Bea Angelee Arellano

REM

1. What is accounting? Accounting is how finances are tracked by an individual or

organization, such as a small business. Accounting is the recording of financial
transactions along with storing, sorting, retrieving, summarizing, and presenting
the results in various reports and analysis. Accounting is also a field of study and
profession dedicated to carrying out those tasks.

2. Qualitative Characteristics:
a. Understandability - Understandability is the degree to which information is
easily understood. In today’s society, corporate annual reports are in
excess of 100 pages, with significant qualitative information. Information
that is understandable to the average user of financial statements is highly
desirable. It is common for poorly performing companies to use a lot of
jargon and difficult phrasing in its annual report in an attempt to disguise
the underperformance.
b. Relevance - Relevance refers to how helpful the information is for financial
decision-making processes. For accounting information to be relevant, it
must possess:
i. Confirmatory value – Provides information about past events
ii. Predictive value – Provides predictive power regarding possible
future event

c. Reliability - Reliability is described as one, of the two primary qualities

(relevance and reliability) that make accounting information useful for
decision-making. Reliable information is required to form judgements
about the earning potential and financial position of a business firm.
Reliability differs from item to item.
d. Comparability - Comparability is the degree to which accounting standards
and policies are consistently applied from one period to another. Financial
statements that are comparable, with consistent accounting standards and
policies applied throughout each accounting period, enable users to draw
insightful conclusions about the trends and performance of the company
over time. In addition, comparability also refers to the ability to easily
compare a company’s financial statements with those of other companies.

3. Assumptions:
a. Business entity - A business entity assumption is a term used to refer to
an accounting principle that declares the separation of every financial
 record of the business from any of the financial records of its owners or
that of other businesses. It may sometimes be known as a separate entity
assumption or as the economic entity concept. It works by recording every
income that was a result of the company’s business operations as
earnings and every expense recorded must only be the costs that the
business itself has incurred.
b. Going concern - Going Concern is also termed as a continuity assumption.
As per this assumption, a company will continue to deliver its business
operations and continue to exist for an unforeseeable future. This
assumption is based on the fact that a company will never go bankrupt,
and it shall be able to perform its business operations for a more extended
period.
c. Time Period - This assumption states that the accounting practices and
methods that are used by an entity must be reported and maintained for a
particular period. The companies must ensure that these periods remain
consistent for each year so that it becomes easy for the readers of the
financial statements to compare the same for different periods. This
assumption is also known as periodic or accounting period assumption.
d. Monetary - Monetary unit assumption (also known as money
measurement concept) states that only those events and transactions
are recorded in books of accounts of the business which can be measured
and expressed in monetary terms. An information that cannot be
expressed in terms of money is useless for financial accounting purpose
and is therefore not recorded in books of accounts.

4. Assets:
a. Cash - is bills, coins, bank balances, money orders, and checks. Cash
is used to acquire goods and services or to eliminate obligations. Items
that do not fall within the definition of cash are post-dated checks and
notes receivable.
b. Accounts receivables - refers to money due to a seller from buyers who
have not yet paid for their purchases.
c. Inventory - is the accounting of items, component parts and raw materials
a company uses in production, or sells. The verb “inventory” refers to the
act of counting or listing items.

5. Liability
a. Accounts payable - refers to an account within the general ledger that
represents a company's obligation to pay off a short-term debt to its
creditors or suppliers
 b. Bonds payable - is a liability account that contains the amount owed to
bond holders by the issuer. This account typically appears within the long-
term liabilities section of the balance sheet, since bonds typically mature in
more than one year.

6. Capital
a. Capital - means the assets and cash in a business. Capital may either be
cash, machinery, receivable accounts, property, or houses. Capital may
also reflect the capital gained in a business or the assets of the owner in a
company.
b. Withdrawal - occurs when funds are removed from an account.
Withdrawals can be triggered for many types of accounts, including
bank accounts and pension accounts.

7. Revenue/sales - Revenue is the entire income a company generates from its

core operations before any expenses are subtracted from the calculation. Sales
are the proceeds a company generates from selling goods or services to its
customers.

8. Expenses:
a. Salary expense - Salaries expense is the fixed pay earned by employees.
The expense represents the cost of non-hourly labor for a business. It is
frequently subdivided into a salaries expense account for individual
departments, such as: Salaries expense - accounting department.
b. Rent expense - is the cost incurred by a business to utilize a property or
location for an office, retail space, factory, or storage space. Rent
expense is a type of fixed operating cost or an absorption cost for a
business, as opposed to a variable expense. Rental expenses are often
subject to a one- or two-year contract between the lessor and lessee, with
options to renew.
c. Depreciation expense - Depreciation expense is that portion of a fixed
asset that has been considered consumed in the current period. This
amount is then charged to expense. The intent of this charge is to
gradually reduce the carrying amount of fixed assets as their value is
consumed over time.

9. Accounting principle:
a. Revenue recognition - Revenue recognition is a generally accepted
accounting principle (GAAP) that identifies the specific conditions in
which revenue is recognized and determines how to account for it.
 Typically, revenue is recognized when a critical event has occurred, and
the dollar amount is easily measurable to the company.
b. Matching principle - The matching principle requires that revenues and
any related expenses be recognized together in the same reporting
period. Thus, if there is a cause-and-effect relationship between
revenue and certain expenses, then record them at the same time. If
there is no such relationship, then charge the cost to expense at once.
This is one of the most essential concepts in accrual basis accounting,
since it mandates that the entire effect of a transaction be recorded
within the same reporting period.
c. Full disclosure - The full disclosure principle states that all information
should be included in an entity's financial statements that would affect a
reader's understanding of those statements. The interpretation of this
principle is highly judgmental, since the amount of information that can be
provided is potentially massive.
d. Exchange price - The exchange-price principle -- also known as the cost
principle -- requires the recording of assets at the historical cost at which
they are acquired. Historical cost is the perceived fair market value of
assets at the time of purchase.

10. Financial statement:

a. Statement of Financial Position - The statement of financial position also
known as a Balance Sheet represents the Assets, Liabilities and Equity of
a business at a point in time. For example: Assets include cash, stock,
property, plant or equipment – anything the business owns. Liabilities are
what the business owes to outside parties, eg.
b. Statement of Financial Performance - A statement of financial
performance is an accounting summary that details a business
organization's revenues, expenses and net income. Three financial
statements comprise the statement of financial performance: income
statement, balance sheet and cash flow statement.