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b. 2. Users

Information system that identifies, records and communicates the economic events of an entity to interested users (language of business) 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. Internal users - include managers and employees


External users - include investors and creditors such as suppliers and banks Luca Pacioli a. Italian Renaissance mathematician b. In 1494 text Summa de Arithmetica, Geometria, Proportione et Proportionalite, described a system to ensure that financial information was recorded efficiently and accurately (double entry bookkeeping) Double-entry bookkeeping is based on the principle of dual aspect concept and principle of balance. Two effects are to be made - 1. value received and 2. value parted with Bookkeeping vs. Accounting a. Bookkeeping - involves only the recording of economic events b. Accounting i. Financial accounting - provides information to internal and external users

a. b.


ii. 5.

Managerial accounting - concerned primarily with providing information to internal users

Generally accepted accounting principles (GAAP)/Financial Reporting Framework - accounting rules that indicate how to report economic events Fields of accounting profession and potential accounting careers a. Public accounting - offers expert service to the general public i. Auditing - examination of the financial statements by a certified public accountant (CPA) in order to express an opinion as to the fairness of presentation ii. Taxation


Private (or managerial) accounting - accountant is employed by the entity (Controller)



i. General accounting ii. Budgeting iii. Internal auditing c. Not-for-profit accounting i. Accounting for entities needing financial reporting and control (e.g., hospitals, schools) ii. Government accounting Types of business organizations a. As to ownership i. Proprietorship (sole proprietorship) - business owned by one person 1. Owner is often the manager 2. Often small service-type businesses and retail stores 3. Relatively small amount of capital 4. Personally liable for all debts of the business ii. Partnership - business owned by at least two persons associated as partners 1. Unlimited personal liability for the debts of the business 2. Often service-type businesses (e.g., law and auditing firms) 3. Mutual agency - acts of the partners bind the partnership iii. Corporation 1. Organized as a separate legal entity under corporation laws 2. Ownership is divided into transferrable shares 3. Limited liability for shareholders 4. Continuous life 5. Separation of ownership and management 6. Compliance to government regulations b. As to activity i. Service ii. Merchandising iii. Manufacturing Financial statements - structured representation of the financial position and financial performance of an entity; objective is to provide information about the financial position, financial performance and cash flows of an entity that is useful to a wide range of users in making economic decisions; also show the results of the managements stewardship of the resources entrusted to it a. Statement of Financial Position (Balance Sheet)

1_ACCTBA1_C42_C34 Term 2, AY 2012-13

b. c. d. e.

1. 2.

Income Statement (Profit or Loss) Statement of Comprehensive Income Statement of Changes in Equity Statement of Cash Flows Notes to Financial Statements

Accounting entity - entity is separate from its owners (for fair presentation) Monetary unit a. Quantifiable - should be stated in terms of a unit of measure (Philippine peso) b. Stability of peso - purchasing power of peso is stable and any instability is insignificant (account for peso, not for changes in purchasing power) 3. Cost - assets should be recorded at cost (reliable) 4. Reliability (objectivity) - quality of information is free of error and bias 5. Going concern - entity is viewed as continuing in operations indefinitely in the absence of evidence to the contrary 6. Materiality - determining if an item is important enough to likely influence the decision of a user 7. Disclosure - events that make a difference to users should be disclosed 8. Time period - indefinite life of the entity is subdivided into time periods or accounting 9. Accrual - income is recognized when earned regardless of when cash is received; expense is recognized regardless of when cash is paid 10. Income recognition - income is recognized in the accounting period in which it is earned 11. Matching (expense recognition) - efforts (expense) should be matched with accomplishments (income)

12. Consistency - uniform application of accounting methods from period to period; retain the presentation and
classification of items in the financial statements from one period to the next (comparability - uniform application of accounting methods among entities in the same industry) 13. Conservatism (prudence) - when in doubt, choose the least likely to overstate asset and income

1_ACCTBA1_C42_C34 Term 2, AY 2012-13