Accounting - is the process of identifying, measuring and communicating economic information to permit informed judgment and decision by users of the information. Components of accounting (MIC) 1. 1. Measuring (technical component) ƛ is the assigning of peso amounts to the accountable economic transactions 2. 2. Identifying (analytical component) ƛ is the recognition or non-recognition of business activities as Ơaccountableơ events. An event is accountable when it has an effect on assets, liabilities and equity. -> External Transactions ƛ economic events involving one entity and another entity Example Purchase of merchandise from suppliers -> Internal Transactions ƛ economic events involving the entity only Example: Casualty ƛ any sudden and unanticipated loss Production ƛ resources are transformed into products 1. 3. Communicating (formal component) ƛ is the process of preparing and distributing accounting reports to potential users of accounting information. -> Recording ƛ is the process of systematically maintaining a record of all economic business transactions -> Classifying ƛ sorting or grouping of similar and interrelated economic transactions into their respective classes. It is accomplished by posting to the ledger. -> Summarizing ƛ is the preparation of financial statements. Basic Purpose of Accounting - To provide quantitative financial information about a business that is useful to statement users particularly owners and creditors in making economic decisions. Republic Act 9298 ƛ is the law regulating the practice of accountancy in the Philippines. Board of Accountancy ƛ is the body authorized by law to promulgate rules and regulations affecting the practice of accountancy profession in the Philippines -> Single practitioners and partnerships shall be a registered CPA and have a minimum of 3 years experience in public accounting -> SEC shall not register any corporation organized for the practice of public accountancy Controller ƛ highest accounting officer in an entity Three main areas in the practice of accountancy profession 1. Public Accounting ƛ individual practitioners, small accounting firms and large multinational organizations that render independent and expert financial services to the public 3 kinds of services offered by public accountants (ATM) Auditing ƛ examination of financial statements by independent CPA for the purpose of expressing an opinion as to the fairness with which the financial statements are prepared Taxation Service ƛ includes the preparation of annual income tax returns and determination of tax consequences of certain proposed business endeavours Management Advisory Service Ɗ it refers to service to clients on matters of accounting, finance, business policies, organization procedures, product costs and etc. 1. Private Accounting ƛ assists management in planning and controlling the entityƞs operations. Private accountants are responsible for the determination of the various taxes the business is obliged to pay. 1. Government Accounting ƛit involves the process of analyzing, classifying, summarizing and communicating all transactions involving the receipt and disposition of government funds. Accounting (constructive) vs. Auditing (analytical) - Accounting ceases when financial statements are already prepared - Auditing examines the financial statements whether they are in conformity with GAAP. Accounting (conceptual) vs. Bookkeeping (procedural) - Accounting is concerned with the why, reason or justification for any action adopted - Bookkeeping is concerned with maintenance of accounting records. Accounting vs. Accountancy - Accountancy refers to the profession of accounting practice - Accounting refers to the particular field of accounting such as public, private and government accounting. Financial vs. Managerial accounting - Financial accounting is primarily concerned with the recording of business transactions and the eventual preparations of financial statements. It is an area of accounting that emphasizes reporting to creditors and investors. - Managerial accounting ƛ area of accounting that emphasizes developing accounting information for use within an entity. Generally Accepted Accounting Principles ƛ rules, procedures, practice and standards followed in the preparation and presentation of financial statements. - GAAP are like laws that must be followed in financial reporting Financial Reporting Standards Council (FRSC) ƛ is the accounting standard setting body created by PRC upon the recommendation of the board of accountancy in carrying out its powers and functions provided under RA 9298. - The main function is to establish and improve accounting standards that will be GAAP. ->FRSC adopted entirety IAS and IFRS. International Accounting Standards Board ƛ its objective is to achieve uniformity in accounting principle around the globe Underlying Assumptions (G2AMP) 1. 1. Going concern ƛ means that in the absence of evidence to the contrary, the accounting entity is viewed as continuing in operation indefinitely. - Recorded @ cost. 1. 2. Accrual ƛ transactions are organized when they occur and not as cash is received or paid. 2. 3. Accounting Entity ƛ entity is separate from the owners, managers and employees who constitute the entity. - if parent and subsidiary relationship exists, consolidated financial statements are made. And the reporting entity is the mother company. 1. 4. Monetary Unit Quantifiability ƛ should be stated in the amount of peso Stability of peso ƛ purchasing power of peso is stable or constant. 1. 5. Periodicity ƛ the indefinite life of an entity is subdivided into time periods which are usually of equal length for the purpose of preparing financial reports on financial position, performance and cash flows. Fiscal Period ƛ a period of twelve months Calendar year ƛ twelve-month period that ends on December 31, 2010 Natural Business year ƛ is a 12 month period that ends on any month when the business is at the lowest or experiencing slack season Users and their information needs Investors ƛ they need information to help them determine whether they should buy, hold or sell. Employees ƛ they are interested in information which enables them to assess the ability of the entity to provide salaries, retirement benefits, and etc. Lenders Ɗ for them to determine whether their loans and interest thereon will be paid on due Customers ƛ interested in information about the continuance an entity especially when they have a long-term involvement with the entity Governments and their agencies ƛ they need information to regulate the activities of the entity, to determine taxation policies and as a basis for national income and similar statistics Suppliers ƛ they need information to determine whether there amounts owing to them will be paid on maturity Public ƛ for the information of recent developments in the prosperity of the entities -> In the absence of a standard management shall consider the applicability of framework Framework ƛ is the summary of terms and concepts that underlie the preparation and presentation of financial statements - Deals with objective of financial statements, qualitative characteristics of financial statements, concepts of capital and capital maintenance Management ƛ primary responsible for the preparation and presentation of financial statements of the entity Stewardship of management ƛ or the accountability of the management for the resources entrusted to it Liquidity ƛ is the availability of cash in the near future to cover currently maturing obligations Solvency - is the availability of cash over a long term to meet financial commitments when they fall due Financial structure ƛ is the source of financing for the assets of the entity. It indicates the amounts of assets that have been financed by the creditors. It is the ratio of equity to liabilities. Capacity for adaptation ƛ is the ability of the entity to use its available cash for unexpected requirements and investment opportunities Notes to financial statements ƛ provide narrative description or disaggregation of the items presented in the financial statements about items that do not qualify for recognition Accounting concepts 1. Entity theory ƛ emphasizes the importance of the income statement A = L + C 1. Proprietary theory ƛ emphasizes the importance of the statement of financial position A ƛ L = C 1. Residual equity theory ƛ objective is also proper valuation of assets. A ƛ L ƛ Preference Shareholderƍs equity = ordinary shareholdersƍ equity 1. Fund theory ƛ main objective is the custody and administration of funds Fund = Cash inflow Ɗ Cash outflow Financial Reporting ƛ is the provision of financial information about an entity to external users that is useful to them in making economic decisions and for assessing the effectiveness of the entityƞs management. The principal way of providing financial information is through annual financial statements Qualitative Characteristics of financial statements (2RUC) - qualities or attributes that make financial accounting information useful to the users 1. Relevance ƛ the capacity of the information to influence a decision. Ingredients of Relevance (PFT) Predictive Value Ɗ forecasting outcome of events Feedback Value Ɗ enables users to confirm or correct earlier expectations Timeliness Ɗ providing information to the decision maker while it has the capacity to affect a decision. 1. Reliability ƛ is the quality of information that assures users that the information is free from bias and error and faithfully represents what it