Definitions of ACCOUNTING Accounting Standards Council (ASC) - Accounting is a service activity.

Its function is to provide quantitative information, primarily financial in nature, about economic entities, that is intended to be useful in making economic decision. American Institute of Certified Public Accountants ( AICPA) - Accounting is 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 a financial character and interpreting the results thereof. American Accounting Association (AAA) - Accounting is the process of identifying, measuring and communicating economic information to permit informed judgement and decision by users of information. Identifying means the recognition or nonrecognition of "accountable" events. Not all business activities are accountable. An event is accountable or quantifiable when it has an effect on assts, liabilities and equity. Measuring or measurement is the process of determining the monetary amounts at which the elements of the financial statements are to be recognized and carried in the balance sheet and income statement. Communicating is the process of preparing and distributing accounting reports to potential users of accounting information. BASIC PURPOSE OF ACCOUNTING The basic purpose of counting is to "provide quantitative financial information about a business that is useful to statement users particularly owners and creditors, in making economic decisions." PUBLIC, PRIVATE, AND GOVERNMENT ACCOUNTING Public Accounting, in essence, is the practice of the accounting profession. Individual practitioners, small accounting firms and large multinational organizations render independent and expert financial services to the public such as: Auditing or specifically external auditing is the "examination of financial statements by independent certified public accountant for the purpose of expressing an opinion as to the fairness with which the financial statements are prepared". Taxation service includes the preparation of annual income tax returns and determination of tax consequences of certain proposed business endeavors. Management Advisory Service has no precise coverage but is used generally to refer to services to clients on matters of accounting, finance, business policies, organization procedures, product costs, distribution and many other phases of business conduct and operations. Private accounting means that CPAs are employed in business entities in various capacity as accounting staff, chief accountant, internal auditor and controller. The highest accounting officer in a business entity is the controller. Among the more important areas of private accounting are: Financial accounting- is the branch of accounting that is primarily concerned with the measurement and communication of information that summarizes and reports the financial condition and operating results of a business enterprise. Management accounting- the specific information needs of the internal data-users, principally the management, are provided by the internal reporting functions of the accounting system called management accounting. Also known as managerial accounting, it is a useful tool in achieving the functions of management Internal Auditing- An internal auditor is an employee of the business enterprise, who have the responsibilities of evaluating the efficiency of operations and determining whether the business' policies are being followed consistently in all organizational levels of operations. Government Accounting "encompasses the process of analyzing, classifying, summarizing and communicating all transactions involving the receipt and disposition of government funds and property and interpreting the results thereof. ACCOUNTING VS BOOKKEEPING Bookkeeping involve those mechanical and repetitive recording and classifying procedures related to the business activities of a natural or artificial person, until the voluminous financial information is summarized and reported in the form of financial statements. Bookkeeping is only a part of the wider field of accounting. It is the clerical side of accounting. Among others, accounting includes the analysis and interpretation of financial statements, the income tax work, the design and installation of an accounting system, audits, and the preparation of forecasts, budgets, and feasibility studies. TYPES OF BUSINESSES Service enterprise- this type if business provides various forms of services, not tangible products, to its customers or clients. A service enterprise recognizes income in the form of fees, rents, interests, royalties, retainers, or commissions. Merchandising enterprise (buy and sell)- a trading or merchandising enterprise buys ready -to-use products and then sells these products, without changing the form of the materials bought and sold, to end-consumers or to other processors or manufacturers at higher prices. Manufacturing enterprise- a manufacturer, also called a fabricator, producer, or processor, is in the normal business of producing the product that he sells.

FORMS OF BUSINESS OWNERSHIP Single Proprietorship - a business that is owned by one person is called single proprietorship, a sole proprietorship, or just plainly proprietorship. From an accountant's point of view, a business enterprise is looked upon as a separate and distinct from that of the owner. This assumption is known as the business entity principle. However from a legal viewpoint, the business enterprises of a proprietor is not separate and distinct from himself. Partnership- a partnership form of business has two or more owners called partners. The formation of a partnership requires some form of a written or oral agreement between the partners because of the business entity principle applied in accounting, a partnership is looked upon as an entity that is separate and distinct from that of the partners. from a legal viewpoint, a partnership is not considered separate from its partners. Corporation- a business that has ts ownership capitalization divided into hundreds or thousands of transferable chares of stock is called a corporation. the corporation must have at least five owners or investors called stockholders or shareholders. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP) , they are Conventional- they become generally accepted by agreement, often tacit agreement, rather than by formal derivation from a set of postulates and basic concepts. The principles have developed on the basis of experience, reason, custom, usage, and practical necessity. Simply stated, generally accepted accounting principles represent the "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. Although called principles, these are not rigid or fixed, but are continually evolving in response to the changes in the business environment. BASIC ACCOUNTING CONCEPTS Accrual basis accounting- under this basis, the amount of net profit or loss is determined by deducting the total expenses incurred (whether the expenses are already paid for or not) from the total earned income for the same time frame(whether the income is already collected or not). Going Concern Assumption/ continuity assumption- under this assumption, the primary financial statements of a business enterprise are prepared on the assumption that the normal operations of the business enterprise will continue indefinitely. Other Concepts Business entity principle. This concept assumes that the business and its owner are separate and distinct entities. as such, there should be separate accounting and reporting of the transactions, resources, obligations, income, and expenses of the business and those of the owner.

Periodicity Concept. the assumption that the operating life of the business may be divided into time-periods is known as the periodicity concept or time period concept. The use of equal time-periods for reporting purposes is helpful so that the reported information would have the qualities of timeliness and comparability. Concept of the equality of value received and value given up. The recording and reporting of the business transactions are based on the assumption that for every value received, there is an equal value given up. Monetary concept. because of this concept, the transactions recorded in the books of accounts and the elements reported in the financial statements are expressed in terms of a common unit of measurement, the peso. Matching concept. Under this concept, there should be a simultaneous recognition of income and the corresponding expenses that are directly or indirectly contributory to the earnings of such income. QUALITATIVE INFORMATION CHARACTERISTICS OF FINANCIAL

Qualitative characteristics are the qualities or attributes that make financial accounting information useful to the users. Qualitative characteristics that relate to content of financial statements are relevance and reliability. Actually, these are the primary qualities of financial statements. Qualitative characteristics that relate to presentation of financial statements are understandability and comparability. These are the secondary qualities of financial statements. Relevance. Relevance means "the capacity of information to make a difference in a decision by helping users form predictions(predictive value) about the outcome of past, present, and future events, or confirm or correct prior expectations(feedback value)." Timeliness is an important ingredient of relevance, along with feedback value and predictive value, because relevant information furnished after a decision is made is useless or of no value. Reliability. Reliability is the "quality of information that assures users that the information is free from bias and error, and faithfully represents what it purports to represent." Factors that enhance the reliability of financial information 1. Faithful representation- means that the actual effects of the transactions should be properly accounted for and reported in the financial statements. Faithful representation is synonymous with verifiability or objectivity. 2. Substance over form- If information is to represent faithfully the transactions and other events it purports to represent, it is necessary that they are accounted for in

accordance with their economic substance and reality and not merely their legal form. 3. Neutrality- means that the financial statements should not be prepared as to favor one party to the detriment of another party. To be neutral, the information contained in the financial statements must be free from bias. 4. Conservatism/Prudence - Under conservatism, when alternatives exist, the alternative which has the least effect on equity shall be chosen. Prudence is the desire to exercise caution when dealing with the uncertainties in the measurement process such that assets or income are not overstated and the liabilities or expenses are not understated. 5. Completeness - requires that relevant information should be presented in a way that facilitates understanding and avoids erroneous implication. Completeness is the result of the adequate disclosure standard or the principle of full disclosure. Understandability. Understandability requires that financial information must be comprehensible or intelligible if it is to be useful. Accordingly, the information should be presented in a form and expressed in terminology that a user understands. Comparability. Comparability means the ability to bring together for the purpose of noting points of likeness and difference. Comparable information presents similarities and dissimilarities. Comparability may be made within an entity (horizontal comparability or intracomparability) or across entities (intercomparability or dimensional comparability). Implicit in comparability is the principle of consistency which requires that "the accounting methods and practices should be applied on a uniform basis from period to period." ACCOUNTING CONSTRAINTS Accounting constraints are the factors that may affect the relevance and reliability of financial accounting information. a. Timeliness. Timeliness requires that the accounting information must be made available or communicated early enough when a decision is to be made. Relevant information may lose its relevance if there is undue delay in its reporting. b. Cost and benefit. The cost and benefit constraint is a consideration of the cost incurred in generating information against the benefit to be obtained from having the information. c. Materiality. Materiality is a practical rule in accounting which dictates that strict adherence to GAAP is not required when the items are not significant enough to affect the evaluation, decision and fairness of the financial statements. Materiality is relativity. What is material for one entity may be immaterial for another. d. Balance between qualitative characteristics. In practice, a balancing or tradeoff between qualitative characteristics is often necessary.

Components of a Complete Set of Financial Statements 1. Statement of Financial Position 2. Statement of Financial Operation 3. Statement of Changes in owners Equity 4. Statement of Cash Flows 5. Notes to Financial Statement Recognition and Measurement in the Financial Statements Recognition the process of reporting an asset, liability, income or expense on the face of the financial statements of an entity. It involves the inclusion of peso amount in the entitys financial statements. Measurement the process of determining the monetary amounts at which the elements of the financial statements are to be recognized and carried in the statement of financial position and statement of financial operation. 3 Elements in the Statement of Financial Position Asset resources controlled by the entity as a result of past transactions or events and from which future economic benefits are expected to flow to the entity. Liability present obligations of the entity arising from past transactions or events the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits. Equity residual interest in the assets of the entity after deducting the total of its liabilities. 2 Elements in the Statement of Financial Operation Income increase in economic benefit during the accounting period in the form of an inflow or increase of asset or decrease of liability that result in increase in equity, other than contribution from owners. Expenses decrease in economic benefit during the accounting period in the form of an outflow or decrease of asset or increase of liability that result in the decrease in equity, other than distribution to owners. Accounting Cycle a. The recording phase concerned with the collection of information about economic transactions. 1. Analyzing analysis of the documentation of business activities provides the basis for making an initial record of each transaction. 2. Journalizing the recording of transactions in chronological order in the appropriate journals. 3. Posting the transfer of information recorded in the journals to the appropriate accounts in the ledger. b. The summarizing phase the recorded information is organized and summarized for decision making purposes. 4. Preparing the unadjusted trial balance the trial balances, usually prepared in a worksheet, provides a summary of the information as classified in the ledger, as well as a general check in the accuracy of the posting.

*Worksheet used to facilitate the preparation of adjusting journal entries and financial statements. #Trial Balance #Adjustments #Adjusted Trial Balance #Statement of Financial Operation #Statement of Financial Position 5. Adjusting entries before financial statements can be prepared, all relevant information that has not been recorded must be determined. a. Accrued revenue revenue already earned but not yet collected. b. Accrued expense expense already incurred but not yet paid. c. Prepaid expense expense already paid (or otherwise recorded) but not yet incurred. Payment may initially debited to an * Asset Account * Expense Account d. Unearned revenue revenue already collected but not yet earned. Collection may be initially credited to a *Liability Account *Revenue Account 6. Preparing financial statements statements summarizing operations and showing financial positions and cash flows are prepared from the information on the worksheet. 7. Preparing the closing entries balances in the nominal accounts are closed in to appropriate owners equity account. 8. Preparing a post-closing trial balance (optional) a postclosing trial balance is taken to determine the quality of the debits and credits after posting the adjusting and closing entries. 9. Preparing the reversing entries (optional) an entry that is exact reverse of an adjusting entry as to account title and amounts. Reversing entries are usually made at the same time as closing entries but are dated the first day of the next accounting period. *At the beginning of a new period, the following types of adjusting entries may be reversed: #Accrued expenses #Accrued revenues #Prepaid expenses when the original debit was to an expense account #Deferred revenue when the original credit was to a revenue account PARTNERSHIP - is an organization where two or more persons bind themselves to contribute money, property or industry into a common fund with the intention of dividing the profits among themselves. (New Civil Code, Article 1767) FEATURES OF PARTNERSHIP 1. 2. 3. 4. 5. Voluntary Association Legal Entity Co-ownership of property Taxable Entity Mutual Agency

6. 7.

Limited life Unlimited Liability

KINDS OF PARTNERSHIP 1. 2. As to Liability General and Limited Partnership As to Property Universal Partnership of Property and Universal Partnership of Profits

KINDS OF PARTNERS 1. 2. 3. 4. 5. General and Limited Partner Capitalist and Industrial Partner Real and Nominal Partner Ostensible and Secret Partner Universal and Particular Partner

PARTNERS CAPITAL ACCOUNT 1. INVESTMENTS -contributions made are credited to each partners capital account to increase the partners equity. PERMANENT WITHDRAWALS -withdrawals of capital are debited to each partners capital account to decrease the partners equity.

2.

PARTNERS DRAWING ACCOUNT 1. SHARE IN THE NET PROFIT -credited to the drawing account to increase the partners equity and become a source of regular drawings by the partner; or SHARE IN NET LOSS is debited to the drawing account to decrease the partners equity and his source of regular drawings. PERSONAL DRAWINGS -oftentimes called salaries but are in fact withdrawals of profits and are debited to the drawing account to decrease the partners equity.

2.

OPENING OF THE BOOKS OF THE PARTNERSHIP CASE 1 Contribution in the form of Cash, Property and Industry CASE 2 Contribution of Property with an attached liability CASE 3 Investment of an already existing business with the old books closed and new partnership books opened CASE 4 Both partners invested their businesses with one of the sole proprietorship books used as the partnership books CASE 5 Investment of an already existing business with recognition of bonus and new books are set up for the partnership METHODS OF DIVIDING PROFIT AND LOSS 1. Arbitrary Ratio (any agreed ratio)

2.

3. 4. 5. 6.

Capital Ratio based on any of the following: a. Initial or original capital b. Beginning yearly capital c. Ending yearly capital d. Average capital Interest on investments, balance in an agreed ratio Salaries to partners, balance based on investments made Interest on investments, salaries to partners, balance in an agreed ratio Interest on investments, salaries to partners, bonus to managing partner, balance in an agreed ratio. Where bonus is expressed as: a. A distribution of profit (a certain percent of net income) b. An expense (a certain percent of net income after bonus)

Withdrawal of a Partner Death or Incapacity of a Partner LIQUIDATION -is the process of winding up the affairs of the business which normally will take four steps to accomplish 1. Lump-Sum 2. Installment Liquidation Steps in the Liquidation Process 1. Realization of Other Assets/ Other Non-Cash Assets rd 2. Settlement of 3 party obligations 3. Settlement of deficiency 4. Payment of partners a. Loan b. Capital Cash Priority Program Order of Priority rd 1. 3 party liabilities 2. Partners loan account 3. Partners capital account Settlement of Capital Deficiency 1. Right of off-set 2. Additional investment 3. Absorption by other partner CORPORATION an artificial being created by operation of law having the right of succession and the powers, attributes and properties expressly authorized by law or incident to its existence. Characteristics of Corporation 1. Artificial Being 2. Created by operation of law 3. right of succession 4. Powers, attributes and properties expressly authorized by law or incident to its existence 5. Ownership interest comprised of share capital 6. Management by a board of directors Advantages of a Corporation 1. Limited liability of shareholders 2. Transferability of shares 3. Continued life existence 4. Greater source of funds Disadvantages of a corporation 1. Complicated in formation and operation 2. Greater degree of government control and supervision 3. Centralized management 4. Heavier income tax Kinds of Corporation 1. Stock Corporation- subject to income and business taxes 2. Non- Stock corporation- created for civic, charitable, or religious purposes. They are composed of members, not shareholders. These corporations are generally tax exempt.

DISSOLUTION -occurs when ownership changes -a change in the relation of the partners ceasing to be associated in carrying on the business (ARTICLE 1828 of the New Civil Code) Admission of a New Partner: 1. By Purchase a. Transfer of interest is equal to the amount paid to the selling partner b. Transfer of interest is less than the amount paid by the buying partner c. Transfer of interest is greater than the amount paid by the buying partner d. Transfer of interest with revaluation of asset (upward adjustment) e. Transfer of interest with revaluation of asset (downward adjustment By Investment a. New partners investment is equal to his capital credit b. New partners investment is equal to his capital credit. Assets of the partnership are to be revalued. c. Capital credit for the new partner is lesser than his actual investment. The difference is given as bonus capital to the current partners. d. Capital credit for the new partner is higher than his actual investment with the difference given as bonus by the original partners.

2.

IMPLIED ASSET REVALUATION OR BONUS 1. 2. 3. 4. 5. No asset revaluation or bonus Bonus to new partner Bonus to current partners Asset revaluation for current partners Asset revaluation and bonus

Components of a Corporation (a) Incorporators (b) Corporators (c) Shareholders/ members (d) Subscribers SHAREHOLDERS EQUITY Also known as net assets, net worth, book value, stockholders equity, or equity is the residual interest of the shareholders in the assets of the corporation after deducting the total amount of corporate liabilities. Elements of Shareholders Equity 1. Total share capital (total capital stock) (a) Share Capital - represents the amount of the total par or stated value of the shares issued. - the amount fixed in the articles of incorporation to be subscribed and paid in or secured to be paid in by the shareholders of the corporation. Authorized Share Capital the amount fixed in the articles of incorporation. Par Value - refers to the fixed amount assigned to each equity share No par, Stated Value - the issue price of no par shares may vary from time to time as it is usually fixed on the basis of the shares book value. (b) Subscribed Share Capital - is the portion of the authorized share capital that has been subscribed but not yet fully paid and therefore still unused. (c) Subscriptions receivable - unpaid portion of the subscribed share capital (d) Treasury Shares - issued shares reacquired by the issuing corporation which is treated as a reduction from the total shareholders equity. 2. Other reserves 3. Accumulated profits/losses (formerly earnings and deficit, respectively) Share and Share Certificate The share capital is divided into shares evidenced by share certificates. A share represents the interest of a shareholder in the corporation. A share certificate is the instrument or document that evidences the ownership of a share. Share Premium - is the portion of the paid in capital representing the excess over the par or stated value. Two Classes of Share Capital 1. Ordinary Share - ordinary share is so called because the ordinary shareholders have the same rights and privileges. The ordinary shareholders have no fixed or specific return on investment.

2. Preference Share - the preferences usually pertain to the preference shareholders claims on dividends and net assets in the event of liquidation. The preference shareholders have only a limited or fixed return on investment. Classifications of Preference Share Capital 1. Cumulative Preference Shares - the right of preferred shareholders to receive dividends in arrears is given and protected and given priority before any payment of dividend is made to common shareholders. 2. Noncumulative Preference Shares - the right of preferred shareholders to receive dividend in arrears is lost. 3. Participating Preference Shares - the preferred shareholders have the right to receive additional dividend after the dividend for both ordinary and preferred shares are paid. 4. Nonparticipating Preference Shares - they are entitled only to receive dividends that are declared during the current year. 5. Convertible Preference Shares - they are given the option to convert the preference share into ordinary shares or other securities of the investee corporation. 6. Redeemable or Callable Preference Shares - the issued preference shares can be bought back by the issuing corporation with a specific call or redemption price. Accounting for Share Capital Transactions 1. Authorization involves recording of capital share upon approval by the SEC. 2. Subscription involves accounting for share capital assigned to potential shareholders who agreed to pay a consideration in the future. 3. Issuance involves accounting for share capital upon the shareholders full payment of his subscribed capital shares. 4. Reacquisition involves accounting for the acquisition and retention of the corporations own equity shares previously issued. 5. Retirement involves accounting for the acquisition and retirement of the corporations own share capital. Issuance of Share Capital for Noncash Consideration Rule 1. If issued for tangible or intangible property, the value of share capital issued is equal to values according to the following order of priority: 1. Fair market value of the property received. 2. Fair market value of the share capital issued. 3. Par value of the share capital issued. Rule 2. If issued for services received, the value of share capital issued is equal to the values according to the following order of priority. 1. Fair market value of the services rendered. 2. Fair market value of the share capital issued. 3. Par value of the share capital issued.

called

retained

Rule 3. If issued in consideration for equity shares owned by other corporations, the value of share capital issued is equal to the values according to the values according to the following order of priority: 1. Fair market value of the equity shares received. 2. Fair market value of the share capital issued. 3. Par value of the share capital issued. Treasury Shares the equity shares owned by the issuing corporation that have been issued and then reacquired but not cancelled. Sources of Treasury Shares 1. Repurchase of own shares but not cancelled. 2. Delinquent subscription without a highest bidder assumed by the corporation. 3. Corporate own shares donated by the shareholder to the company itself. Accounting for Treasury Shares Treasury shares are accounted for at cost irrespective of the par value, stated value or market value of the share capital acquired. Transactions involved in the accounting for treasury shares: 1. Acquisition 2. Reissuance 3. Retirement Share Splits or Stock Splits Stock split is a share capital transaction which may change the number of original shares and par or stated value per share but not the total amount of the share capital of the company. This share capital is effected only if authorized by the SEC. Share Split/ Stock Split/ Split-Up an increase in the number of shares outstanding resulting in a reduction in the par value per share. This is made when the corporation believes that a lower price of share capital would attract more investors to the company. Split-Down/ Opposite Share Split/ Reverse Share Split a decrease in the number of shares outstanding with a corresponding increase in the par value per share. This usually happens when the corporation determines that a higher price of share capital would create prestige and other business advantage to the company.

PREPARED BY: CESAR FELIPE CHENIE FELIX HAZEL PAJARILLAGA CYNTHIA ANNE MARIE LOPEZ KARLA JIN RODRIGUEZ