Financial Accounting and Reporting

Financial accounting – financial position, results of operation || Financial

Corporation report
– at least – FS + other SEC
5 (stockholders),
useful info Cooperative – 15 or more (members), CDA
Accounting

 AAA – process Types of business activities

 AICPA – art  Service – offer service
 ASC – service activity  Merchandising/Trading – buy and sell
 Manufacturing – raw materials to finished
Types of accounting information

 Quantitative – numbers, units

Accounting concepts and principles
 Qualitative – words, notes
(Ideas and procedures that guide accountants)
 Financial – money
 Separate entity concept – owner’s transaction
Users of accounting information diff. from entity’s
 Historical cost – record purchase at purchase
 Internal – directly involved in management
price
 External – for investment and credit decisions
 Going concern – entity to continue || Liquidating
General Purpose FS Special Purpose FS concern – entity intends to end
-for external users -for internal users  Matching – some cost initially recognized as
-common needs -specific needs assets until recognition of related revenue
-by financial accounting -by management  Accrual basis – record in period where it
accounting occurred/when earned or incurred || Cash basis –
Objectives of financial reporting… record when cash is affected
1. Provide info on economic resources, claims,  Prudence – degree of caution
and changes on resources  Time Period – using reporting periods
2. Provide info for assessing management (calendar/fiscal, interim can be
stewardship month/quarter/semiannually)
Fields and branches of accounting  Stable monetary unit – inflation ignored
 Public Accounting – professional services for  Materiality concept – record if it affects decision
fee  Cost-benefit – cost should not exceed benefits
o External auditing – independent
 Full disclosure – disclose important matters
evaluation || PSA (Philippine Standard
 Consistency – same treatments
on Auditing)
Accounting Standards
o Tax Services, Management Advisory
 Philippine Financial Reporting Standards
Services
(PFRS)
 Private Accounting – employed in privates / o PFRS, PAS, Interpretations
NGO
o Issued by FRSC (standard-setting body
o Financial accounting – PFRS/PAS
in Philippines)
o Cost accounting
o Patterned from IFRS by IASB
o Tax accounting – NIRC (National
 Generally Accepted Accounting Principles
Internal Revenue Code)
(GAAP)
o Management accounting
Qualitative characteristics of useful financial info
o Internal auditing Fundamental – makes info useful
 Government Accounting - disposition of public  Relevance – can affect decision
funds || NGAS (National Government o Predictive value – predictions about outcome
Accounting System) o Confirmatory value – confirm predictions
 Accounting Education o Materiality – entity-specific
 Accounting Research
 Faithful representation – factual
Forms of business organizations
o Completeness – necessary info
 Sole proprietorship – one owner (sole
o Neutrality – without bias
proprietor), DTI
o Free from error - in description/process
 Partnership – 2 or more (partners), SEC
Enhancing – supports fundamentals
 Comparability – identify similarities/differences
 Verifiability – reach same agreement
 Timeliness – available in time
 Understandability – clear and concise
Accounting Equation
Assets = Liabilities + Equity (+ Income – Expense)
Income – Expense = Profit/Loss
Major Accounts:
Balance sheet accounts/Real accounts
Assets – economic resources you control
Liabilities – obligations
 Legal – from contract, law
 Constructive – expected responsibilities
Equity – capital, net assets, net worth
Income statement accounts/Nominal accounts
Income – increase in economic benefits; +assets, -liab
Expenses – decrease in econ benefits; -assets, +liab
DEBIT (VALUE CREDIT (VALUE
RECEIVED) PARTED)
EXPENSES LIABILITIES
ASSETS INCOME
DRAWINGS CAPITAL
Account – record of increase/decrease in items
 Contra accounts – deduction to related account
 Adjunct account – addition to related account
Chart of accounts – list of all accounts used by business
Book of accounts
 Journal – book of original entries
o Special – similar transactions
o General – transactions not in special
 Ledger – book of secondary/final entries
o General – accounts in trial balance
o Subsidiary – w/balances of accounts
Double-entry system
Transactions should have a debit and credit
Concepts:
 Duality – two-fold effect
 Equilibrium – equal debits and credits
Accounting Cycle
1. Identifying and Analyzing
o Accountable events from source
documents
2. Journalizing
o Record accountable events
chronologically; entries can be
simple/compound
3. Posting
o Classify effects of transaction to ledger
4. Unadjusted Trial Balance
o Check equality and detect errors
5. Adjusting Entries
o Update accounts (accruals, depreciation,
bad debts, deferrals)
*accruals – recognize uncollected/unpaid income and
expense
*deferrals – postpone recognition advanced
collections/prepayments
>advance collections – liability/income method
>prepayments – asset/expense method
6. Adjusted Trial Balance / Worksheet
>analytical device to gather data
>cross-footing – add/sub amounts horizontally
>footing – add/sub amounts vertically
7. Financial Statements
o Balance sheet (FS) – info on assets,
liabilities, and equity
o Income statement – profit/loss
o Statement of comprehensive income –
other income and expense not in profit
and loss
o Statement of changes in equity
o Statement of cash flows – assess ability
to generate income, pay obligations
i. Operating activities – creates
income/expense
ii. Investing activities – PPE,
loans, lending (long term)
iii. Financing activities – obtain
cash on investors, providing
ROI, debt financing
8. Closing Entries
o Zero out nominal accounts including
drawings
9. Post-closing Trial Balance
10. Reversing Entries
o Receivables and payables
Accounting in Merchandising Business
Inventory – goods for resale
 Perpetual – continuous record
 Periodic – physical count
Gross profit = Net sales – COGS
Net sales = Total sales – sales returns and discounts
COGS = Beginning inventory + net purchases – ending
Net purchases = Purchases + freight in – purchase
returns and discounts
 SAMPLE
(Sample problems)

1.
a. account PROBLEMS
It is the basic storage of information in accounting
b. journal c. memory card d. USB
2. The term “record” is most synonymous with
a. identifying b. journalizing c. posting d. communicating
3. Sole proprietorship is registered with
a. DTI b. SEC c. CDA d. all of these
4. Under the accrual basis of accounting, a business records a sale
a. When sale occurs b. when sale price is collected c. a or b, as an accounting policy choice
5. Which of the following is least likely to be a source of an accounting concept?
a. The standards b. the conceptual framework c. general acceptance d. laws by congress
6. Which of the following is not correct?
a. Assets = Liabilities = Equity + Income – Expense
b. Assets – Liabilities = Equity + Income – Expense
c. Assets + Expense = Liabilities + Equity + Income
d. Assets = Liabilities + Equity – Income + Expense
7. An expense could not possibly result
a. In a decrease in equity b. from an increase in assets c. from an increase in liabilities d. from
decrease in assets
8.