1ST SEM Flashcards
(36 cards)
Brief History of Accounting
More than 10,000 years ago: Methods of record keeping and accounting have been invented.
Accounting has existed for thousands of years, with early examples in Mesopotamia, Babylonia, Egypt, China, and Greece.
Definition of Accounting
Accounting is a process of identifying, recording and communicating economic information that is useful in making economic decisions.
Fra Luca Pacioli is known as the father of modern accounting.
Essential elements of the definition of accounting
Identifying. The process of analyzing each business transaction and identifying whether the transaction is an ‘accountable event’ or ‘non-accountable event.’
‘Accountable events’ are those that affect the assets, liabilities, equity, income, or expenses of a business.
Recording
Journalizing – the process of recognizing (i.e., records) the identified ‘accountable events.’
‘Account’ is the basic storage of information in accounting, e.g., ‘cash,’ ‘land,’ ‘sales,’ etc.
Communicating
The process of summarizing the information processed in the accounting system to produce meaningful reports.
Accounting provides quantitative, qualitative, and financial information for decision-making.
Branches of Accounting
Financial accounting – is the branch of accounting that focuses on general purpose financial statements.
Financial accounting is governed by the Philippine Financial Reporting Standards (PFRSs).
Users of Accounting Information
Internal users – those who are directly involved in managing the business. Examples include business owners and managerial personnel.
External users – those who are not directly involved in managing the business. Examples include investors, lenders, creditors, government agencies, and customers.
Users of accounting information are classified into internal and external users.
External users include:
Existing and potential investors (e.g., stockholders who are not directly involved in managing the business), lenders (e.g., banks) and Creditors (e.g., suppliers), government agencies (e.g., BIR, SEC), non-managerial employees, customers, public
Forms of Business Organizations
Sole or single proprietorship – is a business that is owned by only one individual. It is the most common and simplest form of a business organization. The business owner is called a “sole proprietor.” A sole proprietorship is registered with the Department of Trade and Industry (DTI).
Example: A small bakery owned and operated by a single individual.
Types of Business according to Activities
Service business – is one that offers services as its main product rather than physical goods. A service business may offer professional skills, expertise, advice, lending service, and similar services. Examples of service businesses include: Schools, Professionals (accounting firm, electrician, etc.), Banks and other financial institutions, hotels and restaurants
Example: An accounting firm providing financial advisory services.
Accounting concepts and principles
Separate entity concept – Under this concept, the business is viewed as a separate person, 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.
Example: A business owner using personal funds for groceries should not be recorded in the business’s financial records.
Liquidating concern
The assets of a liquidating concern are measured at net selling price rather than at historical cost. (Going concern - good; Liquidating concern-bad)
Example: A business that is bankrupt and is winding up its operations.
Matching (or Association of cause and effect)
Some costs are initially recognized as assets and charged as expenses only when the related revenue is recognized.
No additional information.
Accrual Basis of accounting
Economic events are recorded in the period in which they occur rather than at the point in time when they affect cash.
Example: Recording income when it is earned, not when it is collected.
Prudence (or Conservatism)
The accountant observes caution when making accounting estimates under uncertainty.
Explanation: Choosing unfavorable outcomes over favorable ones to avoid overstatement of assets or income.
Time Period (Periodicity, Accounting period, or Reporting period concept)
The life of the business is divided into series of reporting periods.
No additional information.
Stable monetary unit
Assets, liabilities, equity, income, and expenses are stated in terms of a common unit of measure.
Explanation: Using the peso in the Philippines as the stable monetary unit.
Materiality concept
Accountant considers materiality when applying accounting principles to material items.
Explanation: Omission or misstatement of material items can influence economic decisions.
Cost-benefit (Cost constraint)
The cost of processing and communicating information should not exceed the benefits.
No additional information.
Full disclosure principle
Information communicated to users reflects judgmental trade-offs for sufficient detail and condensation.
No additional information.
Consistency concept
Business must apply accounting policies consistently and present information consistently.
Explanation: Like transactions must be accounted for in the same manner.
Accounting Standards
Explicit concepts and principles are specifically mentioned in the Conceptual Framework for Financial Reporting and in the Philippine Financial Reporting Standards (PFRSs).
No additional information.
Philippine Financial Reporting Standards (PFRS)
PFRSs are Standards and Interpretations adopted by the Financial Reporting Standards Council (FRSC).
No additional information.
Relevant Regulatory Bodies
Other than the FRSC, the SEC, BIR, BSP, and CDA affect accounting policies and financial reporting.
Explanation: Regulatory bodies like SEC and BIR require specific financial reporting from businesses.
