FABM 2 1ST SEM Flashcards
(34 cards)
Accounting is the process of identifying, measuring and communicating economic information to permit
informed judgement and decisions by users of the information.
American Accounting Association (AAA)
Accounting as the art of recording, classifying and summarizing in a significant manner and in terms of
money, transactions and events which are in part at least of financial character, and interpreting the result
thereof.
American Institute of Certified Public Accountants(AICPA)
Accounting as a service activity.
Accounting Standards Council(ASC)
needed by an accountant are the economic transactions entered into by the business,
evidenced by supporting documents
Input
Identification - answers “what transactions/accounts are concerned?
Measurement - answers “how much money is involved?
Recording - captures the transaction in the book of accounts of the business.
Process
Communicating Useful Financial Information
Output
- Is like a Static picture of portrait
- Presents company’s “POSITION” when it comes to the resources it owns (ASSETS), obligations
claimed against it (LIABILITIES), and the owner’s residual interest (EQUITY). - The date of this statement is always “as at” or “as of”.
Statement of Financial Position (Balance Sheet)
- Is like a moving video clip
- Tells the reader about the “performance” and activities of the company for a certain period.
- Presents the revenues and expenses incurred by the company for a period of time.
- The date of SCI is always “ for the period ended”
Statement of Comprehensive Income (Income Statement)
- Tells a specific story about the owner’s stake in the company.
- The SCE tells the reader about the beginning stake of the owner (beginning capital), any additional
investments, withdrawal of resources, and share in net income or net loss. - The date of the SCE is similar to SCI.
Statement of Changes in Equity
- Tells a specific story about the cash transactions of the company.
- Cash is very vital resource owned and controlled by the business.
- Cash is most susceptible to theft and mismanagement.
- Cash can be used or derived from operating, investing and or financing activities.
Statement of Cash Flows
- Complete set of financial statement also includes explanatory notes.
- These notes generally provide additional information needed by the readers but not captured by the first
four statements.
Notes, comprising a summary of significant accounting policies and other explanatory
information.
Some stories are true but not appropriate for a conversation. The same is true in
accounting. Some information are true and yet not significant for user’s decision making process.
Information is said to be relevant if it can assist a user in predicting a financial situation or
scenario (predictive value).
Relevance
Information regarding current year expenses can assist the owners in
evaluating whether these are within budgeted limits(did the company overspend for the year?)
Faithful Representation
-Is similar to the expression “apples to apples” comparison.
An entity’s information is said to be comparable if such information can be compared to another
entity.
A company’s cash account can be compared to a similar company’s cash account like competitor’s
account.
A keen user of financial information can expect that the composition of both cash accounts is
comparable and not dissimilar.
(eg. such accounts do not include goods for sale)
Information is also said to be comparable if it can be compared with the previous year.
Example:
An entity’s sales for the current year can be compared with the sale fro the previous year for
percentage increase or decrease, since both of the accounts contain similar transactions.
Comparability
Means that different users can reach an agreement about the financial information.
Example:
An entity’s accountant records a cash receipt transactions of P100,000.00, then another
accountant would agree that transaction is indeed for P100,000.
Verifiability is about consensus.
Verifiability
-People make decisions based on what they know at hand. Sometimes, crucial
information comes late in the picture and a decision has been made already. Timely financial
information ensures that such information is available to the users when they will make might be
misinformed.
Timeliness
In general, business dealings are characterized to be brief, clear and concise.
In an organization’s day to day operations, information must be clearly and concisely scaled down
in order to be understandable. Complex yet relevant information, however, are not to be
eliminated. Useful financial information presumes that the users are willing to learn about these
complex information.
Understandability
“a resource controlled by the
entity as result of past events and from which future economic benefits are expected to flow to the
entity”
ASSET
Cash includes bills and coins on hand, bank accounts, and operating funds.
Cash deposited in banks under the company’s name are also classified as cash, unless they are
restricted.
Operating and working funds are also classified as cash. A common example of these working funds
is petty cash.
Cash or Cash Equivalents
are amount owed by customers to the entity.
Ordinarily, entities sell on credit over cash.
- are called”open” accounts
since thery do not have documentary support other than the sales contract.
Trade Accounts Receivables
are evidenced by a promissory note.
First is a principal amount of the amount collectible by the entity from the customer.
Second, notes receivables would have maturity dates which can be for 30, 60 or 90 days upon the
date of issue.
Last, it must have a corresponding interest(e.g., 6% or 7%)
Notes receivable
-collectible amounts due to the cost of borrowing money. Interest is is
computed as principal, multiplied by interest rate, multiplied by the related time factor.
Interest Receivable
These assets include fixed assets used in the normal operating cycle or production of the business.
These assets also include land and buildings being used by the company. Manufacturing plants,
manufacturing equipment, vehicles, furniture and fixtures, and leasehold improvements are also
included in this category.
- are depreciated over their estimated
useful life. However, land is not depreciated since such is deemed with perpetual benefit. PPE assets
are presented in the statement of financial position after deducting the related accumulated
depreciation.
Property, Plant and Equipment
are those assets meeting the definition of an asset but without physical substance.
-include trademarks for brand names, patents for inventions, and copyrights for
artistic/literary works.
-definite useful lives are amortized over their useful
lives. Those with indefinite useful lives, however, are annually tested for impairment.
Intangible Assets
