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Accounting Fundamentals Overview

Accounting involves systematically recording all business transactions and classifying them into elements like assets, liabilities, and capital. It provides important financial information for decision making, control, and tax purposes. While bookkeeping is the routine recording of transactions, accounting analyzes and interprets financial statements to effectively manage a business. Both accounting and record keeping are required by law.

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46 views4 pages

Accounting Fundamentals Overview

Accounting involves systematically recording all business transactions and classifying them into elements like assets, liabilities, and capital. It provides important financial information for decision making, control, and tax purposes. While bookkeeping is the routine recording of transactions, accounting analyzes and interprets financial statements to effectively manage a business. Both accounting and record keeping are required by law.

Uploaded by

Jason Binondo
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd

Start of Module 5Start of Module 5

• Fundamentals of Accounting

• INTRODUCTION OF ACCOUNTING

Accounting is an art of recording, classifying, summarizing and interpreting business transaction in terms
of money and events. It is the recording of all business transactions that take place in an enterprise. It is
the “language of business.” Business transactions are expressed in accounting terms.

• For example, an individual who purchase lot and house for P 150 000.00, paying P 50, 000. 00 as
down payment and signing a balance for P 100,000. 00 does the following

• He purchase lot and house for P 150,000. 00 on installment basis.

• He decreases his accounts payable (a/p) by P 50, 000. 00

• He incurs a long- term liability of P 100, 000. 00

• To the manager’s point of view, accounting is an information system by which financial data are
recorded, accumulated and communicated for decision- making purposes.

• It provides information concerning profitability a vital element in business. It also provides data
for the guidance and control or certain business operations.

Many people confuse accounting with bookkeeping, but there are important differences between the
two.

• Accounting deals with the entire system for providing accurate and up- to- date financial
information- from the design of the system through its operation to interpretation of the
information that is obtained to become an accountant, an individual must undergo years of
training and chalk up a great deal of practical experiences.

•  Accounting involves taking financial statements and analyzing and interpreting the information
they contain in order to effectively plan and control a business’s affairs, identify and overcome
its problems.

BOOKKEEPING

• Bookkeeping on the other hand, is the routine, day- to- day record keeping that is necessary
part of accounting. Bookkeepers are responsible for obtaining the financial data that the
accounting system processes.

•  An accounting system cannot operate without good, accurate bookkeeping, but a bookkeeper
can generally trained within a year or so.

•  Bookkeeping involves systematically recording information about a business’s transactions in


ledgers and journals on a day- to- day basis.

WHY BOTHER TO KEEP RECORDS


• Keeping records involves time, effort and money. Why, then, bother keep them? Income Tax
Assessment Act says:

• Every person carrying on a business shall keep sufficient records, in the English language, of his
income and expenditure to enable his assessable income and allowable deductions to be rapidly
ascertained, and shall retain such records for a period of at least five years after the completion
of the transactions, acts or operations to which they relate.

•  The above regulation applies to all businesses. In addition, the corporation Act has this to say
about the records to be kept by a limited liability company:

• A company shall

• Keep such accounting records as correctly record and explain the transactions of the company
(including any transactions as trustee) and the financial position of the company; and

• Keep its accounting records in such a manner as will enable (1) the preparation from time to
time of true and fair accounts of the company; and (2) the accounts of the company to be
conveniently and properly audited in accordance with this act.

• The accounting records of the company shall be kept in writing in the English language or so as
to enable the accounting records to be readily accessible and readily convertible into writing
into English language.

•  There are, however, positive reasons for keeping records, whether they are financial or
statistical. Effective control of a business is impossible without an efficient information system,
and an information system is based on records of one kind or another.

• The accounting records of the company shall be kept in writing in the English language or so as
to enable the accounting records to be readily accessible and readily convertible into writing
into English language.

• Thus, whether a business operates as a sole trader, partnership or limited liability company, it is
required by law to keep proper records.

• The legal obligations outlined are really negative reasons for keeping accounting records. Under
these conditions most businesses would maintain only the minimum records consistent with
meeting legal responsibilities.

• A good record- keeping system

• will allow you to:

• Identify and avoid problems such as:

• Overspending

• Overstocking

• Slow collection of accounts

• Cash shortages
• Failing profits

• Fraud

• Identify and seize opportunities to:

• Invest surplus cash

• Win creditor confidence

• Take advantage of purchase discounts

• Maximize profits

• Minimize tax

FIELDS OF ACCOUNTING

•  Private business accounting

• Government accounting

• Public accounting

PRIVATE BUSINESS ACCOUNTING

• Enterprise of private ownership employ as many accountants as they find necessary. In large
organizations, an accounting department may be composed of many employees with accounting
knowledge under the chief accountant.

• Where the accounting department is quite large. Work may be divided into the following fields
of specialization:

• General or financial accounting- deals with the over- all problems of operations and financial
position.

• Cost accounting- deals specifically with the manufacturing phase of the business.

• Internal auditing- deals with the verification of accounts as well as the maintenance of adequate
internal control or check in the office systems.

GOVERNMENT ACCOUNTING

• All divisions of the government employs accountants. The work of the private business
accountant is almost similar to the work of the government accountant.

• Of the governmental institutions, the Bureau of Internal Revenue, Budget Commission, and the
general auditing office employ the greatest number of accountants.

PUBLIC ACCOUNTING

• In public accounting, the accountant offers his varies services to the public like other
professionals. In the Philippines, only licensed Certified Public Accountants can legally practice
public accounting.
• At present, the title C. P. A. can be obtained only by passing a very difficult civil service
examination for the purpose.

ELEMENTS OF ACCOUNTING

• In accounting, all items resulting from business transactions are classified into accounting value
or elements namely:

• Assets- these are the property rights of the business. Example cash, account receivable, land,
building, equipment, furniture and others.

• Liabilities- these are financial obligations or depts. Of the business to other persons or firms.
Example – amounts payable to sellers from whom the business might have bought merchandise
on credit. Loans from other parties, taxes due but not paid to the government. Promissory
notes, etc.

• Capital- when the proprietor goes into business, he makes an investment of various assets. The
investment may consists of cash, and other assets.

• The total of the assets invested is called the proprietor’s capital. Capital may be defined as the
amount invested in a business. A point to be stressed is that capital does not mean cash. Capital
is a total of the assets invested.

DEBIT AND CREDIT

•  The accounting Equation. As previously stated, the business entity is distinct and separate from
the person or the owner. This concept is expressed in the equation.

•  ASSETS= EQUITIEES

•  ASSETS according to Pasion, include anything owned or possesses by the business which is
capable of being expressed in terms of money or possessing monetary values, and which,
consequently, is available for the payment of the debts for the business.

•  EQUITIES- include all the vested rights of persons in the assets of the business. Stated
differently, equities include all the amounts owned by the business to all persons which may be
classified into:

• Equities of outsiders or amounts owning to persons other than the owners of the business,
technically known as liabilities and

• Equities of owners, known in the accountant’s language as “capital” “proprietorship”, “net


worth’, OR OWNERS EQUITY”.

Common questions

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Retaining accounting records for a specified period, as mandated by laws such as the Income Tax Assessment Act and corporate statutes, ensures that businesses maintain an audit trail that supports legal compliance . This requirement helps demonstrate adherence to financial regulations and enables the verification of financial statements during audits, safeguarding against discrepancies and fraud . Furthermore, such retention encourages accurate historical financial analyses, assisting management in assessing past business performance and making informed future decisions . Consequently, it strengthens operational integrity by fostering transparency and accurate reporting, vital for regulatory scrutiny and investor confidence .

Government accounting focuses on managing public funds and ensuring accountability for financial performance in the public sector . Unlike private accounting, which often emphasizes profit maximization and shareholder value, government accounting prioritizes public accountability and transparency, necessitating adherence to specific statutory regulations . Government accountants are employed in various governmental bodies to manage budget execution, control spending, and report on the fiscal status of government entities, such as the Bureau of Internal Revenue or the Budget Commission . While both private and government accounting aim to ensure financial integrity and accuracy, government accounting uniquely serves public interest by facilitating informed policy-making and resource allocation .

Different fields of accounting play specific roles in the financial management of an organization. General or financial accounting focuses on the overall financial operations, providing insights into profitability and financial position . Cost accounting centers on the manufacturing aspect, helping control production costs and improve efficiency . Internal auditing ensures the accuracy of accounts and maintains effective internal controls, preventing fraud and ensuring compliance . Government accounting manages the financial aspects of governmental entities, similar to private accounting but with a focus on public accountability . Public accounting offers services like auditing and consultancy to the general public, ensuring compliance with legal standards and enhancing financial transparency . Together, these fields ensure robust financial operation and strategic decision-making within organizations.

Legal requirements for record-keeping in businesses ensure that accurate, comprehensive records of transactions are maintained. The Income Tax Assessment Act mandates that every business keeps detailed records of income and expenditure to assess taxable income and deductions . Additionally, limited liability companies must maintain records that accurately document transactions and financial status, enabling the preparation of true and fair accounts that can be audited . These legal obligations promote transparency, accuracy, and accountability in financial reporting, supporting effective control and management of business operations by providing reliable data for decision making .

Accounting is the comprehensive system for recording, analyzing, and interpreting financial information, essentially serving as the 'language of business.' It encompasses everything from system design to the operation and interpretation of financial data, ultimately aiding in decision-making, planning, and control of business operations . In contrast, bookkeeping is the routine day-to-day process of recording financial transactions in journals and ledgers, forming the data foundation upon which the accounting system operates . While bookkeeping ensures the accurate recording of financial data, accounting uses this data to generate financial reports that inform business decisions. Thus, efficient bookkeeping is crucial for an effective accounting system, as it provides the necessary accurate data .

The accounting equation, expressed as ASSETS = EQUITIES, reflects the separate entity concept by delineating the business's assets and equities as distinct from the owner's personal finances . In this equation, 'assets' include anything owned by the business with monetary value, indicating the business's wealth . 'Equities,' which comprise liabilities and owner's equity, represent claims on the assets by outsiders (liabilities) and the owner (equity). This framework emphasizes that a business is an independent entity separate from its owner, maintaining its own financial responsibilities and ownership interests . This principle is fundamental to accurately tracking and interpreting a business's financial position independent of the owner's personal wealth or obligations.

Classifying financial transactions into elements like assets, liabilities, and capital is essential for organizing and interpreting a business's financial data systematically . Assets represent the resources owned by the business, liabilities denote obligations, and capital reflects the owner's stake in the business . This classification enables businesses to prepare financial statements such as the balance sheet and profit and loss statement, providing insights into financial health and operational efficiency. By analyzing these classifications, management can assess liquidity, solvency, and overall financial position, supporting strategic decisions regarding investments, funding, and growth . Consequently, accurate classification is critical for comprehensive financial analysis and decision-making.

An accounting system is indispensable because it organizes, controls, and processes financial data into meaningful reports that underpin strategic decision-making . Accurate financial reporting, which results from a well-structured accounting system, informs management about the company's profitability, cost management, and financial health, enabling sound business planning . Furthermore, it helps in identifying financial problems, potential fraud, and inefficiencies, thereby promoting operational transparency and accountability . Without an effective accounting system, businesses lack the necessary insights to make informed decisions, manage risks, and comply with regulatory requirements .

A well-maintained record-keeping system can provide multiple benefits for businesses. It aids in identifying problems such as overspending and cash shortages, and facilitates seizing opportunities like investing surplus cash and maximizing profits . It also builds creditor confidence and helps in minimizing tax liabilities . However, challenges include the costs, time, and effort involved in maintaining these records and the necessity for accuracy and detail to ensure compliance with legal and auditing standards . Despite these challenges, the benefits of accurate and efficient records significantly enhance business management and decision-making .

In accounting, 'capital' refers to the total assets invested by a proprietor in a business, encompassing cash and other assets rather than just cash itself . This means that capital represents the financial stake a business owner has in the business as a whole, known as the proprietor's capital or equity, and not merely liquid cash or revenue . This differs from common interpretations where capital might be understood simply as available cash or liquid assets, while in accounting it reflects the entire invested value in business operations, impacting owner's equity and the financial structure of the business .

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