CHAPTER 1: FUNDAMENTALS ACCOUNTING CONCEPT AND PRINCIPLES

ACCOUNTING - a service activity whose function is to provide quantitative information, primarily financial in nature, about economic entities, that is intended to be useful in making economic decisions. It is the "Language of business". - is the process of identifying, measuring and communicating economic information to permit informed judgment for an economic decision.

FOUR PHASES OF ACCOUNTING: 1. Recording - business transactions are recorded systematically and chronologically in the proper accounting books. 2. Classifying - items are sorted and grouped. 3. Summarizing - after each accounting period, data recorded are summarized through financial statements. 4. Interpreting - usually, due to the technicality of accounting reports, the accountant's interpretation on the financial statement is needed. BOOKKEEPER VS. ACCOUNTANT BOOKKEEPER - is the person who handles the day-to-day transactions & records the information into the accounts required by the business or individuals ACCOUNTANTS - Do not handle the day-to-day transactions but they do analyze, verify & reports the date in financial statements & tax returns. They also advise their clients in tax matters & other economic decisions

PARTIES INTERESTED IN THE FINANCIAL INFORMATION INTERNAL USERS - are those who own and/ or manage and control the business entity. It is also known as Direct Users Owners - He is interested to know whether the business should be maintained, increased, decreased, or disposed of completely. Management - financial information serves as a measure for making future financial decision and a measure of its effectiveness EXTERNAL USERS - do not own and/or manage and control the business entity. They have no access to the management of the business. It is also known as Indirect Users

Investors - to assess the risk of investments portfolio, investors need information to help them determine whether they should buy, hold or sell their investment. Employees - workers are interested in the financial statement to determine the employer's stability and profitability. Lenders - Financial statements are used by lenders to borrowers can pay their loans and interest attached to them when due. Suppliers and other trade creditors - they are interested in the information that enables them to determine whether debts owed to them will be paid when due. Customers - to insure the availability of supplies that will sustain their business operation. Government - is interested in the financial statements of an enterprise for statistics, income taxes and other regulatory policies.

Types of Business Organization Single/sole proprietorship - owned by only one person Partnership - is owned & managed by 2 or more person bind themselves to contribute money, property & industry to a common fund with the intention of dividing the profits among themselves Corporation - is an artificial being created by operation of law, having the right of succession and the powers, attributes and properties expressly authorized by law or incident to its existence.

TYPES OF BUSINESS OPERATIONS SERVICE - Engaged in rendering services. EX: DENTAL CLINIC, BEAUTY SHOP, WELLNESS & SPA CENTER, and FREIGHT SERVICES. TRADING or MERCHANDISING - Engaged in buying and selling EX: GROCERIES, SARI-SARI STORE, FASHION BOUTIQUES, AND ELECTRONIC SHOPS MANUFACTURING - Engaged in production of items to be sold from purchasing to converting raw materials to finished goods. EX. SHOE MANUFACTURING, FOOD PROCESSING, GARMENT FACTORIES

Philippine Accounting Bodies & Organization

Philippine Institute of Certified Public Accountant (PICPA) Philippine Institute for Bookkeepers Association Financial Reporting Standards Council Board of Accountancy Professional Regulation Commission

Generally Accepted Accounting Principles (Philippine Accounting Standards)

Are rules, procedures, practice and standards followed in the preparation and presentation of financial statements

Scope of the Framework

Focusing on the information needs of the users, the Framework deals with A) The objective of financial statements; B) The qualitative characteristics that determine the usefulness of information in financial statements; C) The definition, recognition and measurement of the elements from which the financial statements are constructed; and D) Concepts of capital and capital maintenance The Objective of Financial Statements - Is to provide information about the financial position, performance and changes in financial position of an enterprise that is useful to a wide range of users in making economics decisions. Evaluation of objective of FS: Liquidity - refers to the availability of cash in the near future after taking account of financial commitments over the current period. Solvency - is the availability of cash over the longer term to meet financial commitments as they fall due. Profitability - is the ability of the enterprise to generate cash flows from its existing resource base. Flexibility - is the economic environment in which it operates or to take advantage of profitable investment opportunities as they arise. Two Underlying Assumptions: 5. Going Concern - assumes that the business will continue to operate indefinitely.

6. Accrual Principle - states that income should be recognized at the time it is earned (delivered/rendered). Likewise, expenses should be recognized at the time they incurred or used. Four (4) Qualitative Characteristics of Financial Statements Understandability - is the linkage between the information and the economic decision to be made by the user. Relevance - Relevant financial information bears on the economic decision to be made by the user. Information is considered relevant if knowledge of such information would affect the decision or evaluation of the user. Reliability - Information is considered reliable if it is free from error and bias and can be depended upon by users to represent faithfully that which it intends to represent. Comparability - is a quality of information that enables users to identify similarities and differences between at least two sets of economic circumstances.

Fundamental Concepts: 1. Entity Concept - the business enterprise as separate & distinct from its owners & from other business enterprises. 2. Periodicity - Financial accounting information about the economic activities of an enterprise for specified time periods. For reporting purposes, one year is usually considered as one accounting period. 3. Objectivity - states that all business transactions that will be entered in the accounting records must be duly supported by verifiable evidence. 4. Historical cost - all properties & services acquired by the business must be recorded at its original acquisition cost. 5. Adequate Disclosure - all material facts that will significantly affect the financial statements must be indicated. 6. Materiality -means that financial reporting is only concerned with information significant enough to affect decisions. An item is considered as material regardless of its value if it can influence prudent users of the Financial Statements. 7. Consistency - means that approaches used in reporting must be uniformly employed from period to period to allow comparison of results between time periods. Any changes must be clearly explained