LEGAL ACCOUNTING

THE BASIC
ACCOUNTING
ENVIRONMENT
Legal accounting

What is a business?

1. An organization or enterprising entity engaged in

commercial, industrial or professional activities. A
business can be a for-profit entity, such as a
publicly-traded corporation, or a non-profit
organization engaged in business activities, such as
an agricultural cooperative.

2. Any commercial, industrial or professional

activity undertaken by an individual or a group.

3. A reference to a specific area or type of

economic activity.

Source: http://www.investopedia.com/terms/b/business.asp

What are the forms of a

business organization?

Sole proprietorship
Partnership
Corporation

Define a sole
proprietorship.

Sole proprietorship is a business

organized by one person.
Advantages:

Small capital needed; easy handling of

operations; unlimited liability of proprietor
(advantage from creditors perspective)

Disadvantage:

Difficulty in expansion

Define a partnership.

Cite Article 1767 of the Civil Code.

Art. 1767. By the contract of partnership two or

more persons bind themselves to contribute
money, property, or industry to a common fund,
with the intention of dividing the profits among
themselves.

Two or more persons may also form a

partnership for the exercise of a profession.

Define a corporation.

Cite Sec. 2 of the Corporation Code.

Sec. 2. Corporation defined. - A
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.

What are the types of business

operations?

Service
Merchandising
Manufacturing

Explain the types of business

operations.

Service:

Merchandising:

provision of services for a fee (clinic, parlor)

buy and sell of goods/merchandise (grocery,
drugstore)

Manufacturing:

buys raw materials for conversion to and

sale of finished products (laboratories/
factories with sales departments)

Relate business to
accounting.
Queries:
Is accounting relevant to a business?
Would lawyers, especially those
practicing in the corporate arena,
benefit from having an accounting
background?

What is accounting?

According to American Accounting

Association:

Accounting is the process of identifying,

measuring and communicating
economic information to permit informed
judgments and decisions by users of
information.

What is accounting?

According to the American Institute of

Certified Public Accountants:

Accounting is the art of RECORDING,

CLASSIFYING, 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.

What is the nature of

accounting?

It is a SERVICE activity.

It is the language of
business.

What are the functions of

accounting?

To provide quantitative information,

primarily financial in nature, about
economic activities, that is intended to be
useful in making economic decisions
To record transactions
To report economic reality of the business
(audit function) to test the reasonableness
of the assertions made relative to the
financial statements

What are the types of

accounting and the
corresponding
reports?
Managerial Accounting
managerial reports

Financial Accounting financial

reports/general purpose financial reports
Tax Accounting tax returns
Government Accounting special reports as
required by law
Cost Accounting reports that may form
part of managerial and/or general purpose
financial reports

Note:
The process of accounting involves
communicating the results of the economic
transactions analyzed, recorded and summarized.
But how are such results communicated?
-Through FINANCIAL REPORTING
Therefore, what is the end product of the
accounting process?
-FINANCIAL STATEMENTS

What are the different financial

statements as provided for in
PAS
1? of financial position (balance
Statement

sheet)
Statement of comprehensive income
(income statement)
Statement of cash flows
Statement of changes in owners equity
Notes to financial statements

Explain: Statement of Financial

Position

It is a formal financial statement that

reports the financial condition of an
enterprise as of a particular date.
It provides information about the assets,
liabilities and owners contribution as of
a particular date.
It is useful in evaluating liquidity,
solvency and financial flexibility of the
enterprise.

Sample: statement of financial position

Sample: statement of financial position

Sample: statement of financial position

Explain: Statement of
Comprehensive Income

It provides information about financial

performance (profit or loss) of the
business during a given period.
It is useful in predicting the capacity of
the enterprise to generate cash from its
operation.

Explain: Statement of Cash

Flows

It shows information that provide users a

basis to assess the ability of the entity to
generate cash and cash equivalents and
the needs of the entity to utilize those
cash flows.
It is designed to provide information
about the change in an enterprises cash
and cash equivalents.

Explain: Statement of Changes

in Equity

This financial report shows the

movements in the various elements of
the shareholders equity.

Explain: Notes to Financial

Statements

Notes are additional information

provided in a company's financial
statements. These report the details
that are left out of the main reporting
documents, such as the balance sheet
and income statement.

Who are the users of these financial

statements?

External Users:

Investors
Lenders
Suppliers
Employees
Customers
Government

Who are the users of these financial

statements?

Internal Users

Management

FUNDAMENTALS OF
ACCOUNTING
Legal accounting

FUNDAMENTALS OF
ACCOUNTING: THE
CONCEPTUAL
FRAMEWORK
Legal accounting

Note:
Our discussion on legal accounting would be focused
on
FINANCIAL ACCOUNTING.
Hence, the terms and processes explained are mainly
for:
-general purpose financial statements

that could be used by various users with different

concerns
that are the usual subject of an external audit by
Certified Public Accountants

Other accounting courses would cover topics on:

-special reports required by different regulatory bodies
-managerial reports prepared for management use

What are the objectives of general

purpose financial reporting?

The financial statements provide

information that enables the users to
make economic decisions.
The financial statements provide
information on the reporting enterprises
financial position, performance and
changes in financial position.

Explain the reporting entity concept.

The business enterprise is a separate

juridical entity from its owners, managers,
employees.

For financial statements to be useful,

what qualitative characteristics must
they possess?
Fundamental Qualities:
They must be relevant.

Feedback value
Predictive value

They must be of faithful representation.

Neutrality
Freedom from error
Completeness

Enhancing Qualities:
Comparability and Verifiability ( Timeliness +
Understandability)

What are the elements of financial

statements?

Assets
Liabilities
Equity
Income
Expense

What are assets?

Assets resources controlled by the

enterprise as a result of past events and
from which future economic benefits are
expected to flow to the enterprise

What are the two main classes of assets?

Current Assets
Noncurrent Assets

Distinguish: current from noncurrent

assets.

Current Assets

expected to be realized, or is intended for sale or

consumption in the entitys normal operating cycle
(which is usually one year)
held primarily for trade
expected to be realized within 12 months after

date of financial position

(cash, inventories, accounts receivable, short-term
investments)

Noncurrent Assets

All other assets (property, plant and equipment; longterm investments)

What are liabilities?

Liabilities present obligations of an entity

arising from past transactions or events,
the settlement of which is expected to
result in an outflow from the entity of
resources embodying economic benefits .

What are the two main classifications of

liabilities?

Current Liabilities
Noncurrent Liabilities

Distinguish: current from noncurrent

liabilities.

Current Liabilities expected to be settled in

the entitys normal operating cycle
held primarily for trading
due to be settled within 12 mos. after date of
financial position
(accounts payable, taxes payable, short-term
payables)

Noncurrent Liabilities

All other liabilities (bonds payable, deferred

tax liability)

What is equity?

NET ASSETS
Equity is the residual interest in the assets
of the entity after deducting all its
liabilities.

What is income?

Income is the increase in economic

benefits during the accounting period in
the form of inflows or enhancements of
assets or decreases of liabilities that result
in increases in equity, other than those
relating to contributions from equity
participants.

The term income encompasses

both revenue and gains.

Revenue
arises in the course of the ordinary activities
of an entity and is referred to by a variety of
different names including sales, fees, interest,
dividends, royalties and rent

Gains
represent

other items that meet the definition

of income and may, or may not, arise in the
course of the ordinary activities of an entity.
.

What is expense?

Expenses are decreases in economic

benefits during the accounting period in
the form of outflows or depletions of
assets or incurrences of liabilities that
result in decreases in equity, other than
those relating to distributions to equity
participants..

The term expense encompasses

Losses as well as those expenses that arise in
the course of the ordinary activities of the entity.
Expenses that arise in the course of the ordinary
activities of the entity include: cost of sales,
wages and depreciation. They usually take the
form of an outflow or depletion of assets such as
cash and cash equivalents, inventory, property,
plant and equipment.
Losses represent other items that meet the
definition of expenses and may, or may not, arise
in the course of the ordinary activities of the
entity.
.

Q: What elements are elements of

STATEMENTS OF FINANCIAL POSITION?
What are elements of INCOME
STATEMENTS?
A: Balance Sheet Elements Assets, Liabilities, Owners
Equity
These are REAL/PERMANENT accounts.
You do NOT CLOSE these at the end of the accounting
period. The transactions are accumulated in these
accounts.

Income Statement Elements Revenue, Gains, Expenses

These are NOMINAL/TEMPORARY accounts. At the end of the
accounting period, you CLOSE these accounts, such that
they have ZERO balances at the opening of the next
accounting year. (Closing entries will be discussed later on.)
Q: What is the rationale behind closing of accounts?

FUNDAMENTALS OF
ACCOUNTING:
TRADITIONAL
CONCEPTS
Legal accounting AND

What is the going concern assumption?

It is expected that the business will

continue to exist indefinitely, thus
financial statements should be prepared
on going concern basis unless
management intends to close the
business.

What is the periodicity concept?

The indefinite life of an entity is subdivided

into time periods of equal length.

Since statement users need financial

infomration on a regular basis, then the life
of an entity has to be divided into specific
time intervals called the accounting period.
This will enable the enterprise to prepare
periodic financial statements.

What is the accrual assumption?

Assets, liabilities, revenues and expenses are

recognized based on the period they relate or
based on the occurrence of the
transaction/event, rather than based on the
cash received or paid.

Example:
A sold a shirt on January 1, but received the
payment on February 1.

Under accrual basis, A should already recognize a

revenue (income) on January 1, despite nonreceipt
of cash on such date.

What is the monetary unit concept?

All business transactions are measured

and recorded using only one unit of
measurement. In accounting, only data
measurable in terms of money are
recognized and recorded in the books of
the entity.

REFERENCES

Partnership and Corporation Accounting by Valencia

Accounting for Partnership and Corporation by Tolentino-Baysa

21st Century Accounting Process by Cruz-Manuel