.
Financial accounting
The branch of accounting that is concerned with recording transactions using generally accepted accounting principles (GAAP) for a business or other economic unit and with a periodic preparation of various statements from such records.
Going Concern Assumption
The business is presumed to continue operating instead of being closed or sold.
Separate Entity Concept
The business is viewed as a separate person, distinct from its owners. Only the transactions of the business are recorded in the books of accounts. The personal transactions of the business owners are not recorded.
material items
The concepts of materiality and accounting principles are applicable only to ________
1. The objective of general purpose financial reporting 2. Qualitative characteristics of useful information 3. Financial statements and the reporting entity 4. The elements of financial statements 5. Recognition and Derecognition 6. Measurement 7. Presentation and disclosure 8. Concepts of capital and capital maintenance
The content of the framework includes:
a. Comparability b. Verifiability c. Timeliness d. Understandability
The enhancing qualitative characteristics consist of the following: a. b. c. d.
a. Relevance b. Faithful representation
The fundamental qualitative characteristics consist of the following: a. b.
not less than 5 but not more than 15 individuals
The incorporators (i.e., founders) of a corporation shall not be less than _______ but not more than _______ individuals. However, a corporation can have as many stockholders as its authorized capitalization permits.
Interested users
The information processed in an accounting system is communicated to ________________ through accounting reports (i.e., financial reports)
Time Period Assumption
The life of a company can be divided into time periods, such as months and years.
reporting periods (or accounting periods).
The life of the business is divided into series of equal short periods called ___________
Account numbers
The numbers assigned to accounts according to the chart of accounts
Members
The owners of the cooperative are called
Financial Reporting Standards Council (FRSC).
The primary task of the council is to improve and establish accounting standards that will be generally accepted in the Philippines.
Accounting
The process of planning, recording, analyzing, and interpreting financial information.
Cost constraints (Cost-Benefit Principle)
The users must assess the benefit of providing the information needs to justify the cost of providing the using the information.
Finished Goods
These are the partly processed raw materials lying on the production floor. And they have also not reached the stage where they have been converted into the final product.
Work in Progress
These are the partly processed raw materials lying on the production floor. And they have also not reached the stage where they have been converted into the final product.
temporary accounts (nominal accounts)
They temporarily contain the revenue, expense, and dividend information that is transferred (or closed) to a stockholders' equity account (Retained Earnings) at the end of the accounting period.
Materiality concept.
This concept guides the accountant when applying accounting principles.
Confirmatory value (or Feedback value)
This concept is related to the predictive value. Information can be use it to confirm past predictions.
Fraud Triangle: Opportunity, Pressure, and Rationalization.
Three factors must exist for a person to commit fraud:
generally accepted accounting principles (GAAP).
Traditionally, accounting standards were referred to as the __________
1. Service Business 2. Merchandising Business (Trading) 3. Manufacturing Business
Type of business according to activities
1. Sole proprietorships 2. Partnerships 3. Corporations
Types of Business Organizations
Qualitative Characteristics
Under the Conceptual Framework, these are the traits that make information useful to users. Without these characteristics, information may be deemed useless.
The unfavorable one. This is necessary so that assets or income are not overstated and liabilities or expenses are not understated.
Under the concept of Prudence (Conservatism), - if the accountant needs to choose between a potentially unfavorable outcome versus a potentially favorable outcome, the accountant chooses the?
Yes
Under the stable monetary unit concept, the purchasing power of the peso is regarded as stable. Therefore, is changes in the purchasing power of the peso due to inflation are ignored?
Historical cost concept (Cost principle)
Under this concept, assets are initially recorded at their acquisition cost.
Stable monetary unit
Under this concept, assets, liabilities, equity, income and expenses are stated in terms of a common unit of measure, which is the peso in the Philippines.
Accrual Basis of accounting
Under this concept, economic events are recorded in the period in which they ocour rather than at the point in time when they affect cash. Thus, income is recorded in the period when it is earned rather than when it is collected, while expense is recognized in the period when it is incurred rather than when it is paid.
Matching (or Association of cause and effect)
Under this concept, some costs are initially recognized as assets and charged as expenses only when the related revenue is recognized.
Going concern assumption
Under this concept, the business is assumed to continue to exist for an indefinite period of time. This is necessary for accounting measurements to be meaningful.
Cost-benefit (Cost constraint)
Under this concept, the cost of processing and communicating information should not exceed the benefits to be derived from it.
Time Period (Periodicity or Accounting period concept)
Under this concept, the life of the business is divided into series of reporting periods.
Trial balance
Up to where does bookkeeping normally ends
Internal users External users
Users of financial statements
a. Direct verification b. Indirect verification
Verification can either be _____________
an entity may need to provide information about that item in the notes.
What if an item meeting the definition of an asset or liability is not recognized, then...
Finding "Ending balance" of an account by means of offsetting the debits and credits
What is the final step in posting?
International Accounting Standards Board (IASB)
What is the international counterpart of the FRSC?
if an account has a zero balance (debits is equal to credits)
When is an account considered closed?
if an account has a balance (either debit or credit)
When is an account considered open?
Measurement
When items are recognized, their values are also quantified in monetary terms. The determination of this monetary value is known as the _________.
Securities and Exchange Commission (SEC)
Where is a Corporation registered?
Securities and Exchange Commission (SEC)
Where is a Partnership form of Business registered?
Cooperative Development Authority (CDA)
Where is a cooperative being registered?
Professional Regulation Commission
Who created the Financial Reporting Standards Council (FRSC).
Accounting cycle
a collective process of identifying, analyzing, and recording the accounting events of a company
Special journal
a journal used to record frequently recurring transaction
Chart of accounts
a list of all accounts used by a business
The Philippine Financial Reporting Standards (PFRSs)
are Standards and Interpretations adopted by the Financial Reporting Standards Council (FRSC). They consist of the following: a. Philippine Financial Reporting Standards (PFRSs); b. Philippine Accounting Standards (PASs); and C. Interpretations
Accounting concepts and principles (assumptions or postulates)
are a set of logical ideas and procedures that guide the accountant in recording and communicating economic information.
External users if Financial Statements
are broader in scope and includes anyone outside the company but is in one way or another involved or simply interested in that company.
Government units
are concerned with the compliance of the company to laws and regulations
Customers
are concerned with the fairness of the pricing of the company and the longevity of the company in order to honor its product warranties.
Expenses
are decreases in assets, or increases in liabilities, which result in decreases in equity, other than those relating to distributions to holders of equity claims.
Income
are increases in assets, or decreases in liabilities, that result in increases in equity, other than those relating to contributions from holders of equity claims.
Potential investors
are interested in the company for the reason of deciding whether it would be wise to commit their resources for the company to use to generate more wealth.
Raw Materials
are the basic materials that a manufacturing company buys from its suppliers, and that is used by the former to convert them into the final products by applying a set of manufacturing processes.
Current liabilities
are those obligation that are reasonably expected to be settled within one year from the report date or the normal operating cycle of the business, whichever is longer.
Current assets
are those reasonably expected to be realized to cash within one year from the report date or the normal operating cycle of the business, whichever is longer.
Implicit concepts and principles
are those that are not specifically mentioned in the foregoing but are customarily used because of their general and longtime acceptance within the accountancy profession.
Explicit concepts and principles
are those that are specifically mentioned in the Conceptual Framework for Financial Reporting and in the Philippine Financial Reporting Standards (PFRSs).
general-purpose financial statements
are those that cater the common needs of a wide range of external users.
Financial position
assets, labilities and equity, which relate to a reporting entity's _________________
Salaries and wages expense
compensation paid to employees of the business
Capital
consists of investments made by the owner
Utilities expense
includes cost of electricity, water, telecommunication, and networking
Financial performance
income and expenses, which relate to a reporting entity's _______________
Relevance
information has the ability to affect the decision making of the users. Without this ability, information is deemed irrelevant and useless.
Faithful Representation
information that is complete, neutral, and free from error
Auditing
involves the inspection of an entity's financial statements or business processes to ascertain their correspondence with an established endeavors.
Ledger
is a collection of all accounts and their balances for an accounting system. A company's size and diversity of operations affect the number of accounts needed.
chart of accounts
is a list of all accounts and includes an identifying number for each account
Memorandum entry
is a narrative entry with the purpose of simply reminding or explaining an event that has occurred in the company, but did not affect the company's financial position.
Liabilities
is a present obligation of the entity to transfer an economic resource as a result of past events. For a liability to exist, three criteria must all be satisfied:
general ledger
is a record of all accounts used by the company.
Account
is a record of increases and decreases in a specific asset, liability, equity, revenue, or expense.
Accounting
is an information and measurement system that identifies, records, and communicates an organization's business activities.
The general public
is concerned with how the company is affecting the society in terms of employment, environmental hazards, and advocacies.
Footing
is the final balance when adding all the debits and credits.
The Philippine Financial Reporting Standards (PFRS)
is the set of accounting standards issued by the FRSC and constitutes the generally accepted accounting principles observed in the Philippines.
Simple journal entry
journal entry which includes one debit entry and one credit entry
Trial balance
lists all ledger accounts and their balances at a point in time. If the books are in balance, the total debits will equal the total credits.
Statement of Cash Flows
lists the cash inflows and cash outflows for the period.
Indirect verification
means checking the inputs to a model, formula or other technique and recalculating the outputs using the same methodology. example: verifying the carrying amount of inventory by checking the inputs (quantities and costs) and recalculating the ending inventory using the same cost flow assumption.
Understandability
means classifying, characterizing and presenting information clearly and concisely.
Timeliness
means having information available to decision-makers in time to be capable of influencing their decisions.
Direct verification
means verifying an amount or other representation through direct observation. example: by counting cash.
Accounting Research
pertains to the careful analysis of economic events and other variables to understand their impact on decisions
Historical costs
provide monetary information about assets, liabilities and related income and expenses, using information derived from the price of the transaction or other event that gave rise to them.
Subsidiary ledger
provides a breakdown of the balances of controlling accounts
Solvency
refers to a company's capacity to meet its long-term financial commitments.
Liquidity
refers to an enterprise's ability to pay short-term obligations.
Sales revenue
refers to carings of a business from selling merchandise to its customers (in the case of a merchandising or manufacturing company)
Interest revenue
refers to earnings from the passage of time with money committed in a certain fund, e.g. bank deposits
Service revenue
refers to earnings of a business from rendering services to its clients (in the case of a service company)
Value in use
refers to the present value of the cash flows, or other economic benefits, which an entity expects to derive from the use of an asset and from its ultimate disposal.
fair value
refers to the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date.
Consistency
refers to the use of the same methods for the same items, either from period to period within a reporting entity or in a single period across entities.
Statement of owner's equity
reports how equity changes over the reporting period from net income (or loss) and from any owner investments and withdrawals over a period of time.
income statement (profit and loss statement)
reports revenues less expenses incurred by a business over a period of time.
Balance sheet
reports the financial position (types and amounts of assets, liabilities, and equity) at a point in time.
T-account
represents a ledger account and is used to show the effects of one or more transactions.
Doubtful accounts expense
represents amounts from open accounts receivables which are estimated to be uncollectible, and thus recognized as expense
Depreciation expense
represents the allocated portion of property, plant, and equipment charged to expense due to passage of time and / or regular wear and tear for a given accounting period.
Revenue Recognition Principle
requires that revenue be recorded when the goods or services are provided to customer and at an amount expected to be received from customers.
Generally Accepted Accounting Principles (GAAP)
serves as a guide for individuals in the accounting profession.
Types of business according to activities
service, merchandising (trading), manufacturing
tax accounting
the preparation of tax returns and rendering of tax advice, such as the determination of the tax consequences of certain proposed business endeavors.
Recognition
the process of capturing for inclusion in the statement of financial position or the statement of financial performance an item that meets the definition of one of the elements of financial statements (asset, liability, equity, income or expenses).
Accounting
the process of identifying, measuring, recording, and communicating economic information that is useful in making economic decisions.
Journalizing
the process of recording business transactions in a journal
cost accounting
the systematic recording and analysis of the costs of materials, labor and overhead incident to production of goods or rendering of services.
Philippine Financial Reporting Standards (PFRSs).
the term "standards" is used to specifically refer to the ____________
Enhancing qualitative characteristics
these characteristics support the fundamental characteristics. They enhance the usefulness of information. As such, they must be maximized. The enhancing qualitative characteristics consist of the following: a. Comparability b. Verifiability c. Timeliness d. Understandability
Fundamental qualitative characteristics
these refer to the essential characteristics that information must have before it can be included in the financial statements. They consist of the following: - Relevance - Faithful Representation
Employees
these users are interested in knowing how well a company is performing as it could have implications for their job security and income
Internal users in Accounting
• Research and development managers • Purchasing managers • Human resource managers • Marketing managers • Production managers • Distribution managers
Free from error
- Information presented in the financial statements must not be materially misstated. - Accounting information must be perfectly accurate in all respects, because some accounting information necessarily needs to be estimated..
Corporation
- 1 or more, called stockholders; can get many investors by selling stock or shares of corporate ownership. - additional corporate income tax - Limited liability. Stockholders or shareholders are not liable for acts or debts. - A separate entity with the same rights and responsibilities as a person. - Indefinite
Sole proprietorship
- 1 owner; easy to set up - no additional business income tax - Unlimited liability. Owner is personally liable for debts. - Not a separate legal entity - Business ends with owner death or choice.
Partnership
- 2 or more, called partners; easy to set up. - no additional business income tax - Unlimited liability. Owner is personally liable for debts. - Not a separate legal entity - Business ends with owner death or choice.
cooperative
- A business that is owned by the members it serves and is managed in their interest. - formed in accordance with the provision of the Philippine Corporation Code of 2008.
Interim period
- An accounting period that is shorter than 12 months. - The period can be a month, a quarter (3 months) or a semiannual period (6 months).
Partnership
- Formed by contractual agreement - Registered with SEC
Cooperative
- Formed in accordance with the corporation code of 2008 - Registered with CDA
Comparability
- Information has this characteristic if it enables users to make comparisons to identify and understand the similarities in, and the differences among, items. - Unlike the other qualitative characteristics, comparability does not relate to a single item. - This requires at least two items.
Statement of Cash Flows
- It is concerned about the inflows and outflows of cash of the entity. - It is useful tool for determining the short term capability of the company to pay its bills.
1. Fundamental Qualitative Characteristics 2. Enhancing Qualitative Characteristics
2 classifications of Qualitative characteristics under Conceptual Framework
1. Identifying 2. Measuring 3. Communicating
3 basic process of accounting
1. raw materials 2. work in process 3. finished goods
3 types of inventories in Manufacturing
1. Verifiability 2. Comparability 3. Understandability 4. Timeliness
4 qualitative characteristics that enhance the usefulness of relevant and faithfully represented information. 1. 2. 3. 4.
Calendar year period Fiscal year period
A 12 month reporting/accounting period can be either ___________
Business Entity Assumption
A business is accounted for separately from other business entities, including its owner.
• Statement of financial position • Statement of comprehensive income • Statement of changes in equity • Statement of cash flows • Notes to the financial statements
A complete statement of financial statements includes:
Fiscal Year Period
A fiscal year period also covers 12 months but starts on a date other than January 1. Ex: July 1, 2017 to June 30, 2018.
Compound Journal Entry
A journal entry that is characterized by having multiple debits and/or multiple credits
1. historical cost 2. fair value 3. current cost 4. value in use and fulfilment value.
A measurement basis is an identified feature of an item being measured. Examples of this includes: 1. 2. 3. 4.
Calendar Year Period
A period which starts on January 1 and ends on December 31 of the same year.
12 months although it can be longer or shorter.
A reporting period is usually ___________
manufacturing business
A type of business that changes basic inputs into products that are sold to individual customers.
Assets = Liabilities + Owner's Equity
Accounting Equation
1. Going-Concern Assumption 2. Monetary Unit Assumption 3. Time Period Assumption 4. Business Entity Assumption
Accounting assumptions
explicit or implicit.
Accounting concepts and principles are either
1. Cost-benefit 2. Materiality
Accounting contraints
Financial statements
Accounting information is communicated to interested users through accounting report, the most common form of which is the _____________
General purpose
Accounting information is provided by financial accounting and is prepared primarily for external users.
Special purpose
Accounting information is provided by management accounting or their branches of accounting and is spread primarily for internal users.
1. General purpose 2. Special purpose
Accounting information may be either