een yan ulcre Circ DUNTING PRES ESS ‘sey Se Dr . ceaatt\ A a se SI ARE a ge ceCHAPTER 1 CHAPTER 2 CHAPTER 3 CHAPTER 4 CHAPTER 5 TABLI SOF CONTENTS: E BASIC ACCOUNTING ENVIRONMENT Accounting and You; Accounting and Business: History of Accounting: Business, Its Various Motives and! Sources of Capital Forms of Business Organization of Business Operations; Ways of Obtaining Prot Management of the Business: Types of Business Aetivitic Accounting As A Language of Business; Stakchold Types of Accounting and Reports; Accounting Information System; Financial Statements: Questions, Exercises, Problems, Case Studies and Quizzes 1 to 3 FUNDAMENTAL CONCERNS IN ACCOUNTING The Changing Business Environment; Qualities of a The 21° Century Business Person: The’ Accountant of the Century; Career Fields: Accounting Areas: Regulatory Bodies: International Accounting Standards: Accounti of 2004; Accounting Framework; Good Gover ndards; The Future of Accounting: Soe rental Accounting; Guide Questions, Exe Problems, Case Studies and Quizzes 4 to 5. ice: Bthieal and ses, STARTING UP A BUSINESS Qualitative Characteristics; Accounting Principles; Financial Structure of a Business; Accounting Equation and the Statement of Financial Position; Business Transaction and the, Accounting Elements; Accounting Equation Ilustrated; Statement of Financial Position; Guide Questions, Exercises, Problems, Case Studies and Quizzes 610 10. DETERMINING INCOME THROUGH OPERATION le of Revenue Recognition: Principle of Expense Recognition; Income; Expenses: Accrual Concept against Cash Concept; Profit or Loss; Income Statement; Statement ‘of Comprehensive Income, Capital Statement; Statement of Financial Position; Statement of Cash Flows; Fundamentally Related Financial Statements; Balance Sheet Approach; Classification of Assets and Liabilities: Accounting Period; Operating Cycle: Concept of Capital and Capital Maintenance; Guide Questions, Exerei Problems, Case Studies and Quizzes 11 to 15 PROCESSING BUSINESS TRANSACTIONS FOR A SERVICE PROVIDER AND FINANCIAL ANALYSIS Accounting Cycle; Business Papers; Account: Chart of Accounts: T-Accounts; Venetian Model; ‘The Ledger; The Journal; Journalizing and Posting Procedures; Trial Balance 25 to 42 43 to 64 65 to 90 91 to 122CHAPTER 6 CHAPTER 7 CHAPTERS CHAPTER 9 and Locating Errors; Subsidiary Ledgers and ue Control Accounts; Combination Journal; | Guide Questions, Exercises, Problems, Case Studies and Quizzes 16 to 2 PROCESSING SELECTED BUSINESS TRANSACTIONS Owner's Investment and Drawings; Cash On Hand and In Bank: Value of Property; Acquisition and Sale of Assets Payroll; Payroll Sheet, Employers’ Payroll Liabilities Interest. and Non-Interest Bearing Promissory Notes: Discounting of Notes; Taxes and Registration Fees; Guide Questions, Exercises, Problems, Case Studies and Quizzes 22.10 26. COMPLETING THE ACCOUNTING CYCLE Accounting Cycle Illustrated; Need for Adjustments: Accrual of Income” and Expenses; Deferred Revenue: Prepaid Expense; ; Bad Debts; Depreciation; Worksheet: Adjusting Entries; Adjusted Trial Balance; Guide Questions, Exercises, Problems, Case Studies and Quizzes 27 to 29. FINANCIAL STATEMENT PRESENTATION, CLOSING THE BOOKS, AND FINANCIAL ANALYSIS Financial Statements and its Limitations; Integrity of Financial Statements; Income Statement, Capital Statement, Statement of Financial Position; Current and Non-Current Classification, Adequate Disclosures; Statement of Cash Flows; Fundamentally Related Financial Statements; Closing the books; Post Closing Tiial Balance: Reversing Entries; Interpreting the Financial Statements; Foreign Financial Statements; Guide Questions, Exercises, Problems, Case Studies and Quizzes 30 to 33. PROCESSING TRANSACTIONS OF A. MERCHANDISER Service Business and Merchandising Business Compared: Net Sales, Gross Profit, Operating Profit; Inventory System of Recording; FIFO Costing Method: Gross Sales; Invoice: Sales Discount, Returns and Allowances; Credit Memo. Net Sales; Credit Card Sales; Cost of Goods Sold: Gross Purchases; Freight In; Purchase Returns, Allowances and Discounts; Operating Expenses; and Other Operating Expenses; Method of Income Statement; Imy Drawing; Purchase and Sale of Assets Other than the Merchandise; Value Added Tax and Percentage Tax; Guide Questions, Exercises, Problems, Case Studies and Quizzes 34 to 3 Other Operating Income Function of Expense ported Goods; Owner's 0159 151 to 182 183 to 218 219 to 258CHAPTER 10 CHAPTER 11 CHAPTERI2Z CHAPTER 13 CHAPTERI4 QUIZZES ACCOUNTING SYSTEM: SPECIAL JOURNALS Journals; Sales Retailer Against. Wholesaler; Special Journal; Cash Receipts Journal; Purchases Journal: Cash Disbursements Journal: Gencral Journal: Guide Questions Exercises, Problems, Case Studies and Quizzes 39 tc CYCLE OF A COMPLETING THE ACCOUNTING MERCHANDISER Adjusting Entries: Merchandise Inventory End; Methods of Financial Statements; Estimating Bad Debts: Worksheet Balance: Worksheet, Closing Entries: Post Closing Tria Financial Analysis; Comparative Financial Statements; Horizontal Analysis, Vertical Analysis, Ratio Analysis; Guide Questions, Exercises, Problems, Case Studies and Quizzes 44 to 49. REPORTING CASH FLOWS Objectives; Concept of Cash; Categories of Major Business Activities; Direct Method and Indirect Method of Cash Flows from Operating Activities; Statement of Cash Flows: Cash Ratios; Guide Questions, Exercises, Problems, Case Studies, Quizzes 50 to 53 CASH CONTROLS Internal Control, Imprest System, Petty Cash Fund Operation, Current Account; Bank Reconciliation Statement; Voucher System; Guide Questions, Exercises, Problems, Case Studies and Quizzes 54 to 57. PROCESSING TRANSACTIONS OF A MANUFACTURER Operation of Merchandiser and Manufacturer Compared; Product Cost; Period Cost; Direct Cost: Common Cost; Pricing; Statement of Cost of Goods Manufactured; Cost Flow; Income Statement; Journal Entries; Guide Questions, Exercises, Problems, Case Studies, Quizzes 58 to 61. 1 to 61 259 to 288 289 to 326 327 to 342 343 to 372 373 to 394 395 to 560CHAPTER I ACCOUNTING ENVIRONMENT. LEARNING OBJECTIVES Afier studying this chapter, you should be able to: a. explain the importance of accounting and relate it to your personal life bh. explain the importance of accounting and relate it to business. define business, and explain its motive and role in society d._ describe the forms of business organizations and types of operations ©. define management and explain its functions and roles in business. f define accounting and explain why itis called the language of business identify the users and explain why they depend on accounting information deseribe what an accountis identify the ng information system is, \d the financial information contained herein. ncial reports a This chapter will surely catch your interest as it opens the door of accounting for you. It will be interesting to find out how accounting ‘relates to your personal life and your professional life, as well, Since accounting is part of any business organization, it will also be interesting to find out what a business is and how you can make it successful. In fact, just by reading this chapter you will find out that accounting is a powerful tool in business. The author will try to hold your interest as she walks you into the first four chapters. the topics of which are shown in the diagram on page 2. These four chapters are very important and must be clearly understood before the author opens the second door where you will acquire a deeper knowledge of accounting as you move to the succeeding chapters. Chapter 1 describes the forms of organizations and types of business operations. You will find out who the users are and why accounting matters to them. The chapter ends with financial reports that will give you an idea ‘on how accounting informs readers. Chapter 2 discusses skills and competence that you should possess to be able to meet the challenges brought about by the 21 century ~ global market, high information technology, trade liberalization. It also gives you the areas of responsibility of a business/individual: financial, social and environmental. It also describes the accounting areas, career fields, professional regulatory bodies. Most important, it ends with the accounting framework pervasive in the creation of accounting standards. Chapter 3 explains the accounting principles needed to start up a business and illustrates how business transactions shape its financial structure. Chapter 4 explains the accounting principles affecting business operation and illustrates how business transactions shape its financial performance.| ieee Importance of Accounting, Business and its Role in Chapter 3 ‘undamental Changes in the 21" Accounting Principles, | transaction | Transaction Analysis | Analysis to opy ij | Century, Skills & | to start upa business, | business, ¢ anges, Society, Users and | Competence, | Accounting Equation | Capital Expandeg! their Needs, | Regulating Bodies, | Iilustrated, Preparation | A, ounting Accounting Accounting Areas, | of the Statement of | E quation Iustratey Information System, Accounting, | Financial Position Preparation of the Accounting Reports. | Framework, Good | | Profit or Loss | Governance _ | | Statement, WHO CARES ABOUT ACCOUNTING? ON A PERSONAL LEVEL ‘Whether you are a student, housewife, problems. Balancing your daily expenditures difficult feat. Accounting will help you. You ni oF worker, you will always be confronted with fnancd against your limited earings or resources (money) is2 \eed to prepare a budget. ON A PROFESSIONAL LEVEL And then a few years from now you will be graduating from college and regardless of your profession (lawyer, doctor, banker, entrepreneur, chef, manager), you will need answers ‘0 the following questions that will have a financial impact in your professional life: suche Entrepreneur: Should I set up an Internet Shop or a Water Refilling Station? Investor: Should I buy Jollibee shares or Ayala bonds? Bank manager: Should I approve the cash loan of Mr. Ben Chan for P1,000,000? Financial manager: How many units of Product A should our firm sell to breakeven? Marketing manager: Should our firm spend P3,000,000 to promote this new product? Supplier of Flour: Should I grant Mr. King a monthly credit line of P2.000,000? Accountin; 2 will prepare reports and provide you with relevant information so you Will be able to answer these questions and help you make sound decisions. ON A BUSINESS LEVEL : r fe Although Accounting is vital to one's daily activities, the impact of accounting is ™0! felt in the field of business food from the small neighborhood bakery to a multi-national company corporation, e baker has many financial problems, It How much capital dot need? How much and what much materials (flour, milk, sugar and y ast) shoul sell the breads and pastries considering the procest needs to answer the following questi. are the tools and equipment needed” Hor id be bought? What is a reasonable we ing and operating costs to be incurred’= « limited company in other countries as in Europe) has ma Sean pany. It will be confronted with the following questions: How problems if it sets up a 00" SONG? What type of stock will it issue, how many shares and Pe ea Te aie ho will be the Board of Directors and what will be their what vill be the pak i what tools and equipment will be necded? What products will we responsibilities and cai yroducls. what will be the processing and operating costs? Be that as sean en ans eens the question always ends up with: What is a fair and reasonable price to sell the different pro : or complicated would like to know whether they sking the following questions: Did our business make any profit? Did our assets or resources grow (specially the cash)? What money has come in and what has gone out? Are we ready to expand? Did the owners or investors earn a good return on the money he creditors (bank or supplier) paid on time? Likewise, both businesses be it simple succeeded or failed by they invested? W All businesses, from the simple to the most complicated, have one thing in common: they need financial information before making decisions. This is where Accounting comes in as it plays a vital role in tracking down the activities and resources of the business, preparing reports and providing you with relevant information concerning financial position, financial performance, and changes in monetary resources, HOW HAS ACCOUNTING DEVELOPED? The earliest accounting system was found as early as 2000 BC in the cities of Babylonia, Greece, Egypt and in 3500 B.C. in Assyria. It consisted of records of taxes imposed by the king and collected from the people by the tax collectors. Likewise, when pyramids were being constructed in Egypt, the pharaoh required a record of materials, labor and overhead used in the construction of the pyramids. ‘The first accounting book was written by Cotrugli in Naples but the modem day double entry bookkeeping could be traced from the book prepared in 1494 by an Italian mathematician, Fr. Luca Pacioli, entitled Summa de Aritmetica, Geometria, Proportioni et Proportionalita. One section of this book made him famous, Particularis de /Computis et Scripturis. Modern bookkeeping system has evolved from Pacioli’s “Model of Venice” which he developed to help the Italian merchandise in their trade practice. This has earned for him the title of Father of Accounting. In the [5th century, limited companies were conceived when the Italian merchants entrusted their properties to their servants or employees who were required to prepare reports by tracking down their daily activities and listing the properties (assets) owned by the merchants and the debts ies) owed to others. From their records came the terms debtor (one who borrows money or buys goods and services on credit) and creditor (one who lends money or sells services or goods on credit). From these, two accounting terms - debit and ‘redlit - were derived and this will be explained in a succeeding chapter. It was only after the |6th century, when trading in foreign ports started, that profit was calculated and a profit and loss report was prepared after a particular voyage o trip was completed. ‘The 19th century was a witness to the massive develoy : pment of trade and industry and th: le structure ofa business changed to a more complex one with the formation oft uals Combinations, mergers and consolidations. It became necessary to improve the process of 0 : ess of ‘ecording and reporting financial information from simple bookkeeping to accounting, And with 2ey > | «ne advent e ¢ of the information age driven by electronic devices such as th for processing 7 Processing information turned from manual to electronically assisted eT the desi In the PI : ; et he Philippines, bookkeeping was introduced by the Spaniard called Tenedor de Libro. Trade Mourished even before the Spaniards caine 4. aia trdlrs from the n en before the Spaniards came to oug nearby Asian shores, Chinese tra at y is ese traders in particular. hang res iat thes ' exchanged goo res with the Filipino merchants. It was only when the Americans came in th M5 ang the twentieth century that busine: fe v6 Cay pao ey ‘at_business proliferated with the establishment of Am, Sampanies. Kis also no wonder that our accountng practice followed that of th Ga es. The first licensure examination was given for Certified Public Accountants in ja and the professional association of ac: now) was established in 1929. ountants (called Philippine Institute of Accountay WHAT IS A BUSINESS? ‘an eae ee ales all aspects of our lives - the food that we eat, books and supplies, We use, clothes and shoes we wear, the transportation ride we take. We interact with seven isinesses everyday because of the products and services that we need. It is therefore importan, that we take time to look at what business is all about and what are its various motives and roles _ A business is simply defined as an economic activity of buying and selling in order 19 obtain profit. It can be defined formally as-an economic unit that obtains and controls resources and then engages in buying and selling of goods or services with a view of enhancing these resources. A major concern of a business is how best to use the resources - what machines are needed, what labor skills are required, how many men to employ, how much fixed capi working capital are needed, what raw materials to use. These must be used efficiently at the least possible cost. Success in business is measured in terms of profit which increases the value of funds and resources of the business. Profit is obtained when the amount you receive is more than the amount you paid for the goods or services you sold. 1 is possible for business to expand. Subsequently, more properties ‘goods are produced and sold, and more taxes are paid to the government. Money received by the government from these taxes help fund the projects. These projects consisting of roads, bridges, piers and other infrastructures facia fransportation of people, goods and services. Safety. good service and efficient service 2% best provided when government has enough funds to spend. A flourishing business surely contributes to the economic growth of the country. With more funds, are acquired, more men are hired, more WHAT ARE THE SOURCES OF CAPITAL? Where does a business get its resources or capital? or investor. With a successful business, investor nvested (return of capital) but receives more than You need money to start a business. The primary source of capital is the owner succeeds not only in getting back what was ir the amount he o she has invested (return on capital). If the business owner or entrepreneur does not have enough funds, one méy borrow from relatives, Iriends or Financing institutions such as banks and cooperatives. The many institutions helping Filipino entrepreneurs fund their projects (called nero Financ a few of them are the following: Tulay sa Pagunlad Inc.. Bangko Kalayaan, BPI Glo ee and the Rural Bankers Association of the Philippines. An entrepreneur is one who 120 ( risk of putting up a business to produce and sell goods or services. The sn entrepreneur is one who creates new ideas or differentiates a produet that would ent 4 aa is a means of providing a range of financial services to low iiding for their business, customers to buy. Miero fina come entrepren WHAT IS BUSINESS RISK? the success of a business is measured in terms of profit. But the ing venture is risky. The higher profit you desire, the more risky the venture is, Risk is the of wavertaity in an outcome, An endeavor like a business has always an clement of wneettainty~ it is not certain that the operation of the business will turn out well, nor is it certain that the owner will recover what was invested nor fs it certain that the creditors will be paid. But there are ways of reduci ig risks. Careful planning and control by the manager reduce risk. Another way of reducing risk is to make a careful assessment of the Forni of business and the type of operation one wants to pul up. WHAT ARE THE FORMS OF BU: INESS ORGANIZATIONS? ‘A business may be organized and take one of the following three legal forms: As mentioned earli reality is that any money ma |. A sole proprietorship is a business organized by one person. Most small businesses are sole;Proprietor owned. beauty parlors, dress shops, barbershops and bakeries. It is easy to sct this up as no formal legal process is required. However, it has to be registered with the Department of Trade and Industry and the Bureau of Internal Revenue after getting a permit from the City or Municipal Hall. Advantages: Only a small amount of capital is needed, the operation can be easily handled by the proprietor who gets all the profits earned by the business. Additionally, when the business is insolvent (cannot pay its debs) the other personal properties of the proprietor may be taken over by the business creditor. This is an advantage from creditor's viewpoint, or else creditor may hesitate to lend. ft The disadvantage is that, alone, he or she may find it difficult to expand the business or sell different products or services as these will entail more funds apd. higher level of skill or expertise. 2. A partnership is @ business owned by two or more individuals who contribute money, eentaermane (alent into @ common fund. These individuals called partners share in the seh ge nent of the business and naturally share the profits among themselves. Professionals fuch as lawyers, accountants, engineers and doctors usually eam up to establish a consultancy fim anc offer various forms of professional services. An accounting fim. for ‘example, offers audit, tax, financial, management advisory services. Note that the Partnership is not really a {eet entity, Business is carried out by the partners themselves. However it moet be registered With and its Articles of Co-Partnership approved by the Securities and change Commission. It must also be registered with the Bureau of Intemal Revenne Punongbayan & Araullo, Manabat, Delgado, Amper & Co, Isa Li Advantages: With more people involved, more money and skills are pooled. With more Partners, the different managerial positions such as production, marketing, finance, sales and Scan easily be filled up, Partners, like sole proprietors, have unlimited liability ‘© pay obligations even out oftheir personal properties in the event of business insolvency. also a lot of disadvantages in putting UP a partnership. For one, it can easily be dissolved because of disagreements and petty quarrels among themselves. Likewise, the mere Withdrawal, insolvency or death of a partner makes it also easy to dissolve or terminate the Far tae A Partnership (excepr professional pariershipgs the a Pay taxes on its profit ata rate of 30% mh NS © omperation, is Uible ty\¢ Word Corporation as a le; si : pee te Sell property and Stocks. It has its own rights, duties and responsibilities as « ; vidi icles LoMever its legal personality starts only after it has been resistered wi its i es of Incorporation approved by the Securities and Exchange Commission Tt mus, also be registered with the Bureau of Intemal Revenue. The investor is whose right over the busin led a share holder ess is expressed in the number of shares bought and is cv idenceq nike a sole proprietorship which is managed by the owner or the waged by the partners, a corporation cannot be managed by all the Shareholders. A corporation is managed by a Board of Directors clecied by the Shareholders from among themselves. Examples of corporations where large amounts ni Ganlal are invested and are listed among the best ten corporations in the Philippines are the following: Jollibee Foo Is Corporation, San Miguel Corporation, Ayala Corporation, PLDT, Metropolitan Bank and Trust Company, by a certificate of stock. U Partnership which is man: Advantages: With a big number of shareholders, a huge amount of capital can be obtained With a large amount of resources held, lan rge volume of products or services could be sold Which would mean high amounts of profit. High profit would mean a high return om shareholder's investment. Corporations can afford to hire expert people to manave the business. ‘A corporation is more stable than a partnership since it is not affected by the Withdrawal of a shareholder. A shareholder withdraws by simply selling the shares of stocks owned to another investor or back to the corporation. The corporation has an indefinite life, {can operate for fifty years and renew for another fifty years. Disadvantages. Corporate creditors Partnership since a shareholder has corporation assume higher risk than in a sole proprietorship or ‘no unlimited liability which means that in case of the insolvency, shareholders are not required to pay corporate debts out of their Personal properties. There are more legal and tax requirements to be complied. The power of the Board of Directors may be exercised according to some ulterior motives that may adversely affect the welfare of the shareholders and the general public, as well. WHAT ARE THE TYPES OF BUSINESS OPERATIONS? The activities needed to earn profit depend on the type of operation of the business. There are at least three general lines of businesses: 1. A service business is one which provides services, for a fee, to clients or customers, Examples: beauty parlor, barbershop, travel agency, intemet café, school, airline, clinic. Refer to Figure I.1 a>. A merchandising business is one which buys and sells goods or merchandise. Examples bookstore which sells books, Ma {Tice supplies, schoo! supplies, toys and gift items or hh wells medicines, health foods, baby products and hospital supplies pwise. Puregold, Shoe Salon. Referto Figure 1.1 b. tore whic Mercury Drugstore. St Figure Lb. Merchandising Type of Business 3. A manufacturing business buys raw materials, forms this into a finished product and then sells this to the customer. The costs of the product manufactured consist of the raw materials used, direct labor required such as wages paid to the workers for processing the manufacturing expenses applied to process the product such as electricity, water, factory supplies and super Example of a manufacturing corporation is United Laboratories Ine. which sells its drugs not only in the Philippines but in our neighboring Asian countries as well: Singapore, Thailand, Malaysia, Indonesia, Hongkong. Vietnam, Myanmar. Refer to Figure 1.1 e. — Figure 1.1 ¢. Manufacturing Type of Business WHAT ARE THE WAYS OF OBTAINING PROFIT? One of the motives why one goes into business is profit, Figure 1.2 illustrates how profit is obtained depending on the line of business. In a service business, money is received for the cost of service rendered. In a merchandising business, money is received for the cost of merchandise given. In a manufacturing business, money is received for the cost of the produet siven, Take note that the product being sold in a manufacturing business may be the same as the merchandise being sold in a merchandising business. The difference is that in a merchandising business the products such as bags and shoes are bought ready for sale. In a manufacturing business raw material such as leather is bought and manufactured into bags and shoes before they are finally sold to the customers. The channel of distributing the product is ‘also different. A manufacturer, such as a shoe factory, sells its goods to wholesalers or retailers such as Shoe Mart. A merchandiser such as ‘Shoe Mart sells its goods. direct to consumers, OF course, the manufacturer would need a huge amount of resources, as compared 7 ialPca ca cinllser, because of fixedicapital quirements guch’se rischine force and raw materials, MIO ie lb BUSINESS CUSTOMER PROFIT? Service type - Cost of processing of Service Revenue visa and passport by the: Cost of Service travel agency P1000 ——» Profit | Merchandise type - Cost ofa pair of shoes p59 ———>. Sales Revenue P29 [Fas | Cost of Sales 159 Profit Manufacturing type - Cost of leather Sales Revenue Piso Wages of worker Cost of Goods Sold 90 Manufacturing overhead Profit P 60 Cost of a pair of shoes ears 2 Figure 1.2. Ways of Obtaining Profit [Dre should, however, not conclude that the profit obtained by @ manufacturer is [ower than that of the merchandiser. It is possible that the profit per nie of product sold by a manufacturer is low but because of its high volume of sales (number of units cod to-whalessier and retailers) its total sales revenue will be much higher than that of a merchandices ‘The accounting process for a service provider is discussed in Chapters 4 and 5. Chapter 9 discusses the accounting process for a merchandiser, while Chapter 14 discusses the accounting process for a manufacturer. The book focuses only on a sole-proprietor owned business Partnership accounting and Corporation accounting are discussed in the next accounting course WHAT ARE THE TYPES OF BUSINESS ACTIVITIES? ies. The owner “finances” the business with a stan in cash and other resourees. If owner's contribution is insufficient, additional financing can be extended by banks and other financing in . Financing activities also include withdrawals (capital withdrawn) made by the owner/investor as well as loans repaid to lenders. As a business needs resources other than cash to make it possible to operate, investing volve the acquisition of properties such as land, furniture, machineries and cauipment, Eventually these properties are disposed oF retired on its maturity date. Operating are the day to day activities related to earning of income when goods or services are sold and the incurring of expenses when wages, rent, milites, transportation are pai WHO MANAGES THE BUSINE The success of any business endeavor will depend greatly on m which is good management, Management may be defined simply as the art of managing and directing people and resources as efficiently us possible with a view of accomplishing the goal of the organization. Good and efficient management spells success or profit, Itis very important that authority and responsibility for pertormance be delegated to managers ? ny factors, one of 8 eeified to run the business. A sole proprietor owned business. being simple in eee ee asa cmp oxi eee’ tha dagetien of t mecampr. Sox nena che organization becomes oorrglen - Business grows 2d branches OUk OF & greaier numer of prodets oe becomes complex = busine these will need the creation of more departments and people with the services are 10 be sold I expertise have to be hired For u business to be successtitl, management must be efficient and effective. A company is efficient when ity resource inputs such as materials and labor hours are used at the least te, effort and eos to produce the required output which i the produet or service being sold by the business. A company is effeetive when it is able to achieve its goal as stated in its strategie plan such ay making PI million profit or capturing a 20% share of the market after five years. Management's efficiency and effectiveness depend on how management functions are calcd out, There are four management funetions: planning, organizing, directing and controlling and decision making, Planning starts with goal setting and from these activities are lined up. Organizing defines the company structure upon which management will work out its plans. Positions will be created, people will be hired. Their role (authority and responsibility) will be defined. Directing and controlling means management will oversee the day to day operation of carrying out the planned activities « act, decide, agree, argue, question. approve, solve, and ensure that the daily activities conform with the planned activities. This way, any deficiency or error may be promptly rectified. Decision making is required whenever a problem ‘crops up requiring management to evaluate alternative ways to solve it such as - whether or not to drop a losing produet, whether or not to process further a Product, whether or not to inerease the price ofa product, whether to buy or repair a machine. Managers are hired to head the different departments of an org Finance, marketing. sales and human resource. ‘The production manager makes a study on What products/services to produce, how to produce them, how much cost to incur, what machines to use, how many workers to hire, how big the factory site should be. Then he draws a plan based on this study and directs the activites (operation) of the production department, accordingly. The marketing manager makes a study of the market place, product. price, people. A market plan is then dravvn based on the study. The products/serviees are promoted Pased on the market strategies or plans drawn. The sales manager is tasked to draw a pln on how to distribute the products/services at the least time and cost. A study of the sales reselt against expenses incurred and resources used up is made by the finance manager to find out whether the goals of the company were achieved. The finance manager takes charge of the Company's financial resources - how to source it (looking for investors and creditors), and how {0 use it (purchase of capital asset, new product, payments of loans). The personnel manager lakes charge of employees and workers - selecting, hiring, training and overs -eing them. With Proper division of work and awareness of their duties and responsibilities, managemet will be more efficient and lesser risk of loss would result ization: production, Much of the works of these manager counting information, The accountant Strives to assist management accomplish its four areas of responsibility by provid them with managerial ports processed in an accounting information system called managerial counting, DO YOU UNDERSTAND AND SPEAK THE ACCOUNTING LANGUAG! Accounting in this day and aye, has become the hear of information of any business endeavor and its users, To be effective, the users must have a sound knowledge of aecountina pyntdtstand the messave embedded in the reports which ses terms and symbols familiar only in accou rei e a fc * realize that you will become either the preparer Ling. Before you continue, (accountant) or the user (decision maker)Accounting, as broadly defined, is the process of identifyine. measuring g communicating economic information to permit informed judgment ae decision, mm Philippine Financial Reporting Standards whieh is a compilation of accounting concepts, my and ‘principles defines, accounting as a service activity which function is 0 provig, quantitative information, primarily financial in mature, about econ mic entities that jg tended to be useful in making economic decisions. Figure 1.3 shows that accounting jg. language that communicates vital information to users. The firm transaets busiiess &versday ang keeps track of these through pertinent documents which accountant analy, Wessies ang records, and finally summarizes into financial reports, The users, as stakeholders, carefully study the repon. nd make decisions accordingly ‘Accom. 3 information and decision making are interactive in nature, Decisions made the statement users wil affect the activities ofthe business which in turn will affect the resting accounting information after repeating the process of accumulation and communication ‘COMPANY a accumulates accounting information through its various transaetions ACCOUNTING INFORMATION SYSTEM processes the financial information and prepares the reports, STAKEHOLDERS or USERS review the reports and make decisions [ere Figure 1.3. Accounting as the Language of Business |G MATTERS ACCOUNT |A stakeholder is a person or entity who has a “stake” or interest in the economic performance of a business. Aside from the owners or investors, the other stakeholders are the Tenders, suppliers, employees, government and customers, ‘An owner or investor is one who puls in money or property (called capital) in a business venture with the objective of receiving a return on c ital or investment from the \ profits earned by the business. Is my capital stfe? Assess the level of risk involved by Looking peje economic wealth of the business (financial position), Is riy capital earning’? Assess the ability of the business 10 eam profit and in tam earn a satisfactory return on investment (financial performance) Financial performance indicates ability ‘OF the business to eat tes financial wealth of the business._— A - manager is responsible for organizing, planning, dirveting and controlling 7 operation of the business. Activit manufacturing promoting a distributing must be carefully planned and controlled by the mai The manager also makes decisions when confronted with problems such as dropping an unprofitable product or operation, changing the price of the product, laying off must also be a good steward, protecting the assets productive? Are we buying n of our revenues? Financial nd assess the such as. buyin division, shutting down employees/workers, among others, A manag’ business resources and helping it grow in value, Are all th more goods than what we can sell? What is the profit ma reports make it possible for one (© evaluate performance of the business ement and stewardship. manager's qu A lend. charge called interest. Can it repay the money on maturity date? Does it have fi Again. the paying ability of the business - borrower is reflected in its financial po: ity of m assesses the ability of the business to pay the principal debt and the additional uid assets? ion. A supplier offers goods ot merchandise on cash basis or on credit term depending on the paying ability of the business. Can it pay its account on the due date? The accounting information to determine the credit worth of the business is also in its financial position. The government uses the accounting reports in several ways. Is it paying the right taxes and filing all required documents? As tax collector, it investigates tax returns and assesses truthfulness of the reported profit and the tax liability to be paid by the business. As a regulatory body, it verifies if one is complying with its rules’ and regulations. And as a customer. before it awards a contrat to build infrast Jn as roads and highways, it ‘must first assess the construction company's ability to deliver the goods or serviees. The employee wants higher wages, benefits. good working conditions and security of, tenure. Is it right for me to stay and work here? ly it paying fair wages? What about additional benefits? A review of the company’s financial reports will enable one to assess the ability of the business to grant these demands. The company cannot afford to grant higher salaries and more benefits ifthe business is losing as reflected in its Financial performance. ‘The customer assesses the company's ability to continuously supply the goods they need at the right price and quality. Is it fair for them to increase the price? The fairness of the price is reflected in the financial performance. The ability to ensure continuous supply could be determined from its financial position. The aforementioned stakeholders are classified as direet users as well as external users except for management who is an internal user. The indirect users are the stock exchange, trade associations, regulatory bodies. and financial analysts who rely on the financial statements in their role of regulating, assisting, advising and protecting clients and investors, Figure 1.4 describes accounting as a service activity which provides financial information ag shown in the middle column to statement users in support of various economic decisions as wown in the third column, [ACCOUNTING INF , Statement Users _ | — Financial information Investors le Financial Profitability 8 § Lenders || Finaneiat Position Investing Decisions | Managers | Liquidity | Performance Evaluation Suppliers | Solveney Cash & Credit Strategies | leh ees 8 | Employees | Cash Flows Labor Relations 1 Guten || Adequacy | Allocation of Resou Government Timing. 2 | Tax Plans re. 1.4 Accounting as Information Pros ider thATION SYSTEM 6 ‘ORM ACCOUNTING INE ssed to produce reports depends on the scored and proce : How information ie eee in business (from local to world class product, from a accounting system. The paradian en focal market to a global market) demands that Information System is an orderly way of chat meaningful information will come out and reports may es an orderly way of s AIS) involves anor : ee thro ff analyzing, measuring, nnerated for proper simple to a complex business st 1 be more efficient and effective. the syste and processing data gatherin 2 prepared, Accounting Inforn volves accumcl Hess transactions through a process 0 recording, classilyi and from which reports are ge! communication (© deci na and reporti and summarizin; ion makers. What are the Fundamental System Principles? For the AIS to be effective and efficient, five principles must be followed. nail Control Principle, Cost-Benefit Principle, Relevance Principle, Compatibility Principle am Flexibility Principle. The Control Principle prescribes that the AIS of the firm must possess internal control. Internal Control enumerates the methods and procedures necessary to monitor the activities 0: the business and ensure efficient operation, With internal control, the properties of the business are protected, records are accurate and reliable, company policies are complied with and performance of business units or divisions are properly evaluated. Intemal control is a very ificant feature of AIS. intemal control is discussed further in Chapter 14. Control procedures are described in the next vo pages. Recall that to be efficient, the information must be timely and must be processed at the least cost and effort. And to be effective, the information must be able to answer the needs of the decision makers. Supporting these requirements are two principles- Cost-Benefit Principle and the Relevance Principle, the Cost-Benefit Principle prescribes that the advantages enjoyed from installing the system must outweigh its cost. For example, installing a computerized system may be costly but it can reduce the number of employees which in turn will reduce costs of salaries, wages and allowances. Additionally, recording can be more accurate and lesser errors will be committed making the reports more reliable. These and the fact that reports must always be updated are considered benefits which would more than outweigh the cost of the installed system, Relevance Principle prescribes that the information must be reported promptly and that information must be useful to enable statement users to reach a conclusion and make a decision. The Compatibility Principle + prescribes a system designed to fit the unique characteristics of the company- its personnel, activities and structure. A sole proprietor-owned business operating only within a mall will require a simple AIS. A multi-national company with diverse products and off-shore operations will require a more complicated AIS. The Flexibility Principle prescribes that the company’s system should be changed, if change is needed, to come up with timely and updated information in response to indlust demand, government promulgations, technological advances and competitive pressures. Fer example, multi-national companies have resorted to mergers and full consolidation regen Accounting policies have to be revised and the manner of preparing and presenting finerel Teports changed to suit the emerging new forms of business combinations ee nancial What are the components of an Accounting Information System? A system, be it man methods system, oF computerized, involves people, d nb cl . documents, | equipment. These are the five components Uf ey ay i These will be discussed in Tine with the illustrated ecord: an accounting information accounting information system:a WHAT ARE THE TYPES OF ACCOUNTING AND ITS REPORTS? Go over page 2 again. Notive that on the business level the bakery i> confronted some financial problems, the answers will require managerial repor's. ThE sinie tue wig the food company. And then again, both the bakery and the food comps. the foun paragraph, are confronted with some financial problems. the answers will reguire nang, reports. This is also true for the direct users mentioned in Figure 14 on page | At this point, let me introduce to you two types of accounting and the various repon they prepare as shown in Figure 1.5: ‘A. Internal reports called managerial reports are prepared for management use: Although management receives the other reports they also require additional information such as product cost, estimate of profit to be earned for a planned project. comparison of two alternative courses of solving a problem, budgets, among others. This information nee gave rise to a course called Management Accounting, B._ The main source of information of stakeholders or users are the financial reports or the s called general purpose financial statements. This information need gave rise 0 4 course called Financial Accounting. These reports are audited by a Certified Public Accountant who attests to its fair presentation and validity thus making it reliable and acceptable by the stakeholders, Note that although there are various users, their concerns could be answered with a single set of reports, C. All firms are required to prepare and file tax’returns to the Bureau of Internal Revenue (BIR). Different taxes require different tax forms to be filled up by business enterprises, Examples: Income Tax. VAT. Percentage Tax. among others. D. Some firms. by the naturé-of their organization/operation, are required to prepare special reports by certain regulatory bodies. For example. banks prepare monthly, quarterly and annual reports to be submitted to Bangko Sentral ng Pilipinas. Managemen “ Mani ial Reports. Taxing | / Tex REPORTING | | Special Regulatory Agencies | (C) Reports PROCESS Reports (D) Agencies such as BIR BSP. SEC Audited Financial Reports (By ou = ate See Tf s Suppliers Lenders || Investors Sniployees |] Regulatory [Esa | Board 1.5. Channels of Accounting tataa ne ACCOUNTING INFORMATION SYSTEM. How information is record and processed to produce reports depends on the accounting system, The paradiem shill in business (from local to world lass product, from a simple to a complex business structure. from a local market to a global markey) demande thar the system be more ificient and effective. Information System is an orderly way of and processing data so that meaningful information will come out and reports may iting Information System (AIS) involves an orderly’ way. ef business transactions through a process of analyzing, measuring, zing. and from which reports are generated for proper gather be prepared. Ac accumulating and reportia recording, classifying and summar communication to decision makers. What are the Fundamental System Principles? For the AIS to be effective and efficient, five principles must be followed, namely: Control Principle, Cost-Benefit Principle, Relevance Principle, Compatibility Principle and Flexibility Principle, The Control Principle prescribes that the AIS of the firm must possess internal control. Internal Control enumerates the methods and procedures necessary to monitor the activities of the business and ensure efficient operation, With internal control, the properties of the business are protected, records are accurate and reliable, company policies are complied with and performance of business units or divisions are properly evaluated. Internal control is a very significant feature of AIS. Internal control is discussed further in Chapter 14. Control procedures are described in the next two pa Recall that to be efficient, the information must be timely and must be processed at the least cost and effort. And to be effective, the information must be able to answer the needs of the decision makers. Supporting these requirements are two principles- Cost-Benefit Principle and the Relevance Principle. The Cost-Benefit Principle prescribes that the advantages enjoyed from installing the system must outweigh its cost. For example, installing a computerized system may be costly but it can reduce the number of employees which in turn will reduce costs of salaries, wages and allowances. Additionally, recording can be more accurate and lesser errors will be committed making the reports more reliable, These and the fact that reports must always be updated are considered benefits which would nore than outweigh the cost of the installed system. Relevance Principle prescribes that the information must be reported promptly and that information must be useful to enable statement users to reach a conclusion and make a decision. The Compatibility Principle + prescribes a system designed to fit the unique characteristics of the company- its personnel, activities and structure. A sole proprictor-owned business operating only within a mall will require a simple AIS. A multi-national company with diverse products and off-shore operations will require a more complicated AIS. The Flexibility Principle prescribes that the company's system should be changed, if change is needed, to come up with timely and updated information in response to industry demand, government promulgations, technological advances and competitive pressures. For €\ample. multi-national companies have resorted to mergers and full consolidation reports, Accounting policies have to be revised and the manner of preparing and presenting financial reports changed to suit the emerging new forms of business combinatio What are the components of an Accounting Information System? A system, be it manual or computerized, involves: people, documents, records, methods and equipment. These are the five components of an accounting information system, These will be discussed in line with the illustrated accounting information systemshown in Figure 1.6. Note that in all four phases: people or personnel ate involy : ed Phase 1 data gathering to Phase 4 summarizing, reporting and interpr cting “e Documents in support of the data are gathered in the first phase. All phases get \ certain methods or procedures of doing, Equipments/deviees such as printers are also needed in all phases to be able to which are then summarized in the computers process data and generate informa setae ual by form of financial reports. analyangs | (Siging | [niin decisin : ifying 7 , gathering measuring, sare | reporting, [1 making . interpreting L PHASE | ~ PHASE 3 PHASE 4 Figure 1.6. Accounting Information System Data processing starts with the gathering of documents which are evidences of business, transactions. A transaction is an activity or event taking place in business which is expressed in terms of money. Examples: buying or selling of goods, receiving or paying cash. rendering or receiving service and borrowing or lending money. A business document describes in ‘words and amounts the nature of the transaction. Examples: official receipt (when receiving cash), cash voucher (when paying cash) and invoice (when selling or buying goods or services). These documents come from various departments. The official receipt is prepared by the Collection Officer or Cashier from the Finance Department. The sales invoice is prepared by the Sales Officer from the Sales Department, while the cash voucher is prepared by the Disbursing Officer from the Finance Department. Documents may be prepared manually or may be computer generated. Internal Control requires that documents by properly controlled, nuinbered and stored. Since the documents come from various departments, the personnel practically in the entire company are involved in preparing, gathering, handling and recording busines, transactions, Internal Control prescribes that, only qualified people should be hired, thei duties and responsibilities carefully determined and properly disseminated. Documents mus be prepared only by the employee duly assigned to do such task. There should be no duplication of functions by the employee so as to be able to pinpoint or fix responsibil The documents are received by the Accounting Officer or Clerk. These are ther analyzed, measured, recorded and classified. An input device o instrument is used to record the data captured in the documents. In a manual system the pen or pencil is the input device In a computer based system the keyboard is the input device. The data input, be it manual & computerized, is called a journal entry. Other forms of input devices are the scanner and bat code readers (popularly used by groceries to ring up sales). Records are the books of accounts that must be maintained b department. Just as one gathers lecture notes and places them in a notebook, account are gathered and recorded in a book called the journal. And since the recording will involve ® large number of data too diverse t0 be understood by the decision makers, to make i meaningful and understandable, the data is organized and classified into related groups at Mored in another book called the ledger. Phases 2 and 3 as well as the summarizing of phase + oof the system covers the mechanical or procedural phase of accounting called Bookkeeping 14Sof processing captured data from the documents. In Methods involve the proved accounting, information is processed in @ meaningful manner by journalizing, el summarizing, reporting, and interpreting, The processing can be done manually or lectronically depending on the size of the organization, the volume of data to be processed, the amount of information required, and the need for prompt access to the data. The computerized system follows the same logic as the manual system although the processing is, done differently - the organized data become meaningful information when summarized and reported in the financial statements prepared by the accountant. The accountant further assists the decision makers in making informed decisions by interpreting the financial data through a tool called financial statement analysis. Final WHY DO I NEED ACCOUNTING WHEN THERE ARE COMPUTERS TO DO THIS? In an electronic data processing (EDP) environment, transactions may be recorded, classified and stored in a computer. When needed, information may be drawn out from the system using output devices such as the printer. A software is available to take care of the recording including the generation of documents and records and even the computations in the interpreting phase. The good news is that the electronic data processors have freed accountants from the routine aspects of processing data but computers cannot think, cannot evaluate or render judgment. [valuation of the accounting information and the preparation of recommendations require the critical thinking and competence of the accountant and the decision makers. Figure 1.6 shows the computerized accounting system. (aneur oo PROCESS |———-»|OUTPUT From the source The data are measured, Reports come out documents, data are recorded, classified, from the processed analyzed and encoded summarized and stored data, by the employees. by the computer. Figure 1.6. Computerized Accounting System The employee analyzes the data contained in the business document, arrangés the data to be encoded and using some sofiware application key-enters these into the computer. The computer processes the data input according to the instruction up to the preparation of financial amples of accounting software applications are the Peach Tree, MYOB and Quick STATEMENTS PREPARED IN ACCOUNTING? ‘The three primary information needed by the users relate to 1) financial position, 2) financial performance and 3) cash flows of the business. These are contained in the accountant’s reports called financial statements, The best way to introduce these reports is to look at a very simple business as illustrated Service Center. He invested 320,000 on June | and purchased and paid P300,000 for a Xerox machine and paper and ink for P15,000, He set aside P5,000gE , first week of June, rey Percent of the supplies Sy roduc Production of documents brought in sales of P12,00 : Were used up ” Cash 10F P and rent was paid for PIs a °: Foy Figure 1.7) prepared after a week wil swe "PISO. Finan Mem Re Income State ‘ment (| ch wer (how much wealth was produced) for the week. Sales P 129 Supplies used — 15,000 x 40° Gan Rent : oo Profit for the week ei 1 arc Stat : he week ending June 7, 2012 p ‘atement of Changes in Equity (change in owner’s wealth) Es Doria Capital, June 1, 2012 320.000 Add Profit for the week 500 Doria Capital, June 7, 2012 324,500 esition(how much wealth was aceumulated)as of June 7.2012 Cash P 15.500 Supplies 9,000 Xerox Machine 300,000 Total Assets P324.500 Doria, Capital P324,500 Statement of Cash Flows(what cash has come and gone outfor the week ending June 7. Cash Investment of Doria, June 1,2012 P 320,000 Cast receipts from sales 12,000 Cash payment for supplies (15,000) Cash payment for rent (1,500) Cash payment for machine (300,000) * Cash, June 7, 2012 P_15,500 Reports of Doria Xerox Center Figure 1.7 Finan Note that the profit for the week was added to increase or maximize the capital of Doria from P320.000, after a week it became P324,500. Profit is one of the motives of a business Maximizing or enhancing wealth of investor (owner) is another business motive. Note that in the absence of liabilities, all the assets or wealth belongs to Mr. Doria. Basically, this is how the scarce resource (P320,000 cash ) was used in business to make it profitable (P4,500) i] enhance wealth of owner (P324,500), Why was the remaining cash of P30,000 from the retirement not included in the above statements? There are rules that guide the practice of any profession, Accountants are guided by the accounting framework and standards. As Do contributed only P320,000, the resources of the business starts from this amount. The accounting principles will be introduced in the succeeding chapters. ‘The statement of cash in the cash, It answers the question: the business started flows shows what caused the cha with P320.000 cash, how come it is now just P1S,S00? ally (not weekly) and are directed neral The financial statements are prepared at least ann diy all the stakeholders, hence these are called toward the common needs of practi purpose financial statement facome Statement reports the Hnancial performance of Uhe business and is also called 1 oF carnings. Vitis is a report which deseribes how the year 1 jtoduced wealth over a given period of time, say one month or oneed by reporting a profitable or losing ) earned as well as the expenses \vorable operation called profit or net income results when ‘venues received from customers amounted to P750.000 Achile, totel costs andl expenses incurred amounted £0 P500,000 only, a net income or profit of P250.000 is earned by the business enterprise. A business enterprise is a term used for any Iv may be called a company iff it is a partnership or a business which in turn increases the business net expenses exceed revenues. A It tells ws whether the business succeeded or yme (revenues a operation, It lists down the in incurred by the business. A income exceeds expenses. If total business venture or undertakin corporation. Profit increases the assets of the worth or owner's wealth, On the other hand. a loss occurs when loss decreases the assets of the business which in turn decreases net worth or owner's equity strength: it is a basis for tax, Profit ensures long life for the business, it boosts finan salaries and bonuses, Now you know why accounting is important to all stakeholders. Statement of Financial Position (formerly called the balance sheet) shows how healthy or robust the enterprise is when it shows the accumulated resources and debts of the business with a list of its assets (cash and properties) a ies (debts or obligations to pay). After deducting the liabilities from the assets, the net assets shows the net value oF net worth of the firm which belongs to the owner. Hence itis also called the owner’s equity. Let us assume that as at May 31 of the current year your business listed a total of P1,000,000 assets while liabilities amounted to 400,000. The business net worth (net assets) oF owner's ‘equity is 600,000. On the other hand, you have a friend whose business listed assets as P1,500,000.and liabilities as 11,200,000 or a net worth of P300,000 only. It is apparent that your business has a bigger net worth and therefore your business is financially stronger and solvent than that of your friend. Solvency is the ability of the business to pay for its liabilities. The more assets left after deducting the liabilities the more solvent the business is. Liquidity is another information provided by this statement. It shows ability of the enterprise (through its assets) to pay for its short term obligations (payable within a year) as it falls due. Statement of Changes in Owner's Equity is another report prepared by the accountant Which explains the activities for a period of time that caused the owner’s equity to change. There are four activities affecting owner's equity: contribution, withdrawal, profit or loss. Recall that contribution (also called investment) and profit increase assets which in turn s equity while withdrawal and loss decrease assets which in turn decrease owner's equity. If the statement of financial position last year showed a net worth of P500,000 while the net worth this year is P700,000 including profit of P250,000, the accountant has to ‘of P200,000 only when the profit earned this year is increase own explain why there isan increase 250,000 Statement of Cash Flows is a fi cash changed over a period of time. The report makes a listing of the cash inflow activities flow activities (cash payments) of the business/ Assume, for example, that the cash (hich is one of the assets of the business) of P500,000 at the end of the previnus sear hay a current balance P200,000. How come the eash decreased by P300,000 shen there was income earned for the current year of P250,000? Shouldn't the cash to P750,000 because of this? The statement of eash flows will explain what happened to the . investing and operating aetivities of the ancial statement which explains why the amount of (cash receipts) and the cash out finanein cash by listing the tash flows from th business enterprise 7eo ae any GUIDE QUESTIONS : Ads ton information, explain how accounting affects your personal life Boe ui a a it, What are the other reasons why a person goes into business eee b pusiness plays an important role in the economy of the country eae al se resources needed to run a business. How should these resourge, 5. wigattle in order forthe business tobe succesful? ‘are the two main sources of capital? . a is investing in business always risky? How do we minimize the risk”, low is the success of any business measured? 8. What is profit, how is it earned and what is its effect on business? 9. Discuss the forms of business that may be organized. Give the advantages and disadvantages of each. 10. What is the main difference between a merchandising business and a manufacturing busi 11. Give examples of corporations operating as a service provider, merchandiser and manufacturer. 12. Differentiate return on investment from return of investment. 13. Explain the role of the different departmental managers in a business organization 14. Fora business to be successful, management must be efficient and effective. Explain. 15. Describe the four functions of management. 16 Give the differences in computing for the profit of a service business, a merchandising business and a manufacturing business. 17. When is.revenue recognized by a service provider? By a merchandiser? By a manufacturer? 18. Explain unlimited liability. Who are the investors affected by this? 19. Define accounting. What is its basic purpose? 20. Why is accounting called the language of business? 21. Explain the needs of the following stakeholders and why they are interested in the financial reports of Philippine Airlines: a) Boeing Company, a manufacturer of aircrafts b) PAL Employees Association c) PAL Vice President of Marketing 4) Bureau of Internal Revenue e) Securities and Exchange Commission ess? 22. What is accounting information system (AIS)? Give the four phases of an accounting information system Explain the four types of reports that are generated by the accounting information system Discuss the components of an AIS. 26. Give examples of internal control procedures a business enterprise must implement Give the advantages of computer-based over a manual-based accounting system. Enumerate and esplain the five fundamental principles that guide accountants in designing the AIS of ms. tant. Explain why the computer cannot take the place of the acco What is bookkeeping? crate the financial statements prepared by the accountant, Beside each one, provided and the user(s) interested in this information give the enw financial informati 18EXERCISES arts and works as a baker in 500,000. She ngie’s Bread, Angela Paulino, a native of Cebu, is a graduate of culinary Chicago, USA. Afier working for ten years she was able to save decided 9 go back to Cebu and put up her own bake shop called Ar Cakes and Pastries or simply ABCP. a, What form of business did she put up? b. What is the type of operation? €. Other than for profit, explain why people engage in business. Angela was not contented with the bakeshop, Since teaching children was her first love y school, as well. She remembered her friend, Jane hicago teaching nursery children. Jean agreed to come home to the Philippines and put up a nursery sehool with Angela. Unfortunately they need about P2.000.000 to start the business and both their savings amounted only to about P1,000.000. Added to this they know little about marketing and finance. Beth Salvador is a business graduate and knows about marketing and finance, They asked her to join them and Beth also agreed io invest another P500,000. she wanted to put up a nurs Romasanta, whom she met in a. What form of business will they put up? b. What is the type of operation? c. Where can they go for added financin, {ame ax many possible sources. From the following matrix, select the form of organization in Colum B that fits the description given in Column A. You may have as many answers as are appropriate: Column 1 Column 2 1. Must register with SEC. A. Sole Proprietorship __ 2. Owner(s) have unlimited liability B. Partnership __3. Profit may easily be withdrawn, C. Corporation __ 4. Must register with BIR. ____5. Managed by all investors. 6. Death of the owner/investor may close the business. 7. Less paper work and start up costs. ____8. Large amount of contributed capital. ‘There are several stakeholders who are considered users of financial reports. Based on the given needs described in cach number, identify the stakeholder: a. This stakeholder charges penalties for late filing of returns and for deficient payment of taxes. bb. This stakeholder demands the rollback of gas prices and threatens to stage a boycott. This stakeholder requires a project feasibility study as a basis for evaluating the project proposal’s profitability and liquidity. The approval of the loan will be based on. this project. 4, This stakeholder requires a submission of weekly sales report to evaluate performance as a basis of promotion/reward 19,e. This stakeholder wants to compare the company's return on capital is inst BPs premium rate on its UITF product before making a decision on where wl bow much to invest. 6. Listed below are activities (planning, organizing, directing. controlling, decision makingy to be performed by division managers (finance, marketing. production. sales. human resource). Identify the activity and the division manager, a. Makes a study on cost, volume, and profit considering the cscalating price of petroleum product which is one of its major costs as an airline company b. With a view of reducing costs and meeting target prices. a product is undersoing design and trial testing, €. Conducts monthly dialogues to thresh out problems of employees with regards to work, work habits and interpersonal relationship, d. This manager is confronted with a problem on whether the factory machine should be repaired or traded in for a new one. Prepares a survey on a particular locality’s reaction on a new product the firm wants to launch. {This manager makes surprise tours of its retail outlets, observes how employees entertain customers, and reviews the list of customers’ returns and complaints. s either: 7. Various reports are prepared for the users. Identify the reports described below financial statements, tax reports, managerial reports, special reports. a, A sales report for the Vice President for Sales of Philippine Sky Air showing number of flights and passengers based on specific routes services. b. A report to the Board of Directors showing the costs and expenses incurred by the company as well as the revenues eared for the year 2009. A report prepared by the Company Controller and submitted to the Securities and Exchange Commission showing the result of the meeting conducted for the shareholders approval on the merger plan and the exchange of shares of stocks between the constituent companies. d. As the merger mentioned in c) will affect the future operation of the company. a report was also prepared by the Controller on the different activities resulting from the ‘merger and their effects on the tax obligation of the firm 8. Some transactions are described below for an entrepreneur who wants to put up a restaurant, Based on the events or transactions that are numbered select the business transactions using their numbers and then classify them as a) financing activities, b) investing activities and c) operating activities of the restaurant Mr. Maagap is the owner of a piece of property situated in Tagaytay. When he retired last March 2010 he decided to put up a restaurant, (1) He received a retirement pay of 6,000,000 and decided to Q) invest P5,000,000 in the business and the rest (3) he deposited in his personal account. Knowing that the capital may not be sufficient, using his property as collateral, he applied for and (4) got a loan for another P5,000,000 which he placed in the business. With ten million, he (5) paid P6,000,000 to construct a buil He also (6) bought P1,000,000 worth of furniture and fixtures and another P1,000,000 worth of equipment. Alter a month, it was ready for operation. He was able to (7) collect P1,200,000 cash ay sales revenue and he (8) incurred and paid for P700,000 expenses. He was able t0 (9) pay P250.000 to the bank as first monthly installment payment and he alse (10) pay P25,000 as interest expense.9. 10. There are five basic principles in an Accounting Information. System: Control Compatibility, Relevance, Cost-Benefit, Flexibility. Mlentify what principle is deseribed in the following statements: a, The system must provide timely intormation so the information will be useful in aking decisions. b. The system must fit the firm's unique features and culture € The system must be able to monitor all activities with the view of ensuring that operation is efficient and according to company’s plans and policies. 4. The system must make allowances for changes in order that it would be able to appropriately respond to ailvances in technology and to competitive demands of its clients and customers, The cost of installing and maintaining the system must be justified, that is, it must not outweigh the advantages of implementing it Accounting is system whereby data is tumed into information using the processes described below. Identify the process (recording, reporting, analyzing, classifying, interpreting, data gathering, storing) described in each letter i a, The systematic encoding of b. Summarizing the financial i by the statement users. © Accumulating the financial data that has an effeet on the specific business, 4. Evaluating the reported financial information to allow statement users to make informed decisions about the business e, Determining how each information affects the \ accounting data based on documents received. nformation in a condensed format to be better understood alucs of the specific business. Refer to Exercise 9. Rearrange the processes in an orderly manner in accordance to the requirement of the accounting information system. Two of your business associates approached you for a loan, Jasper has a travel agency with assets worth P500.000 and liabilities of P1S0,000, Jane has a beauty parlor with assets worth 600,000 and liabilities of P400,000. Both businesses are doing well. They want to borrow P100,000 from you so they could expand their business. a, Who has more assets? Liabilities? b. Ifyou have to choose only one, who are you going to help and why? Gally, a businessman, has plans of going abroad and abandoning his Rent-A-Car business in Batangas. He offers to sell the business to Sonia, a cousin. The assets amount to P1,500,000 one third of which is still payable to the bank. Sonia wants to know what will be a fair off isiness, She has only 750,000. Will this be sufficient to buy Gally’s business? She asks for your help. She gives you the statement of fina position. It includes accounts due from clients P150,000 as one of the assets of the business, You ask for their whereabouts. Gally coukl not, for certain, know where they are now, Repair equipment is ahother asset listed in the statement as P500,000 which was bought ten years ago, Currently itis worth hal its cost prive only, Given this information, what will be the revised total assets of the business and what will be its net worth to the owner? Will he money of Sonia be sufficient to buy the business of Gally’? 2tUse the following as a guide: Reported total assets i (xx) Less: Worthless receivables (xx) Decrease in value of equipment NN Revised total assets (xx) Less liabilities 5 A Net worth (minimum offer price) ion i ed in Chapters 3.4 and 8 Preparation of the statement of financial position is discussed in Chapter he following transaction i er to pages 15 and 16. The following : inue with the Doria illustration, refer to pages ‘ owing ae ve Contin Feo Cine & Id: Salstamotnted 10 P1300. Paper on ik we turetced and paid for P5000, Another P8.500 worth of supplies were : again paid. Statement of Income (wealth produced for the week): . Sales Rent Supplies used ae Profit for the week ending June 14 P Statement of Changes in Equity for the week: Doria, Capital June 7 Add Profit Doria, Capital June 14 P Statement of Financial Position (wealth accumulated)as at June 14: “Cash P Supplies Xerox Machine Total Assets P Doria, Capital on June 14 P Statement of Cash Flows for the week: Cash receipts from sales P Supplies purchased Rent paid os Cash, June 14 P ae 15. Mr. Sojo opened an internet shop on October 1 with a cash investment of PS0,000. After three months of operation, the following activities were given to you for study: Cash received from customers 160,000 Cash borrowed from the bank 150,000 Utilities, salaries, supplies and rent paid 105,000 Cash paid to the bank 50,000 Cash purchase for equipment 100,000 Cash purchase for furniture 2 5.000 ‘Assume thatthe policy of the store i: No Credit allowed. Expenses are all p Required: a) Compute tor the correct profit oF loss b) Compute for the eash flows fur thr ©) Prepare a statement of o d) Compute for the net wor id in cash, after three months of operation, © months ending December, hanes in equity for the three-month pe rth by preparing tod, 4 statement of financial position16. The cash balance of Waterfront Hotel on December 31 of the previous year was P750,000. 6. The cash balance of Wat I ary of the current year total revenues amounted to P800,000 of which P100,000 is it be te ted. Total expenses amounted to P350,000 of which PS0,000 is still to be re Ghuslness loone were paid amounting, 10 BIS0,000; The: cwner. made; a cath paid. Business loans we withdrawal of P20,000 by the end of January, Equipme and cash way paid for P75,000. What was the new cash balance of the hotel at the end of January of the current year? Did the cash inerease alter one month? Explain why or why nL was acquired by the business not Use the following as a guide: Cash inflows from sales revenues. P xx Less Cash outflows for: Expenses paid P xx > Owner's cash drawing xX Payment of loans XX Acquisition of equipment xx (xx) Net cash inflow (or outflow) during the month P xx Add: Cash balance last month xX Cash balance this month P xx Preparation of a statement of cash flows is in Chapters 4 and 8. 17. Refer to no. 16. Using the same information, what was the net income of Waterfront Hotel for the month of January? Use the following as guide: Sales Revenues camed (cash and credit) Pxx Expenses incurred (cash and credit) Net Income . P xx Preparation of an income statement is discussed in Chapters 4, 8 and 11. 18 Refer to nos. 17 and 16. Using the same information, if the owner's equity was P1,250,000 on December 31 of the previous year, what was the owner's equity as at january 31 of the current year? Did the owner's equity increase? Explain why or why not. Use the following as guide: Owner's Equity. December 31 P xx Net Income xx Owner's Drawing (a) Owner's Equity, January 31 P xx Preparation of a statement of owner's equity is discussed in Chapters 4 and 8, 9. As it was nearing Christmas, Helen asked her mother if she could h; gift. She wanted one that costs P15,000 but hei asked her mother for the money so she can use it for a small business which will ear P10,000 so she can buy the cell phone she likes so much, For the first week of December, she used P4,500 to buy some pastries and cakes and P300 for taxi fare. She was able to sell all of the pastries and cakes for P7.000. On December 8, she bought several baskets of assorted fruit Y ‘ave a cell phone as a ‘t mother could only give her P5,000. Sheae od Required: a) Prepare financial statements for three weeks. December I to December 2) Use the Doria illustration as a guide. Do not prepare weekly reports b) How much was the total profit for three weeks? ©) How much cash did she have after three weeks? 4) Can she afford to buy the cell phone? CASE STUDIES i lowing requiremen 1. Interview a relative ora friend who has a business. Answer the following requirements Company's name, location, and form of organization. Type of business and specify the goods or services being sold sent net worth (if already existing). Reasons for putting up the business. Major customers and competitors Current problems confronting the business. ‘Alternatively, look for a service provider, or merchandiser or manufacturer Using the internet. Answer the above requirements. a b c. Initial capital requirement (if new) or pre: d e. - DECISION MAKING PROBLEMS. Cely Toledo is the manager of Shangrila Daily Wear, a store selling clothes and footweu branches in Manila, Cebu and Davao. She gave you the following information: Manila Branch Cebu Branch Davao Branch Total Sales 300,000 350,000 P100,000 —P750,000 Cost & Expenses 00,000 220,000 105,000 525.000 Net Income (Loss) P1.00,000 P130,000 P(_5,000) —_P225,000 ‘She wants you to prepare a management report stating how the profit performance of the business may be improved. After a careful study, you made the following recommendation: Expand Davao by putting up a grocery, Projected sales will be P500,000 with cost and expenses amounting to 80% of sales. Required: a. Revise the profit of Davao by adding the incremental sales and dedueting the incremental cost and expenses. b. To arrive at total profit, add the Davao revised profit in a) to the reported profits of Manila and Cebu. ©. Compare the total profit in b) against the actual total profit of P225,000 Will the profit improve? ¢ data in no. Assume that your assistant came up with another course of action y- expand Cebu Branch and drop Davao Branch. Projected incremental sales pi Cohu will be P4O0.000 with cost and expenses of 70% of incremental sales. The wager ol) Davao Branch will be transferred to Cebu Branch and will be paid a salary of Bota vi by tacluding the incremental sales, costs and expenses eto 11k by ading revived profit of Cebu in a) to the profit of Manili Gang si i i mative 1b) above. Which is a better alternative?CHAPTER 2 NDAMENTAL CONCERNS IN ACCOUNTIN After reading this chapter, the student should be able to: a. describe the changing business environment. b. discuss the skills and knowledge that a 21” century professional must possess ¢. identify the different accounting areas, career fields and accounting associations. d. explain the role of the regulatory bodies and professional bodies in accounting, e. f discuss the important provisions of the Accountancy Act of 2004, explain the theoretical framework of accounting, . 8, explain corporate governance, business ethics and social responsibi h. discuss the firure of accounting The business environment is marked by constant changes that pose a big challenge not only to accountants but to all stakeholders, as well. The way of doing business and communicating in business has become highly technical, the marketplace has become global, business structures have become complicated because of mergers and offshore operations. It cannot be denied that the economic downturn brought about by recession, natural calamities and high costs of commodities worldwide have -greatly affected the business entities. Big time corporations have declared bankruptey, the most recent of which is Japan Airlines, its only recourse is to undergo restructuring or face closure, Others are lucky as they have formed mergers or alliances with other financially stable entities. Merrill Lynch was purchased by the Bank of America while Cadbury was just recently bought by Kraft. The picture has not been pretty for the business environment as we witness giant corporations breaking down: WorldCom, AIG, Lehman Brothers, Enron. Bankruptcy of a firm adversely affects the economy of a country because it results to mass lay-off of employees, obligations being left unpaid and business with suppliers and customers being cut-off. Bankruptcy may be duc to external factors beyond the control of a business entity, but it may also be the result of intemal factors such as mismanagement or too aggressive management, accounting fraud (like treating expenses as assets or borrowing cash and declaring it as income), and business fraud (like deviating funds to personal accounts, making the company appear as profitable when itis not so people will be enticed to buy). . This chapter discusses the 21" century professional and the skills, ethical standards and social responsibilities that you must possess to make you efficient, competitive and socially responsive, You, as a 21 century professional, must be able to help business entities face slobal challenges while at the same time protect the interests of all stakeholders, Although the focus is on the accounting profession, mention is made of the different regulatory bodies and standard setting bodies to make you aware that whatever is your profession, you will become a member of @ professional organization and you will have to comply with the rules and regulations promulgated by them as well as by the government regulatory agencies, C\ the ditferent standard setting and regulatory bodies have c principles and requirements to regain the contidenc rently, ne up with updatedirevised rule: of investors and improve competitivepositions of business enterprises. Stewardship more than ever has been emphasized regulatory bodies who are now more active and vigilant in the developr ples, ethics, international practice and even technology This chapter also includes the accounting career fields and accountins the Accountancy Act of 2004. The accounting framework was also included foundation of accounting rules and prin the preparation and presentation of financial statements ples which serves as guide in setti Jace in the and so cial in answer to the changes takin of business in environmen You must also realize that accountin; environment, is also changing and reporting impa concerns, WHAT CHANGES ARE TAKING PLACE IN THE ENVIRONMENT? The 21st century ushers in high information technology. More information are generated than ever before and new information are discovered almost everyday making yesterday's information already obsolete. The amount of information, accessibility and speet make it imperative for a business person to use creative and critical thinking to evaluate information and use it to ones advantage. Technological advances have greatly affected the way of doing business with the use of electronic devices such as computers, fax machines, iPads, cellphones and the network application systems such as the Internet, E-Commerce and Mobile Banking, It is possible to contact people anywhere in the world, documents can be copied or transmitted within a few minutes, presentations and audio visual aids can be made at no record time. One can attend a conference elsewhere without traveling thanks to video and web cameras. Even produc process and design have become automated and the manufacturing process delegated to machines with less or no human intervention such as the CAD (computer aided design) or the CAM (computer aided manufacturing) and the robot. The new millennium is envisioned as world business (popularly known as electronic commerce) where series of transactions are iinternet-based such as internet marketing or E- Commerce (tracking down customers ant confirming their orders), investing and partnering (mergers and ventures), and placing of orders up and down the supplier's chain (e-commerce). Even payments of bills are now om line. Trade and industry has become more complicated with trade liberalization (free flow of goods and services anywhere around the world) and trade internationalization (globd market). Companies conduct business through wider and diverse markets, New challenges are encountered since products and services have to suit a society with diverse culture and habit Products have to be repackaged and laws and regulations increased because business is done in different countries. With global competition, a business must be able to produce a world class product or service that will mect the demands of all eustomers. complex forms of businesses have eropped UP through mergers, business combinations and joint ventures, Likewise, more complex forms of ies and creative products have evolved sueh as the financing and investment business activ packages offered by banks and financing companies (the most recent is the tie up or ventute between Ayala’s BPI and Philamlife). New investment outlets have been opened and mor complex compensation and pension schemes have been created, Thanks to clectroni¢ 26 ae iat ja as been quite generated information and communication teghnology. the service industry has been qu busy putting up call centers, medical transcriptions and business processing and outsourcing ictivities that a business enterprise ean hardly cope up with centers to manage the volume anymore, DO YOU HAVE THESE QUALITIE! A business college graduate must no Longer be content with just a diploma, To meet the demands of an ever changing environment a business person must be devoted to a lifelong process of learning by back to school or by attending conferences and seminars. To remain in a dynamic environment, you must acquire new skills and be dynamic, too. Knowledge, however, has been eclipse: yy and innovation! Qualities that a 21" century business person should possess. A survey conducted by a reputable firm from among 100 Human Resouree Officers in Metro Manila came up with the following eight traits and skills they look for when hiring personnel: 1) effective communication skills. 2) right attitude, values and personality, (3) competence (4) creati innovative mind, (5) flexibility and adaptability, (6) critical mind, 7) good interperson and (8) updated technical skills and knowledge, Effective Commu Skills. You should not only be able to read, write and speak good English, More important is that you should be able to get your message across to others clearly such that others understand you, It also means that you can understand and interpret well what you hear and read. One of your responsibilities as a department head is to discuss and explain clearly before management and the other usets the reports, plans or any information you want to convey to them. Attitudes, Values and Personality. It is all about integrity, positive attitude, moral standards and even disposition or behavior in the workplace. Can people trust you? Are you truthful and do what is right no matter what the cost may be? Integrity means possessing a sterling character, of being trustworthy, of being always on the right side and standing for truth, A. positive attitude means you believe in yourself, that you can do it, that you will try and that you will never say 1 can’t. A pleasing personality and one with a happy disposition would certainly be welcome in any workplace. Competence. You must have the ability to perform well each task or function assigned to you. Your college diploma is not a guarantee that you know all. Learn more by attending ‘Seminars and getting additional training, in your field of expertise. Remember, a person who knows how, will always get the job but until you know the why’s in business and the surrounding environment you will never be the boss. Flexibile and Adaptable. You must be aware of the changes taking place in the environment, accept these changes and make adjustments accordingly. Grow with the organization! with, Creative and Innovative. You must be creat mind open to more ideas. You must be inquisitive, appreciative of others viewpoints. d. You must have ae Critical Mi ical mind. identifying and defining clearly the problem. evaluating different ideas or ways of solving the problem from the data gathered so hat you Will be able to make the right ehoice from among the different ideas evaluated.Interpersonal Skills. As part of the business team, your must Po» skills such as knowing how to get along with people. and being able to motivate, lead ang influence them. Ability to organize and delesate tasks as well as Withstand and resohyy conflicts is also part of what we call “people” skills. 1 interpersong} 4 problem solver and a decision, 1 knowledge b ‘quired education. For business students (ineluding accounting), this knowledge is divided into four parts: y 1 and information technology. Generyy [ knowledge includes history and culture so one can interact with people of different places ang appreciate their different political views and social traits. Business knowledge include, economics, business statistics, quantitative methods, operitions management. behavior, law, tax and other social and cultural courses in business which understand how business works and enable him to apply the different methods and st in managing and solving business problems. Information Technology knowledge makes ong conversant in IT concepts and proficient in the implementation and use of information technology, design and implementation of internal control in a computer-based accounting system as well as development of standards and practices in management information system. For the accountancy majors, Accounting and Auditing knowledge are required 0 be able * to construct accounting data and come up with reliable and relevant information. evaluate t these and give advice on how to use these in making decisi Intellectual Skills. You must be an analytical thinker, maker. However, to develop these skills, you must possess through colleg erieral, business, accounting aaa Sanam THE ACCOUNTANT OF THE 21°! CE The accountant is not simply expected to keep records and produce financial reports. Recall that the principal objective of accounting is decision making. The accountant wears many business hats..As part of the management team involved in strategic planning, budgeting and control, the accountant is also expected to make decisions as business planner, economic forecaster and financial analyst | | ‘As business planner, the accountant is involved in the preparation of the master budget for the coming year involving operating and financial plans. As economic forecaster, the accountant determines the profitability trend of the company. effect of the economic and political climate on business. in general and the industry to where the company belongs. in particular. And as a financial analyst, the accountant helps evaluate for the users as mentioned in chapter one the financial statements of the entity 1o determine its profitability, solvency and liquidity. As management consultant, the accountant gives adviee on how to make the company more competitive vis-a-vis productivity, cost leadership, product differentiation and customer service. With the onset of advanced technology, it is inevitable that the accountant’s role includes that of a systems analyst which requires participation i the design, development, maintenance and control of electronic systems to ensure that thy are in accordance with the requirements for processing accounting and financial information. a It is therefore imperative that the accountant’s skills must be improved, and acquired knowledge must be expanded, This can be done by retooling oneself, attending conferences seminars, and training programs. The present dy certified public accountant (CPA) is a professional who has successfully passed the CPA licensure examination and is ready’ te wear many professional hats and this ean only happen if one acquites skills much more than what is demanded by the accounting profession. It is no surprise that a CPA, aside from the traditional role of accountant and auditor, works even in the production department as the purchasing jomer service departinent and of course the finance department as its manager, or heads the 28Chief Finance Oificer (CFO). Other than the CPA Licensure Examination, there are other Fecognized examinations given such ay those for Certified Management Accountant (CMA), or Certified Financial Analyst (CFA), or Certified Internal Auditor (CIA), CAREER FIELDS IN ACCOUNTING The accountant renders fessional service in any of the following major fields of work: {Public Accounting is a career field open to firms and individual CPAs who offers to the public. for a fee, expert services like bookkeeping, auditing, accounting, tax and financial Planning. For auditing and accounting services, itis required that one must first pass the Certified Public Accountant Licensure Examination given by the Professional Regulation Commission. Qualifications as well as requirements for one to become a CPA are contained in the Accountancy Act of 2004 which iy explained in a succeeding topic. Several accounting firms have been established by CPAs, the bigger and more popular national firms include Syeip, Gorres and Velayo or SGV & Co: Isla Lipana and Company; Punongbayan, Araullo and Company: Manabat Delgado Amper & Co, among others. To penetrate the international market, the Philippine audit firms are affiliates of Ernst and Young, KPMG Intemational, Deloitte Touche ‘Tohmatsu, and Pricewatethouse Coopers, four of the powerful international accounting firms, A certified public accountant wears many hats. As an auditor, one is licensed to make an independent examination or review of the financial records of the firm and renders an opinion as to the faimess of presentation of the firm’s financial statements. Audited financial statements are required not only by the government and financing institutions but also by the stockholders of a corporation, as well. The auditor must be duly licensed with the title Certified Public Accountant (CPA). The role of the auditor is leaning more on providing assurance services the essence of which is in the improvement of quality of information provided to the financial statement users. As a tax consultant, one is skilled in preparing tax returns in giving advice concerning tax consequences on economic or financial decisions made by a taxpayer, The tax expert represents the taxpayer (an individual or a firm) on tax and other accounting related matters before government agencies such as the Bureau of Internal Revenue and the Bureau of Customs. A management consultant advices management on many delicate issues such as analysis, design, review and installation of an accounting information system, financial planning. profit planning, operation and cost controls, 2. Industry Accounting (also called Private Accounting) is another career field where ‘more accountants are employed than in public accounting because of the huge number of merchandising, manufacturing or service firms. They are employed as. financial accountant, controller, budget officer, internal auditor, electronic data processing head or cost accountant. The Accountancy Act of 2004 mandates that positions requiring supervision of recordifg of financial transactions, preparation of financial statements, coordination with extemal auditors in institutions whose paid up capital is at least five million pesos (P5,000,000) and or an annual revenue of at least ten million pesos: (P10,000,000) must be occupied by a duly registered certified public accountant. The bookkeeper is a person with knowledge of accounting who does the routine work of recording, classifying and summarizing of accounting information, Most often, his/her work is supervised by the Chief Accountant who does the preparation ef the financial statements, The controller is the overall in-charge of all accounting activities and functions as the chief accounting officer (CAO) of the corporation whose work includes both financial accounting and management accounting such as the preparation of 2%— Feports, petformiaive reposts, buspets, internal control and t8® Studies. Most gn required that, im the practice of the accounting profession, Me MUSE pass ye iy Ticensure Examination An internal audit maintenance of the organization's internal is an accountant Who assay mntrol by. coruhieting On-Boing. geysn, Me nce with company policies and pron ‘and forecasts of the ensure efficient and effective operation, compli Protec officer prepares plaw company fiture operation, Primarily, projection of the activities measured iM quantitative go (called budgets) are prepared to ensure that established goals will De accomprigiey Budgets serve as control devices against which actual performance (activities measured. Budgets ensure efficiency of operation, The Chief Information Offer (45 is in charge of the information and communication technol is to oversee the electronic data process such as the compute Tax Officer handles tax pans, prepares tay vets a OF taxes on his various plans and projects. The complenity of the x laws require a hig, level of competence whieh can be provided by a licensed accountant of company’s resources, A buds ig the elestonic quinn umee and contro} ement on the efgg operation (thro Accounting is another career field where one works officer or electronic data processing head of any of jh. government agencies, religious organizations, labor unions. colleges and universities trade associations and many others. Examples of government agencies are the following Commission on Audit (COA), Bureau of Internal Revenue (BIR), Bangko Sentral py Pilipinas (BSP), Government Service and Insurance System (GSIS), Bureau of Custom, (BOC), National Bureau of Investigation (NBN. Philippine Red Cross (PRC), among others. Gove il Not for Prof accountant, auditor, bud 4. Researeh and Education is another professional field where the accountant assumes thy role of researcher, teacher and reviewer. A researcher investigates and makes a study creating, applying, relating or improving accounting theories and business concepts tht will suit the changes taking place in a particular business or industry sector, Ay accounting professor is responsible for the formation of competitive accountants ani consultants and teaches subjects such as accounting, auditing, management. advisory services, finance, financial management, business law, taxation and other technically related subjects. All accounting subjects whether for accountaney or non-accountany jors and finance subjects for accountaney majors should be handled by CPAS only. An accounting reviewer helps prepare the candidates for the CPA Licensure Examination. The aforementioned careers (practices) and their scope of activities are included in the Accountancy Act of 2004 and are explained further on pages 33 and 34, ACCOUNTING ARE. Two types of accounting were already mentioned in Chapter 1, managerial accounting and financial accounting. The accounting profession requires an accountancy major to take Up the following courses, cach of which has a large body of accounting concepts and theories: |, Basie Accounting or Bookkeeping summarizing busine accounting is the routine activity of recording, classifying and Hansactions in a systematic manner, It is the procedural aspect of 30 Se ee. ti iFinancial Accou ting involves the preparation and interpretation of financial statements primarily int led for external users such as the investors, lenders, suppliers, government tomers, “Tinancial statements are primarily eongerned with historical financial Tnation resarding performance (profit or loss). position (liquid, solvent), structure “He equity and compliance with leval and regulatory requirements, Cost Accounting deal materials, labor and with ree: ding. classifying and summarizing the details of rverhicad necessary to produce and. sell product or service 4 product or service is of paramount importance in m: ie decision ay this relates to pricing and cost leadership strategy ing sou ing is the presentation of financial and non-financi information Owners and managers to assist them in their various functions of planning. ‘ontrolling the affairs of the business. They need accoun ing information to performance, 2) determine, analyze and control cost. 3) evaluate cost behavior of achieving target profit, 4) prepare operating and capital budgets, among ) design and install accounting system and data-base system means others, § Anditing deals with the independent verification and examination of. the accounting ccords for the purpose of giving credibility to the financial statements, Audited financial sratements is a requirement by most regulatory bodies specially by the Bureau of Internal Kevenue, Securities and Exchange Commission and the Bangko Sentral ng Pilipinas. This not only ensures fairness of presentation of the financial statements but also serves as a means of protecting the integrity of the firm, Government and Non - Profit Accounting uses the administration or use "Fund Accounting” which deals with of public or community funds to bring about service to the People. Its objective is more on how the funds are used to service the people rather than to eam profit Tax Accounting deals with tax matters affecting firms (partnership and corporation), individuals, trusts and estates. It involves preparation of tax returns, interpretations and” application of tax rules in the determination of tax liability, analyzing tax effect on firms or individual’s projects or plans, Forensic Accounting is getting to be recognized as a new discipline which integrates ‘counting. auditing and investigative skills. For one, it aims to assist companies in solving ud and illegal transactions by tracking down paper and electronic trails and helping build up real cases against people committing fraud or illegal acts PROFESSIONAL REGULATORY BODIE! The practice of the accounting profession, among others, is governed by regulatory ies such as the Professional Regulation Commission, Board of ‘Accountancy: and the hilippine Institute of Certified Public Accountants. The financial reports prepared aré also fected by the rulings and promulgations issued out by the Securities and Exchange ommission, Bangko Sentral ng Pilipinas and the Bureau of internal Revenue, rofessional Regulation Commission (PRC) This is a government body in charge of regulating and licensing the practice of a rofession like accounting, medicine, engineering, nursing and the like. Among its primary nctions are the following: 1) maintaining and enforcing professional examinations, 2 romiulgating and implementing standards and ethics in the practice of @ profession. 3) roviding legal and other regulatory services such as hearing formal complaints and 4) acting 31= con valid complaints by suspending and revoking license of an erring profession Board of Accountaney (BOA-ROARD) Republic Act 3105 reputated on Mare 17, 1978 the practice of aecounting by crag, the Board of Accountancy, It is under the jurisdiction of the PRC and fs HNKEU 10 8eC yp ggg promulgate a set of professional standards and ethies in the practice of the Acco profession. BOA is composed of a chairman and six members appointed by the Presiden, of the Philippines upon the recommendation of the PRC. It constantly monitors the prac accountancy in the Philippines by conducting exams wo CPA candidates. BEAMING certficgg, to board passers registering and suspending members, conducting dialogues with accounting students, examinees, accountants, and condneting seminars 10 update CPAS on cure jars and policies. ntants (PICPA) ippine Institute of Certified Public Ac PICPA was first established in 1929 t0 represent the interest of the Filipino Cpag, e aceounting practice and the CPA Board sams. It was aceredited by the Boar nd the Professional Regulation Commission per PRC Accreditation No. 15 dated October 2, 1975 and is now considered the integrated national professional organization of certifieg public accountants in the Philippines having the basic authority of setting up ang mplementing rules vital to the accounting profession. In this regard, the Philippine Pinancil Reporting Standards Council (PPRSC) and the Philippine Interpretation Council were ercatey in 2006 (as provided in the Philippine Accountancy Act of 2004), the former to assist in formulating and promulgating standards and the latter to assist the PFRSC. The PFRSC replaced the Accounting Standards Couneil (ASC) which was ereated in 1981 by the PICPA, PERSC has issued several bulletins on financial reporting standards which are used as guidelines in financial reporting. The financial reporting standards in the Philippines comprise of three sets: Philippine Financial Reporting Standards (PFRS), Philippine Accounting Standards (PAS) and Interpretations. Under PICPA’s umbrella are several accounting associations representing differen accounting fields of specialization: Association of Certified Public Accountants in Education (ACPAE) for the accounting professors; Government Association of Certified Public Accountants (GACPA) for the government accountants and Association of Internal auditors (ALA) for all internal auditors, All private and public accountants are members of the Association of CPAs in Commerce and Industry (ACPACI). late ‘The PICPA jis represented in the world’s major accounting bodies, such as: International Federation of Accountants, Confederation of Asian and Pacilie Accountants and ASEAN Federation of Accountants tasked mainly in the development and ent ent of a well coordinated worklwide accounting profession. ecurities and Exchange Commission (SEC) SEC was established on October 26, 1936 under C.A. $3. IL is tasked to safeguard public interest specially investors. in the capital market (stocks and bonds), It regula business operations specifically of — partnerships, corporations, entities geal license/fianchise to operate, and foreign companies doing business in the country. t reviews/registers securities issued by firms, evaluate financial position and performance: supervises brokers, dealers. tanster agents, investment houses, and capital market participants. It ensures that investors are provided with full and fair information about publictraded companies and protects them from manipulations and back hand deals, (BSP) Bangko Sentral ng Pilipi BSP regulates the operations of all banks and financing institutions tasked to promote and maintain peso stability. It closely monitors importations, exportations, loans, dive interest and foreign currency transactions through a series of sound monetary policies. ants, Bureau of Internal Revenue (BIR) BIR exacts tax and license compliance from people and business entities earning income. They are required to fill up and submit periodic tax returns and pay for licenses, fees and taxes. Collection of licenses, fees and taxes is a prime responsibility of this agency as this is the principal source of funding the various projects/activities of the government. INTERNATIONAL ACCOUNTING STANDARDS Each country has its own accounting professional association - the American Institute of CPAs (AICPA) of United States. Institute of Chartered Accountants of India, Hong Kong Society of Accountants, Institute of Certified Public Accountants of Singapore, Institute of Chartered Accountants in Australia, to name a few, Each of these associations has set up its own national reporting standards to address the unique needs of its users after considering the cultural attributes of its country. However, because of the increase in global business and in cross-country financing, it is imperative that these financial reporting and measurement standards be harmonized to make comparability of financial statements possible across countries. 1973 saw the emergence of a private institution, the International Accounting Standards Committee (IASC) as a standard unifying body. To date it has more than 160 professional accounting bodies as members coming from over 115 countries, including the Philippines. The International Accounting Standards Board (IASB) took over the [ASC and is currently tasked to formulate new standards for financial reporting and.measurement called the International Financial Reporting Standards (IFRS). The IASB is working actively with national standard setting groups to bring convergence to the national accounting, standards and the IFRS. As early as 1996, the Philippines has already aligned its accounting standards to the International Accounting Standards (IAS), the International Financial Reporting Standards (IFRS) and Interpretations. Aside from the Philippine Institute of Certified Public Accountants and the Board of Accountaney, other local regulatory bodies concurring with the international accounting standards are the Securities and Exchange Commission and Bangko Sentral ng Pilipinas and two international financial institutions- World Bank and Asian Development Bank. THE ACCOUNTANCY ACT OF 2004 The Rules and Regulations Implementing Republic Act 9298 (IRR) otherwise known as the Accountaney Act of 2004 has the following far its objectives: Standardization and regularization of accounting education; b) Examination for registration of certitied publ ©) Supervision, control and reg accountants; and ion of the practice of accountancy in the Philippines.Salient points covered are the following: 1) Defines the standard of practice and service that an accountant May engage in whigy inentioned in the topic Career Fields in Accounting. 2) Mandates the creation of standard setting bodies such Standard Couneil and the Auditing and Assurance Stunt 3) Mandates the creation of the Edueation Technical Council wh BOA in matters involving curriculum making, teaching standards, Monitoring progress accountaney programs and evaluating performance of educational institutions offen accountancy id licensing of 4) Requires the taking of the licensure examination. registration and Heensing of certify public accountants before they auditing practice. It states thr candidate must be a Filipino citizen, of good moral character. a holder of @ degree op Bachelor of Science in Accountancy or its equivalent conferred by an accredited schoo, college or academy. To pass the licensure examination and obtain a license t0 practice, hy candidate must obtain a general average of seventy-five percent (75%), with no grade jy any subject below sixty five percent (65%). Failure to pass the licensure exami after taking it twice requires the candidate to take up a refresher course in any accreditey accountancy program before taking the examination a third time. : 5) Aside from a certificate of registration, a professional identification card shall be issued to the registrant. Both are needed by the certified accountant when preparing documents he or she signs, uses or issues in connection with the practice of the profession. 6) Enumerates prohibitions, vested rights and limitations in the practice of accountancy. 7) Requires certificate of accreditation for individual certified public accountants (CPAs), a, well as firms and partnerships of CPAs, Accounting practice commences only after the ndividual, firm or partnership has been duly accredited. To ensure quality of audit of financial statements a Quality Review Couneil was created to review the quality contr) measures instituted by the CPAs. 8) Promulgation by PRC of a continuing professional education (CPE) for all CPAs, as a pre- requisite for renewal of license to practice. A CPE Couneil was created for this purpose which will be responsible for implementing this requirement. The CPE is needed to ensure that the CPA is updated on latest trends in the profession brought about by modernization and scientific and technological advancements. The CPE program ensures competence integrity and global competitiveness of CPAs to practice their profession, ay 1s the Financial. Re Council. ch is tsked to assy, POrting n go into accounting and In view of the new. demands of the profession, the Philippine Institute of Certified Public Accountants, through its CPE Council, the ACPAE and the BOA are conducting a number of seminars to update the accountant's competency specially in the revisions of financial reporting standards. It has required its members to attend continuing professional education seminars and training programs such as information System and design, information audit and control, activity based costing, environmental accounting. revised tax laws and implementing guidelines for financial reporting standards, FRAMEWORK OF ACCOUNT! The Framework isa pervasive structure which sets the boundaries of the accounti practice with its basie rules, objectives and assumptions, The framework provides formation of accounting standards which prescribe the nature of financial reporting, The framework serves as a guide to the following groups: 34 ¢1) FRSC in developing future Finaneial Reporting Standards and in reviewing existing Philippine accounting standards, Syopavers af financial statements in applying Financial Reporting Standards 3) Users of financial siilements in interpreting the information contained in the fis statements, 1) Auditors in forming an opinion as to the Fairness in the pr tation of the 5) All other interested parties who w Lt know how the standards are being formulated. The framework is also used in resolving issues th FRS or by the Interpretation. are not addressed directly by the The framework deals with the following 1) objective of financial statements 2) qualitative characteristics of financial information 3) definition, measurement and recognition of the elements of the fi 4) concepts of eapital and capital maintenane cial statements Recall that in Chapter | mention was made about the primary objective of financial statements, that it provides financial information in answer to the common needs of stakeholders. There are three principal information provided by the financial statements: (1) financial position and changes in financial position, (2) performance, and (3) cash flows. While decision making is its primary purpose, secondarily, financial statements keep track with what has been done to the resources entrusted to the care of the managers. This is called stewardship or the accountability in managing the resources of the business. Again, recall that in chapter | mention was made that only general information are provided by the financial statements hence these are ose Financial Statements. Pronouncements on the financial reporting standards are under the authority of PICPA thru its Financial Reporting Standard Council (FRSC) and the Philippine Interpretation Committee (PIC). Once standardized, these become part of the PERS. If a conflict should ‘arise between the Financial Reporting Standard and a concept within the accounting framework, the standard shall prevail. Is there a difference between a standard and a concept. A standard is specific such as recognition of cash, while a concept is a general rule such as recognition of assets, With the Financial Reporting Standards and the Framework, statement users are assured of reliable financial reports and relevant financial information since these are assembled based on acceptable practices and rules and regulations set up by authoritative accounting bodies duly supervised by government regulatory agencies. Succeeding chapters will make mention of the concepts, rules of principles applied and PFRS No. from which these are derived. If there is no mention of the FRS, the concept is still valid as it is within the accounting framework. ‘The Framework of Accounting is extensively discussed in a higher accounting course called Financial Accounting. ristics of the financial statements and their underlying concepts and principles are discussed in Chapters 3 and 4. Additionally, Chapter 3 discusses transactions or business activities to start up a business and leads to the preparation of the statement af financial position while Chapter 4 discusses the transactions to operate a business and ends with the preparation of the income statement, The al statements are further discussed in Chapters 8 and 11, Financial statements are only the means to an end, The end products are decision making by the users and stewardship of mn ‘The qualitative cha amazementyr GOOD GOVERNANCE Vhe reeevsion taking plice in the United States, the Econom tend in Ee the 1996 Asia Crisis were all broupht about by fines Ht by red, ag te tn power, mpm tated appa mt armen Oa ge inappropriate decision mshing. AlLat these they tried to cover ap s6ilt ianetal pep, Were misstated, For these reasons, the wateliduys such as the SEC. BSP. PIC A have becrint Vigilant and required different burs aizations to pin pee conte a see structures for compliance hy all personnel trons the company officers down 10 the ernpey id workers, Good yovernanee is the proc ing, overall direetions by ONLISECIDB And stg the activities of the business and ensure that the interests of the ders are protectu Good governanee involves a) structuring managerial positions 0 b) promot cthical code of conduct, ©) ensuring credibility in Financial reports. A) takings timely yg relevant disclasures, €) protecting and respecting the rights of creditors, 1) encouraging go Performance, 4) providing, fair and just remuneration, h) respecting Fights of workers, ang j complying, with eval, regulatory and tax sequiremen re perceived by outsiders as lacking in goog sto lose their confidence over the will be inevitable, Barrings, a 235 ‘one person was given blank nd generate artificial profi, Lack of self-control a governance. Loss of cred firm. Without their support the firm’s financial collap: year-old British investment Bank, collapsed in 1995 whe authority including circumventing controls to conceal losses Arthur Andersen, an accounting firm, charged with fraudulent accounting and auditing Practices was forced to turnover its license when it lost its clients who transferred 10 othe audit firms. One of its clients, Enron, considered as one of the world’s largest energy firm was declared bankrupt in 2001 and was only able to recover three years afier when it sold ig, last subsidiary, Prisma. WorldCom and Asia Pulp and Paper were also two of its clienis charged for fraud. Good governance requires that a code of professional conduet or behavior should be set up for the business and effective internal control should be in place. Code of Professional Conduct is a set of rules designed to produce professional conduct and behavior consister with the high ethical standards expected by the public. The Philippine Institute of Certified Public Accountants has a Code of Ethies for Professional Accountants which serves as a guide for practitioners to perform with professional competence and within the boundaries of ethical standards. As a regulatory measure, the government agencies such as the SEC, BSP and the BIR has required that the financial statements be audited and certified by an accredited CPA individual or firm as being fairly presented in accordance with generally accepted accounting principles. Provisions regarding this requirement is found in the Accountancy Act of 2004, ETHICAL STANDARD Students must reatize that the practice of any profession is guided by a set of ethical standards. Ethics is a set of moral principles and values which guides one to distinguish hetween right and wrong and to act and conduct oneself’ accordingly. Remember that it accounting, financial statements are the main source of information of practically most of the stakeholders outside of the firm. Since these are also used to evaluate management Performance the objectivity and validity of the reports might be questioned, To prevent this the one preparing the report must be trustworthy or credible. Credibility depends on youl! Personal characteristies such as competency, integrity, objectivity and independence. A wrone 6 Be..._— - Ps «mai choice of method, measure or presentation may mean a wrong decision by m nee other statement users. Competeney requires you to have adequate knowledge, skills experince in the practice of your profession. Integrity is a highly professional characteristic whieh you fo be honest, sound, sincere and trustworthy. Actions must be free from yentional distortions or manipulations, Integrity requites you to engage only in fair and honest business practice. Objectivity requires you to be fair, to avoid bias and prejudice and always to maintain an impartial attitude in all matters. Independence goes hand in hand with objectivity. Independence requires a practitioner to be free of interest and to avoid Comprontising relationships that will impair objectivity, Confidentiality of records requires you to keep from leaking out information obtained in the course of the professional cngagement from leaking out. I should only be disclosed if you are authorized by the client to do so When faced with a situation wh lere your decision may jeopardize your integrity, the following ethical guidelines hopefully ‘may help in arriving at the best course of action: a) Is it legal or according to the guidelines of the firm? b). Will it hurt a stakeholder? c) Am I being honest and objective? d) What if | am the owner of the firm and this happens to me? © Would | be able to tell my boss about what happened or do I keep it to myself? (Reference: Managerial Accounting by Dopson and Hayes) THE FUTURE OF ACCOUNTIN The “good feeling” or good name of on financial performance (profit or loss) performance (relationship with peopl environment), as well. ‘The bottom line 4 person or firm should be evaluated not only based ‘financial position (net worth) but also on social le) and environmental performance (care of of achievement in business should be: maximization of owner's wealth (financial performance), promoting the well being of people (social performance) and protecting the environment and Preserving its natural resources (environmental performance). A good number of firms have already included social and environmental awareness as part of their core values, most specially the big firms. OCIAL ACCOUNTING. Ethics extends to social responsibility which may be defined as the ethical behavior or impact of a person’s or entity's action towards society. Business must know how to balance financial gains with social awareness, Firms and professionals should Provide opportunities for people to improve their standard of living through economic growth and development and through environmental management, as well. Social awareness focuses on the following issues: healthy and safe workplace, fair compensation, health program for employees, safe packaging, safe ingredients and safe processing of products Some large corporations have done their part in alleviating poverty by setting up "elihood projects for the deprived. providing free education for the poor, sending. medical and dental missions to remote and poor places, creating classrooms and schools. denat n books and computer equipment. among others. All ofthese will surely redound to the benef ithe firms as these will ensue healthy and economically progressive communities where the | business firm is located or customers patronizing the fiem’s products are | Pool of labor hired by firms come from, ving and where the ENVIRONMENTAL ACCOUNTING. We ar Clogged waterways, stinking living in a sick environment: polluted a wage, massive Nooding, deplet Hof the ozone layer leading attoe towards sustainable measures focused on rehabilitation of the of chemicals and other poisonous or harmful pollutants. proper 2 imate chan Scraps and used materials. greening of the environment. p and global warming, Stakeholders must pressure business firms to we environment: emission gy Ont ste disposal and reesey hreservation and developing i ent oy natural resources. Villar Land and Ayala Land has faunehed its Greet! Eavironment Progra, so with Motolite with the proper disposal of discarded batterie proper use of its fuel supply, Even Jollibee hay launehied a pree and Cebu Pacific wih an 011 €ORSEEVAON of yap il and energy HOW DO YOU REPORT THESE CONCE Accounting hay moved to include in their rey environmental concerns. And as there are no standards yel classity the measures/progeams used into finaneial environmental costs, for example may be further identified Disclosure of non programs created by the procedure for wastes and conee education and health maintenance prog he yen aS 9, 10. Explain the changes in the bu a) b) c) ANS INTHE FINANCIAL STATEMENTS, sts the impact of business on Social ang 1 set for this, the best thing iy, ‘and non-financial, Financial measures, fay | as preventive oF corrective cial information may include a description of environmental or soggy sm such as safety measures used for waste disposal, bidding crap, handling and recycling procedures for scrap. For societa) Sa Very’ good example would be the hiring of disabled persons or minority groups, ams launched for the deprived or the disabled. GUIDE QUESTIONS environment brought about by the follow ade liberalization and trade internationalization advances in information technology complex business form How does one cope up with these changes so as to be able to compete/survive in the 21" century? Describe the qualities that you as a 21st century business person must possess. As part of the management team, discuss the different hats that an accountant must wear. Tobe What are the four fields of er, what skills must a business person or an accountant possess? counting practices and enumerate the various career nt may avail of in each field. effective company off Discuss the requirements that one must accomplish to become a Certified Public Accountant. Differentiate G a) b) ) ) Give some profes regulate the practice ofa profession such as the accountan a) b) °) inancial Accounting from Managerial Accounting and Cost Accounting, the duties or funetions of the following: external auditor ©) tax officer accountant 1) budget officer controller 2) management consultant internal auditor ional organizations and government agencies and discuss how they profession, cc the functions of the following councils ereated by the Accountaney Act of 2004 ‘ducation Technical Council, Continuing Profession Educatién Council, inancial Reporting Standard Council,Counei anc a) Quality Reviews Philippine Interpretation Committee ooinmrne tramewerk of accounting, the different issues being dealt by it 11. Describe the frames« relevance to different 2roUP : temational Accounting Standards Board of th What is the mission What is good governan What is social responsibility entity’s success. humerate some practices of good governance. Enumerate some practices of social responsibility. The bottom line of an hinges on three performance levels. What are these and give examples for each? : 16, Wh ) Why is ethics a critical issue in accounting? 17. ¢ lards. How does one comply with these ethical standards? 18, Enumerate 19, Explain how account is ethics! ie six ethical stand: e examples of misstatements contained in the financial reports reports include social and environmental concerns. EXERCISES ional in the 21st century must possess. 1. Described below are skills that a successful profe: Identify each one. 4. Ability to interactideal with people comes with understanding why they behave the way they do. b. The skill in a) above requires you to take up of courses such as history and culture, political science and literature ‘An understanding on how business works and familiarity with its different concepts. principles and strategies will lead one to be able to identify and define problems. make the appropriate evaluation and prepare alternative solutions. 4, This skill is needed to make one never run out of ideas. You must be inquisitive and sensitive to the viewpoints of others. With this kind of mind, it is not far fetch for you to come up with a bright idea on how to make the business more profitable. ¢. As part of the management team, it is required that you should develop this skill and be good at exchanging ideas, giving suggestions, expressing oneself clearly whenever a report has to be presented. As part of the management team, it is important that you should develop the skill of dealing with people, motivating them, being able to withstand and resolve conflicts. 2. There are many career opportunities open to an accounting professional. A few are described below which you are required to identify. 4. A licensed CPA professional who enamines the records and reports of the accounting department ensuring that these are fairly presented in accordance with generally aecepted accounting principles. b. A licensed CPA professional or lawyer in charge of preparing reports to be submitted ‘o the BIR and who advises elients on financial and economic decisions made and the impact of taxes on them. © A licensed professional who makes a study and gives recommendations to Management regarding decision making problems such as retainin, product, processing a product before selling or selling it at a pre feasibility of merging with another company. among others. or dropping a -prepared form,d. A licensed professional assigned to a fraud ease, among others. USS 4 Paper tri tity of the transfer ang il 4g the trace the money based on documents, ascertains lee officers involved. e. One who determines the cost of producine ance in the market profitability and monitors its performance in the ma : ee om of the COMPANY, pre £ Responsible for establishing the accounting spster PANY. Prepargs hom financial reports and assists management 10 analy7il ty encompasses accounting. tas. budgeting, internal aygy a product oF SEPVIEE, determing, ig ting One whose responsi system design and internal control h. Assists the accountant in the recordin accounting such as posting. footing, reports i, A licensed professional who assists stu and other procedural aspects op ng of transactions ration of schedules. ang cross-footing, Prep cents in their accounting, tax and auditing courses en usiness s The following are the accounting courses being taken up by bi students jp preparation for their professional careers. Identify each one. ' 4. This isa course that deals with fund administration, that is, accounting of funds receiveg | and how these funds were used, Service isthe primary motive rather than profit b. Basic accounting course that deals with the procedural aspect of recording ' classifying, and reporting, Course that primarily deals with pre aration of special reports that will assig controlling, directing ang management in accomplishing its functions of planning decision making. d. Course wherein generally purpose financial statements are prepared primarily for external stakeholders or users. ©. Course on assurance principles reports and ensure that these are necessary for one to know how to examine records and accordance with the GAAP. 4. Described below are some regulatory bodies governing/assisting accounting professionals in their field of practice. a. A government agency that requires publicly listed companies to submit financial : statements, and requires that sale and purchase of stocks and bonds be propetly approved before negotiation-can take place. ‘A government agency in charge of regulating all professions, overseeing the condu: of the licensure exams, licensing them, promulgating professional standards of practice and the ethical conduct of the profession. ¢. Popularly known as the Board, it has the same duties as the ageney described in b) above but limited only to the accounting profession. 4d. Integrated national organization of CPAS accredited by the Board and PRC. Council which is responsible for establishing accounting standards, monitoring its implementation to ensure quality accounting practice. f. The council in charge of ereating standards common to all accounting professionals that there is consisteney in the application of rules and regulations when preparing financial reports. Comparison of financial statements of companies. located it different countries may also be possible and that accountants may not find it difficult tw practice the profession in another country ade up of accounting educators tasked to ensure that train6 9. ave condueted 1 update the members on recent pronouncements made by governing bodies at she same time develop their teaching and stratepies i. This council created by the Accountaney Act of 2004 is tasked to assist the Board in ‘updating curviculum of accountancy program and evaluating performance of schools offering the program, i. “This council ereated by the Accountancy Act of 2004 is tasked to assist the Board in romvulgating the continuing professional education requirement which is a pre. requisite for renewal of the CPA license. The ost of cme oil has again escalated in the world market and this has brought about a round of inerease in the prices of diesel, gasoline and petroleum products. Who are the stakcholders affected by this price increase and what performance measure is being addressed by them? Explain the effect of this increase to the stakeholders. Private schools are planning to hike tuition fees this coming school year. Despite the intervention of the President of the Philippines, some schools have decided to go on with their plans to increase their tuition fees, Who are the stakeholders affected by the tuition fee hike and explain the effect of this to the stakeholders? What performance measure is being addressed by them? The officers of Excell Corporation went over the fin Financial statements just’ recently Prepared by the accountant. The reports showed a very lean net worth and a very poor profit perf nance. One of the officers asked the accountant to change these based on the a) Include as asset a plot of land beloi will improve the net worth of the firm. b)_ Reduce advertising expense by P200,000. This will increase profit. sing to the officer amounting to P500,000. This How should the accountant react to these suggestions? What ethical standard(s) will be violated if the accountant makes the changes? Laguna Leather Company manufactures leather from cowhides, goatskins, and earabao hides. These in tum are used to manufacture shoes, bags and belts. Its manufacturing Process entails a lot of soaking of hides and skins in chemicals which are improperly discarded in the backyard and through the regular drainage polluting the neighborhood and the Laguna Lake. Describe how the company as part ofits social responsibi and make the business environment eco-friendly can help to combat pollution Some ethical risks result from the following fraudulent transactions to make appear profitable and or solvent a. Window dressing b. Fraudulent recording of an asset ©. Phony asset certificates d. Payment of fraudulent disbursement the company 4) IWentity which of the following transactions appropriately describe the practives that result in loss of the firm's etedibility rementioned 1. The personal loan of the company president in the amount af P100,000 was passed ‘tsa business loan and paid out of the eompany’s bank account 2. The finanee officer of the company presented to the luditor personal investment 4iD 4 Certificate of a company offiver amounting to 1.000.000 85 evidengg company’s investment ‘ 3. Cash sales of January 2, 2011 amounting to P500,000 Were teCOrded g, December 31, 2010. . 4. Some expenses paid by the company amounting to P2500 jtics and profit ofthe finn» yo) were recorded as asst, +) In each manipulation, what will happen to the assets Ronaldo Po, a CPA, was hired to review the accounting information system of Bell Smit, Company with a view of improving it and replacing the computer with new models. yy. client was considering buying from Dell Computer Company. Mr Po. is a stockholder Dell Computer Co. Should Mr, Po decline the engagement? Is there any ethical standary violated by Mr. Po? Explain. Remember Ronaldo Po? He was hired as auditor of Bell Smith Company. When askey about his fees, he remarked “We will wait until the financial reports are done. It will 5% based on the profits eatned by your company”, What is wrong with this? You are a financial adviser and has been approached by the Director of Westpoing Corporation to recommend their firm as a good investment to your clients. You went over their material and note that 1) the return on investment is 12% per annum when normally investment of this kind is only from 6% to 8% per annum making the information you received quite doubtful, 2) the buoyancy of the property market makes the information you received reasonable but still there is a high amount of risk involved. The director promised to give you double the normal rate and you need this money for business expansion purposes. Your clients are interested in investing in properties specially one with high returns, 1) What are your duties towards your clients? 2). How should you act as adviser of your clients? 3) Of these four alternatives, which will be the best? Explain why you chose it. a) recommend the investment, disclose the risk and even the commission involved. b) recommend the investment, don’t disclose the risk and the commission involved, ) inform the clients of the risk, if they go ahead refuse the commission. d) do not recommend the investment 4) What would be the consequences? | CASE STUDY 1 Using the internet: | a) by d) ©) 5 2) Look for Social Responsibility and Environmental Activities and Practices of Nokia Corporation and make a short report on this. Cite non-government agencies (NGO) or industries and their act and environmental concerns, Look for Enron, WorldCom and Andersen Consultancy under ethical standards or Corporate Governance and make a report on what breach of ethics they committed. Look for Philippine Red Crass and San Miguel Corporation. Cite the difference(s) in their mission Using the internet, look for big firms and describe their social or environmental progran's Suggestions: Jollibee, Ayala, San Miguel, Villar Foundation, Cebu Pacific. Using the internet: Update your road map about the Intemational Accounting Standard Board You have been doing your researches via internet. List down at least three wron done by students, ~~. ities in support of socialCHAPTER 3 x STARTING UP A BUSINESS LEARNING OBJECTIVES After studying this chapter, you should be able to: a _chumerate and explain the qualitative attributes that apply to financial statements be enumerate and explain the accounting principles underling the preparation of the statement of Financial position or balance sheet define and identify the first three basic elements of accounting. define business transaction and discuss its three features. Tespect the relationship of balance or fundamental identity when analyzing the business transactions to start up a business, present the accounting elements in a financial report called the statement of financial position or balance sheet Whether you are the preparer or the user, knowledge of the basic accounting concepts and principles will help you understand how the financial statements are prepared. Why are these principles important? Proper application of the accounting principles makes for reliable financial information contained herei ‘A number of guidelines or standards have been developed by the accounting profession to ensure truth, fairness and consistency in the preparation and presentation of financial statements. This chapter discusses 1) the qualitative attributes (characteristics) financial information must possess, 2) the accounting principles required in the preparation of finan: statements, 3) how to analyze transactions (classified as financing and investing activities) needed to start a business together with the appropriate application of the accounting principles. QUALITATIVE ATTRIBUTES The Framework for the preparation and presentation of financial statements describes, among others, the attributes or characteristics that financial information must possess to make them trustworthy and usefull in making informed judgment and decision, The framework identifies four principal attributes: understandability, relevance, reliability, and comparability. UNDERSTANDABILITY This was also explained in Chapter |. Of what use are the finaneial reports if statement users do not know how to read and use them? Understandability requires that 1) terminologies ‘must be clear, 2) form and presentation orderly and 3) users have a reasonable knowledge of finance, economies and accounting to be able to make a good assessment and sound judgment. RELEVANCE, tt prescribes the quality of information that will make a difference and influence a statement user to make a meaningful decision. The information must give the past performance of the business (feedback value) which is useful in projecting what might take 43 =|| place in the future (predictive value). For example assume the sales of the comy any y, P2,500.000 in 2009, P1.800,000 in 2010 and P1.200,000 in 2011. It gives You a feedbacy™ how much the company earned for the last three years. At the same mes it shows thay i," ene: ca Sing the trend is decreasing, it is projected that sales may go down some more MEN yea . The relevance of financial information is also affected by materially. Materiatigy depend on whether au item (by its nature or size) will influence user’s decision oy Example, a broom may have all the attributes of an ayset but because OF its MALUTE it dogs 44 have to be recognized as asset and can immediately be expensed. Or. an unpaid Bill of psy) received too late to be recognized as liability may not affect financial structure Of the firm total liabilities of the firm is quite la « P5Q0,000. Whether P500.000 oF P500 woul i matter much to the user? The rule is that the information is material if its omission misstatement will adversely affvet the decision of the user. Conversely. if the information ja, only a small bearing on user’s judgment, then it is immaterial, ‘Aside from materiality another constraint in reporting relevant information ji, ness. Reports must be given promptly or within the period it is needed 10 form nent else it loses its usefulness. A constraint such as Materiality and Timeliness permit, way in the application of the principles as long as it does not reduce the relevance o, usefulness of the financial information. RELIABILITY Can the financial statements be depended upon by the users? Yes, if information jg objective and free from material errors or misstatements, ‘There are four ingredients to by considered: faithful representation, substance over form, prudence, and neutrality Faithful representation means that information represent faithfully what they purport to be, that the information should not mislead users to think that it is when it is not. Example WorldCom, one of the largest telecommunication companies in the world that collapse, boosted profit artificially by recording expenses as assets and by recording amounts borrowed as profit. In substance over form, if the substance or economic reality (intention) of the contract is not consistent with the legal form, the economic reality should prevail. For example, a machine may already be considered as asset even if the business does not own it because it was just leased on a long term non-cancellable lease contract. Neutrality requires that the information should be useful to all users, It should not show bias for a particular user. Likewise, financial information is not neutral if it will influence the making of a decision in order 10 achieve a predetermined result. WorldCom did this when it submitted financial reports which showed growing assets and huge profit as a result of which market value of their stock inereased drastically and many investors were enticed to buy. Prudence is another ingredient of reliability which requires the accountant to exere nm wwhen using estimates oF information that is marked by uncertainty. Accountant must see to it that assets ct income are not overstated and liabilities or expenses are not understated. Care must be taken though that assets or income are not deliberately understated nor liabilities and income overstated only because the preparer is unsure in the information received or unsure in making the estimate. Completeness is another component of reliability. The value of information found in the financial statements may be enhanced to help users make informed judgment when all information are provided taking into consideration the importance of each item to statement users. Ht means that if the data is omitted, it will cause the information to be false oF misleading, Example: A company desiring to borrow from the bank submitted a statement of financial position as at December 31, 2011. One of the properties listed was a building wert 44P5,000,000, On January 2.0! the following year, the t existing on December 31. hio\wing that it no long Hiding was destroyed by fire, Although heer exists and that this information may influence judgment of the lealer-bank, adequate disclosure may be presented in the body of the financial statement or as an aevompanying note for this. The note may be worded, os follows The building appearing in the statement of financial position in the amount of 5.000.000 was destroyed by fire on January 2, Insurance carried may only amount to P1,000.000. In judging whether the information is relev 115, enumerates items/information that must be ii Chapter 12 explains this further. to warrant disclosure, PAS 1 par. 103- kled and how these should be presented COMPARABILITY Comparability helps one identify changes taking place in the entity between two or more periods so users will be able 10 determine the change or trend of its performance. or position. Comparability may also be made between two or more entities so users w {o make @ meaningful assessment of the entity’s competitiveness. Comparative financial Statements are presented in Chapter 11. The rule of comparability (PAS | par. 38-39) is complemented by the rule of Co ea of accor permitted when a par. 46) ACCOUNTING PRINCIPLES (GAAP) Principles are laws or rules that guide the conduct and accounting, these are specially used in identifyin information. These generally accepted accounting principles or simply called GAAP are not natural laws but man-made laws usually a result of long-used accounting practice, norm of conduct of a place or standards promulgated by an authoritative body. Time and again they have been revised or updated to ensure its appropriateness to the changes taking place in the business environment: Accounting Principles are either general such as the basic concepts and assumptions laid down by the framework or specific such as the standards laid down by authoritative bodies. practice of the profession. In 12. ‘measuring, arid reporting financial The accounting principles or standards depend! on the study and pronouncement made by the PICPA through its Accounting Standards Council now called Financial Reporting Standards Council (FRSC) which includes members coming from the PICPA, SEC. BIR. CHED (Commission on Higher Education), Financial Executives (FINEX) and the PRC. The ERSC initially prepares exposure drafis which are disseminated to the accounting members. After a series of dialogues with the members, the cowcil meets, finalizes or r Mandard and circulates this through a series of bulletins. Seminars are then con calighten the members on how the standard so formulated should be has been formalized and Reporting Standards (FRS fines the ducted to applied. When the standard approved by the FRSC then it forms part of the so called Financial . the following are the accounting principles used in the Financial statements as provided in PAS | Preparation and presentation ofMEASUREMENT IN TERMS OF MONEY AIL business transactions are measured and recorded USiNE Only one yp, Measurement. Since money is used as a medium of exchange. its therefore the most prac Unit of measuring financial data. At this poiit, itis worth noting that in aecounting, gy measurable in terms of money are recognized and record in the books ofthe entity a) BUSINESS ENTITY CONCEPT This concept assumes that a business enterprise is or investor. In preparing financial statements of an entity, on , Feveny, and expenses of that entity should be contained herein, Personal assets 2 ities of owner should not be included. The accounting process is primarily for the entity, seconde for the owner. Itis difficult o determine if the entity is making profit if personal activities business activities are recorded together in one book. Likewise, itis required that if an own, has more than one business, the records and reports of each one should be separa maintained. This way it will be easy to determine how each one is doing and therefo, decisions can be made accordingly for each business: separate and distinet from its gy iy the assets, liabilities, reyen" il EXCHANGE PRICE OR COST PRINCIPLE Assets, liabilities, revenues and expenses should be recorded based on cost. Cost is th, amount agreed upon in an arm’s length transaetion. It may be based on cash or its cash equivalent if no cash was exchanged (paid) at the time the transaction occurred. PAS |g par.15-16 deals with recognition and measurement of property and equipment at acquisition date, A computer equipment with a list price of P50,000 but was purchased and paid less discount of P1,000 should be recorded at P49,000. If after a month, a similar machine could be purchased at a lower price of P45,000, the statement of financial position should still show th, ‘machine at P49,000 as this was the price actually paid for the machine, Remember that values change. The cost price now may not be the cost price yesterday or tomorrow. It means that constantly changing the amount will make our asset value unreliable. GOING CONCERN ASSUMPTION Supporting the Exchange Price or Cost Principle is the Going Concern Assumption Based on this premise, it is expected that the business will continue to exist indefinitely (PAS 1 par. 25) thus financial statements should be prepared on a going concern basis unles management intends to close the business or cease trading. It will also follow that properties are intended to be used for a long period of time and therefore should be recognized at cost without regard to the changes in their market values. For example, Moreno the owner of a delivery service bought a truck. This could be valued three ways: a) P300,000 the actual cast paid oF b) P250,000 the amount it will fetch in the market if you sell it or 3) P200,000 if will be replaced in case of loss or thefi. Using going concern, it should be the actual prt since you intend to use it for a long period. Market value should be used only upon exit. ACCRUAL ASSUMPTION PAS | par. Assets, liabilities, revenues or exper 7-28 requires that financial statements be prepared under the accrual basis 's should be recognized based on the period they relat or based on the occurrence of the transaction/event rather than based on cash received or paid For example: the doctor bought medical equipment on May 8 but paid for it on June 28. Whe will the transaction be recorded? Since the equipment was purchased and received on May 46»uld be recorded on that date. You do not have to wait for the casb to be paid on June 28 before ree the transaction, OBJECTIVITY [he Concept of Objectivity requires that assets acquired must be verifiable and substantiated by documents such as invoices, vouchers or official receipts. This compliments oe - ss Principle since valuation of resources at cost is definite as it represents the actual soe ot cs them. Current market value is subject t0 constant change and usually is ohonwin sie which is subjective as it is largely a matter of judgment. Recall that principle of going conn Ponent of the qualitative characteristic of reliability and even of the REPORTING PERIOD How often should the accountant prepare the financial statements especially since itis assumed that the business is a continuing concem? It is understood that a complete and accurate financial picture of the business may only be made at the end of its life However, since the statement users need finaneial information on a regular basis and the success of the business operation depends on financial information contained in the accounting reports, then its life has to be divided into specitic time intervals called accounting period. This will enable the enterprise to prepare periodic financial statements. PAS | par 36-37 provides that the basic accounting period is one year with interim reports prepared for shorter periods of time such as monthly, quarterly or semi-annually. This is discussed further in Chapter 4. THE FINANCIAL STRUCTURE OF A BUSINE Based on the Framework of Accounting, the financial position or structure of a business entity is based on three elements called assets, liabilities, and owner's equity while its financial performance is based on two elements called revenue and expense. Only the inancial position or structure will be discussed in this chapter. Changes in capital based on financial performance will be discussed in Chapter 4, Assets are economic resources owned by the business. They afe used in operating the business and are expected to benefit the business over a number of years. The school's assets, to name a few, are: land, building, cash or money, furniture and fixtures (tables, chairs, blackboards, filing cabinets, electric fans), equipment (computers, printers, fax machines), school bus, supplies (paper. pencils, erasers, printer's ink, picces of chalk). An asset, as defined in the Framework, is a resource obtained and controlled by the enterprise as a result of ind from which probable future economic benefits are expected to flow to the enterprise. Economié benefit is the ability of the asset to produce future cash flows for the business entity whether directly (as when the asset is sold for cash) or indirectly (as when itis. used to create other assets such as a machine used to produce goods or services). Note that ai, asset has three features: 1) it is a resource obtained from a past event, 2) the enterprise has control over it and 3) future economic benefits will be received from its use. ‘As demonstrated in the first chapter, financing is always the first activity of a bus followed by investing. The first assets or business resources are contributed by the owner of the business. Secondarily. some assets will come from the creditors such as cash borrowed from the bank and appliances, furniture, equipment, and goods purchased on account from the suppliers. Assets are therefore claimable by two parties - creditors and owner(s). Werhave the ‘next two clements- liabilities and equity a past event ness 47ee Wie. ies can be simply defined as an obligation to do or pa Or It may be dein, te debts of the business owing to outside parties like the banks. Financing. compan a suppliers of goods and services. The framework defines a liability a8 @ Present objig,i? 7 f expected 10 result in an oye tion arising from a past event, the settlement of whic ee iirc eatin, Wee is fiability has also three features: 1) they" resources from the enterprise, Like the asset. a Hib 3) element fs expected i present obligation 2) which arose from a pas 1 and usually paid in cash gre in the future in the form of an outflow of resourees. A liability is usually en UL ay also be paid in the form of property or sery ice Net assets or net worth ofthe business is determined by deducting the total Kain, from the total asses. The net assets elaimable by the owner is ealled oWEr"S equity. Equigy defined by the framework 2s the residual right or interest of the owner(s) in the entity 2 assets. As there are numerous owners in a partnership and in a corporation, equity calle Partners’ Equity and Shareholders’ Equity. respectively THE ACCOUNTING EQUATION Figure 3.1 shows how accounting views the financial structure of a business. shows a relationship of balance or fundamental identity of the three elements, Sin assets are claimable by the creditors (represented by liabilities) and owner or jin (represented by the equity), this relationship of balance should always be respecte relationship is expressed in an accounting equation: Asset that iy 18 the nestor -d. The Liabilities + Owner's Equity Happy Tour & Travel ASSETS 300,000 P100,000 Owner's Equity 200,000 Figure 3.1. Financial Structure of a Business To illustrate, assume Peter Sori accounting equation will show: Assets Owner's Equity Cash 200,000 Soriano, Capital 200,000 The above equation means that the business has and that Soriano has a right over it To illustrate further, in the business, The assets in cash amounting to P200,000 issue Soriano borrowed cash of PL uunting equation will change: Assets Liabilities + Cash 300,000 Loan Payable ~~ PT00,000 00,000 from the bank for use Owner's Equity Soriano, Capital P200,000 48 | |these. The creditor (bank) has a right over P100,000 of the assets with Soriano having a right ove’ the Femaining P200,000 only. Notice that the liabilities have preferential claims over the sees Teves. it ts placed before the owner's equity in the accounting equation. The balance bevwecn the assets on one hand and the claims on the other hand must be maintained at all times, {he accounting equation could be stated another way to emphasize the residual interest of the owner over the assets ofthe business: Assets - Liabilities = Owner's Equi Recall in the Doria Problem in Chapter 1 since there are no liabilities all the assets belong to the owner, and the accounting equation is simply: Assets = Owner's Equity THE ACCOUNT The account is a device the wecounts receivable, notes ng and machinery. Similar Cash refers to currencies, coins, checks and les, chairs, desks and cabinets. Cash may be used to record the changes (increases or decreases) accounting elements. For the assets, the accounts used are cash, receivable, merchandise, supplies, land, furniture, equipment, bul assets are grouped together under one account, bank drafts. Furniture and fixtures refers to tabl designated as Cash On Hand (located within deposited in a bank). Chapter 6 discusses thi machines, duplicating machines, the entity) and Cash in Bank (for monies is. Equipment includes typewriters, adding air condition units, printers and computers. Liabilities are usually identified by the wor d payable such as accounts payable, notes payable, loans payable and mortgage payable. Two accounts are used to represent owner's equity: owner's capital and owner's drawing, Owner's capital is the account used to represent investments made by the owner while owner's drawing is used when there is recovery of investment in that assets of the business are personally withdrawn by the owner. Two other accounts representing, also changes in capital, revenues and expenses, are discussed in the next chapter. BUSINESS TRANSACTIONS AND THE ACCOUNTING ELEMENTS The accounting elements are affected by the business transactions or economic activities occurring daily in a business. A transaction has three characteristics: (1) it is an exchange of values, (2) between two parties, (3) in terms of money. "his means that assets in cash is now P300,000 but Soriano cannot lay claim over all of ‘There must be an exchange of values. This means that for every value received by the business there must be an equal value parted with, This is the dual effect of a business transaction, which gave rise to the bookkeeping system called Double Entry Bookkeeping or the Venetian Model. A transaction either increases or decreases the assets, liabilities or owner's equity but the equation or fundamental identity of the three elements should always be ‘maintained. For example, from the first transaction in the Soriano Travel Agency illustrated in the preceding page, the business received cash so its assets increased and the business gave the ‘owner right over the assets so there is also a corresponding increase in the owner’s equity. In the second transaction, the asset cash again increased when it was received from the bank this time ‘with a corresponding increase in the liabilities since the bank was given a right over it 4a business transaction there are at least two parties involved. In the first illustration on the preceding page, the parties are Soriano and the tnivel agency, while in the second illustration the parties inyolved are the bank and the travel agency. 49The transaction must he stated in terms of money. This contained inthe aco, concept of Measurements in Terms of Money. It states that the eemnomie resources (Me and economic obligations (liabilities) must be recounized and measured USIME One gy, ‘measurement or denominator - money " nnsidered financial in I should also be noted at this point that tansactions not ature there being no exchange of values, should not be reeorded in the books of the entity Examples: Soriano hired tourist guides for a salary of P10,000 each 2. A lease contract was signed for the use of an office space at a monthly rental of P18, 59 3. An order for medical supplies was placed with Good Health Trading amounting to P5444 Until the hired workers have rendered service or the travel ageney has given the hing workers advance salary, the transaction is not considered @ financial transaetion 4 4 processed by the bookkeeper. In the second example, the office should first be occupied of. the travel agency should give an advance payment in order for the transaction to be recognized, j, the third example, the order should first be received or the business should make an advange. payment for the transaction to be recognized. DEMONSTRATION PROBLEM I: To illustrate the effects of the transactions in the accounting elements, let us assume the following: Assets invested by the owner. March 1 May Gomez opened a tour and travel service by contributing cash of P50,000. She has three cars worth P1,200,000 but contributed only two cars worth P750,000. Analysis: The assets of the business will inerease in the form of cash PS0,099 and cars P750,000 with a corresponding increase in owner's equity ASSETS = OWNER’S EQUITY Cash P 50,000 Gomez, Capital 800,000 Cars 800,000 800,000 Cash borrowed from the bank. March 3 Gomez borrowed P 100,000 cash from PNB for use in her business. Analysis: ‘The assets of the business will increase again in cash by P100,000 with ‘a corresponding increase in liability ASSETS = LIABILITIES + OWNER’S EQUITY Cash P150,000 Loans Payable P100,000 Gomez, Capital P800,000 Cars 750,000 a7 a 900,000 100,000 800,000, Asset purchased for cash, ‘ March 7 Bought tables and chairs from BI 's and paid cash, P45,000. Analysis: The assets of the business will inerease in the form of furniture and decrease in the form of cash, Fotal assets will still be the same since there was only a change in its form. seine iain, =on LIABILITIES + OWNER’S EQUITY Gi 105,000 Loans Payable 100,000 Gomez, Capital P800,000 Cars 750,000 Furniture 45,000 - ae 900,000) 400,000 P800,000 Asset purchased on account. Various equipment were purchased on account from National Winners for P55,000. March 15) H jease in the form of equipment with Analysis: The assets of the busi a corresponding increase bilities. ASSETS = LIABILITIES + OWNER’S EQUITY Cash P105.000 Loans Payable P100,000 Gomez, Capital P800,000 Cars 750,000 Accounts Payable $5,000 niture 45,000 Equipment oon 955,000 Cash is withdrawn by owner. March 18 Gomez made cash withdrawal of P5,000 for personal use. Analysis: The assets of the business will decrease in cash P5.000 with a corresponding decrease in the owner’s equity since owner recovered part of her investment. ASSETS = LIABILITIES + OWNER’S EQUITY Cash P100,000 Loans Payable 100,000 Gomez, Capital 800,000 Cars 730,000 Accounts Payable 55,000 Gomez, Drawing (5,000) Furniture 45,000 Equipment 55,000 950,000 Pi53,000 795,000, Payment of liability. March 20 The account due to National Winners was paid in cash, Analysis: Assets of the business in the form of cash will decrease with a corresponding decrease in liabilities. ASSETS a LIABILITIES + OWNER’S EQUITY Cash P 45.000 Loans Payable — P100,000 . Gomez, Capital P800,000 Cars 750,000 Gomez, Drawing ( 5,000) Furniture 45,000 pment 55.000 895,000 P795,000 Note that the accounting equation was maintained all throughout the transactions. This a bee use of the dual effect of the transactions in the accounting elements. If the assets and Viabilities are affected, the effect should be the same as illustrated on March 3 and 15, that an increase in the assets will bring a corresponding inerease in the Or assets wi € e with a cor ‘ponding decrease in the liabilities as itlustrated on March 20, The same tule is, applicable if the assets and owner's equity are affected’as illustrated on March | when SLeae : the increase tn caroecla corresponding, increase in ayner’s equity: OF WHEN a dec, tnrassets canted with a corresponding: decrease in owner's equily 3 Hlustrated on Margy Honly one accounting viluc is atlected ay illustrated on March 7. the accounting eqtatigg not change since the inetcase in one asset item carries a correspondins decrease in gy asset item, Recall that this Venetian Model or Double Entry Bookkeeping fequires qhay jt every value received there is aan equal value parted with Note that the owner's equity increased when investment wary pul UH ThE busines, decreased when the owner exercised her elaim by withdrawing cash fom he business analyzing the transactions, take note of the accounting prineiples that Were applied. 4), Business Entity Concept was applied on March | when the assets of the Business incre gy with the investment of one car, notwithstanding the fact tha Gomez owned three cary concept was also applied when cash was withdrawn by Gomez on Mareb 18 the cash of the business. On March 7 and 15, Exehange Price av Cost Concept as appiigg when the eash prices of the furniture and equipment bought were P615.000 and P55,699 respectively, and were recorded jounts no matter if the prices differed in anothg, sore, All these transactions were properly documented based on the Objectivity Principy, nd the qualitative characteristic of Reliability: March 3 was supported by a contract signey by Gomez ay owner of the enterprise, March 10 and 15 were supported by purchase invojeg, and March 20 by an official receipt Again, let us 2o over the transactions of Happy Tour & Travel owned by Gomez: 1 Gomez opened a tour and travel ageney by investing eash of P50,000 and two cars wor 750,000. 3° Borrowed P100,000 from PNB for use in her business 7 Bought tables and chairs and paid cash of PAS,000 : 15. Various equipment such as eleetrie fan, computer and typewriter were purchased on account from National Winners for P55,000. 18 Gomez made a eash withdrawal of P5,000 for personal use 20. ‘The account due to National Winner was paid in cash, The following table summarizes the effects of these transactions on the accounting equation, Balances are given afier each transaction, bate Assets HawuLits OWNERS LgUity Mul Gi he et foie a 1 sao 750,00 00.000 s 100.000 100.000 Balaness 150.000 750.000 ton. ‘0.000 7 15,000 + as.00 Balances” 108.000 780,000 45.000 100,000 00,000 Is «35.000 + 35.000 BalaneesTosan0 750900 58.000 45000 Laon $5,000. _Now.ao K s.200 5008 700.000 750,000 5000 45000 TORa00 ssn Bo0.0H) ~ S.al 20 55.000 53000 atances 45.000 750,000 $8000 __ 45.000 Jamon wooo = S00 895,000 = 10,000 + 795,000 52rION STATEMENT OF FINANCIAL PO Fhe Statement of Fuiaucial Position isa fist of assets, liabilities, and owner's equity of a business where a user is informed of the wealth accumulated by the business, its lig solvency and net worth. It was formerly called the Balance Sheet (before PAS | was revised in 2007) because it shows the balances of each account and the grand total shows a balance hetween the assets (business resources) on one hand and the Ti ‘nthe other hand, ilities and owner's equity (claims over the assets This statement is not prepared every time there is a change in the accounting equation. It is usually prepared yearly with balances shown only at the end of the particular year. Interim statements may be prepared (monthly or quarterly) as needed by the users. An interim statement of financial position for Happy Tour on March 20 will appear as follow: Happy Tour & Travel Statement of Financial Position March.20, 2011 ASSETS LIABILITIES AND OWNER’S EQUITY Cash P 45,000 Loans Payable P100,000 Cars 730,000 Gomez, Capital 795,000 Equipment 55,000 Furniture & Fixtures 45.000 Total 895,000 Total 805,000 Note that the owner's capital was presented already net of drawings (P800,000 - P5,000), DEMONSTRATION PROBLEM 2: Another set of transactions for a photocopying and binding services provider is given below for the students to practice on. Follow the table format given for Happy Tour and write down the effects of the transactions on the accounting elements. Determine the balances after every transaction, Prepare the statement of financial position. Check your answers against the solution given on the next page. Copyclear and Bindery Center situated at Taft Avenue, Manila was set up January 2, 2011. The owner, Susan Alegre, contributed cash of P20,000, and equipment of P48,000. The following are the additional transactions for January. Jan 5 Bought furniture and fixtures worth P6,000 on account 7 Bought a photocopier machine for P20,000. Terms: 50% down, balance on account. 8 Hired a helper on commission basis, based on 10% of sales, to operate the machine. 10 An emergency prompted Ms. Alegre to withdraw P1,500 cash for personal use. 15. Bought supplies costing P3,000 and paid cash, 20 The account of January 5 is due. Ms. Alegre paid this from her personal cash. 30 The account of January 7 is due. Issued a 60-day promissory note for this. The second demonstration problem showed the effects of the transactions in the accounting elements and that the fundamental identity is always respected, To prove this, balances are shown after eich transaction Note that on January 20°the liability of the business was paid by the owner out of her Personal cash. A decrease in the liability of the business was made, but there was no Sorresponding decrease in assets since the cash came from the owner herself. This should be =co e Jigbility and increasi Viewed as additional investment by the owner decreasing the liability and inereasin, equity. On January 30, the total issued for the 2 OWing liabilities remained the Mote y. account due for payne. The fsbility merely changed in FOMM from aceon Payable to notes payable. Accounts Payable is used for a ibility represented By an gp Promise to pay. When the liability is supported by a promissory note The AEOUNE Ke opt used is Notes Payable. Always sce to it that the total assets is always equal to the 4 liabilities and owner's equity maintaining its fundamental identity ne when a promissory SOLUTION TO DEMONSTRATION PROBLEM 2: : ries OWNrR's Date ASSETS = tap EQUITY Fomiure Teams Noes Alegre. Alegre Jan, Cosh Suppliss QTaars guint Paable _nshle Capit Drawing 1 30.000 8.000 va 5 6,000, + 6,006 ‘ = 68.000 Balances 20,000, 6.000 48,000 6. a 68,00( 7 10.000 + 20000 + 10,000 Balances 10.000" 6,000, 68.000, 16,000 68.000 er 10 = 1,300 s 1S = 3.000 _+3.000 20 = 6.000 + 6,000 Balances. 55003000 G00 —aEDOT 10.000 74.000 ~ 150 30 10,000 _+ 10.000 o_o an 010,000 7.000 TS 82500 = 10.000 + ‘72.500 COPYCLEAR AND BINDERY CENTER Statement of Financial Position January 30, 2011 ASSETS LIABILITIES & OWNER'S EQUITY Cash P 5,500 Notes Payable P10,000 Supplies 3,000 Alegre, Capital 72,500 Furniture & Fixtures, 6,000 Equipment 68,000 Total 82,500 Total P 82,500 SUMMARY OF TRANSACTIONS AND EFFECTS ON ACCOUNTING ELEMENTS The illustrated problems simply show the accounting process to start up a busines. Once the business is ready to operate, revenues will be eamed and expenses will be incurred resulting in either a net profit or net loss. This information is presented in another financial Statement called the Income Statement which is discussed in the next chapter, At this point the student should be familiar with the following business transactions and their effects on the accounting elements:waw 10. 12, 13. 14. 15. 16, 7. 18, Transactions Assets = | Liabilities > | Owner's equity assets by the owner | Increase forse Withdrawal of assets by the owner | Decrease Decrease chase of assets in cash Increase & | Decrease Purchase of assets on account Increase Increase [Settlement of abilities in cash Decrease Decrease Settlement of account with a noe Increase & Decrease [Settlement of liabilities from lowner's personal cash Decrease Increase GUIDE QUESTIONS Enumerate and explain the qualitative characteristics that financial statements must possess. Why is consistency needed in compliance with the comparability requirement? Materiality depends on the nature and size of the item. Explain what it means. Explain why disclosure is necessary in making the financial reports reliable? Cite examples. Explain the following concepts and principles which are needed in identif ng, measuring and “recording economic information: accrual. business entity, going concer, measurement unit, objectivity. disclosure, reporting period, exchange price What does the acronym FRSC stand for? How are these formed and what authoritative body (bodies) is (are) responsible for its creation and pronouncement. Explain what is fundamental identity and why this must always be maintained. What three accounting values affect the financial structure of a business? Gine two ways of expressing the fundamental idemtty of presenting the statement of financial position. = What are the three features of an asset? Give five examples of assets owned by a hospital, a grocery, and a shoe factory. Are there differences in their assets? _ Define liability by giving its three features. Give five examples of liabilities. Why is owner’s equity also called net worth? Give two transactions affecting owner's equity ‘What is a business transaction? What are its three characteristics? What is the Venetian Model all about and how does one use this in analyzing business transactions? What financial statement shows a listing of the assets and liabilities of the business? How do liabilities and owner's equity differ? And in what respect are they similar? Describe five fon-financial transactions that are not recorded in accounting.rr EXERCISES Ineach number eite what qualitative attribute is mnissing or sinter and explain why 8. Miss Sanchez, a fresh uraduate, was hired as bookkeeper of Excellent Cy, manufacturer of beauty products. She prepared at statement and! included the folgg¢ fs fumiture and equipment P300; waste buskel, broom, dustpan, Paper weigh, an caleulator, Total Assets aniounted to 210,000,000. stement of financial postion, Assets P4,500.000 for ait <2 b, Mr. Bo, the bookkeeper of Nature Spa, prepared a St presenting only three items: Cash, 250,000, Other Kinds of assets and ‘Fotal Claims P3,250,000 forthe elaims of both creditors and iy 2 1 cannot draw out much information, yj laimed the owner. owner why are the assets not equal to the claims?” excl .- ‘The company spent P400 for repair tols whieh the acountant immediately expen, 2011 were submitted to the Board op d. The finan reports dated December x. ant contends that last dg, Directors on April 13, 2012, a Friday. Ms. Roca the account for filing with the BIR is still on April 15. The financial reports were presented 19 the shareholders of Manila Hospital, Ine, jy most of them were medical practitioners, several issues were raised. The Chief Finance Officer announced that the reports showed the firm was more profitable this year by P'10,000,000. Sever: shareholders raised their hands and queried, “Why jg cash down to P250,000 ther {The shareholders had a hard time evaluating the 2011 reports submitted to them by AJA Company which showed the assets, liabilities and profit for 2011 only. “Wher are the 2010 reports”, they asked. “We can’t determine the trend of performance nr the improvement in its Financial structure.” Presented as one of the assets in the company’s 2011 statement of financial poste was a parcel of land worth P300,000 when it was purchased several years ago bx which market value increased to P450.000 in 2011. The Finance Officer was surprised to see this account as P450,000, “Did we buy another piece of land?” he asked the accountant? The accountant explained that she changed the price to conform tothe current value. From the following situations, explain why the following accounting practices are not i conformity with the Accounting Principles and cite what principles are violated: a, The owner-manager bought a computer for personal tse. The invoice was given tothe accountant who recorded it as asset of the business. b.. The statement of financial position of Baby's Play Center included play equipmes purchased from Japan for 350,000 Yens. It was reported at that amount in tk sMatement of financial positon while all the other assets were reported! in Philipt pesos. \ No financiil statements were prepared by Miguel Gan for his business. He expla that he will prepare the statements when'he closes the business which he predicts P take place afier twenty years d. Albert operates a canteen aside from a shoe store owned by him. The assets of ‘canteen are reported in the statement of financial position of the shoe store. sieteto at a cost of P00. This was recorded as an asset and expensed y P50 per year for ten years Purchased 3 ee Jored a machine needed in the assembly line of its production fF Food Compans or, the machine was immediately listed as one of its assets. department, Upon order, tuation, compute the missing financial statement amounts Perc bilities = + Equity 3, Using the accounting = L ompany Assets i : compe 300,000 - P250,000 B 2 450,000 350,000 ¢ 900,000 150,000 ae D 500,000 2 E 2 20% or 800,000 ? 4. Refer to number 3. Considering the net worth of each firm, which one is most solvent after comparing the liabilities against the owner’s equity? i (The one with the highest equity ratio: Equity/Assets x 100=_%) 5, Assuming that profit earned by each firm in exercise 3 is P200,000, which one is most profitable to the owner? (The one with the highest ROE: Profit / Equity x 100 = _%) 6. a. Total assets of Red River Co. amounts to P2,550,000 and owner has a 60% interest over it. How much is its liabilities? b. Total liabilities of Danielle Company amounts to P400,000 which is 40% of the total assets. How much is owner’s equity? ¢. Total liabilities amounts to P500,000. Total owner's equity is thrice the liabilities. How much is total assets? 4, Total assets at the beginning of the year is P1,000,000 and liabilities is P400.000. During the year, the assets increased by P500,000 but liabilities increased only half as much as the asset increase. How much is owner's equity at the end of the year? 7. Complete the statement of financial position of Mr. Orange and prepare the capital statement. He started the Wash Ur Car Business three months ago with a capital of PS50,000. Assets Liabilities and Owner's Equity Cash P7000 Accounts Payable P14,000 Accounts Receivable 2 Notes Payable 2 Car 9 Orange, Capital 2 Equipment 2 Determine the missing figures based on the assets, total liabilities and owner's equity: a. Record shows that customers owe the firm P40,000. b. The car costs P180,000 but its current trade in value is only P100,000, ©. Mr. Orange signed a note payable to the bank for P300,00 following information and give the total ,000 which he used to buy the car and equipment. But he says he has already paid halfof this note 8. Referto exercise 7 4) Did he make an additional inv : a estment or a withdrawal? Explai aes thdrawal? Explain, no additional investment or withdrawal, what caused the change in capital?