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BASIC ACCOUNTING – SUMMARY NOTES

DEFINITION OF ACCOUNTING

 AMERICAN INSTITUTE OF CERTIFIED PULIC ACCOUNTANTS (AICPA) – The art of recording, classifying and summarizing in a significant
manner and in terms of money, transactions and events which are in part at least of financial character and interpreting the results thereof.

 ACCOUNTING STANDARDS COUNCIL (ASC) – 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.

 AMERICAN ACCOUNTING ASSOCIATION – The process of identifying, measuring, and communicating economic information to permit
informed judgments and decisions by users of the information.

NATURE OF ACCOUNTING
 A discipline
 A service activity
 An art and science
 The language of business
 The eyes of the business

DIFFERENCE BETWEEN BOOKKEEPING, ACOOUNTING AND AUDITING

BOOKKEEPING – primarily concerned with procedures in the making and keeping of accounting records

ACCOUNTING – the conceptual and logical part of the service activity

AUDITING – confirms the credibility of financial statements and protects or ensures the confidence of financial users

FUNCTIONS OF ACCOUNTING

 The primary function of accounting is to provide financial reports to various end-users for economic decision-making. This is achieved
through the use of the accounting functions as follows:
 Recording
 Classifying
 Summarizing
 Analyzing and Interpreting
 Communication
 Protecting the property of business
 Preparing legal requirements

USERS OF ACCOUNTING INFORMATION

1. THE MANAGEMENT GROUP


2. THE FINANCING GROUP & PUBLIC GROUP
 Investors
 Employees
 Lenders
 Suppliers and other trade creditors
 Customers
 Government and its agencies
 Public

SPECIALIZED FIELDS OR BRANCHES OF ACCOUNTING

1. PUBLIC ACCOUNTING (PRACTICE IN PUBLIC ACCOUNTANCY)


- When accountants offer their professional services to clients for a fee like other professionals do, they are said to be in public
accounting.

BRANCHES OF ACCOUNTING UNDER THIS CATEGORY:


 EXTERNAL AUDITING – primarily centers on the critical examination of financial statements by an independent CPA to express an
opinion regarding the fairness of the contents of the financial statements.
 TAX SERVICES – deals with the accountant’s preparation of the client’s income tax returns, business and transfer taxes

 MANAGERIAL ADVISORY SERVICES – provides assistance to the management

2. PRIVATE ACCOUNTING (PRACTICE IN COMMERCE AND INDUSTRY)


- Accountants are said to be in private accounting when they are employed in a private enterprise or in a nonprofit organization

BRANCHES OF ACCOUNTING UNDER THIS CATEGORY:


 FINANCIAL ACCOUNTING – primarily concerned with the recording and classifying of business transactions culminating in the
preparation of general-purpose financial statements or reports regarding the business’ financial position, operating results and
cash activities in accordance with the GAAP.

 INTERNAL AUDITING – deals with determining the operational efficiency of the company regarding protection of the company’s
assets, accuracy and reliability of the accounting data, and adherence to prescribed managerial policies.

 TAX ACCOUNTING – embraces the preparation of various tax returns and tax planning necessary to minimize the impact of taxes
on the firm

 COST ACCOUNTING – has something to do with determining the inventory costs and/or product costs of the manufactured goods
and assisting in product pricing activities of the company

 BUDGETING – covers the efficient management of cash by anticipating or predicting monetary objectives in the future period

 ACCOUNTING SYSTEMS DESIGN – primarily includes the evaluation of the company’s control system to find out any area of
improvement. It includes the establishment of a computerized accounting system.

 INTERNATIONAL ACCOUNTING – encompasses special accounting for international transactions, comparisons of accounting
principles in different countries, and harmonization of diverse accounting standards worldwide and tax requirements of all the
countries in which the company does business.

 NOT-FOR-PROFIT ACCOUNTING – deals with special accounting for charitable organizations, philanthropic foundations, religious
groups, governmental agencies, hospitals, schools and cooperatives

 SOCIO-ECONOMIC ACCOUNTING – concerns the measurement of the impact of business or governmental agency’s decision
on the public sector.

3. GOVERNMENT ACCOUNTING (PRACTICE IN THE GOVERNMENT)


- Mainly focuses on the proper custody of government funds and their purposes

4. ACCOUNTING EDUCATION (PRACTICE IN EDUCATION/ACADEME)


- Involves teaching accounting, taxation, and some business subjects

FORMS OF BUSINESS ORGANIZATIONS

BUSINESS – is any economic activity conducted primarily for profit.

1. SOLE OR SINGLE PROPRIETORSHIP – a business entity owned by one person called a sole proprietor

ADVANTAGES

 Easiest to start and set up


 Only one decides for the business
 All profits are for the owner
 The owner, not the business, is taxed.
 Easy to dissolve
DISADVANTAGES

 Unlimited liability
 Limited resources
 All losses are borne by owner
 Limited life

2. PARTNERSHIP – a business entity owned by two or more persons called partners who have agreed to contribute money, property and
industry to a common fund with the intention of dividing the profits among themselves

ADVANTAGES

 Easy to form – mere agreement organizes a partnership


 Joint resources of partners
 Lesser government supervision
 Tax exempt if professional partnership, but subject to corporate tax if commercial partnership

DISADVANTAGES

 Unlimited liability
 All partners may be held liable for the action of one partner
 Consensual and restricted transfer of ownership
 Limited life

3. CORPORATION – a business registered as an artificial person under the operation of the law

ADVANTAGES

 Limited liability
 Power of succession
 Unrestricted transfer of ownership
 Greater source of resources
 Renewable and perpetual life

DISADVANTAGES

 Most costly and difficult to organize


 Only the Board of Directors and other authorized officers can bind the corporation in contracts
 Shareholders have limited access and control over management and operations
 More stringent government supervision and restrictions
 Corporations are taxed at a flat 30% income tax rate

4. COOPERATIVE – is an association of individuals who joined together to contribute capital and cooperate in order to achieve certain goals

ADVANTAGES

 Your “say” on cooperative affairs is not affected by the number of shares you own
 Generally exempt from paying taxes
 Compared to corporation, a cooperative is easier and less costly to form because there are fewer formal business requirements.
 Limited liability
 Unlimited life

DISADVANTAGES

 Prone to poor management


 Susceptible to corruption
 The Cooperative Code places some restrictions on the distribution of a cooperative’s profit to its members.
 More difficult to sustain growth compared to corporation
 Restrictions on the transfer of a member’s shares
TYPES OF BUSINESS ACCORDING TO ACTIVITIES

1. SERVICING – one that offers services as its main product rather than physical goods

ADVANTAGES

 No inventory costs, warehousing and distribution costs


 Need only small capital
 Perceived as an expert

DISADVANTAGES

 Do not have a flexible personal time


 Normally suffer first from decline in demand during times of economic difficulty
 Business’ success depends on your credibility
 More costly to commit an error in a service business compared to a merchandising business

2. MERCHANDISING – one that buys and sells goods without changing their physical form

ADVANTAGES

 Lower start-up capital compared to manufacturing


 You can take advantage of price fluctuations
 Lower cost of quality
 Easier to start

DISADVANTAGES

 Need to have a retail store


 Less flexibility in managing costs
 Keeping track of inventory is tedious
 Self-satisfaction is low compared to manufacturing

3. MANUFACTURING – converts raw materials into finished goods that are to be sold at selling price

ADVANTAGES

 Opportunity to establish a brand


 Self-satisfaction is high
 Not need to have a strategically located retail store
 Have a better pricing policy

DISADVANTAGES

 High start-up capital


 Conceptualizing a viable manufacturing business is difficult
 Need to be continuously innovative and abreast of changes in technology
 Warehousing and logistics costs can be high
 Rely on raw materials