Open University - Expanded Tertiary Education Equivalency and Accreditation Program (ETEEAP)

ACCO 2013 - BASIC FINANCIAL ACCOUNTING P1, Second Semester, 2017-2018

Ms. Andrea Rose E. Rimorin, CPA, MBA

Unit 1 - Introduction to Accounting

I. Discussion Questions. Explain and discuss the following items:

1. Define accounting.
Practice and body of knowledge concerned primarily with methods for recording
transactions, keeping financial records, performing internal audits, reporting and
analyzing financial information to the management, and advising on taxation matters.
It is a systematic process of identifying, recording, measuring, classifying, verifying,
summarizing, interpreting and communicating financial information. It reveals profit or
loss for a given period, and the value and nature of a firm's assets, liabilities and owners'
equity.

2. Give a brief history on the development of accounting

The name that looms largest in early accounting history is Luca Pacioli, who in 1494 first
described the system of double-entry bookkeeping used by Venetian merchants in his
“Summa de Arithmetica, Geometria, Proportioni et Proportionalita.” Businesses and
governments had been recording business information long before the Venetians. But it
was Pacioli who was the first to describe the system of debits and credits in journals and
ledgers that is still the basis of today's accounting systems.

The industrial revolution spurred the need for more advanced cost accounting systems,
and the development of corporations created large groups who were not part of a firm’s
management but had a vested interest in the company’s results—namely, shareowners
and bondholders who provided external financing. The rising public status of
accountants helped to transform accounting into a profession, first in the United
Kingdom and then in the United States. In 1887, thirty-one accountants joined together
to create the American Association of Public Accountants. The first standardized test for
accountants was given a decade later, and the first CPAs were licensed in 1896.

The Great Depression led to the creation of the Securities and Exchange Commission
(SEC) in 1934. All publicly-traded companies were required to file periodic reports with
the Commission which had been certified by members of the accounting profession. The
American Institute of Certified Public Accountants (AICPA) and its predecessors had
responsibility for setting accounting standards until 1973, when the Financial Accounting
Standards Board (FASB) was established. In WHEN TK, the AICPA and the FASB began to
establish the Generally Accepted Accounting Principles (GAAP) standards for the U.S.
The accounting industry thrived in the late 20th century, as the large accounting firms
expanded their services beyond the traditional auditing function to many forms of
consulting. However, as their responsibilities expanded beyond that of financial
watchdog, accounting firms also began to get embroiled in corporate scandals.

The Enron scandal in 2001 had broad repercussions for the accounting industry. One of
the top accounting firms, Arthur Andersen, went out of business and, under the
Sarbanes-Oxley Act, accountants faced tougher restrictions on their consulting
engagements. One of the paradoxes of the profession, however, is that accounting
scandals generate more work for accountants, and demand for their services continued
to boom throughout the early part of the 21st century.

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Open University - Expanded Tertiary Education Equivalency and Accreditation Program (ETEEAP)
ACCO 2013 - BASIC FINANCIAL ACCOUNTING P1, Second Semester, 2017-2018
Ms. Andrea Rose E. Rimorin, CPA, MBA

3. Describe accounting as an information system.

An accounting information system (AIS) is a structure that a business uses to collect,
store, manage, process, retrieve and report its financial data so that it can be used by
accountants, consultants, business analysts, managers, chief financial officers (CFOs),
auditors, regulators and tax agencies.

For example, most people invest their savings in mutual funds, meaning mutual funds
management companies handle hundreds of billions of dollars from millions of clients. It
is not possible to run this kind of business without accurately recording information.
When a client calls her investment company to find out her balance, the company must
be able to give her accurate information instantly. Companies rely on advanced
information systems to store data accurately.

4. What are the three forms of business organizations. Explain each.

1. Service Business
A service type of business provides intangible products (products with no physical form).
Service type firms offer professional skills, expertise, advice, and other similar products.

Examples of service businesses are: salons, repair shops, schools, banks, accounting
firms, and law firms.

2. Merchandising Business
This type of business buys products at wholesale price and sells the same at retail price.
They are known as "buy and sell" businesses. They make profit by selling the products at
prices higher than their purchase costs.

A merchandising business sells a product without changing its form. Examples are:
grocery stores, convenience stores, distributors, and other resellers.

3. Manufacturing Business
Unlike a merchandising business, a manufacturing business buys products with the
intention of using them as materials in making a new product. Thus, there is a
transformation of the products purchased.

A manufacturing business combines raw materials, labor, and factory overhead in its
production process. The manufactured goods will then be sold to customers.

5. What are the three types of business as to operations? Describe each.

1. Sole Proprietorship
A sole proprietorship places all liabilities for finances and operations on the owner. The
owner's personal property is tied to the business, so he assumes a risk against his
personal assets should the business experience financial hardship. Annual income tax
returns are filed on a Form 1040, and the owner must also file self-employment taxes.
The profits and losses of the business are reported through the owner and are taxed at
the individual rate. The sole proprietorship business entity is the simplest form to set
up, but the owner typically must sell the business to retrieve his investment.

2. Partnership
A partnership entity has two or more owners sharing equal control, unless the
partnership agreement states otherwise or the structure is set up as a limited
partnership. Similar to a sole proprietorship, the profits and losses of the business flow
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Open University - Expanded Tertiary Education Equivalency and Accreditation Program (ETEEAP)
ACCO 2013 - BASIC FINANCIAL ACCOUNTING P1, Second Semester, 2017-2018
Ms. Andrea Rose E. Rimorin, CPA, MBA

to the partners and are taxed at the individual rate. Operating partners assume risks
both legally and financially. Creditors can attempt to collect debts from the partners
personal assets. To recoup his investment, a partner is generally required to sell his
interest in the business.

3. Corporation
A corporation can have an unlimited number of owners, also known as shareholders. In
a corporation, the business entity remains separate from the owners in legal and
financial matters. The profits and losses of a corporation are taxed at corporate rates,
not individual rates. If the corporation realizes a profit, it is paid out to shareholders
who must then report it as income and pay taxes on it at the individual rate. A
shareholder in a privately held corporation must sell his interest to regain his
investment. In a publicly held corporation, a shareholder can trade his shares on the
open market.

OPTION: LLC
The limited liability Company, or LLC, is also an option to choose for accounting
purposes. This business structure is actually a hybrid of a partnership and a corporation.
Owners are protected from personal liability just like a corporation, but enjoy the tax
advantages similar to a partnership.

The LLC is not recognized as a business type for tax purposes by the federal government.
Businesses operating as an LLC must file taxes under one of the three recognized
business structures.

6. Explain each:
a) Business Entity Concept
- The business entity concept (also known as separate entity and economic
entity concept) states that the transactions related to a business must be
recorded separately from those of its owners and any other business.

b) Going Concern or continuity assumption

- Going concern principle is the assumption that an entity will remain in
business for the foreseeable future. It means that the entity will not be
forced to halt operations and liquidate its assets in the near term at what
may be very low fire-sale prices. By making this assumption, the accountant
is justified in deferring the recognition of certain expenses until a later
period, when the entity will presumably still be in business and using its
assets in the most effective manner possible.

c) Time-Period Assumption
- Also known as the periodicity assumption. The accounting guideline that
allows the accountant to divide up the complex, ongoing activities of a
business into periods of a year, quarter, month, week, etc. The precise time
period covered is included in the heading of the income statement,
statement of cash flows, and the statement of stockholders' equity.

d) Unit of Measurement Assumption

- The unit-of-measure assumption which is sometimes referred to as the
stable monetary unit assumption. This assumption holds that the U.S. dollar

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Open University - Expanded Tertiary Education Equivalency and Accreditation Program (ETEEAP)
ACCO 2013 - BASIC FINANCIAL ACCOUNTING P1, Second Semester, 2017-2018
Ms. Andrea Rose E. Rimorin, CPA, MBA

is the common denominator or measuring stick for all accounting

measurements taken for American companies.

e) Accrual Basis
- Accrual accounting is an accounting method that measures the performance
and position of a company by recognizing economic events regardless of
when cash transactions occur. This method allows the current cash
inflows/outflows to be combined with future expected cash inflows/outflows
to give a more accurate picture of a company's current financial condition.

f) Matching Principle
- An accounting practice whereby firms recognize revenues and their related
expenses in the same accounting period. Firms report "revenues," that is,
along with the "expenses" that brought them. To avoid misstating earnings
for a period. Reporting revenues for a period without stating all the expenses
that brought them could result in overstated profits.

7. Differentiate accounting from bookkeeping.

PARTICULARS BOOKKEEPING ACCOUNTING
DEFINITION Bookkeeping is the process Accounting is an
of recording economic information system that
events. identifies records and
communicates the
economic events
PART Bookkeeping is just a part Accounting is the entire
of accounting process part of accounting process.
TITLE Person concerned with On the other hand, person
bookkeeping is called concerned with final stage
bookkeeper to accounting is called
accountant.
STAGE Bookkeeping is the primary Conversely, accounting is
stage of the whole the second or final stage of
accounting process. the whole accounting
process.
Nature Bookkeeping is a clerical Accounting is an analytical
natured. natured.
Standards Bookkeeping follows only Reversely, accounting
own organizational follows internationally
standards recognized standards.
Development Bookkeeping has no But accounting is always
remarkable development. developed by experts.
Function In the bookkeeping, Whereas, identifying
recording is its one recording and
function. communicating are
accounting major
functions.
Users Only the internal users Accounting has both
(owners, managers and internal and external users
employees) use
bookkeeping

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Open University - Expanded Tertiary Education Equivalency and Accreditation Program (ETEEAP)
ACCO 2013 - BASIC FINANCIAL ACCOUNTING P1, Second Semester, 2017-2018
Ms. Andrea Rose E. Rimorin, CPA, MBA

8. What are the specialized fields in accounting. Explain each.

:

● Financial Accounting

Financial accounting is said to be the primary form of accounting. It relates to the

preparation of financial statements which are based on the individual or business'
accounting records. It is made for the benefit of the people other than those in the
business like creditors, suppliers, banks, financial institutions and government entities.

Financial accounting computes, estimates and determines the profits or losses made
during a particular period. Additionally, it illustrates and explains the individual or a
business' financial position.

● Cost Accounting

Cost accounting provides the essential information to managers in ascertaining and

controlling the cost of products and operations. This is necessary for the managers in
making business decisions. Cost accounting helps the managers in the evaluation and
the administration of costs.

Cost accounting approaches vary from one company to the other. The approach may be:
Standard cost accounting, activity based costing, resource consumption accounting,
marginal costing, cost-volume-profit analysis and lean accounting. Cost elements like:
Labour, raw materials and indirect expenses are also considered.

● Managerial Accounting

Managerial accounting is specifically made for the management. It regularly uses

management information systems (MIS) for computations. The MIS takes into
consideration people, information and technology to determine costing, operations and
business strategy.

As such, managerial accounting is geared towards the decision making capacity of the
management and it helps management in controlling numerous business activity
endeavors. Additionally, information gathered is usually confidential and for the sole use
of management.

● Audit

Audits are done to verify the genuineness and reliability of the information in the books
of accounts. Its primary objective is to ensure that the financial statements and records
are free from miscalculations. Auditors usually employ statistical sampling, and
quantitative and qualitative factors in auditing to make sure that the accounting books
are without substantial misstatements.
9. Who are the users of financial information? Why do they need said information?
Data such as credit card numbers, credit ratings, account balances, and other monetary
facts about a person or organization that are used in billing, credit assessment, loan
transactions, and other financial activities.

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Open University - Expanded Tertiary Education Equivalency and Accreditation Program (ETEEAP)
ACCO 2013 - BASIC FINANCIAL ACCOUNTING P1, Second Semester, 2017-2018
Ms. Andrea Rose E. Rimorin, CPA, MBA

Internal users are people within a business organization who use financial information.
Examples of internal users are owners, managers, and employees.

External users are people outside the business entity (organization) who use accounting
information. Examples of external users are suppliers, banks, customers, investors,
potential investors, and tax authorities.

Financial information must be processed in order for business to be conducted, but it

must also be carefully handled by businesses in order to ensure security for customers
and to avoid the litigation and bad publicity that can stem from negligent or improper
use.

10. What are the basic financial statements? Explain each.

s:

Income statement.
Presents the revenues, expenses, and profits/losses generated during the reporting
period. This is usually considered the most important of the financial statements, since
it presents the operating results of an entity.

Balance sheet.
Presents the assets, liabilities, and equity of the entity as of the reporting date. Thus, the
information presented is as of a specific point in time. The report format is structured so
that the total of all assets equals the total of all liabilities and equity (known as the
accounting equation). This is typically considered the second most important financial
statement, since it provides information about the liquidity and capitalization of an
organization.

Statement of cash flows.

Presents the cash inflows and outflows that occurred during the reporting period. This
can provide a useful comparison to the income statement, especially when the amount
of profit or loss reported does not reflect the cash flows experienced by the business.
This statement may be presented when issuing financial statements to outside parties.

Statement of retained earnings.

Presents changes in equity during the reporting period. The report format varies, but
can include the sale or repurchase of stock, dividend payments, and changes caused by
reported profits or losses. This is the least used of the financial statements, and is
commonly only included in the audited financial statement package.
11. Give the qualitative characteristics of financial statements.
Understandability.
The information must be readily understandable to users of the financial statements.
This means that information must be clearly presented, with additional information
supplied in the supporting footnotes as needed to assist in clarification.

Relevance.
The information must be relevant to the needs of the users, which is the case when the
information influences the economic decisions of users. This may involve reporting
particularly relevant information, or information whose omission or misstatement could
influence the economic decisions of users.

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Open University - Expanded Tertiary Education Equivalency and Accreditation Program (ETEEAP)
ACCO 2013 - BASIC FINANCIAL ACCOUNTING P1, Second Semester, 2017-2018
Ms. Andrea Rose E. Rimorin, CPA, MBA

Reliability.
The information must be free of material error and bias, and not misleading. Thus, the
information should faithfully represent transactions and other events, reflect the
underlying substance of events, and prudently represent estimates and uncertainties
through proper disclosure.

Comparability.
The information must be comparable to the financial information presented for other
accounting periods, so that users can identify trends in the performance and financial
position of the reporting entity.

12. What are the basic elements of financial statements? Explain each.
1. ASSETS
Assets are the property or legal rights owned by a business to which money value can be
attached. In other words, it is an item of economic value that is expected to yield a
benefit in the future. Assets can be classified into:

i. Tangible Assets
Tangible Assets are those assets which have physical existence i.e. they can be seen and
touched.
Examples of tangible assets are machinery, furniture, building, etc.
ii. Intangible Assets
Intangible assets are those assets which do not have physical existence i.e. they cannot
be touched and seen. Examples of intangible assets are goodwill, patents, trademarks,
etc.
iii. Fixed Assets
Fixed Assets are those assets which are put to use for more than one accounting period
and its benefit is derived over a longer period.
For example, computer, machinery, land, etc.
iv. Current assets
Current assets are the assets which are readily convertible into cash and generally
absorbed within one accounting period.
For example, debtors exist to convert them into cash, bills receivable, etc.

2. LIABILITIES
According to IFRS Framework, “A liability is a present obligation of the enterprise arising
from past events, the settlement of which is expected to result in an outflow from the
enterprise of resources embodying economic benefits”. In other words, liability is the
amount owed by the business to the proprietor and to the outsiders. Liabilities are
generally categorised into 2 broad categories i.e. Current Liabilities and Non Current
Liabilities.

i. Current Liabilities It refers to those obligations or payments which are repayable

during the current financial year. Examples of current liabilities are Creditors, bills
payable.
ii. Non Current Liabilities It comprises of those payments which are due for payment
over a long period of time and there is no need to discharge it immediately. For example
Debentures, long term loans, etc.

3. EQUITY

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Open University - Expanded Tertiary Education Equivalency and Accreditation Program (ETEEAP)
ACCO 2013 - BASIC FINANCIAL ACCOUNTING P1, Second Semester, 2017-2018
Ms. Andrea Rose E. Rimorin, CPA, MBA

Equity represents ownership interest in a firm in the form of stock. Being precise in the
accounting terms, it is the difference between value of assets and cost of liabilities of
something owned. It is mainly a residual amount adjusted by the assets against
liabilities.
4. INVESTMENT BY OWNERS
It depicts an increase in equity resulting from transfer of resources in exchange of an
ownership interest .It basically describes any owner’s contribution to the firm.
Issue of ownership shares of stock by a company in exchange for cash represents an
investment by owners.

5. DISTRIBUTION TO OWNERS
It represents a decrease in equity which results from transfer to owners. It determines
the owners’ withdrawal from ownership interest of the firm.
A cash dividend paid by a corporation to its shareholders is an example of distribution to
owners.

6. REVENUE
Revenue is the income that a business earns from its normal business activities. It is an
inflow of assets, which result in an increase in owner’s equity.
Exchange of goods and services for money consideration is an example of revenue.

7. GAINS
Gain is an increase in owner’s equity from peripheral transactions which are irregular
and non recurrent in nature.
For example, Sale of machinery for an amount greater than its book value (original cost
less depreciation) would result in a gain for an enterprise which is engaged in the
business other than that of sale and purchase of machinery.

8. EXPENSES
are the gross outflows incurred by the business enterprise for generating revenues. An
expense is charged to Profit and Loss Account.

9. LOSSES
Loss is a decrease in owner’s equity from peripherals transactions which are irregular
and non recurrent in nature.
For example, Sale of machinery for an amount lesser than its book value (original cost
less depreciation) would result in a gain for an enterprise which is engaged in the
business other than that of sale and purchase of machinery.

10. COMPREHENSIVE INCOME

Comprehensive income is the change in equity of a business enterprise from
transactions from non owner sources. It includes all changes in equity of an enterprise
other than those resulting from investments by owners and distributions to owners.

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Open University - Expanded Tertiary Education Equivalency and Accreditation Program (ETEEAP)
ACCO 2013 - BASIC FINANCIAL ACCOUNTING P1, Second Semester, 2017-2018
Ms. Andrea Rose E. Rimorin, CPA, MBA

II. Exercises
A. Classify the following business as (A) Service Company, (B) Merchandising Company, and (C)
Manufacturing

C 1 Textile Mill B 11 Gift Shop

C 2 Shoe Factory B 12 Furniture shop
B 3 Appliance Store A 13 Barber shop
A 4 Repair Shop A 14 Driving School
B 5 Pharmacy A 15 Dress/Tailoring shop
A 6 Call Center B 16 Department Store
A 7 Medical Clinic A 17 Dental Clinic
A 8 Laundry Shop A 18 Car Assembler
B 9 Hardware A 19 Computer Shop
B 10 Grocery A 20 Schools

B. Classify the following as to: (A) Asset, (L) Liability, (C) Capital, (R) Revenue) and (E) Expense

A|L 1 Sales L 11 Interest Payable

A 2 Land L 12 Interest Expense
A 3 Building A 13 Prepaid Insurance
A 4 Notes Receivable A 14 Prepaid Rent
L 5 Notes Payable R 15 Professional Fees
A 6 Cash L 16 Taxes Payable
A 7 Automobile C 17 Pedra, Drawing
L 8 Bonds Payable C 18 Pedra, Capital
C 9 Franchise A 19 Accounts Receivable
A 10 Commissions Income A 20 Accounts Payable

C. Matching Type - On each space provided, indicate the letter of the word or group of words that fit the
given statement.
List of possible answer

A Accounting period I Revenue

B Calendar year J Expense
C Proprietor K Going Concern Assumption
D Statement of Financial Position L Unit of measure assumption
E Statement of Comprehensive Income M Business entity assumption
F Assets N Time-period assumption
G Liabilities O Corporation
H Capital P Sole Proprietorship

P 1 A business that is owned by one person.

K 2 An assumption which gives the business a continuous life of existence.
N 3 An assumption which divides the life of the business into equal periods.
L 4 An assumption which considers peso as our unit of measure.
B 5 An annual accounting period that begins on January 1 and ends on December 31 of the same
year

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Open University - Expanded Tertiary Education Equivalency and Accreditation Program (ETEEAP)
ACCO 2013 - BASIC FINANCIAL ACCOUNTING P1, Second Semester, 2017-2018
Ms. Andrea Rose E. Rimorin, CPA, MBA

A 6 The division of time in the life of the business.

C 7 Owner of a sole proprietorship business.
D 8 The statement which presents the financial picture of a company as of a specific date
J 9 The economic resources that a business controls and expects to be useful in the future.
F 10 Owner's claims on the business assets.
O 11 Type of business organization which is owned by stockholders.
E 12 The statement which shows the results of operations for a specific date.
G 13 These are present obligations of the entity arising from past transactions.
I 14 Gross inflow of economic benefits during the period other than those relating to contributions
from owner
H 15 Costs incurred to produce revenue.

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