FUNDAMENTALS OF ABM 1
- Report that informs the users of the financial condition
first quarter.
The Role of Accounting in the Operation of Business Entities
1. Accountants analyze, record, and summarize financial
information arising from business transactions into
reports.
2. Accountants relay conclusions acquired from
completed reports to decision-makers.
3. Decision-makers create and implement well-informed
and justified decisions.
4. The business is ready to operate with better
strategies and methodology.
5. The business operates and transacts.
FINANCIAL STATEMENTS:
Statement of Cash Flows
- Reports the firm’s receipts and disbursements of cash
which are classified according to the company’s major
activities: operating, investing, and financing
- shows the sources and uses of cash and its balance
at the end of the period
- Financing activities: personal savings put in a
business
- Investing activities: start-up investment in sewing
machine; purchase of assets that benefit many years
of operation
- Operating activities: cash generated by operations
Income Statement
- Report that shows the result of business operations
whether net income or net loss for a given period of
time
- Expenses associated with the fixed assets owned by
the enterprise fall under this
- Depreciation Expense: equipment that are estimated
to last for a long period of time and would have a
negligible amount of residual value at the end of the
assets’ estimated life
- DE can be obtained by dividing acquisition costs by
the estimated number of years the asset would
benefit the shop
Statement of Changes in Equity
- Report that presents a summary of the changes that
occurred in the owner’s equity of the entity during a
specific time period; used to determine whether
capital increased or not
- Taking out cash or non-cash asset for personal use
would decrease capital balance
Statement of Financial Position
of the business at a given date, usually at the end of
an accounting period
- Assets: resources owned or controlled by the
business
- Liabilities: commitments to give out assets (typically
cash) or to render services to creditors
- Assets and liabilities should be classified into two:
current (used or paid within one year) or noncurrent
(used or paid beyond one year)
- Double-entry recording system: recording activities to
ensure a balanced statement of financial position
Nature and Scope of Accounting
Accounting vs. Bookkeeping
Bookkeeping – deals primarily with the systematic method of
recording and classifying financial transaction of business
Accounting – the art of recording, classifying, and summarizing
in a significant manner (as defined by the American Institute of
Certified Public Accountants); a system that measures
business activities, processes given information into reports,
and communicates those findings to decision-makers (as
defined by the Philippine Institute of Certified Public
Accountants)
- “art” connotes that accounting is an art of
communication; it provides both financial and
nonfinancial information
- Accounting is often regarded to as the language of
business because it is the medium of communication
between a business firm and the various parties
interested in its financial activities
: An accountant is a bookkeeper AND MORE
History of Accounting
- Account records date back to the ancient civilizations
(circa 4000 B.C.) of China, Babylonia, Greece, Egypt,
and Mesopotamia
- The rulers of these civilizations used accounting to
keep track of the cost of labor and materials used in
building structures like the great pyramids
- 1400s: accounting developed as a result of the
information needs of merchants in the city-states of
Italy
- Luca Pacioli: published the first known description of
double-entry bookkeeping entitled Summa de
Arithmetica, Proportioni et Proportionalite (Everything
about Arithmetic, Geometry and Proportion) published
in Venice in November 1494; Father of Accounting
 - Industrial Revolution (1760-1840): pace of accounting
development increased as the economics of
developed countries began to mass produce goods;
merchandise was priced based on managers’
hunches, but increased competition required
merchants to adopt more sophisticated accounting
system
- Early Twentieth Century: the growth of corporations,
especially those in the railroad and steel industries,
spurred the development of accounting
- Government played a role in leading more
development in the field of accounting when it started
using the income tax. Accounting supplied the
concept of “income.”
The Accounting Profession
Two Classifications:
Public Accountants: those who serve the general public and
collect professional fees for their work such as what doctors
and lawyers do; works include auditing, income tax planning
and preparation, and management consulting
Private Accountants: work for a single business (Jollibee, etc.);
employed by charitable organizations, educational institutions,
government employed private accountants
Certified Public Accountant (CPA)
- A professional accountant who earns his title through
a combination of education, qualifying experience and
an acceptance score in the written national
examination given by the Board of Accountancy
- The Board of Accountancy prepares, grades, and
gives the results of the examination to the
Professional Regulation Commission (PRC) who then
issues licenses that allow qualifying examinees to
practice accounting as CPAs.
CPA:
1. A degree in accountancy
2. Good moral character
3. Professionalism
4. Qualifying experience
5. Passing score in the CPA board exam
Who hires them?
1. CPA firms that offer accounting services to outside
firms
2. Private companies that range from insurance
companies, manufacturers, banks, and more
BRANCHES OF ACCOUNTING
Financial Accounting
- Keeps track of a company’s financial transaction
- Prepares financial statements (and notes to the
financial statements) using standardized guidelines
scenario! (read for better understanding)
Chloe has been working as a financial accountant for
Singapore Airlines for quite sometime now. She is in
charge of maintaining the company’s accounts, supervising
its tax payments, making bank reconciliations, and creating
its periodic financial statements. She states that becoming
a financial accountant was her best decision, as she
enjoys working by herself, she has a knack for precision
and organization, and she enjoys maintaining records and
creating reports.
Management Accounting
- The Institute of Management Accountants (2008)
defines management accounting as “a profession that
involves partnering in management decision-making,
devising, planning, and performance management
systems, and providing expertise in financial reporting
and control to assist management in the formulation
and implementation of an organization’s strategy”
- Management accounting provides regular reports
containing essential information which is vital to
achieving company’s competitive advantage
scenario! (read for better understanding)
Angela is an accountant working under the field of
management accounting in Indonesia. In the company, she
is responsible for advising managers of all levels about
strategies and methods that will best impact the financial
status of the company. A couple of which include
explaining the advantages and disadvantages of certain
decisions, and evaluating business plans. Since Angela
likes interacting with other people and is good at analysis,
strategy-building, communicating, and risk-taking, she is
perfectly equipped to be a managerial accountant.
Government Accounting
- A branch of noncommercial accounting that takes into
account collection of taxes, computation of national
income, fixing of gross national product (GNP) target,
ascertaining the balance of payments, among others
- Has its own accounting system in which budgets and
encumbrances form parts of the accounts and assets
which are restricted for specific purposes
scenario! (read for better understanding)
Jay is an accountant employed at a local government
organization in his province in Vietnam. He is in charge of
managing the organization’s public funds: auditing its tax
accounts, monitoring and allocating revenues, and
investigating fraud. Jay expresses his satisfaction working
as a government accountant, as he uses his good
analytical and deductive skills and his adept verbal and
written communication skills on a regular basis.
Auditing
- Tasks include the review of a firm’s accounting
systems and financial statements to confirm that all
these follow the Generally Accepted Accounting
Principles (GAAP) and prescribed standards
- The objective of this task is to provide an opinion on
the sufficiency of financial and other control measures
within the firm which is communicated through an
audit report
- Audit is also conducted to evaluate and improve the
effectiveness of the company’s risk management,
control, and government processes
scenario! (read for better understanding)
Mica is working as an auditor of a multinational company
based on Brunei Darussalam. It is her job to maintain and
ensure the correctness, compliance, and completeness of
the various financial statements that the company
presents. Mica is very good at detecting errors, has an
extensive knowledge and expertise in accounting
standards and policies, and is known to her coworkers as
honest and upright; that is why she thinks it was most
appropriate for her to become an auditor.
Tax Accounting
- Focuses on tax matters; includes all undertakings
concerning tax computation, filing tax returns, and
planning for future tax obligations
scenario! (read for better understanding)
Clarisse is a tax accountant who works for various clients
who need help with their tax obligations in the Philippines.
As a tax accountant, Clarisse prepares their tax returns,
suggests ways to minimize their tax liabilities, and ensures
their compliance with tax regulations. She thinks that she is
best suited to become a tax accountant because she
enjoys continuous learning, especially about tax laws that
are constantly changing. She knows how to deal with
people, and she is wise, practical, organized, and
hardworking.
Cost Accounting
- Branch of accounting in which costs incurred by the
firm in accomplishing its objective or executing its
various activities are collected, recorded, and
classified.
- Cost includes cost of goods, manufactured and sold,
salaries and wages, overanalyzed costs, among
others
- Cost accounting considers money as the economic
factor of production
scenario! (read for better understanding)
Dianne has been employed by a company based in
Myanmar as their cost accountant. She was given the task
of determining the different costs of the firm, verifying the
factors that affected those costs, and suggesting which
costs to eliminate or reduce while maintaining optimum
quality. Dianne does not regret becoming a cost
accountant because her adeptness for accuracy and
precision, expertise in cost-benefit analysis, and good
decision-making skills allow her to work with ease.
Accounting Education
 - Branch of accounting more inclined to the preparation Based on Ownership
for a professional career in accountancy
- Two elements: experience (practical accounting work) Advantages Disadvantages
Sole or single : Ease of : Limited
and education (comprising of general together with
proprietorship formation amount of
the technical studies)
: a business which is : Owner has capital
owned and managed by full control : the owner
only one person over the assumes all the
scenario! (read for better understanding) management risks including
of the net loss of the
Ever since Anne was young, she liked teaching children.
business business
That is why she chose to become an accountant engaged
: The owner : there is
in the field of accounting education. She wanted to help receives all difficulty in
young people become CPAs like her. Currently, she is the net income attracting and
enjoying her work as a professor in accounting in one of of the retaining
the universities in the Philippines. She shares her talent in business talented
expressing ideas and explaining concepts, her patience, : Less employees
passion, and willingness to teach her students in the area governmental : Expertise
of accounting. control limitation
: Ease in : the owner is
changing taxed as a
ownership single person
structure if
Accounting Research circumstances
change
- Branch of accounting that is responsible for the Partnership : it is easy and : there is lack of
development and discovery of accounting concepts : an association of two or inexpensive to business
and practices. Accounting research is conducted by more persons who bind form and to continuity
both the accounting educators and practicing themselves together to do dissolve because it can
accountants. business for profit; : greater be easily
- Academic accounting researches center on the persons owning this form amount of dissolved
different areas of the accounting profession using a of business are called capital may be : limited amount
more scientific method in the study partners raised of capital may
compared to a be raised
Accounting in Specialized Area sole compared to a
proprietorship corporation
scenario! (read for better understanding) : there is : a partner may
relative be subjected to
Grace has been engaged in accounting research in freedom and a personal
Thailand for a few years now. She does not mind the long flexibility in liability for
hours of scanning books and writing, so she really enjoys decision- erroneous
her work. She thinks that she is a very good fit for this making management
profession because she is persistent, attentive, observant, compared to a decisions made
a critical-thinker, and an eager learner. corporation by his
: less associates
governmental : there is
Fiduciary Accounting control likelihood of
compared to dissension and
- Key terms: trust, trust fund, estate corporation disagreement
: better when each of
Forensic Accounting management the partners
results from has the same
- Key terms: fraud, legal, gathering evidences
the combined authority in the
experience management of
and ability of the firm
TYPES OF BUSINESS ORGANIZATIONS several : there is
individuals difficulty in
 transferring : provides organization
ownership services to : big investors
interest members at may not opt to
because the lowest invest in this
ownership possible cost type of
interest in the : members business due to
partnership enjoy limited
cannot be patronage ownership
transferred refund in interest and
without the relation with that one vote
consent of all business per member
partners volume each policy
Corporation : the : difficulty in member has : it is being
: refers to a body formed corporation’s formation done with the managed and
and authorized by law to power of because of cooperative controlled by
act as a single person; succession complicated during the users-owners
persons who put in capital enables it to legal year from the wherein the
in a corporation are calledenjoy a requirements remaining net services
stockholders continuous and high costs margin derived provided are at
existence in its by the cost or just a
: bigger organization association little above cost
source of : subject to after setting limiting return
capital may be more aside reserves on equity
raised governmental to protect the capital
because many control entities
individuals : corporation’s financial
invest funds in activities are security and
the limited by the future growth
corporation articles of the
: ease of incorporation
ownership : subject to Based on Ownership
transferability more taxes 1. Service concern (service) – businesses engage in the
– shares of
rendering of services to others for a fee, like the
stocks may be
transferred beauty parlor, law firm, dental clinic, and medical
without the clinic
consent of the 2. Merchandising or trading concern – businesses that
other are into the buying and selling of goods or
stockholders commodities like the grocery store, drug store. And
: corporation department store
has the 3. Manufacturing concern (manufacturing) – businesses
capacity to act that are engaged in the processing of products or the
as a legal conversion of raw materials into finished goods that
entity are then sold like the furniture factory and shoe
Cooperatives : may be : they are factory
: a special type of organized as a required to file 4. Hybrid – businesses that are a mixture of service,
business organization legal business periodic
merchandising, and manufacturing
owned and controlled by or entity or registration;
the same people who may just be an failure to do so USERS OF FINANCIAL STATEMENTS
make use or who benefit incorporated will result in
from the services offered organization dissolution Internal Users (directly involved in the business enterprise;
by the same entity; : it is formed : generating operates/runs the business)
persons owning this form for the primary profit for its
of reason of investors is not Owners – provides the money/capital that the business needs
associations/organizations giving service the top priority to begin operations; through the financial reports, the owner
are members to its members of the can properly manage and monitor the business, analyzing
whether or not he/she can expect reasonable return from Assumptions Principles
his/her investment Entity Concept Cost Concept
Management – use accounting information to set goals for the Going Concern Concept Revenue Realization
organization, to evaluate the progress made toward those Concept
goals, and to take corrective action if necessary Time Period or Periodicity Matching Concept
Employees – financial statements enable them to assess the Concept
ability of the enterprise to provide remuneration, retirement Monetary Concept Objectivity or Verifiability
benefits, and other employee opportunities and benefits Concept

Accrual Concept Materiality Concept

External Users (not directly involved in the business
enterprise; outside)
Potential Investors – use financial statements in evaluating
what income they can reasonably expect from their investment
Creditors – nagpapautang; determine the borrower’s ability to
meet scheduled payments
Customers – interested in information about the continuance of
an enterprise, especially if they are dependent on the
company’s offerings either in the form of goods or services
Taxing authorities – amount of the tax is determined using
accounting information
Government regulation authorities – most organizations face
government regulation. For example, the Security and
Exchange Commission (SEC) requires businesses to disclose
certain financial information to the public. The SEC, like many
government agencies, bases its regulatory activity in part on
the accounting information it receives from firms
Nonprofit organizations – they (e.g churches, most hospitals,
etc.) use accounting information in much the same way that
profit-oriented businesses do
Other users – consumer groups and the general public may
also be interested in the amount of income that the businesses
earned
Three Basic Purposes of Accounting (GAAP)
- They help increase the confidence of financial
statement users that the financial statements are
representationally faithful
- They provide companies and accountants, who
prepare financial statements, with guidance on how to
account for and report economic activities.
- They provide independent auditors of financial
statements with basis for evaluating fairness and
completeness of those statements
BASIC ACCOUNTING CONCEPTS
Consistency Concept Disclosure Concept
Conservatism or Prudence
Concept
Business Transaction – a business event that can be
measured in terms of money that affects the enterprise; “value
received and value parted with”
Entity Concept
- Entity: organizational unit for which accounting
records are maintained
- Establishes boundaries or limits as to what
information should be included in the financial
statements of a given company
- Personal transactions of owners must not be
combined with transactions of the business
Going Concern Concept
- This concept assumes that the business is to continue
its operations indefinitely; continuous
Time Period or Periodicity Concept
- Divides the life of the business into regular intervals
(usually one year)
- Fiscal Year: accounting time period of one year in
length
- Calendar Year: a twelve-month period beginning with
January 1 and ending December 31
- Natural Business Year: the length of the fiscal period
is determined by the nature of the business and the
frequency of the need for data regarding the financial
condition and progress of the business. A yearly fiscal
period does not start with January 1 and end on
December 31
- Interim Period: reporting period shorter than one year
Daily: sales reports
Weekly: gross profit report
Monthly: profit and loss
Quarterly and Semi-annually: profit and loss,
and statement of financial position
Yearly/Annually: tax and annual company
reports
Monetary Concept
- Money is used as the unit of measure in preparing the
various financial reports of the company
- Current (peso, yen, won, dollar, etc.)
Accrual Concept
- This concept requires that income be recorded when
earned regardless whether cash is received. And an
expense be recognized when incurred regardless
whether payment is made
Consistency Concept
- Once a method is adopted, it must not be changed
from year to year to allow comparability of financial
statements between years and between businesses
Cost Concept
- Assets are acquired in business transactions
conducted at arm’s length transactions
- For noncash transactions, the cost principle assumes
that the market value of the resources given up in the
transaction provides reliable evidence for the
valuation of the item acquired
- Arm’s Length Transaction: between buyer and seller;
all transactions must be recorded at cost
- Fair Market Value: value that is prevailing in the
market during the time of transactions
Revenue Realization Concept
- Revenue or income: the inflow of assets that results
from producing goods or rendering services
- This concept provides that income is recognized
when earned regardless whether cash is received.
This means that the following conditions are met:
o The earning process is essentially complete
o An exchange has taken place
- These two conditions for most of the companies are
met at the time goods are sold or services rendered.
To wit, two points of income recognition are the
following:
o Income is considered earned when services
are fully rendered
o Income is considered earned when goods or
merchandise are fully delivered
Matching Concept
- States that all expenses incurred to generate
revenues must be recorded in the same period that
the income are recorded to properly determine net
income or net loss of the period
Objectivity or Verifiability Concept
- All transactions must be evidenced by business
documents free from personal biases and
independent experts can verify reports
- Examples are official receipts, invoices, and vouchers
Materiality Concept
- Relative importance of an item or event
- An item/event is considered material if knowledge of it
would influence the decision of prudent users of
financial statements
Disclosure Concept
- All relevant and material events affecting the financial
condition/position of a business and the results of its
operations must be communicated to users of
financial statements
- Important information found in the financial
statements should be revealed/disclosed
Conservatism or Prudence Concept
- Assumes that when uncertainty exists, the users of
financial statements are better saved by
understatement than by overstatement of net income
and assets
TWO FORMS OF THE STATEMENT OF FINANCIAL
POSITION
Account Form – assets are listed on the left side of the report
and the liabilities and proprietorship on the right side
Report Form – assets on the top section of the statement and
the liabilities and owner’s equity on the bottom section
No matter what form you choose to present your statement of
financial position, you will arrive at the same totals.
Accounting Equation:
Assets = Liabilities + Owner’s Equity
(formula for liabilities and OE can be derived)
Assets – anything owned or possessed by the business
Liabilities – economic obligations payable to an individual or an
organization outside the business
Owner’s Equity – represents the claim of an owner of a
business over the assets of the business after the claims of the
creditors have been satisfied
CLASSIFICATION OF ASSETS
Current Assets Noncurrent Assets
Cash Land
Investments in Trading Building
Securities
Notes Receivable Equipment
Interest Receivable Furniture and Fixtures
Accounts Receivable
Advances to employees
Merchandise Inventory
Accrued Income
Supplies on Hand
Prepaid Insurance
Prepaid Rent

CLASSIFICATION OF ASSETS
Current Assets Noncurrent Assets
Accounts Payable Notes Payable Long-Term
Notes Payable Installment Contracts
Payable
Interest Payable Mortgage Payable
Deferred or Unearned Bonds Payable
Income
Taxes Payable
Accrued Expenses