FINANCIAL ACCOUNTING AND REPORTING

 Accounting and its Environment

 Fundamental Business Model

Capital 4 Sales
1

3
Business Owner
Operating Asset Products or
Cash
Assets Use Services
Banks

2
5 Return Costs

1. The investors provide the capital for the business. The cash investment will then be held in
a bank account.
2. The cash in the business can be:
a) Converted into another type of asset that will be used in the business or sold
b) Spent on operating cost such as salaries, rentals & utilities
3. The combination of business resources provides the basis for producing the products or
services
4. The sale of product or service generates an asset called receivable. This asset once
collected will produce a cash inflow for the business
5. The cash inflow from collections will be used to:
a) Pay debts with interest on their loans to the company.
b) Return some cash to the owner
c) The rest of the cash can be sent back to the cycle (stage 2)

 Types of Business

Service Trader
EXAMPLES STRUCTURE
STRUCTURE - Software ACTIVITY - buying a EXAMPLES
ACTIVITY
- Hiring skilled developer - buying and product
- selling - Wholesaler
people's time
staff and selling - Accounting Firm selling - making them
their time - Law Firm/Legal products - Retailer
available for
Firm sale as is
 Manufacture Raw Materials
ACTIVITY STRUCTURE EXAMPLES
STRUCTURE EXAMPLES
- designing - taking raw - vehicle ACTIVITY - buying blocks
products, materials and assembly, - farming
aggregating using equipment construction, - growing and of land and
components and staff to electricity, water, extracting raw using them to - mining
and assembling convert them food, drink, materials provide raw
finiished into finished chemicals, media, materials - oil
products goods pharmaceuticals

Infrastructure Financial
EXAMPLES STRUCTURE
STRUCTURE ACTIVITY - accepting cash from
- transport (airport
- buying operating depositors and paying
ACTIVITY operator, airlines, - receiving them interest using
EXAMPLES
assets (typically trains, ferries,
- selling the large assets); deposits, the money to provide - banks
buses)
utilization of selling occupancy lending and loans to borrowers, - investment
often in - hotels, telecoms, charging them fees house
infrastructure sports facilities, investing
combination with and interest higher
services property money than the depositors
management receive

Insurance
STRUCTURE
- collecting cash
ACTIVITY from many
- pooling customers; EXAMPLES
premiums of investing the
- insurance
many to meet money to pay the
claims of a few losses
experienced by a
few customers
 Forms of Business Organizations
Sole Proprietorship
 Single owner called proprietor REMEMBER!
 The owner receives all profits and absorbs all Business Entity Concept /
losses and solely responsible for all debts Economic Entity Assumption
Partnership states that the recorded
activities of a business entity
 Owned by two or more persons who bind
should be kept separate
themselves to contribute money, property or from the recorded activities
industry to a common fund, with the intention of of its owner(s) and any other
dividing the profits among themselves business entities
 Owners are called partners
 Each partner is personally liable for the debt incurred by the business
Corporation
 Owned by the stockholders
 Artificial being created by the operation of law,
having rights of succession and the powers, REMEMBER!
attributes and properties expressly authorized Corporation is a separate legal
by law or incident to its existence entity
 The stockholders are not personally liable for the
debt of the corporation

 Sizes of Business
Micro
 Net assets of P3M and below
 Less than 10 employees
Small
 Net assets of above P3M to P15M
 10-99 employees
Medium
 Net assets of above P15M to P100M
 100-199 employees
Large
 More than P100M net assets
 200 and above employees

 Activities in Business Organizations

Financing
 Obtaining financial resources
 o Primary sources are owners and creditors
 Repaying creditors
 Paying a return to the owners
Investing
 Acquiring other resources used in the transformation process
o Land, building equipment, etc.
 Disposal and replacement of these resources
Operating
 Involve the use of resources to design, produce, distribute and market
goods and services

 Definition of Accounting
 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 decisions (Philippine Institute of
Certified Public Accountants, PICPA)
 Accounting is the process of identifying, measuring, and communicating
economic information to permit informed judgments and decisions by the
users of the information (American Accounting Association, AAA)
 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
Institute of Certified Public Accountants)
 Accounting is an information system that measures, processes and
communicates financial information about an identifiable economic entity.

Bookkeeping – is an accounting support function that involves the systematic

recording of business transaction in financial terms

 Phases of accounting
 Recording
 Classifying
 Summarizing
 Identifying
  Fundamental Concepts

CAPITAL PROVIDERS (Investors and Creditors) AND THEIR

Primary users of accounting information
CHRACTERISTICS

Constraints COST

Pervasive Criterion
DECISION USEFULNESS

Fundamental
RELEVANCE Qualities FAITHFUL REPRESENTATION

Productive Free from

Ingredients
Value ofConfirmatory
fundamental
Value
qualities
Completeness Neutrality Error

Timeliness
Enhancing Verifiability
Comparability Qualities Understandability

 Accounting Information System

Information System (IS) – is a formal, sociotechnical, organizational system
designed to collect, process, store, and distribute information
Information Systems – is an academic study of systems with a specific reference
to information and the complementary networks of hardware and software that
people and organizations use to collect, filter, process, create and also distribute
data

 Parts of Information System

 People  Input Devices
 Procedure  The system unit
 Software  Secondary Storage
 System Software  Output Devices
 Application Software  Communication Devices
 Hardware  Data
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This diagram illustrates how

economic activities flow into
the accounting process,
which produces accounting
information, which are used
in making economic decisions
and taking specific actions
thus resulting to economic
activities

 Effective AIS should achieve the following objectives

Cost Benefit Principle – to process information efficiently at the least cost
Control Principle – to protect entity’s assets, to ensure that data are reliable,
and to minimize wastes and the possibility of theft and fraud
Compatibility Principle – to be in harmony with the entity’s organizational and
human factors
Flexibility Principle – to be able to accommodate growth in the volume of
transactions and for organizational changes

 Types of AIS
Manual Systems – utilize paper-based journals and ledger
Computer-based Transaction Systems – utilize computer-based journals and
ledger
Database Systems – embed accounting data within the business event data on
which they are based

 Stages of Data Processing

INPUT PROCESSING OUTPUT