ACCG 200 Fundamentals Of Management Accounting
ACCOUNTING
Is a service activity. Its function is to provide quantitative information, primarily financial in nature that is intended to be useful in making economic decisions. – PICPA (Philippine Institute of Certified Public Accountant) Is a systematic process of measuring and reporting relevant financial information about the activities of an economic organization or unit. Its underlying purpose is to provide financial information that is capable of being expressed in monetary units or terms. Is the art of recording, classifying, and summarizing a significant manner under terms of money, transaction, and events which are in part at least of a financial character and interpreting the results thereof. Is the “Language of Business”; the fundamental objective of accounting is communication. Accounting is the medium through which the business entity speaks with various interested parties which include the users of financial information. The communication process is achieved by means of financial statements. The financial statements are prepared at the end of the accounting period and serve as links connecting the business entity with the outside world.
TYPES OF BUSINESS ORGANIZATION
1) Sole Proprietorship – has a single owner who is generally also the manager. It tends to be a small service type businesses and retail establishments. The owner receives all the profits, absorbs all loses and is solely responsible for all the debts of the business. 2) Partnership – is a business owned and operated by two or persons who bind themselves as partners to contribute a common fund, with the intention of dividing the profits among themselves equally. Each partner is personally liable for any debt incurred by the partnership. There is a stronger potential of access to greater amounts of capital. It is a separate organization, distinct from the personal affairs of each partner. 3) Corporation – is a legal entity doing business, and is distinct from the individuals within the entity. It is owned by stockholders or shareholders who elect a board of directors to oversee primary responsibilities. It is an artificial being created by operation of law, having the rights of succession and the powers, attributes and properties expressly authorized bylaw or incident to its existence. The stockholders are not personally liable for the corporation’s debts. Separate legal entity is the most important characteristic of a corporation. It makes a corporation responsible for its own acts and debts and relieves its stockholders of liability for either. It enables a corporation to buy, own and sell property in its own name, to sue and to be sued in its name, and to enter into contracts for which it is solely responsible. In short, separate legal entity enables a corporation to conduct its business affairs as a legal person with all the rights, duties and responsibilities of a person. Lack of stockholder liability and the ease with which stock may be sold and transferred have enabled corporations to multiply, grow, and become the dominant form of business organization. TYPES OF BUSINESS OPERATIONS
1) Service Business – provides services to its customers; selling people’s time. Accounting firms, physical therapy, handyman companies, mechanic shops 2) Merchandise Business – sells physical goods or products to its customers. Department stores, grocery stores
3) Manufacturing Business – in charge of producing the physical goods that they sell. Taking raw materials and using equipment and staff to convert them to finished goods. Makers of clothing, automobile manufacturers, and other types of factories. Wholesalers buy directly from manufacturers and sell the merchandise to retailers. Retailers buy from wholesalers and sell to their customers.
PHASES OF ACCOUNTING
1) Recording – In this phase, all financial transactions are recorded in a systematical and chronological manner in the appropriate books or databases. It includes analysing source documents. 2) Classifying – It involves sorting and grouping similar items under the designated name, category or account. This phase uses systematic analysis of recorded data in which all transactions are grouped in one place. The term “Ledger” refers to the book in which classifications are recorded. 3) Summarizing – It involves summarizing the data after each accounting period. It is achieved through the preparation of financial statements and reports. 4) Interpreting – it involves analysing financial data. This final function interprets the recorded data in a manner which allows the users to make meaningful judgements regarding the financial conditions of a business or personal accounts, as well as the profitability of business operations.
BRANCHES OF ACCOUNTING
Financial Accounting – This area of specialization pertains to the constructive aspect of accounting. It is primarily concerned with the recording of business transactions and the eventual preparation of financial statements. Financial accounting is the process that culminates in the preparation of financial reports on financial position and operating results. It provides financial information for the external users. Management Accounting – This area of specialization provides information within the company so that its management can operate the company more effectively. It is used by the managers to make decisions concerning the day-to-day operations of the business. It provides financial information for the internal users. FUNDAMENTAL CONCEPTS OF ACCOUNTING
1) Entity Concept – The transactions and balances of a business entity are to be accounted separately from its owner. 2) Periodicity Concept – It allows the users to obtain timely information to serve as a basis on making decisions about future activities. One year is the usual accounting period. Calendar Year – An accounting year that begins on January 1 and ends on December 31. Fiscal Year – An accounting year that begins on a date other than January 1. 3) Stable Monetary Unit Concept – The Philippine peso is a reasonable unit of measure and that its purchasing power is relatively stable. The value of peso will remain the same over time. It is the basis for ignoring the effects of inflation in the accounting records.
BASIC ACCOUNTING PRINCIPLES
Generally Accepted Accounting Principles (GAAP) – these are the general rules or standards used in the practice of accounting.
1) Objectivity – States that accounting informations, measurements and reports should use objective, factual, and verifiable data. This provides assurance that any accountant reviewing the same evidence would probably arrive at a similar treatment of the financial event that is recorded. Without this principle, accounting records would be based on whims and opinions and is therefore subject to disputes. 2) Historical Cost – States that acquired assets should be recorded at their original cost and not what management thinks they are worth at reporting date. Asset amounts are not adjusted to reflect any type of increase in value. Fair Market Value – common price in the market by the sellers. 3) Accrual Principle – The effect of transactions and other vets on assets and liabilities are recognized and reported in the time periods to which they relate rather than only when cash is received or paid. In short, income is recognized when earned regardless of when received, and expenses are recognized when incurred regardless of when paid. Revenue Recognition Principle – Revenue should be recorded when goods are delivered or services are rendered or performed. Expense Recognition Principle – Expenses should be recorded after goods or services are consumed or used. Cash Basis – Transactions are recorded when cash is received. Generally, cash receipts are treated as revenues and cash payments as expense. 4) Conservatism – If a situation arises where there are two acceptable alternatives for reporting an item, the alternative which has the least favourable effect on owner’s equity should be chosen. Thus, if there is a choice between two acceptable assets value, the lower figure is selected. 5) Consistency Principle – The firms should use the same accounting method from period to period to achieve comparability over time within a single enterprise. 6) Materiality – Financial reporting is only concerned with information that is significant enough to affect evaluations and decisions. Materiality depends on the size and nature of the item judged in the particular circumstances of its omission. 7) Going Concern – Assumes that a company will continue to exist long enough to carry out its objectives and commitments and will not liquidate in the foreseeable future. 8) Adequate Disclosure – Requires that all relevant information that would affect the user’s understanding and assessment of the accounting entity be disclosed in the financial statements.
USERS AND THEIR INFORMATION NEEDS
1) Investors – need information to help them determine whether they should buy, hold, or sell. Interested to know the solvency position of an organization. They analyse the financial statement of position to know about the safety of their investment and ability to pay interest and repayment of principle amount on due date. 2) Employees – are interested in information about the stability and profitability of their employers. They are also interested in the security of employment and satisfactory compensation. 3) Lenders – are interested in information that enables them to determine whether their loans and the related interest will be paid when due. 4) Suppliers and other trade creditors – are interested in information that enables them to determine whether amounts owning to them will be paid when due. 5) Customers – have an interest in information about the continuance of an enterprise, especially when they have a long-term involvement with, or are dependent on the enterprise. 6) Government and their agencies – are interested in the allocation of resources and, therefore, the activities of the enterprise. They also require information in order to regulate the activities of the enterprises, determine taxation policies, and as the basis for national income and similar statistics. 7) Public – providing information about the trends and recent developments in the prosperity of the enterprise and the range of its activities.
External Users – Owners, stockholders, creditors, potential investors, suppliers, customers, labor unions, government agencies, trade associations, and public; Compares the financial statement of two or more entities to evaluate their efficiencies; Interested in the financial activities of an entity but are not directly involve in its operations. Internal Users – Business managers, plant managers, supervisors, board of directors, chief executive officers, chief financial officers, vice presidents; They are designated to help the entity attain its overall strategies and mission. BASIC ELEMENTS OF ACCOUNTING
1) Assets – These are economic resources owned and controlled by an enterprise as a result of past event or transaction, from which future economic benefits are expected to flow to the enterprise. 2) Liabilities – These are the present obligations arising from past event from which outflow of economic resources are expected. 3) Owner’s Equity – The residual interest in the assets of the enterprise after deducting all its liabilities.
THE ACCOUNTING EQUATION
Most basic tool of accounting. Presents the resources controlled by the enterprise, the present obligations of the enterprise and the residual interest in the assets. ASSETS = LIABILITIES + OWNER’S EQUITY
TYPES OF CASH FLOW ACTIVITIES
1) Operating Activities – converts the items reported on the income statement from the accrual basis of accounting to cash. Involves the use of resources to design, produce, distribute and market goods and services. 2) Investing Activities – reports the purchase and sale of long-term investments and property, plant and equipment. To transform resources from one form to a different form, which is more valuable, to meet the needs of the people. 3) Financing Activities – reports the increasing and repurchasing of the company’s own bonds and stock and the payment of dividends. It is the methods an organization uses to obtain financial resources from financial markets and how it manages these resources.
THE FINANCIAL STATEMENT
Represent a formal record of the financial activities of an entity. These are written reports that quantify the financial strength, performance and liquidity of a company. It reflects the financial effects of business transactions and events on the entity. Any supporting statement that is intended to communicate an entity’s financial position at a point in time and its results of operations for a period the ended. Its objective is to provide information about the financial position, performance, and changes in financial of an enterprise that is useful to a wide range of users in making economic decisions. The end products of the accounting process which serve the financial information needs of various interested parties. COMPONENTS OF FINANCIAL STATEMENT
1) Balance Sheet – (Statement of Financial Position) – presents the financial position of an entity at a given date. It reflects the company’s liquidity, solvency and stability. Prepared “As of a certain date”. [Real or Permanent Accounts] 2) Income Statement – (Statement of Profit and Loss, Statement of Comprehensive Income, Statement of Financial Performance) – summarizes business activities for a given period ad reports the net income or loss resulting from operations and from certain other activities. It covers a period, unlike the balance sheet which is prepared as of a certain date. Summarizes the revenues earned and expenses incurred at a period. “For the year...” [Nominal or Temporary Accounts] 3) Statement of Cash Flow – classifies cash receipts (inflows) and cash payments (outflows) into operating, investing, and financing activities. This statement shows the net increase or decrease in cash during the period and the cash balance at the end of the period. It also helps project the future net cash flows of the entity. 4) Statement of Changes in Equity – summarizes the changes that occurred in owner’s equity. Changes in an enterprise’s equity between two balance sheet dates reflect the increase or decrease in its net assets during the period. 5) Notes to the Financial Statements – they are essential in explaining the basic financial data and should be prepared and read with care. It is used to provide additional information about the balance sheet and income statement items that cannot conveniently be shown.
Revenue – arises in the course of the ordinary activities of an enterprise 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 enterprise. Gains represent increases in economic benefits and as such are no different in nature from revenue. Hence, they are not regarded as constituting a separate element. Expenses – are decreases in the economic benefits during the accounting period of in the form of outflows or depletions of assets or incurrences of liabilities that result in the decrease in equity, other than those relating to distributions to equity participants. Expenses encompasses losses as well as those expenses that arise I the course of the ordinary activities of the enterprise. They are generally classified as cost of services rendered or cost of goods sold, distribution or selling expenses, administrative expenses or other operating expenses. Losses – represent other items that meet the definition of expense and may or may not arise in the course of the ordinary activities of an enterprise. Losses represent decreases in economic activities of benefits and as such are no different in nature from other expenses. Hence, they are not regarded as a separate element in this framework.
TYPES AND EFFECTS OF TRANSACTIONS
1) Source of Assets (SA) = AL/E
An asset increases and a corresponding claims (liabilities or owner’s equity) account increases. Example: Purchase of supplies on account; Sold goods on cash on delivery basis. 2) Exchange of Assets (EA) = A A
One asset account increases and another asset account decreases. Example: Acquired equipment for cash.
3) Use of Assets (UA) = A L/E
An asset account decreases and a corresponding claims (liabilities or owner’s equity) account decreases. Example: Settled accounts payable; paid salaries of employees. 4) Exchange of claims (EC) = L/E L/E
One claims (liabilities or owner’s equity) account increases and another claims (liabilities or owner’s equity) account decreases. Example: Received utilities bill but did not pay.
An Accounting event is an economic occurrence that causes changes in an enterprise’s assets, liabilities, and/or equity. Events may be internal actions, such as the use of equipment for the production of goods or services. It can also be an external event, such as the purchases of raw materials from a supplier. A transaction is a particular king of event that involves the transfer of something of value between two entities.
TYPICAL ACCOUNT TITLES USED
Operating Cycle is the time between the acquisition of assets for processing and their realization in cash or cash equivalents.
Current Assets – assets that can be expected to turn into cash within a year or less. Assets realizable within a normal operating cycle. 1) Cash – any medium of exchange that a bank will accept for deposit at a face value. It includes coins, currency, checks, money orders, bank deposits and drafts. 2) Notes Receivable – a written pledge that a customer will pay the business a fixed amount of money on a certain date. 3) Accounts Receivable – these are claims against customers arising from sale of services or goods on credit. This type of receivable offers less security than a promissory note. 4) Inventories – these are assets which are (a) held for sale in the ordinary course of business, (b) in the process of production for such sale, or (c) in the form of materials or supplies to be consumed in the production process or the rendering of services. 5) Prepaid Expense – these are expenses paid for by the business in advance. It is an asset because the business avoids having to pay cash in the future for a specific expense. This include insurance and rent. These prepaid items represent future economic benefits- assets- until the time these start to contribute to the earning process these the become expenses. 6) Supplies – these are various materials which remains unused at the end of the accounting period.
Non-current Assets – Assets realizable more than a year.
1) Property, Plant and Equipment – these are tangible assets that are held by an enterprise for use in the production or supply of goods or services, or for rental to others, or for administrative purposes and which are expected to be used during more than one period. It includes land, building, machinery, and equipment, furnitures and fixture, service vehicles and equipment. 2) Intangible Assets – these are identifiable, nonmonetary assets without physical substance held for use in the production or supply of good or services, for rental to others, or for administrative purposes. These include goodwill, patents, copyrights, licenses, franchises, trademarks, brand names, secret processes, subscription lists and non-competition agreements. 3) Accumulated Depreciation – it is a contra account that contains the sum of the periodic depreciation changes. The balance in this account is deducted from the cast of the related asset to obtain book value.
Current Liabilities
1) Accounts Payable – by accepting the goods or services, the buyer agrees to pay for them in the near future. 2) Notes Payable – the business entity promises to pay the other party a specified amount of money on a specified future date. 3) Unearned Revenue – when the business entity receives payment before providing its customer with goods or services, the amounts received are recorded in the unearned revenue account. When the goods or services are provided to the customer, the unearned revenue is reduced and income is recognized. Non-current Liabilities
1) Mortgage Payable – this account records long-term debt of the business entity for which the business entity has pledged certain assets as security to the creditor. In the event that the debt payments are not made, the creditor can foreclose or cause the mortgaged asset to be sold to enable the entity to settle the claim. Owner’s Equity
1) Capital – this account is used to record the original and additional investments of the owner of the business entity. It is increased by the amount of profit during the year or decreased by a loss. Income
1) Service Revenue – Revenues earned by performing services for a customer or client. 2) Sale – Revenues earned as a result of sale of merchandise. Expense
1) Cost of Goods Sold – the cost incurred to purchase or to produce the products sold to customers during the period. 2) Salaries or Wages Expense – the amount paid to services rendered by the employees in the operation of the business. 3) Utilities Expense – Expenses related to use of telecommunication facilities, consumption of electricity, fuel and water. 4) Insurance Expense – Portion of premiums paid on insurance coverage which has expired. 5) Rent Expense – Expense for space, equipment or other asset rentals. 6) Supplies Expense – Expense of using supplies in the conduct of daily business. 7) Depreciation Expense – The portion of the cost of a tangible asset allocated or charged as expense during an accounting period. 8) Doubtful Accounts Expense – Represents the current periodic cost for using depreciable plant assets. Depreciation
Appreciation
THE T-ACCOUNT
The simplest form of the account.
Double-entry system
Debit
Credit
Liquidity – ability of an asset to be converted into cash.
Is a service activity. Its function is to provide quantitative information, primarily financial in nature that is intended to be useful in making economic decisions. – PICPA (Philippine Institute of Certified Public Accountant) Is a systematic process of measuring and reporting relevant financial information about the activities of an economic organization or unit. Its underlying purpose is to provide financial information that is capable of being expressed in monetary units or terms. Is the art of recording, classifying, and summarizing a significant manner under terms of money, transaction, and events which are in part at least of a financial character and interpreting the results thereof. Is the “Language of Business”; the fundamental objective of accounting is communication. Accounting is the medium through which the business entity speaks with various interested parties which include the users of financial information. The communication process is achieved by means of financial statements. The financial statements are prepared at the end of the accounting period and serve as links connecting the business entity with the outside world.
TYPES OF BUSINESS ORGANIZATION
1) Sole Proprietorship – has a single owner who is generally also the manager. It tends to be a small service type businesses and retail establishments. The owner receives all the profits, absorbs all loses and is solely responsible for all the debts of the business. 2) Partnership – is a business owned and operated by two or persons who bind themselves as partners to contribute a common fund, with the intention of dividing the profits among themselves equally. Each partner is personally liable for any debt incurred by the partnership. There is a stronger potential of access to greater amounts of capital. It is a separate organization, distinct from the personal affairs of each partner. 3) Corporation – is a legal entity doing business, and is distinct from the individuals within the entity. It is owned by stockholders or shareholders who elect a board of directors to oversee primary responsibilities. It is an artificial being created by operation of law, having the rights of succession and the powers, attributes and properties expressly authorized bylaw or incident to its existence. The stockholders are not personally liable for the corporation’s debts. Separate legal entity is the most important characteristic of a corporation. It makes a corporation responsible for its own acts and debts and relieves its stockholders of liability for either. It enables a corporation to buy, own and sell property in its own name, to sue and to be sued in its name, and to enter into contracts for which it is solely responsible. In short, separate legal entity enables a corporation to conduct its business affairs as a legal person with all the rights, duties and responsibilities of a person. Lack of stockholder liability and the ease with which stock may be sold and transferred have enabled corporations to multiply, grow, and become the dominant form of business organization. TYPES OF BUSINESS OPERATIONS
1) Service Business – provides services to its customers; selling people’s time. Accounting firms, physical therapy, handyman companies, mechanic shops 2) Merchandise Business – sells physical goods or products to its customers. Department stores, grocery stores
3) Manufacturing Business – in charge of producing the physical goods that they sell. Taking raw materials and using equipment and staff to convert them to finished goods. Makers of clothing, automobile manufacturers, and other types of factories. Wholesalers buy directly from manufacturers and sell the merchandise to retailers. Retailers buy from wholesalers and sell to their customers.
PHASES OF ACCOUNTING
1) Recording – In this phase, all financial transactions are recorded in a systematical and chronological manner in the appropriate books or databases. It includes analysing source documents. 2) Classifying – It involves sorting and grouping similar items under the designated name, category or account. This phase uses systematic analysis of recorded data in which all transactions are grouped in one place. The term “Ledger” refers to the book in which classifications are recorded. 3) Summarizing – It involves summarizing the data after each accounting period. It is achieved through the preparation of financial statements and reports. 4) Interpreting – it involves analysing financial data. This final function interprets the recorded data in a manner which allows the users to make meaningful judgements regarding the financial conditions of a business or personal accounts, as well as the profitability of business operations.
BRANCHES OF ACCOUNTING
Financial Accounting – This area of specialization pertains to the constructive aspect of accounting. It is primarily concerned with the recording of business transactions and the eventual preparation of financial statements. Financial accounting is the process that culminates in the preparation of financial reports on financial position and operating results. It provides financial information for the external users. Management Accounting – This area of specialization provides information within the company so that its management can operate the company more effectively. It is used by the managers to make decisions concerning the day-to-day operations of the business. It provides financial information for the internal users. FUNDAMENTAL CONCEPTS OF ACCOUNTING
1) Entity Concept – The transactions and balances of a business entity are to be accounted separately from its owner. 2) Periodicity Concept – It allows the users to obtain timely information to serve as a basis on making decisions about future activities. One year is the usual accounting period. Calendar Year – An accounting year that begins on January 1 and ends on December 31. Fiscal Year – An accounting year that begins on a date other than January 1. 3) Stable Monetary Unit Concept – The Philippine peso is a reasonable unit of measure and that its purchasing power is relatively stable. The value of peso will remain the same over time. It is the basis for ignoring the effects of inflation in the accounting records.
BASIC ACCOUNTING PRINCIPLES
Generally Accepted Accounting Principles (GAAP) – these are the general rules or standards used in the practice of accounting.
1) Objectivity – States that accounting informations, measurements and reports should use objective, factual, and verifiable data. This provides assurance that any accountant reviewing the same evidence would probably arrive at a similar treatment of the financial event that is recorded. Without this principle, accounting records would be based on whims and opinions and is therefore subject to disputes. 2) Historical Cost – States that acquired assets should be recorded at their original cost and not what management thinks they are worth at reporting date. Asset amounts are not adjusted to reflect any type of increase in value. Fair Market Value – common price in the market by the sellers. 3) Accrual Principle – The effect of transactions and other vets on assets and liabilities are recognized and reported in the time periods to which they relate rather than only when cash is received or paid. In short, income is recognized when earned regardless of when received, and expenses are recognized when incurred regardless of when paid. Revenue Recognition Principle – Revenue should be recorded when goods are delivered or services are rendered or performed. Expense Recognition Principle – Expenses should be recorded after goods or services are consumed or used. Cash Basis – Transactions are recorded when cash is received. Generally, cash receipts are treated as revenues and cash payments as expense. 4) Conservatism – If a situation arises where there are two acceptable alternatives for reporting an item, the alternative which has the least favourable effect on owner’s equity should be chosen. Thus, if there is a choice between two acceptable assets value, the lower figure is selected. 5) Consistency Principle – The firms should use the same accounting method from period to period to achieve comparability over time within a single enterprise. 6) Materiality – Financial reporting is only concerned with information that is significant enough to affect evaluations and decisions. Materiality depends on the size and nature of the item judged in the particular circumstances of its omission. 7) Going Concern – Assumes that a company will continue to exist long enough to carry out its objectives and commitments and will not liquidate in the foreseeable future. 8) Adequate Disclosure – Requires that all relevant information that would affect the user’s understanding and assessment of the accounting entity be disclosed in the financial statements.
USERS AND THEIR INFORMATION NEEDS
1) Investors – need information to help them determine whether they should buy, hold, or sell. Interested to know the solvency position of an organization. They analyse the financial statement of position to know about the safety of their investment and ability to pay interest and repayment of principle amount on due date. 2) Employees – are interested in information about the stability and profitability of their employers. They are also interested in the security of employment and satisfactory compensation. 3) Lenders – are interested in information that enables them to determine whether their loans and the related interest will be paid when due. 4) Suppliers and other trade creditors – are interested in information that enables them to determine whether amounts owning to them will be paid when due. 5) Customers – have an interest in information about the continuance of an enterprise, especially when they have a long-term involvement with, or are dependent on the enterprise. 6) Government and their agencies – are interested in the allocation of resources and, therefore, the activities of the enterprise. They also require information in order to regulate the activities of the enterprises, determine taxation policies, and as the basis for national income and similar statistics. 7) Public – providing information about the trends and recent developments in the prosperity of the enterprise and the range of its activities.
External Users – Owners, stockholders, creditors, potential investors, suppliers, customers, labor unions, government agencies, trade associations, and public; Compares the financial statement of two or more entities to evaluate their efficiencies; Interested in the financial activities of an entity but are not directly involve in its operations. Internal Users – Business managers, plant managers, supervisors, board of directors, chief executive officers, chief financial officers, vice presidents; They are designated to help the entity attain its overall strategies and mission. BASIC ELEMENTS OF ACCOUNTING
1) Assets – These are economic resources owned and controlled by an enterprise as a result of past event or transaction, from which future economic benefits are expected to flow to the enterprise. 2) Liabilities – These are the present obligations arising from past event from which outflow of economic resources are expected. 3) Owner’s Equity – The residual interest in the assets of the enterprise after deducting all its liabilities.
THE ACCOUNTING EQUATION
Most basic tool of accounting. Presents the resources controlled by the enterprise, the present obligations of the enterprise and the residual interest in the assets. ASSETS = LIABILITIES + OWNER’S EQUITY
TYPES OF CASH FLOW ACTIVITIES
1) Operating Activities – converts the items reported on the income statement from the accrual basis of accounting to cash. Involves the use of resources to design, produce, distribute and market goods and services. 2) Investing Activities – reports the purchase and sale of long-term investments and property, plant and equipment. To transform resources from one form to a different form, which is more valuable, to meet the needs of the people. 3) Financing Activities – reports the increasing and repurchasing of the company’s own bonds and stock and the payment of dividends. It is the methods an organization uses to obtain financial resources from financial markets and how it manages these resources.
THE FINANCIAL STATEMENT
Represent a formal record of the financial activities of an entity. These are written reports that quantify the financial strength, performance and liquidity of a company. It reflects the financial effects of business transactions and events on the entity. Any supporting statement that is intended to communicate an entity’s financial position at a point in time and its results of operations for a period the ended. Its objective is to provide information about the financial position, performance, and changes in financial of an enterprise that is useful to a wide range of users in making economic decisions. The end products of the accounting process which serve the financial information needs of various interested parties. COMPONENTS OF FINANCIAL STATEMENT
1) Balance Sheet – (Statement of Financial Position) – presents the financial position of an entity at a given date. It reflects the company’s liquidity, solvency and stability. Prepared “As of a certain date”. [Real or Permanent Accounts] 2) Income Statement – (Statement of Profit and Loss, Statement of Comprehensive Income, Statement of Financial Performance) – summarizes business activities for a given period ad reports the net income or loss resulting from operations and from certain other activities. It covers a period, unlike the balance sheet which is prepared as of a certain date. Summarizes the revenues earned and expenses incurred at a period. “For the year...” [Nominal or Temporary Accounts] 3) Statement of Cash Flow – classifies cash receipts (inflows) and cash payments (outflows) into operating, investing, and financing activities. This statement shows the net increase or decrease in cash during the period and the cash balance at the end of the period. It also helps project the future net cash flows of the entity. 4) Statement of Changes in Equity – summarizes the changes that occurred in owner’s equity. Changes in an enterprise’s equity between two balance sheet dates reflect the increase or decrease in its net assets during the period. 5) Notes to the Financial Statements – they are essential in explaining the basic financial data and should be prepared and read with care. It is used to provide additional information about the balance sheet and income statement items that cannot conveniently be shown.
Revenue – arises in the course of the ordinary activities of an enterprise 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 enterprise. Gains represent increases in economic benefits and as such are no different in nature from revenue. Hence, they are not regarded as constituting a separate element. Expenses – are decreases in the economic benefits during the accounting period of in the form of outflows or depletions of assets or incurrences of liabilities that result in the decrease in equity, other than those relating to distributions to equity participants. Expenses encompasses losses as well as those expenses that arise I the course of the ordinary activities of the enterprise. They are generally classified as cost of services rendered or cost of goods sold, distribution or selling expenses, administrative expenses or other operating expenses. Losses – represent other items that meet the definition of expense and may or may not arise in the course of the ordinary activities of an enterprise. Losses represent decreases in economic activities of benefits and as such are no different in nature from other expenses. Hence, they are not regarded as a separate element in this framework.
TYPES AND EFFECTS OF TRANSACTIONS
1) Source of Assets (SA) = AL/E
An asset increases and a corresponding claims (liabilities or owner’s equity) account increases. Example: Purchase of supplies on account; Sold goods on cash on delivery basis. 2) Exchange of Assets (EA) = A A
One asset account increases and another asset account decreases. Example: Acquired equipment for cash.
3) Use of Assets (UA) = A L/E
An asset account decreases and a corresponding claims (liabilities or owner’s equity) account decreases. Example: Settled accounts payable; paid salaries of employees. 4) Exchange of claims (EC) = L/E L/E
One claims (liabilities or owner’s equity) account increases and another claims (liabilities or owner’s equity) account decreases. Example: Received utilities bill but did not pay.
An Accounting event is an economic occurrence that causes changes in an enterprise’s assets, liabilities, and/or equity. Events may be internal actions, such as the use of equipment for the production of goods or services. It can also be an external event, such as the purchases of raw materials from a supplier. A transaction is a particular king of event that involves the transfer of something of value between two entities.
TYPICAL ACCOUNT TITLES USED
Operating Cycle is the time between the acquisition of assets for processing and their realization in cash or cash equivalents.
Current Assets – assets that can be expected to turn into cash within a year or less. Assets realizable within a normal operating cycle. 1) Cash – any medium of exchange that a bank will accept for deposit at a face value. It includes coins, currency, checks, money orders, bank deposits and drafts. 2) Notes Receivable – a written pledge that a customer will pay the business a fixed amount of money on a certain date. 3) Accounts Receivable – these are claims against customers arising from sale of services or goods on credit. This type of receivable offers less security than a promissory note. 4) Inventories – these are assets which are (a) held for sale in the ordinary course of business, (b) in the process of production for such sale, or (c) in the form of materials or supplies to be consumed in the production process or the rendering of services. 5) Prepaid Expense – these are expenses paid for by the business in advance. It is an asset because the business avoids having to pay cash in the future for a specific expense. This include insurance and rent. These prepaid items represent future economic benefits- assets- until the time these start to contribute to the earning process these the become expenses. 6) Supplies – these are various materials which remains unused at the end of the accounting period.
Non-current Assets – Assets realizable more than a year.
1) Property, Plant and Equipment – these are tangible assets that are held by an enterprise for use in the production or supply of goods or services, or for rental to others, or for administrative purposes and which are expected to be used during more than one period. It includes land, building, machinery, and equipment, furnitures and fixture, service vehicles and equipment. 2) Intangible Assets – these are identifiable, nonmonetary assets without physical substance held for use in the production or supply of good or services, for rental to others, or for administrative purposes. These include goodwill, patents, copyrights, licenses, franchises, trademarks, brand names, secret processes, subscription lists and non-competition agreements. 3) Accumulated Depreciation – it is a contra account that contains the sum of the periodic depreciation changes. The balance in this account is deducted from the cast of the related asset to obtain book value.
Current Liabilities
1) Accounts Payable – by accepting the goods or services, the buyer agrees to pay for them in the near future. 2) Notes Payable – the business entity promises to pay the other party a specified amount of money on a specified future date. 3) Unearned Revenue – when the business entity receives payment before providing its customer with goods or services, the amounts received are recorded in the unearned revenue account. When the goods or services are provided to the customer, the unearned revenue is reduced and income is recognized. Non-current Liabilities
1) Mortgage Payable – this account records long-term debt of the business entity for which the business entity has pledged certain assets as security to the creditor. In the event that the debt payments are not made, the creditor can foreclose or cause the mortgaged asset to be sold to enable the entity to settle the claim. Owner’s Equity
1) Capital – this account is used to record the original and additional investments of the owner of the business entity. It is increased by the amount of profit during the year or decreased by a loss. Income
1) Service Revenue – Revenues earned by performing services for a customer or client. 2) Sale – Revenues earned as a result of sale of merchandise. Expense
1) Cost of Goods Sold – the cost incurred to purchase or to produce the products sold to customers during the period. 2) Salaries or Wages Expense – the amount paid to services rendered by the employees in the operation of the business. 3) Utilities Expense – Expenses related to use of telecommunication facilities, consumption of electricity, fuel and water. 4) Insurance Expense – Portion of premiums paid on insurance coverage which has expired. 5) Rent Expense – Expense for space, equipment or other asset rentals. 6) Supplies Expense – Expense of using supplies in the conduct of daily business. 7) Depreciation Expense – The portion of the cost of a tangible asset allocated or charged as expense during an accounting period. 8) Doubtful Accounts Expense – Represents the current periodic cost for using depreciable plant assets. Depreciation
Appreciation
THE T-ACCOUNT
The simplest form of the account.
Double-entry system
Debit
Credit
Liquidity – ability of an asset to be converted into cash.
No comments:
Post a Comment