ACCOUNTING & ITS USES IN BUSINESS DECISIONS

WHAT IS ACCOUNTING?
y

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 a financial character, and interpreting the results thereof

FUNCTIONS OF ACCOUNTING
y RECORDING y CLASSIFYING y SUMMARIZING y INTERPRETING

RECORDING
y Business transactions or events are written in the

books of accounts in chronological order y Technically called bookkeeping

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BUSINESS TRANSACTION
y An activity wherein there is an exchange of values,

resulting from receiving or paying of cash y For every transaction, there is a value received equal to the value given away. y These values received and given away maybe in the form of money, property or service

BUSINESS TRANSACTION
y Example:

Mr. Flores bought supplies worth P5,000. Value Received = Value Given Away Supplies = Cash (P5,000)

CLASSIFYING
y Similar items belonging to the same

category are grouped together y Transactions are classified or grouped according to the elements or values of accounting

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ELEMENTS OR VALUES OF ACCOUNTING

y ASSETS y LIABILITIES y C APITAL y INCOME y EXPENSES

ASSETS
y Properties or goods owned by the business y Can be grouped into:

a. Current assets b. Fixed assets

TYPES OF ASSETS
A. Current assets  assets that are consumable or can easily be converted into cash within one year.  Examples: cash, supplies B.

Fixed assets
assets that are more or less permanent in nature and be used for so many years  Example: land, equipment


LIABILITIES
y Debts or financial obligations of the business to

outside parties or creditor y These are classified into: a. Current or short-term liabilities b. Fixed or long-term liabilities

TYPES OF LIABILITIES
 Current or short-term liabilities  Payable within one year  Example: accounts payable, salaries payable  Fixed or long-term liabilities  payable over a long period of time, usually more than one year.  Example: mortgage payable, notes payable

CAPITAL
y Total amount invested by the owner. This may be in the form of cash and/or other assets y Other names: owner s equity, net worth, proprietorship y Main source of capital: investment made by the owner y Any profit that is made by the business is added to capital y Any loss that the business makes is subtracted from capital y If the owner takes cash or other assets from the business for personal use, this is subtracted from capital, and recorded as drawings.

INCOME OR REVENUE
y Amount earned by the business as a result of its

operations y It can be earned on a cash basis and/or credit basis y Examples: Sales Income, Catering Income

EXPENSES
y Cost of goods or services that are used up in the

operation of the business y Examples: salaries expense, supplies expense

TO CALCULATE PROFIT OR LOSS

Revenue Expenses = Profit (Loss)
PROFIT y Result of business operations where revenue is greater than expenses LOSS y Result of business operation where revenue is less than expense

SUMMARIZING
Transactions that have been recorded and classified are presented in forms of financial reports or statements that already show the overall status of the business These reports are submitted to the management at the end of each accounting period

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KINDS OF FINANCIAL STATEMENTS

y BALANCE SHEET y INCOME STATEMENT y STATEMENT OF CHANGES IN OWNER S EQUITY y CASH FLOW STATEMENT

BALANCE SHEET
y Gives information about the financial position of the

business by showing a list of its assets, liabilities and capital y Shows whether the business is stable or not

INCOME STATEMENT
y Describes how the business operated over a given

period of time, say one year. y Tells whether the business operation is profitable or not y Describes the revenues or income earned by the business as well as expenses incurred

STATEMENT OF CHANGES IN OWNERS EQUITY

y Describes the activities that led to a change in the

owner s net worth over a number of years y Net worth or owner s equity is affected by four activities:
y investments y withdrawal y net income y net loss

CASH FLOW STATEMENT

y Shows the cash inflow (cash receipts) and cash

outflow (cash payments) activities of the business and the net change in cash over a specific period.

INTERPRETING
y The results of the business operations, as summarized

in the various reports, are explained and clarified y Interpretation may be done in the form of :
y percentage analysis y ratios y comparing financial reports of one period with that of

the previous periods

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DISTINCTION BETWEEN BOOKKEEPING AND ACCOUNTING

y BOOKEEPING
y Process by which the business transactions or events are

recorded in a systematic and chronological order y Technical name for recording

y ACCOUNTING
y Involves many complex activities and often includes the

preparation of tax and financial reports, budgeting and the analysis of financial information.

METHODS OF BOOKKEEPING
y SINGLE ENTRY SYSTEM
y System of bookkeeping wherein only the debit part or

only the credit part is recorded

y DOUBLE ENTRY SYSTEM

y System of bookkeeping in which the recording of each

transaction affects two or more accounts and the total debit is equal to the total of the credits y This system provides a complete record of the effect of every transactions, hence it is used by almost all business organizations

METHODS OF ACCOUNTING
y ACCRUAL BASIS
y Method of accounting wherein revenue or income is

recorded when earned and expenses are recorded when incurred

y CASH BASIS
y Method of accounting wherein revenue or income is

recorded when cash is received and expenses are recorded when cash is paid. y It does not give a good picture of profitability. It ignores uncollected revenue which has been earned and expenses which have been incurred by not paid.

TYPES OF BUSINESS ORGANIZATION

A. ACCORDING TO OWNERSHIP

1. Sole Proprietorship 2. Partnership 3. Corporation

Sole Proprietorship
y Owned by one person who usually acts as manager y As sole owner, he enjoys all the profits by himself y Ideal for business which does not need a large amount

of capital and which operation is simple and manageable y Simplest form and usually the smallest form of business organization

Partnership
y Owned by one or more individuals who contribute

money, property and talent y Owners are called partners who manage the business and share the profits among themselves y Advisable to put up a partnership if the business requires more than one kind of expertise that one person may not be able to offer

Corporation ( )
1 of 2

y The word corporation comes from the Latin word corpus meaning body y More complicated form of business requiring the registration and approval of its Article of Incorporation by Securities and Exchange Commission y Organized as a separate legal entity (from the owners) y As a legal entity, it can enter into contracts, own property and issue stocks y Investors are called stockholders, whose rights over the business are expressed in the number of shares bought and are evidenced by certificates of stock y Managed by a Board of Directors elected by the stockholders

Corporation ( )
2 of 2

y Stockholders have limited liability i.e., they are not required to pay the corporation s debts out of their personal properties in case the corporation becomes insolvent y More stable than a partnership because it is not affected by the withdrawal of a stockholder y A stockholder can withdraw by simply selling his shares of stock to another investor or to the corporation itself y There are more legal and tax requirements to be complied with in a corporation as compared to a partnership

TYPES OF BUSINESS ORGANIZATION

B. ACCORDING TO ACTIVITIES PERFORMED: 1. Service business 2. Merchandising or trading 3. Manufacturing

Service business
y Deals with rendering of services to the customers y Ex: school, airlines, travel agencies

Trading or merchandising
y Buys goods or merchandise that are physically

ready for sale and sells these products at higher prices y Ex. Bookstore, drugstore, groceries

Manufacturing
y Makes products using various raw materials y The cost of the product manufactured consists of y the cost of buying the raw material y the cost of direct labor or compensation paid to the worker who processes the raw materials y cost of manufacturing overhead needed to process the products y ex: garment factories, shoe factories, drug laboratories

USERS OF ACCOUNTING INFORMATION

STAKEHOLDERS y Person or entity who has an interest in the economic performance of a business
y EXTERNAL USERS y INTERNAL USERS

EXTERNAL USERS
y

Persons and groups outside the business and include the following: y owners, y creditors, y prospective investors, y suppliers, y government regulatory agencies (e.g. Securities and Exchange Commission), y taxing authorities (e.g. Bureau of Internal Revenue, Customs Authority), y labor unions, y employees and y Financial analysts who offer investment assistance such as consultants, bankers, and others.

INTERNAL USERS
y Include those inside the hospitality business such as the
y y

board of directors, and all levels of management

IMPORTANCE OF ACCOUNTING
y Lack of knowledge in proper bookkeeping and

accounting results in business problems or failures y Proper knowledge of accounting is necessary since accounting is regarded as:
y Language of business y Eyes and ears of management y Tool of management

BUSINESS PROBLEMS ENCOUNTERED BY BUSINESS FIRMS

y Loss of cash y since there is no record of cash received and cash paid y loss of goods y due to lack of records of goods for sale, the amount of goods sold and/or the amount of goods unsold y refusal of suppliers to deliver goods y due to the failure of the business to pay obligations on time y failure to collect receivables y since there is no record of amount due from customers and when the amount is due

BUSINESS PROBLEMS ENCOUNTERED BY BUSINESS FIRMS (CONT N)

y using business assets for personal use y no proper record separating the business transactions from the personal transactions of the owner y operating without knowing the results of the business y inability to borrow capital y the business cannot prove its stability and profitability due to lack of complete records of transactions

BRANCHES OF ACCOUNTING
Basic Accounting or Bookkeeping y Routine activity of recording, classifying and summarizing business transactions in a systematic manner y Is the procedural aspect of accounting Financial Accounting y Involves the preparation and interpretation of financial statements primarily for external users y These financial reports include the balance sheet, income statement and the Statement of Cash Flows

BRANCHES OF ACCOUNTING
 Managerial Accounting y Presentation of accounting data primarily for internal users y The special reports will assist managers in planning and controlling the operation of the business and in making decisions y Example: the decision to open a branch of a restaurant or a travel agency requires the use of managerial accounting y Cost Accounting y Deals with the recording, classifying and summarizing the details of materials, labor and overhead necessary to produce and sell a product or service y Emphasis is on cost determination, cost analysis and cost

BRANCHES OF ACCOUNTING
Auditing y Deals with independent verification and examination of the accounting records for the purpose of giving an opinion on the fairness of its presentation Tax Accounting y Used to prepare tax returns and to examine tax consequences of proposed business transactions

BRANCHES OF ACCOUNTING
 Government Accounting y Uses Fund Accounting , deals with the administration or use of public funds to bring about service to the community y Its objective is more on how the funds are used to service the people rather than to earn profit y Aside from the government, Fund Accounting is also applicable for non-profit organizations such as charitable institutions

BRANCHES OF ACCOUNTING
y Not-For Profit Accounting y Used by non-profit organizations such as foundations, hospitals, colleges and universities to measure the success of their activities and ensure strict compliance with all requirements imposed by law, by donors, or by the entity s purposes. y Donors to organizations such as foundations and Red Cross want information about how well the organization has met its objectives and whether continued support is justified

REGULATORY BODIES IN ACCOUNTING

 Professional Regulation Commission (PRC) y Government agency in charge of regulating and licensing the practice of a profession like accounting, medicine, engineering, nursing and the like y Included in its functions are the maintenance and enforcement of professional examinations, standards and ethics  Board of Accountancy (BOA) y Underneath the PRC is the BOA, which is in charge of regulating the accounting profession by setting up and promulgating a set of professional standards and ethics y It is tasked with the responsibility of conducting annually the CPA licensure examination

REGULATORY BODIES IN ACCOUNTING

 Philippine Institute of Certified Public Accountants y Is the basic authority of all certified accountants in the Philippines  Other Government Agencies y Securities and Exchange Commission (SEC) regulates the business operation especially of corporations with respect to equity holdings of stocks and bonds y Central Bank or Bangko Sentral ng Pilipinas (BSP) regulates the operation of all banks, importations (goods coming into the country) and exportations (goods going out to other countries) y Bureau of Internal Revenue (BIR) ensures the compliance of all business of tax and license requirements