CHAPTER 1

6 most important accounting terms:

ASSETS - property owned by a person or company, regarded as having value and available to
meet debts, commitments, or legacies.

LIABILITIES - a thing for which someone is responsible, especially a debt or financial obligation.

NET WORTH - the total wealth of an individual, company, or household, taking account of all
financial assets and liabilities.

REVENUES - income, especially when of a company or organization and of a substantial

nature.

EXPENSES - the cost required for something; the money spent on something.

PROFIT - a financial gain, especially the difference between the amount earned and the amount
spent in buying, operating, or producing something.

3 accounting areas:
BUDGETING, BOOKKEEPING, FINANCIAL ANALYSIS

When planning to put up your own business with accumulated assets, you must take not of the
ff.:
●​ Sufficient knowledge, skills and interest on the product or service to offer
●​ Enough capital / method of raising funds
●​ Ability to operate resources aside from cash
●​ Operating costs
●​ Location of business
●​ Reasonable price for product / service
●​ Price in comparison to competitor

General Purpose Financial Statements:

1)​ Statement of financial position

a)​ Assets and liabilities
2)​ Income statement
a)​ Revenues against costs and expenses
3)​ Statement of cash flows
a)​ Where we got and where we used the money
4)​ Statement of owner’s net worth
a)​ Changes in wealth
ELEMENTS OF A BUSINESS

Business
-​ an economic unit that engages in buying and selling of goods or services
-​ concern: how to best use its resources (machines, raw materials, labor skills, number of
employees)
-​ Success measured in profit and increase in funds

Profit or income
-​ Obtained when the amounts received from customers and clients are higher than the
cost of goods or services incurred or used up
-​ Generates more resources or funds
-​ Opportunity to expand > more job opportunities > more properties > more goods > more
taxes

Owner or investor
-​ Primary source of capital of a business

Secondary sources : relative, friend, bank, cooperative

Micro finance programs

-​ (E.g., Tulay sa Pagunlad Inc., Bangko Kalayaan, BPO Globe Banko and the Rural Bank
of the Philippines)
-​ Help low-income filipino entrepreneurs

Entrepreneur
-​ One who organizes, manages and takes the risk of putting up a business

Risk
-​ Uncertainty in an outcome
-​ Higher profit desired = riskier venture
-​ Reduce risks through:
-​ Careful planning and control of operation
-​ Business plan + carefully assess the business you want to put up
-​ Have adequate knowledge of the product or service
-​ Choose the right form of business and right type of operation

FORMS OF BUSINESS

THREE LEGAL FORMS

1.​ Sole proprietorship

 Set up and managed by one person. (E.g., beauty parlors, dress shops, barbershops,
bakeries)

Advantages
a.​ Small amount of capital
b.​ Managed easily by proprietor
c.​ Owner gets all the profits
d.​ Ease in formation (minimum requirement to legally operate)
Disadvantages
a.​ Difficult to expand
b.​ No indefinite life
c.​ Unlimited liability (if business is unable to pay its debt, the bank or creditor can
attach the owner’s personal properties)

2.​ Partnership
Owned by two or more persons called partners who contribute money, property and
talent into a common fund for the purpose of sharing profit among themselves. They are
most often also the managers. Professionals such as lawyers, accountants, engineers
and doctors usually put up a partnership or consultancy firm.

​ Advantages
a.​ Ease in managing
b.​ More efficient (division of responsibilities)
Disadvantages
d.​ No indefinite life
e.​ Unlimited liability

3.​ Corporation
A business organized as a separate legal entity from the owners. It means that it can
conduct business by itself - enter into contracts, buy and sell properties and stocks. An
investor that buys and shares of stocks and become a shareholder. It is managed by a
Board of Directors elected by the shareholders from among themselves.

**Republic Act 11232 (signed Feb. 2019) revised some laws affecting corporate
organization and conduct such as its existence, pre-incorporation requirement, one-man
corporation, etc.

Advantages
a.​ More capital can be raised (large number of buying shareholders)
b.​ Can afford to hire experts
c.​ Perpetual existence
d.​ More stable than a partnership (can sell shareholdings)
e.​ Higher amounts of profit
 f.​ Allows a one-man corporation (easier for small time entreps to enter the
corporate playing field)
Disadvantages
f.​ No unlimited liability (higher risk involved on corporate debts since they can only
be paid out of corporate funds)
g.​ Subject to more legal and tax requirements
h.​ Abuse of power by BoD could affect the welfare of the corp. and its shareholders

TYPES OF BUSINESS OPERATION

1.​ Service business

a.​ Provides service for a fee to clients or customers
b.​ E.g., beauty parlor, barbershop, travel agency, internet shop, school, airline
2.​ Merchandising business
a.​ Buys and sells goods or merchandise
b.​ No processing of goods
c.​ E.g., shoe store, bookstore, drugstore
3.​ Manufacturing business
a.​ Buys raw materials, processes these into finished goods and then sells these to
customers
b.​ E.g., shoe factories, food processors

TYPES OF BUSINESS ACTIVITIES

Financing activities
-​ The owner “finances” business with a start up capital in cash and other resources
-​ If owner’s contribution is insufficient, additional financing can be extended by banks and
other financial institutions

Withdrawals
​ Made by the owner/investor as well as loans repaid to lenders

Investing activities
-​ A business requires resources other than cash to be able to operate
-​ E.g., acquisition of properties in lang, furniture, machineries, and equipment
-​ These properties are eventually disposed or retired on its maturity date

Operating activities
-​ Earning of income by selling goods or services
-​ Incurring expenses such as wages, rent, utilities, and transportation

MANAGING THE BUSINESS

Good management may be defined simply as getting things done by using resources and
directing people as efficiently as possible to be able to accomplish the goals of the business. A
manager has 3 objectives:

a)​ That resources are being used productively

b)​ Customers are satisfied with the product or service
c)​ Business is generating adequate profit

Effective
-​ Able to attain goals in terms of being able to produce and sell the required number of
products or services given a specific level of quality

Efficient
-​ Resource inputs (materials and labor hours) are being used at the least time, effort and
cost to produce the required output (products or services)

4 processes: planning, organizing, directing, and controlling

ACCOUNTING AS A BUSINESS LANGUAGE

Accounting
-​ A service activity whose function is to prepare financial reports that will provide relevant
information about the business
-​ Financial decisions should be based on facts
-​ May also be defined as a process of recording, classifying and summarizing transactions
and events which are financial in nature and interpreting the results thereof

USERS OF FINANCIAL INFORMATION

Users of financial statements are called stakeholders. A stakeholder is a person or entity who
has a “stake” or interest in the business. Aside from the owners or investors, other stakeholders
are the managers, lenders, suppliers, employees, government and customers.

Direct users and external users

> aforementioned except managers

Indirect users
> stock exchange, trade associations, regulatory bodies, financial analysts
> rely on the financial statements in their role of regulating, assisting, advising, and protecting
clients and investors

Internal users
> management
TYPES OF ACCOUNTING AREAS AND THE REPORTS PREPARED

A.​ Internal reports / managerial reports

a.​ Prepared for management use
b.​ Product cost, estimate of profit to be earned for a planned project, comparison of
two alternative courses of solving a problem, budgets, etc.
c.​ This information need gave rise to a course called Management Accounting
B.​ Financial reports / general purpose financial statements
a.​ Main source of information of stakeholders or users
b.​ Gave rise to Financial Accounting
c.​ Reports are audited by a Certified Public Accountant who attests to its fair
presentation and validity making it reliable and acceptable by the stakeholders
C.​ Taxes
a.​ All firms are required to pay taxes to the Bereau of Internal Revenue (BIR)
b.​ Gave rise to Tax Accounting
c.​ Specialized in the determination of taxes and preparation of various tax returns
required to be filled up by taxpayers such as Income Tax, VAT, and Percentage
Tax
D.​ Special reports
a.​ Some firms, by nature of their org/operation, are required to prepare special
reports by certain regulatory bodies
b.​ E.g., monthly, quarterly, and annual reports to be submitted to Bangko Sentral ng
Pilipinas. A business planner must submit to the Securities and Exchange
Commission a Plan of Merger.

Note the 4 accounting areas: Managerial, Financial, Tax and Government

ACCOUNTING INFORMATION SYSTEM (AIS)

Can be classified into 2:

Measurement system (processing phase)

-​ Involves analyzing, measuring, recording, classifying and summarizing

Communication system (reporting and communicating phase)

-​ Presentation of formal reports which are communicated to decision makers

AIS PRINCIPLES

Control Principle
-​ The AIS of the firm must have good internal control
-​ Internal control enumerates methods and procedures necessary to monitor the activities
of the business and ensure efficient operation
-​ Through this, the following are achieved:
 -​ Properties of the business are protected
-​ Records are accurate and reliable
-​ Company policies are complied with
-​ Performance of business units or divisions are properly evaluated

Information must be timely and must be processed at the least cost and effort. It should also be
able to answer the needs of the decision makers. Supporting these requirements are the
cost-benefit principle and the relevance principle.

Cost-Benefit Principle
-​ Prescribes that the advantages enjoyed from installing the system must outweigh its cost
-​ E.g., installing a computerized system may be costly but it can reduce the number of
employees which in turn will reduce costs of salaries, wages and allowances.
Additionally, recording can be more accurate and lesser errors will be committed making
the reports more reliable. These and the fact that reports must always be updated are
considered benefits which would more than outweigh the cost of the installed system

Relevance Principle
-​ Prescribes that the information must be reported promptly and that information must be
useful to enable statement users to reach a conclusion and make a decision

Compatibility Principle
-​ Prescribes a system designed to fit the unique characteristics of the company–its
personnel, activities and structure

Flexibility Principle
-​ Prescribes that the company’s system should allow for changes if change is needed to
come up with timely and updated information in response to industry demand,
government promulgations, technological advances, and competitive pressures
-​ E.g., multinational companies have resorted to mergers and full consolidation reports,
accounting policies have to be revised and the manner of preparing and presenting
financial reports changes to suit the emerging new forms of business combinations

Sole proprietor-owned business operating only within a mall = simple AIS

Multinational company with diverse products and off-shore operations = more complicated AIS

COMPONENTS OF AN ACCOUNTING INFORMATION SYSTEM

PHASE 1 (data gathering)

A system, be it manual or computerized, involves people, documents, records, methods and

equipment.
Data processing starts with the gathering of documents which are evidence of business
transactions.

A transaction is an activity or event taking place in business which is expressed in terms of

money.

A business document describes in words and amounts the nature of the transaction.

Internal control requires that documents be properly controlled, numbered and stored.

The personnel practically in the entire company are involved in preparing, gathering, handling
and recording business transactions Internal control prescribes that only qualified people should
be hired, their duties and responsibilities carefully determined and properly disseminated.

PHASES 2 & 3 (analyzing/measuring/recording → classifying/storing/summarizing)

**covers the mechanical or procedural phase of accounting called Bookkeeping.

Documents are received by the Accounting Officer or Clerk. These are then analyzed,
measured, recorded, and classified. An input device or instrument is used to record the data
captured in the documents. (in a manual system, this device is the pen or pencil)

The data input, be it manual or computerized, is called a journal entry. Other forms of input
devices are the scanner and bar code readers.

Records are the books of accountants that must be maintained by the accounting department.

Accounting data are gathered and recorded in a book called the journal.

To make this data meaningful and understandable, the data is organized and classified into
related groups and stored in another book called the ledger.

Methods involve the procedures of processing captured data from the documents. In
accounting, information is processed in a meaningful manner by journalizing, classifying,
summarizing, reporting, and interpreting. The processing can be done manually or
electronically depending on the size of the organization, the volume of data to be processed, the
amount of information required, and the need for prompt access to the data. The computerized
system follows the same logic as the manual system although the processing is done differently.

PHASE 4 (reporting and interpreting)

Finally, the organized data become meaningful information when summarized and reported in
the financial statements prepared by the accountant. The accountant further assists the
decision makers in making informed decisions by interpreting the financial data through a tool
called financial statement analysis.
COMPUTERS DO NOT REPLACE ACCOUNTANTS

In an electronic data processing environment, transactions may be recorded, classified, and

stored in a computer. When needed, ino may be drawn out from the system using output
devices such as the printer.

A software is available to take care of the recording including the generation of documents and
records and even the computations in the interpreting phase. The good news is that the
electronic data and processors have freed accountants from the routine aspects of processing
data but computers cannot think, cannot evaluate, or render judgment.

Evaluation of the accounting information and the preparation of recommendations require the
critical thinking and competence of the accountant and the decision makers. The employee
analyzes the data contained in the business document and encodes the data by using some
software application such as the Peach Tree, MYOB, and Quick Books.

FINANCIAL REPORTS ILLUSTRATED

a)​ Income Statement

i)​ Shows how wealth is produced by listing the revenues earned and expenses
incurred by the business
b)​ Statement of Owner’s Equity
i)​ Shows why the networth changed by listing the activities that caused it to
increase or decrease
c)​ Statement of Cash Flows
i)​ Shows what happened to the cash by enumerating the activities of cash received
and cash used by the business
d)​ Statement of Financial Position (formerly balance sheet)
i)​ Shows how the wealth of the business stands by enumerating the assets,
liabilities and networth of the business

CHAPTER 2​

THE DEMANDS OF GLOBAL - E COMMERCE

-​ Changes taking place in the business environment and how firms have addressed them
-​ Skills and knowledge a 21st century professional must possess
-​ Different accounting areas, career fields and accounting associations
-​ Role of the regulatory bodies and professional bodies in accounting
 -​ Important provisions of the accountancy act of 2004/2016, CPD Act of 2017
-​ Importance of the conceptual framework of accounting and the accounting principles
-​ Corporate governance, business ethics and the code of professional conduct
-​ Social and environmental accounting

Global E Commerce
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High Technology

Trade Liberalization and Internationalization

HOW DO BUSINESS FIRMS ADDRESS THESE CHALLENGES?

World Class Product and Service

Creativity and Innovation

Re-invent

Mergers and partnerships

Sustainability

WHAT HAPPENED TO SOME FIRMS?

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QUALITIES TO BE GLOBALLY COMPETITIVE

Effective Communication Skills

Integrity

Positive Attitude

Competency

Flexible and Adaptable

Creative and Innovative

Critical Mind

Interpersonal Skills

Intellectual Skills
> General knowledge
> Information Technology knowledge
> Accounting knowledge

Outcome Based Education

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THE PRESENT DAY ACCOUNTANT

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CAREER OPPORTUNITIES IN ACCOUNTING

1.​ Public Accounting

2.​ Industry Accounting

3.​ Government and Not for Profit Accounting

4.​ Research and Education

ACCOUNTING AREAS

1.​ Basic Accounting or Bookkeeping

2.​ Intermediate Accounting

3.​ Cost Accounting

4.​ Management Accounting

5.​ Auditing

6.​ Government and Nonprofit accounting

7.​ Tax Accounting

8.​ Forensic Accounting

Outcome Based Learning (current education thrust) expects students to know, understand and
perform each of the above course area when they go to their actual practice

PROFESSIONAL REGULATORY BODIES

Professional Regulation Commission (PRC)

_____________________________________________________________
vvv From discussion pero para lang mas complete ung docs hehe

1.​ Business Entity Principle

a.​ Business is separate and distinct from the owners
i.​ Entity as the artificial being (business is made by law)
ii.​ Owner as the natural entity
b.​ Transaction of owners and transaction of business should be separated
2.​ Going Concern
a.​ Primary guide in preparing the financial statements
b.​ It is expected that the business will continue to exist indefinitely (PAS par. 25)
thus financial statements should be prepared on a going concern basis unless
management intends to close the business or cease trading (it is always
assumed that the business has an indefinite life)
c.​ Assets such as properties acquired by the business are intended to be used by
the business and should be recognized at cost without regard to the changes in
their market values
d.​ (tldr; prices of goods are always changing so u can’t always change the
measurement of the properties every time to adjust)
e.​ Change in value should be used only upon exit of the business
3.​ Time Period or Periodicity (principle of period of time/?)
a.​ Statement is not prepared every time there is a change in the accounting
equation
i.​ It is understood that a complete and accurate financial picture of the
business may only be made at the end of its life
ii.​ However, since the statement users need financial information on a
regular basis and the success of the business operation depends on
financial information contained in the accounting reports, then its life has
to be divided into specific time intervals called accounting periods.
b.​ Interim statements may be prepared (monthly or quarterly) as needed by the
users
c.​ Allows you to compare performance from period to period
4.​ Objectivity (objectivity concept)
 a.​ Requires that assets acquired must be verifiable and substantiated by
documents such as invoices, vouchers or official receipts
b.​ Compliments the cost principle since valuation of resources at cost is definite as
it represents the actual price of acquiring them
c.​ Current market value is subject to constant change and usually is based on an
estimate which is subjective as it is largely a matter of judgment
5.​ Monetary Unit
a.​ Values are assigned to all transactions
b.​ All business transactions are measured and recorded using only one unit of
measurement. Since money is used as a medium of exchange, it is therefore the
most practical unit of measuring financial data.
c.​ In accounting, only data measurable in terms of money are recognized and
recorded in the books of the entity
6.​ Cost Principle
a.​ Assets, liabilities, revenues and expenses should be recorded based on cost.
b.​ Cost is the amount agreed upon in an arm’s length transaction
7.​ Accrual Principle
PAS 1 par. 27-28 requires that financial statements be prepared under the accrual basis.
Assets, liabilities, revenues or expenses should be recognized based on the period they
relate or based on the occurrence of the transaction/event rather than based on cash
received or paid (Tldr; u do not have to wait for the cash to be paid on a later date
before recording the transaction)

a.​ Revenue Recognition Principle (investopedia ko muna kinuha)

i.​ Revenue recognition is a generally accepted accounting principle (GAAP)
that identifies the specific conditions in which revenue is recognized and
determines how to account for it. Typically, revenue is recognized when a
critical event has occurred, and the dollar amount is easily measurable to
the company.
ii.​ Revenues are recognized when realized and earned–not when cash is
received
iii.​ A feature of accrual accounting
iv.​ Tldr; goods or services have been received by the customer, but
payment for the good or service is expected later
b.​ Expense Recognition Principle (AccountingTools)
i.​ The expense recognition principle states that expenses should be
recognized in the same period as the revenues to which they relate.
If this were not the case, expenses would likely be recognized as
incurred, which might predate or follow the period in which the related
amount of revenue is recognized.
 8.​ Exchange Price (cliffnotes)
a.​ Assets are recorded at cost, which equals the value exchanged at the time of
their acquisition. In the United States, even if assets such as land or buildings
appreciate in value over time, they are not revalued for financial reporting
purposes.

CASH BASIS = recognized when collected or paid

ACCRUAL BASIS = recognized when earned or incurred (used by accountants)