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What is Accounting?

obtained in the system to

decision makers.
“Accounting is simply the means by
which we measure and describe the Types of Accounting:
results of any economic activity.”
1- Financial Accounting:
 Accounting is everywhere you It refers to the information
need to calculate for any describing the financial
mater. resources, obligations and
 It’s often called “Language of activities of an economic
Business”. entity.
 It’s widely used in all types of  It assists the investors
business activities. and creditors to decide
 It’s necessary to have a valid where to place their
understanding of accounting scarce investment
to understand the business resources.
matters and communicate
2- Management/Managerial
fluently in the business
The development and
 The basic purpose of
interpretation of
Accounting is to provide
useful information to
information intended
managers who make useful
specifically to add
decisions for the business.
management in running the
 Accounting gives us a closer
look to nature of economic
It is used widely in,
 Setting organizational
Basic functions of Accounting goals.
System:  Evaluating
performance of
1- Interpreting and recording departments and
effect of business individuals.
transactions.  Decision making.
2- Classifying the similar
Management accounting is
transactions. actually financial in
3- Summarize and nature but has been
communicating the data organized in a manner
relating directly to the information to people outside the
decision at hand. organization.

3- Tax Accounting:  People who use this

Tax Accounting is base on the information are called
financial accounting “Users”.
information. It is a specialized  The basic purpose of financial
field within accounting. The statements is to assist users in
information available is evaluating the financial
arranged in such a way to position, profitability and
adjust with income tax future prospects of a business.
reporting requirements.
A set of financial reports consist of
Financial Reporting: four related accounting reports that
summarizes the financial obligation,
The process of supplying general - resources, profitability and cash
purpose financial information to the transaction of a business firm in few
people outside the organization is pages. A complete set of financial
called financial reporting. statements includes:

The accounting information should Balance Sheet: showing the

be accurate and reliable.
financial position of a firm in

Financial Position: specific time by indicating the

resource that it owns, the debt it
The term financial position refers to owes and the amount of owner’s
describing a firm’s financial equity.
resources and obligations at one
point in time. Income Statement: indicating the
profitability of business over the
Result of Operations: preceding year.

Accountants often use the term Statement of Owner’s Equity:

result of operation to describe the explaining certain change in the
financial activities of a firm during amount of owner’s equity in the
the year. business.

Financial Statements: Statements of Cash Flows:

summarizes the cash receipts and
These are the principal means of
reporting general-purpose financial cash deposits of the business over
the same time period covered by CPA expresses the professional
the income statement. opinion as to the fairness of the
financial statements. They are
Accounting System: licensed by the state.

An accounting system consists of FASB: (Financial Accounting

personals, procedures, devices and Standard Board)
reports used by an entity in
developing accounting information The most authoritative source of
and communicating this GAAP and highly independent rule
information to decision makers. making body. It consist seven
members form accounting
Accounting information is first
profession, accounting education,
recorded, then classified into
industry and government. It has
different categories to obtain sub
designed a conceptual framework
totals and summarized to assist the
for financial reporting which
managers in decision making.
stresses on,

Transaction Approach of Objectives of financial reporting

recording Economic Activity:
 Relevancy, reliability and
Accounting reports summarizes understandability
information which has been characteristics
recorded in the accounting system.  Elements of financial
In recording economic activities,
 Criteria on deciding the
accountants focus on transactions- 1-
information to be included
events causes an immediate change
 Valuation concepts relating to
in the financial resources or
financial statement amount
obligations of business. 2- Which can
be measured objectively in SEC: (Security & Exchange
monetary terms. Commission)

CPAs: (Certified Public Accounts) It’s a governmental agency with

legal power to establish accounting
The independent organization whose
principles and financial reporting
specialized auditors make assurance
requirements for publically own
of the validity and accuracy of
corporations. It bears the force of
financial statements of a business
law to implement its accepted rules.
firm by auditing them.
AICPA: (American Institute of information is to be presented in
Certified Public Accountants) financial statements.

It is the professional association of Basically there are seven rules

certified public accountants. It grounded in GAAP
participates in developing code of
1- Comparability and Reliability
professional ethics and auditing
The information shared should
be able to comparable
AAA: (American Accounting vertically or horizontally and
Association) should be reliable.

Comprised of accounting educators. 2- The business entity concept

It sponsors research studies and Set of financial statements are
monographs for improvement of required to describe the
business. affairs of specific business
Annual Reports:
3- The cost principal
A document issued annually by the The assets which are used in
organization having audited making profit should be
financial information for several recorded at their cost in
years as well as nonfinancial financial statements. They
information about the company and may be amortized or
its operations. depreciated.

These comparative financial

4- The stable-dollar assumption
statements enable us to identify
The dollar is a stable unit of
trends in company’s performance
measurement and works well
and financial position.
with stable prices.
GAAP: (Generally Accepted
Accounting Principal) 5- The concept of adequate
The ground rule for financial The user of financial
reporting. It is the accounting statement should be informed
concept, measurement technique of any facts necessary for the
and standards provide the general proper interpretation of
framework determining what financial statements.
6- The going concern assumption business terms the business entity is
The principal show that the regarded as separate from the
business is a continuing personal affairs of its owner.
process, a going concern and
the assets such as land and
building are not for resale Economic resource owned by an
purpose. So their valuation entity. Such as land, building,
with time is not considered in vehicles, machinery, office
financial statements. equipment and many more.

7- The objectivity principal Liability:

Should show the valuation of The economic resources owed by a
assets which should be factual firm or individual for any purpose
and can be verified by
and have to pay back in a specific
experts. period either with a profit or not.

Nature of Accounting Principles: Capital Stock:

Accounting principles are general Transferable unit of ownership in a

rules made by man to better manage corporation.
a business. They should have
authoritative support. Accounting Cost Principal:
The widely used principal for
 Originates from a accounting for assets at their
combination of tradition, original price to the current owner.
experience and official decree.
Ethical Conduct:
 Requires authoritative
support and some means of Doing the right thing with honor
enforcements. and integrity even sacrificing
 Are sometimes arbitrary. personal advantage.
 Must be clearly understood
Income Statement:
and observed by all
participants in process. A statement showing the profit and
loss of a business over a specific time
Business Entity:
It is an economic unit that engages
Internal Control:
in identifiable business activities. In
All measures used by a firm to that can be measured objectively in
assure management that the monetary terms.
organization is operating in
Window Dressing:
accordance to the management’s
rules and policies. Legitimate measures taken by
management to make a business look
as strong as possible at the balance
An increase in owner’s equity sheet date.
through successful business Account:
The record used to summarize the
Public Information: increase and decrease in particular
The information available by law to
the general public regarding any Accountability:
The state/condition of being
Publically Owned Corporations: responsible for one’s actions by
existence of independent record of
The corporations in which the
those actions.
members of general public may buy
or sell the shares of capital stock. Accounting cycle:
Statement of Retained Earnings: The complete set of accounting

The financial statement explaining procedures applied in recording,

certain changes in the amount of the classifying, summarizing accounting

owner’s investment in the business information. The cycle begins with a

organized as corporation. transaction and ends with the

preparation of financial statements.
Chart of Accounts:
Owner of capital stock in a
corporation. Also the owners of The chart lists the ledger account

corporation. titles and account numbers that are

used by particular businesses.
Event causing an immediate change
in the financial position of an entity The amount entered on the right-
hand side of ledger account. Showing
decrease in assets and increase in Accounting Period:
liabilities and owners equity.
The span of time covered by an
Debit: income statement. Ideally one year,
and may be a month, Quarter or a
The amount entered on the left-hand
half year.
side of ledger account. It is used to
record in increase in assets or Accumulated Depreciation:
decrease in liabilities.
A separate account showing the
General journal: decrease in the worth of depreciable
assets used in the accounting period.
The simplest type of journal having
only two columns. It is the first Adjusting entries:
place in accounting where a
The entries required to update the
transaction is recorded.
accounting information to be used
Journal: in financial reporting at the end of
accounting period.
The chronological record of
transactions showing for each Adjusted Trial Balance:
transaction occurred.
After handling adjusting entries an
Ledger: adjusted trail balance is prepared
just like trail balance to check where
A close-leaf book, file or other record
there is balance in accounting
containing all the separate records
equation or not.
of a business.
Closing Entries:
Journal entries made for the
The process of transferring the
purpose of closing temporary
information form journal to
accounts (revenue, expenses and
individual ledger accounts.
owner with drawl) and transferring

Trial Balance: it into owner’s capital account.

A two column schedule listing the
names, debit and credit balance of The systematic allocation of the cost
account in ledgers. It is mostly used of an asset to expense during the
to check the balance of accounting period of its useful life.
Expenses: Prepaid Expenses:

The amount spent on products or Assets representing advance

services to earn revenue. payment of expenses for future
financial year.
Fiscal Year:
Unearned Revenue:
Any 12 months accounting period
adopted by a business. An obligation to deliver goods or
render services in future accounting
Matching Principal:
The GAAP rule, focusing on how
Bar Code:
revenue earned during an
accounting period is matched with The label attached with goods in
the expenses incurred in generating vertical bars with the information
it. only identifiable by computers.

Revenue: Gross Profit:

The price of goods and services Net Sales Revenue-Cost of Goods Sold
charged/rendered by a business.
While the gross profit expressed in
Accrues Means to Grow or terms of %age of net sales.
Accumulate over time.
While net sales is the pure earning
Materiality is the relative after deduction all of the obligations.
importance of an item
Periodic Inventory System:
Notes provide extra information the system in which inventories are
regarding any transaction recorded determined only periodically. And
in journal. don’t need to keep it up to date.

Book Value: Perpetual Inventory System:

The net amount at which an asset Merchandising transactions are
appears in balance sheet at specific recorded as they occur and needs to
time. keep up to date.

Interim Financial Statements: Point of Sale Terminals:

The FS prepared for less than Fiscal The computerized system to record
year. Such as quarterly or 6 months. the transaction form cod bars.
Board of Directors:

Persons elected by the stock holders

of a corporation to set corporate
polices who hire managers and
officers to run the operations.

Capital Stock is transferable unit of

ownership in corporation.

Dividends are the assets distributed

among the stock-holders of any

Retained earnings are the portion of

owner’s equity resulting from the
retaining profit from the business.

Tax planning is the structuring

transactions in a manner that
legally minimize the impact of
income tax.