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THEORIES FROM
External Users those who are indirectly involved in the business Potential Investors use accounting information to evaluate what income they can reasonably expect from their investment
Creditors use accounting information to determine the business ability to meet scheduled payments Customers use accounting information to know whether the business will continue operating especially when they have long-term involvement with, or are dependent on that companys offerings of either services or goods Taxing Authorities use accounting information to determine the amount of tax that should be charged to the business Government Regulation Agencies use accounting information to determine regulatory activities to be imposed to the business Nonprofit Organization use accounting information the same way the profit-oriented businesses do Other Users use accounting information to know that amount of income the company is earning
According to Operations of Activity business is classified based on the nature of its activities Service Concern rendering of services for a fee Merchandising or Trading Concern buying and selling of goods Manufacturing Concern processing of products or conversion of raw materials into finished goods that are then sold
Business Transactions events that can be measured in terms of money that affects the enterprise Monetary Concept money is used as the unit of measure in preparing various financial reports of the company - Stable Money Concept assumes that monetary unit does not change overtime, even if in fact it does Time Period/Periodicity Concept divides the life of the business into regular intervals at the of which financial statements are prepared (usually one year) - Calendar Year a twelve-month period beginning with January 1 and ending December 31 - Fiscal Year does not start with January 1 and end on December 31 Revenue Realization Concept income is recognized when earned regardless whether cash is received as long as it meets the following conditions: when services are fully rendered when goods or merchandise are fully delivered - Income is the inflow of assets that results from producing goods or rendering services Accrual Concept income be recorded when earned regardless whether cash is received and an expense be recognized when incurred Accrual Method of Accounting attempts to record the financial effects on a company of transactions and other events and circumstances in the periods in which those transactions, events and circumstances occur rather that only the periods in which cash is received or paid by the firm Cash Basis records a journal entry upon exchange of cash, typically does not require many adjusting entries Matching Concept all expenses incurred to generate revenues must be recorded in the same period that the income are recorded to properly determine net income or net loss of the period Revenues inflows of resources from providing goods or services to customers Expenses outflows of resources incurred in generating revenue Objectivity/Reliability Concept all transactions must be evidenced by business documents free from personal biases and independent experts can verify reports Cost Concept assets are acquired in business transactions conducted at arms length transactions transactions between a buyer and a seller at a fair value prevailing at the time of the transaction Going Concern Concept assumes that the business is to continue its operations indefinitely meaning, the business will stay in operation for a period of time sufficient to carry out contemplated operations, contracts and commitments Conservatism Concept assumes that when uncertainty exists, the users of financial statements are better served by understatement than by overstatement of net income and assets Consistency Concept states that once a method is adopted, it must not be changed from year to year to allow comparability of financial statements between years and between businesses Materiality Concept refers to relative importance of an item or event
Material if knowledge of it would influence the decision of prudent users of financial statements Disclosure Concept all relevant and material event affecting the financial condition/position of a business and the results of its operations must be communicated to users of financial statements in variety of ways: Parenthetical Comments/Modifying Comments - placed on the face of the financial statements Disclosure Notes conveying additional insights about company operations, accounting principles, contractual agreements and pending litigation Supplemental Financial Statements report more detailed information that is shown in the primary financial statements
Assets includes anything owned or possessed by the business which represents the resources of the business Current Assets Cash Investment in Trading Securities Notes Receivable Interest Receivable Accounts Receivable Advances to Employees Merchandise Inventory Accrued Income Supplies on Hand Prepaid Insurance Prepaid Rent Non-Current Assets Land Building Equipment Furniture and Fixtures Accumulated Depreciation
Liabilities economic obligations payable to an individual or an organization outside the business Current Liabilities Accounts Payable Notes Payable Interest Payable Deferred Income Taxes Payable Non-Current Liabilities Notes Payable Long Term Installment Contracts Payable Mortgage Payable
Owners Equity claim of an owner of a business over the assets of the business after the claims of the creditors have been satisfied Capital Withdrawal
Income Accounts
Service Income income from services rendered Other Income refers to income from sources other than the principal line of activity of the business Interest Income revenue to the payee for loaning out a principal amount to a borrower Dividend Income income earned in investing cash in stocks of other businesses
Expense Accounts
Salaries cost of services rendered by employees Rent rental cost of office space, equipment, etc Office Supplies refers to the cost of office supplies used Utilities refers to the cost of light, water and telephone facilities used Taxes and Licenses refers to all payments required to be made to the Bureau of Internal Revenue Transportation cost incurred by office employees when commuting from the office to the place of the business of clients Traveling used when business trips are made out of town Gas and Oil refers to the cost of gas and oil consumed Representation cost incurred when entertaining clients or prospective clients Depreciation refers to the expense associated with the use of the companys PPE
Bad Debts allocation or provision for this future uncollectibility of some of the accounts of credit customers Donations and Contributions refers to the contribution made to charitable institutions or any other worthwhile projects Miscellaneous any other costs of operations that may not be sufficiently big in amount to be classified separately are charged to this account
Withdrawals withdraw assets for personal use Temporary Withdrawal withdraw business assets for personal use in anticipation of profits Permanent Withdrawal capital withdrawal that is substantial in amount wherein the owner intends to remove the assets permanently from the business operations
Direct Method list the receipts of cash from specific operating, investing and financing activities Indirect Method normally used by companies that employ accrual method rather than cash method in their accounting system
The reasons for the difference between net income and net cash provided (used) by operating activities The cash investing and financing transactions during the period
Typical Transactions
The client receives services of goods and issued promissory note as payment The client has an outstanding account and wishes to extend the payment of his account A loan is extended to a borrower who issues promissory note
Interest on Note
Promissory note may either be:
Interest Bearing provides payment for interest so that the amount paid at maturity date is the maturity value principal plus interest Non-Interest Bearing does not provide any payment for interest so the amount that would be paid on maturity date is exactly the same as the face value of the note
Contingent Liability may be presented in the Statement of Financial Position as: Contingent Liability on the Liability side Deduction from Notes Receivable Footnote to the Statement of Financial Position with the Notes Receivable reported at net amount Parenthetical Note in the Notes to the Financial Statements
Preparing Worksheet an optional step in the accounting cycle but greatly aids in preparation of the financial statements Adjusting Entries done with the purpose of updating some accounts to prevent their overstatement or understatement Preparing Financial Statements the end points of the whole accounting cycle Closing the Books done with the purpose of closing all the nominal accounts to the capital Preparing Post-Closing Trial Balance presents only real accounts which will be carried on to the next accounting period Reversing Entries done with the purpose of bringing back entries to their original amounts