Week 1-Introduction To Accounting Flashcards
This is an art of recording, classifying, 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 results thereof.
Accounting
This is a skill that allows for the recording,
classifying, and summarizing of business transactions
Bookkeeping
recording, classifying, summarizing, and
interpreting, are what we call the
4 phases of accounting
This involves recording and classifying business
transactions, and preparing and presenting financial statements to be used
by internal and external users. Strict compliance with Generally Accepted
Accounting Principles (GAAP) is observed in the preparation of financial
statements.
Financial Accounting
This focuses on providing information for
use by internal users, the management. It involves financial analysis, cost
analysis, budgeting and forecasting, evaluation of business decisions, and
similar areas.
Management Accounting
This Branch deals with the needs of the management rather
than strict compliance with GAAP
Management Accounting
This encompasses the process of analyzing, classifying,
summarizing and communicating all transactions involved in the receipts
and disbursement of all government funds and properties, and interpreting
the results thereof.
Government Accounting
This is the process of examining an entity’s accounting records, as well as
physical inspection of its assets. It is performed by a CertifiedPublic
Accountant (CPA) whom can express an opinion on the fairness of the
entity’s financial statements.
Auditing
This is considered as a subset of management accounting. It
refers to the recording, presentation, and analysis of manufacturing costs.
Cost accounting
This is composed of the accounting principles, standards and procedures
that an enterprise should follow in preparing financial statements. It is
generally accepted by members of the accounting profession by agreement
based on experience, reason, custom, usage and practical necessity. It is like a
law that must be adhered to improve the clarity of the communication of a
financial data.
Generally Accepted Accounting Principles (GAAP)
What is entity principle
When we say business entity, we refer to the specific business enterprise,
sole proprietorship, partnership or corporation. In this principle, it is
assumed that the business owners or managers are separate from the
business enterprise. Therefore, the transactions of the owners should not be
combined with the transactions of the enterprise. This is for fair presentation
of financial statements.
Example:
If Mr. ABC invests money to put up a Repair Shop, it will no longer be his
personal money but a fund to be used by the Repair Shop for its operation.
What is matching principle
This principle requires that those costs and expenses incurred in earning
revenue should be recorded and reported in the same period. This means that
revenues and expenses that result directly from the same transactions and
events should be recognized within one accounting period.
Example:
If the earnings of the repair shop of Mr. ABC from the sale of goods are
reported in the financial statements for 2016, the sales commissions of the
salesman and other expenses related to that sale should also be reported in
the same year
What is Accrual basis of Accounting
It means that the income is recognized when they are earned regardless of
when they are received; and the expense is recognized when they are
incurred regardless of when they are paid. In accrual basis of accounting, we
recognize the effects of transactions and other events from the time they happen and not when cash or its equivalents is received or paid. Recording
and reporting is done at the time they happen.
Example:
If Mr. ABC repaired an air-conditioning (AC) unit on June 5 but was only paid
on June 8, under the accrual basis, income should be recognized on June 5,
the date the income was earned for the repair of the AC, and not on June 8
when the cash is collected by Mr. ABC.
What is stable monetary unit
This principle has two aspects, the quantifiability and stability of peso. The
quantifiability aspect means that we must record the assets, liabilities,
capital, income, and expense in terms of unit of measure which is the peso in
the Philippines. In stability of the peso, we assume that the purchasing power
of the peso is stable and constant therefore, we may ignore its instability
since it is not significant.
What is periodicity concept
This principle requires that life of the enterprise be subdivided into time
periods or accounting periods which may be a calendar year or fiscal year. A
calendar year is a twelve-month period which starts from 01 January and
ends on 31 December, while a fiscal year is any twelve-month period starting
from any month other than 01 January.
What is Going concern concept
Taking into consideration the normal business operation, it is presumed that
business will continue to operate indefinitely. Meaning, preparation of
financial statements is based on the assumption that a business will continue
to operate in time. This is the reason why assets are recorded at cost and
market values are not considered.
Example:
Mr. ABC has several machineries which are used in operating his repair shop.
Said machineries will be reported in the financial statements under the going
concern basis, as part of its assets. Since we assume that Mr. ABC’s repair
shop will continue to operate, these machineries will continue to provide him
economic benefits. If Mr. ABC ceases operation, the machineries will no
longer have any value, hence, would not be treated as assets.
This is a type of business which is owned by only one person. Usually a sole
proprietor (owner of the business), is also the manager or boss of his own
business.
Sole proprietorship
What are the advantages of sole proprietorship
Advantages:
Formation is easy because
fewer documents are needed in
opening this type of business
compared to a partnership or
corporation.
It is easy to operate since most
of this type of business is small.
It is easy to manage since the
owner makes the decision
himself.
Lesser tax to pay unlike other
types of businesses.
The proprietor alone enjoys the
profits gained by the business.
What are the disadvantages of sole proprietorship
Disadvantages:
The sole proprietor has to shoulder all
the risks and losses.
The sole proprietor has no one to get
advice from or opinion regarding
business operations.
The sole proprietor has unlimited
liability for any debt of the business
which may extend up to his personal
properties.
The sole proprietor has limited ability
to raise funds for his business as it
grows.
two or more people join together to
contribute money, property or industry for purposes of dividing the profits
(or loss) among themselves.
Partnership
What are the advantages of partnership
Advantages:
Formation is easier than that of
the corporation because of
minimal regulatory
requirements.
Management is divided among
partners, thus less burden to
each of the partners.
More capital can be
contributed by the partners.
It is exempted from paying
corporate income taxes.
What are the disadvantages of partnership
Disadvantages:
Limited life. When a partner
withdraws due to incapacitation,
bankruptcy, death, or the addition of a
new partner, the partnership is
dissolved.
Unlimited liability of partners. The
partner’s liability extends up to their
personal properties in case of
insolvency.
Joint liability. Each of the partners can
bind the partnership to contracts
which make all partners jointly liable
It is composed of five to fifteen people. It is organized by operation of the law and
considered the most complex form of a business organization.
Corporation
What are the advantages of corporation
Advantages:
There is a board of directors who
makes decisions for the corporation.
It has the capacity to raise more
capital.
It can exist for a period not more than
50 years, subject to renewal.
It has limited liability. This means
creditors cannot go after their
personal property in case of
bankruptcy.
