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Evolution of Accounting
The Present
➔ The Development of Modern Accounting and Commerce
➔ 1997: International Accounting Standards Council (IASC) was established
➔ 2001: International Accounting Standards Board (IASB) replaced IASC and established International Financial
Reporting Standards (IFRS)
➔ 2004: Professional Regulation Commission (PRC) created the Financial Reporting Standards Council (FRSC) to
replace the ASC
Nature of Accounting
AS AN ART
➔ Recording (business transactions)
● General Journal a.k.a. Book of Original Entry
➔ Classifying (assets, liabilities, etc.)
● General Ledger a.k.a. Book of Final Entry
➔ Summarizing
● Financial Statements
i. Income Statement/Statement of Comprehensive Income (SCI)
ii. Balance Sheet/Statement of Financial Position (SFP)
iii. Statement of Cash Flows (SCF)
iv. Statement of Changes in Equity (SCE)
v. Notes to Financial Statements
➔ Interpreting
AS A PROCESS
1. Analyzing business transactions
● Account business transactions only
2. Recording business transactions
● General Journal
3. Posting business transactions
● General Ledger (T-account)
4. Preparing trial balance
● Dr = Cr
5. Adjusting entries (+ / -)
6. Preparing adjusted trial balance
● Trial balance +/- adjusting entries = adjusted trial balance
7. Preparing Statement of Comprehensive Income (SCI)
● Accounts only revenue and expenses
● Revenue > Expense = net income
● Expense > Revenue = net loss
● Revenue = Expense = breakeven
8. Preparing Statement of Financial Position
● A = L + OE (accounting equation)
9. Closing entries
10. Preparing post-closing trial balance
AS A SERVICE ACTIVITY
➔ It caters to the needs of every user
➔ It provides assistance to decision makers by providing them financial reports that will guide them in coming up with
sound decisions
➔ Accountants make sure that financial statements are available on a timely basis
AS AN INFORMATION SYSTEM
➔ Storehouse of information
➔ Transactions from past to present are kept, manual or with intervention of accounting system
Functions of Accounting
Branches of Accounting
PUBLIC ACCOUNTING
➔ The accountant performs or offers to perform any activity that will result to an issuance of an attest report that is in
accordance with professional standards (PAS, PFRS, GAAP)
➔ Services:
1. External Auditing - auditors examine the financial and business transactions of a company with which he is
not affiliated with in order to express an opinion on whether statements have been presented fairly or not
● Auditor - gives credibility to the financial statements
● Auditor’s Opinion/Report - basis of whether or not the financial statements are prepared truthfully
and without any material error
● Audited Financial Statement - FS that underwent the process of auditing
2. Tax Preparation and Planning Services - tax services wherein accountants advice and help clients in tax
planning and preparing tax returns
● Tax Specialist - knowledgeable about revenue regulations and tax laws; represents the client in any
tax-related case filed by the BIR
● Tax Reports/Returns:
○ Income Tax: individual = 5% to 32%, corporate = 30%
○ Business Tax
1. VAT - indirect tax which is passed on to the buyer
2. Percentage Tax - those with annual sales below 1, 919, 500
3. Real Property Tax - paid yearly on all real properties
4. Excise Tax - applies to goods manufactured and to consumed in the Philippines
5. Capital Gain Tax - sale of real property
6. Doc Stamp - tax on documents
7. Donor’s Tax - tax on donation, gift, or gratuitous transfer of property
8. Estate Tax - tax on the right of deceased person to transmit his estate to heir or
beneficiaries
9. Final Withholding Tax - income tax withhold for certain payors
10. Expanded Withholding Tax - covers services
11. Withholding Tax on Compensation - receiving purely compensation income
PRIVATE ACCOUNTING
➔ Involves setting up system of recording business transactions that are aggregated to financial statement
➔ Services:
1. Internal Auditing
● Reviews the business operations to check if they are complying with management policies
● Evaluates the efficiency of business operations
2. Tax Accounting
● Deals with the preparations of various tax returns and doing tax planning for the business
● Similar to tax services in public accounting, but the client is the business and not the public
3. Financial Accounting
● Ends in preparation and presentation of financial statements in accordance with GAAP
● Information from this branch helps investors and creditors in deciding where to allocate their scarce
resources
4. Cost Accounting
● Covers the reporting of financial information relevant to manufacturing operations
● Focuses on accumulating costs for financial reporting and decision making purposes
● Cost Accountant - determines the inventory for financial reporting services
5. Budgeting
● Provides a detailed collection and reporting of expenditures and revenues involved in a business or
company operations
● Tracks money taken in and the money spent by the company and staff
6. Accounting Information System
● Small businesses often use lower costs software packages
● Large organizations would often use accounting built software packages
GOVERNMENT ACCOUNTING
➔ A system used in government offices to record and report financial transactions
➔ Utilizes the systematic process
➔ Reveals how public funds have been generated, utilized and employed in both national and local governments
ACCOUNTING EDUCATION
➔ Engages in teaching accounting, financial management, taxation, and other related business course by accounting
educators (professors, deans and researchers)
➔ Accounting Research - encompasses research interest in the areas of financial accounting, management accounting,
auditing and assurance, and taxation
SPECIALIZED AREAS
1. Forensic Accounting
● Provide detective work needed to investigate and examine evidence of stealing or fraud
2. Information Technology Services
● Businesses seek individuals who can design and implement customized software systems in e-commerce
3. Environmental Accounting
● Determine how companies can be both profitable and environmentally responsible
● Do environmental compliance audit
● Set up preventive system
4. International Accounting
● Accountants who are knowledgeable in international trade rules and regulations
EXTERNAL USERS
1. Potential and Existing Investors
● Assess the risk inherent in, and return provided by, their investment
2. Lenders/Creditors/Potential Creditors
● Determine whether their loans and interest attached to them will be paid when due
3. Customers
● Information about the continuance of an enterprise, especially when they are dependent on it
4. Suppliers
● Determine whether amounts owing to them will be paid on time
5. Tax Authorities
● Determine the credibility of the tax returns filed and if the business paid the correct amount of taxes
6. Regulatory Bodies
● Ensure that the company’s disclosure is in accordance with the rules and regulations set in order to protect the
interest of the stakeholders
● Legitimacy of a business
7. Public
● Provide information about the trends and recent development in the prosperity of the enterprise and the range
of its activities
PARTNERSHIP
➔ Owned by two or more individuals pooling their resources together as a common fund
➔ Profit of the business is divided among the partners as per partners’s request (articles of co-partnership)
➔ 2 Types:
1. General Partnership - each partner is a general partner with unlimited liability
2. Limited Partnership - at least one general partner and the rest are limited partners who enjoy limited liability
➔ Advantages:
● Increased potentials from two or more different strengths
● Easy to form with proper agreements on its formation
● Less regulations compared to corporations
➔ Disadvantages:
● Unlimited liability of one or all partners
● Limited life (business dies if one partner is incapable)
● High possibility of dispute between partner
CORPORATION
➔ Required to have 5 to 15 incorporators
➔ Legal personality that is separate and distinct from the owners
➔ Board of Directors are elected by the owners and take control of the corporation’s activities
➔ Advantages:
● More sources of funds
● Easy to transfer ownership
● Liability of owners is limited
● Unlimited commercial life
● Large pool of human capital
➔ Disadvantages:
● More regulations to be followed
● Profit is taxed at the corporation tax rate
● Costly to incorporate
● Stockholders are taxed again when profits are distributed to them
COOPERATIVE
➔ Owned by a group of individuals who also serve as benefactors to the business endeavor
➔ Requires at least 15 members
➔ Board of Directors and officers are elected to manage the business
➔ Advantages:
● Limited life
● Democratic organization
➔ Disadvantages:
● Obtaining capital through investors
● Lack of membership and participants
MERCHANDISING
➔ “Buy and sell” business
➔ Products are bought from manufacturers and resold at a higher amount than purchase price
➔ Ex. grocery, hardware, department stores, drugstores
MANUFACTURING
➔ Materials are bought to create a new product
➔ Inventories: raw materials, work in process, finished goods
➔ Ex. food factories, garment factories, car manufacturing companies
----------------------------------------------Accounting Assumptions---------------------------------------------
GAAP: Generally Accepted Accounting Principles
➔ Determine what, when and amount to record
➔ Rules and procedures necessary
➔ Govern the application of accounting procedures
Importance of GAAP
➔ Guide: prepares financial statement
➔ Aid: effective execution and communication
GAMET
1. Going Concern - business will exist long enough to carry out its objectives
2. Accrual Basis - revenue/expense is recorded, regardless if the cash is received/paid
3. Monetary Unit - all transactions should be in Philippine Peso
4. Economic Entity - the business and owner are treated separately
5. Time Period - accounting process is completed over a specific time period (calendar or fiscal)
Accounting Principles
FOMaMaCoCoReveRe
1. Full Disclosure - financial statement should include sufficient information for stakeholders’ decisions
2. Objectivity - business transactions should have evidence/documentation
3. Matching - expenses should match revenues
4. Materiality - transactions may affect decision
5. Cost - amount spend/earned should be recorded based on actual cash equivalent/original cost
6. Conservatism - choose the alternative that will least affect the net income
7. Revenue Recognition - revenue is recognized as soon as goods are sold/services are rendered, regardless of when
money is received
Business Transaction Analysis
Business Transactions
➔ Events which involve the exchange of values between two or more parties
➔ Eg. goods purchased, services rendered, credit availed by the business, cash received or paid out, debts incurred
Business Documents
➔ Official receipt for services
➔ Sales invoice (SI) for goods purchased
➔ Promissory note
➔ Contracts
➔ Cheques
Assets
I. Current (CRIP)
A. Cash
B. Receivables
1. Account Receivable
2. Notes Receivable
C. Inventories
1. Unused Supplies
D. Prepaid (AIR)
1. Advertising
2. Insurance
3. Rent
II. Non Current (LBMAF)
a. Land
b. Building
c. Machinery
d. Automobiles
e. Furniture & Fixtures
III. Contra Assets
a. Accumulated Depreciation
b. Allowance for Doubtful Accounts
Liabilities
I. Capital
II. Revenues (PISS)
A. Professional Fees
B. Interest Income
C. Sales
D. Service Revenue
III. Expenses (SSWUTCDD)
A. Salaries Expense
B. Supplies Expense
C. Wages
D. Utilities Expense
E. Taxes and Licenses Expense
F. Cost of Sales
G. Doubtful Account Expense
H. Depreciation Expense
IV. Withdrawals