Reviewer in Legal Accounting

By: Princess Joie Macalinga

What is Accounting?
Accounting is the art of recording, classifying, and summarizing in a
significant manner the amount of money, transactions, and events, which are, in
part at least of a financial character and afterwards interpreting the results
thereof.
Additionally, it is 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. For this reason, accounting
is called the language of business.
Technically, accounting is based on a double-entry system which means
that the dual effects of a business transaction is recorded. A debit side entry
must have a corresponding credit side entry. The total debits for a transaction
must always equal the total credits.
Evolution of Accounting.
1. Primitive Accounting
The origin of keeping accounts has been traced as far back as 8500
BC. The date archaeologists have established for certain clay tokens like
cones, disks, spheres, and pellets as found in Mesopotamia.

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These tokens represented such commodities as sheep, jugs of oil,

bread or clothing and were used in the Middle East to keep records.

8500 BC

Bulae- were the first bills of lading. Clay balls where tokens
were sealed. (Beginning of the art of writing and record
keeping).
China, Babylonia, Greece, and Egypt maintained various types
of records of business activities.

22862242 BC

1st dynasty of Babylonia. Its law which was based on the Code
of Hammurabi, requires merchants trading goods to give
buyers a sealed memorandum containing the agreed price
before it can be considered enforceable.
Agreed upon transaction was recorded by the Scribe.
Clay tablets also recorded payments of wages. Like in Egypt,
were they used the same to keep track of labor costs.
Bookkeeping was then attributed.

3600 BC

Seven Preconditions for the emergence of systematic bookkeeping

a. Art of Writing
b. Arithmetic since the mechanical aspect of bookkeeping consists of a
sequence of simple computations;
c. Private Property recording of facts about property and property rights
d. Money
e. Credit
f. Commerce
g. Capital since without capital commerce would be trivial and credit would
be inconceivable.
2. Middle Ages
The use of credit was prevalent and a semblance of an international
banking system. Marked the development of more formal account-keeping
methods as attributed to the merchants and bankers of Florence, Venice and
Genoa.
Said period also includes various approaches like those of Florentine,
Giovanno Farolfi & Company, Amatino Manucci, the Method of Venice, and the
Savary and Napoleonic Commercial Code.
3. Industrial Revolution
This period marked the formation of the accounting profession.
Industrial Revolution started in regard of the expanded business operations
that require increasingly large amount of funds to build factories and
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purchase machinery. This period also includes the model chart of accounts,
imposition of income tax and conflicts with financial accounting.
4. Information Age
Marked the start of VisiCalc, the first electronic spreadsheet, the most
important business application for the personal computer.
Phases of Accounting
a. Before transactions can be recorded, they must be measured. In order
that accounting information will be useful, it must be expressed in terms
of a common financial denominator money. Money serves as both a
medium of exchange and a measure of value.
b. After measuring and recording transactions, the recorded data must be
classified and summarized. Classification reduces the effects of
numerous transactions into useful groups or categories. Summarization of
financial data is achieved through the preparation of financial statements.
c. Interpretation. Accounting provides the decision-makers with information
to make reasoned choices among alternative uses of scare resources in
the conduct of business and economic activities.
Types of Business (MRI-FITS)
a. Manufacture
b. Raw Materials
c. Infrastructure
d. Financial
e. Insurance
f. Trader
g. Services
Type of Business

Activity

Structure

Manufacture

Designing
products,
aggregating
components
and
assembling
finished products.

Taking
raw
materials
and
using
equipment
and
staff
to
convert them into
finished goods.

Raw Materials

Growing
extracting
materials

Infrastructure

Selling
utilization
infrastructure

Financial

Receiving

or
raw

the
of

Buying blocks of
land and using
them to provide
raw materials
Buying
and
operating assets;
selling occupancy
often
in
combination with
services
Accepting
cash

Examples
Vehicle Assembly,
Construction,
Engineering,
Electricity, Water
Food and drink
Chemicals
Media
Pharmaceuticals
Farming
Mining
Oil
Transport
Hotels
Telecoms
Sports facilities
Property
Management
Bank

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deposits, lending
and
investing
money

Insurance

Pooling premiums
of many to meet
claims of a few

Trader

Buying and selling

products

Services

Selling
time

peoples

from
depositors
and paying them
interest; using the
money to provide
loans
to
borrowers,
charging
them
fees and a higher
rate of interest
than
the
depositors receive
Collecting
cash
from
many
customers;
investing
the
money to pay the
losses experienced
by
a
few
customers.
By
understanding the
risk accepted and
the likelihood of a
claim,
more
premium income
can
be
earned
than claims paid
Buying a range of
raw materials and
manufactured
goods
and
consolidating
them,
making
them available for
sale in locations
near
to
their
customers
or
online for delivery
Hiring skilled staff
and selling their
time

Investment House

Insurance

Wholesaler
Retailer

Software
development
Accounting
Legal

Forms of Business Organizations (SPC)

a. Sole Proprietorship
b. Partnership
c. Corporation

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Sole Proprietorship This business organization has a single owner called

the proprietor who generally is also the manager. Sole-proprietorship tend to
be small service-type businesses and retail establishments. (Owners equity).
The owner receives all profits, absorbs all losses, and is solely
responsible for all the debts of the business. In accounting viewpoint, the sole
proprietorship is distinct from the proprietor. Thus, the accounting records of
the sole proprietorship do not include the proprietors personal financial
records. Example of which are physicians, lawyers, and accountants.
Partnership A partnership is a business owned and operated by two or
more persons who bind themselves to contribute money, property, or
industry to a common fund, with the intention of dividing the profits among
themselves. Each partner is personally liable for any debt incurred by the
partnership. (Partners equity).
Accounting considers the partnership as a separate organization, distinct
from the personal affairs of each partner. It is further divided into two, (a)
general professional partnership and (b) general partnership.
Corporation A corporation is a business owned by its stockholders. It is an
artificial being created by operation of law, having the rights of succession
and the powers, attributes and properties expressly authorized by law or
incident to its existence. (Shareholders equity or Stockholders equity).
The stockholders are not personally liable for the corporations debts.
The corporation is a separate legal entity.
Micro, Small and Medium Enterprises. (MSME)
Republic Act No. 9501
MICRO enterprises are those with assets, before financing, of 3 million or
less and employ not more than nine works.
SMALL enterprises are those with assets, before financing, of above 3
million to 15 million and employ 10 to 99 workers.
MEDIUM enterprises are those with assets, before financing, of above 15
million to 100 million and employ 100 to 199 workers.
Three types of Organizational Activities: (FIO)
a. Financing activities
b. Investing activities
c. Operating activities
Financing Activities. The methods an organization uses to obtain financial
resources from financial markets and how it manages these resources.
Primary sources of financing for most businesses are owners and creditors
such as banks and suppliers.
Investing Activities. Involve the selection and management including
disposal and replacement of long-term resources that will be used to develop,
produce, and sell goods and services. Investing activities include buying land,
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equipment, buildings, and other resources that are needed in the operation of
the business, and selling these resources when they are no longer needed.
Operating Activities. Involve the use of resources to design, produce,
distribute, and market goods and services. Operating activities include
research and development, design and engineering, purchasing, human
resources, production, distribution, market, selling, and servicing.
Definition of Terms.
A. Capital is viewed under two concept, financial concept and physical
concept. Under the financial concept of capital, it is used synonymously
with the net assets or equity of the enterprise.
When does profit earned?
A profit is earned only if the financial amount of net assets at the end
of the period exceeds the financial amount of net assets at the beginning of
the period, after excluding any distributions to and contributions from owners
during the period.
Under the physical concept of capital, such as operating capability, capital is
regarded as the productive capacity of the enterprise based on, for example,
units of output per day.
B. Income increases 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. This encompasses both revenue and gains.
C. 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,
interests, dividends, royalties, and rents.
D. Gains it 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.
E. Expenses are decreases in economic benefits during the accounting
period in the form of outflows or depletion of assets or incurrences of
liabilities that result in decreases in equity, other than those relating to
distributions to equity participants.
F. 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 benefits and as such
are no different in nature from other expenses.
Audited Financial Statements
- Portray the financial effects of transactions and other events by grouping
them into broad classes according to their economic characteristics.
- Should be stamped by the BIR or authorized agent banks.
Elements of Financial Statements (Related to the measurement of
Financial Position)
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1. Assets
- In simple terms, assets are valuable resources owned by the entity.
- They are recorded at the amount of cash or cash equivalents paid or the
fair value of the consideration given to acquire them at the time of their
acquisition. It may also include properties whether tangible or intangible.
Assets = Liabilities + Equity
- Classified into Current Assets and Non-Current Assets. Examples are
cash, cash equivalents, notes receivable, accounts receivable, inventories,
prepaid expenses, property, plant and equipment, investments, intangible
assets and other assets.
2. Liabilities
- They are the obligations of the entity to outside parties who have
furnished resources.
- They are recorded at the amount of proceeds received in exchange for the
obligation, or in some circumstances at the amounts of cash or cash
equivalents expected to be paid to satisfy the liability in the normal course
of business.
- Examples are notes payable, accounts payable, accrued liabilities,
unearned revenues, mortgage payable, bonds payable, and other debts of
the enterprise.
3. Equity
- It is the residual interest in the assets of the enterprise after deducting all
its liabilities.
- Equity depends on the form of business. As such:
a. Sole Proprietorship Owners Equity
b. Partnership Partners Equity (Owners equity exists for each partner).
c. Corporation Shareholders Equity or Stockholders Equity (consists of
share capital, retained earnings, and reserves representing
appropriations of retained earnings among others.
Components of Financial Statement
1. Statement of Financial Position (Balance Sheet)
2. Statement of Income/ Performance
3. Statement of Changes of Equity
4. Statement of Cash Flows
5. Notes to Financial Statement
Statement of Financial

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