6/17/2011

INTRODUCTION TO ACCOUNTING
L Velasco / BA 99.1

Contents
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What is Accounting? Types of Business Organizations Conceptual Framework
Users of Financial Information IFRS and GAAP  Qualitative Characteristics  Constraints  Assumptions
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The Accounting Equation The Financial Statements

What is Accounting?
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“The Language of Business” Accounting is the art of communicating financial information about a business entity to users such as shareholders and managers.
The communication is generally in the financial´s form statements that show in money terms the economic resources under the control of management.  The art lies in selecting the information that is relevant to the user and is reliable.

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and interpreting the results thereof. in part at least.6/17/2011 What is Accounting?  Accounting is defined by the American Institute of Certified Public Accountants (AICPA) as "the art of recording. classifying. Accounting encompasses three main activities: Identification of Economic events Recording  Reporting and Analysis   Types of Business Entities    Sole Proprietorship Partnership Corporation 2 . process them and report the processed data in such a way that it is easily understandable by the intended user. and summarizing in a significant manner and in terms of money. of financial character." Bottomline   Accounting is an information system – how to gather important data. transactions and events which are.

  Unlimited liability of the owner. Characteristics of a Proprietorship     Separate entity with no continuous life Unlimited liability of owner Unification of ownership and management Business Taxation Sole Proprietorship Advantages  Disadvantages   Less regulations by government in operating decisions Flexibility in and simplicity of decision making.  The owner is also the manager of the affairs of the sole proprietorship.6/17/2011 Sole Proprietorship    A business organization where there is only one owner. Suitable for small business and start-ups because of substantially less capital needed to put it up. Limited capital Limited management expertise specially if there are no other professional managers 3 .

 Ownership exercised through stocks. two or more persons bind themselves to contribute money. Difficult to manage the affairs if there are too many partners. Limited funds from partners. Partners are liable prorata to creditors of the Partnership. with the intention of dividing the profits among themselves. property or industry to a common fund.  Serves at the pleasure of the BOD 4 .6/17/2011 Partnership    In a contract of Partnership. Not strictly regulated. Governed by the BOD (Board of Directors) who acts as the stewards of the company in behalf of the shareholders.  Managed by a separate group (called Management) who are not necessarily owners of the company.   More complicated transfer of ownership. The owners and the partnership are separate juridical entities. Partnership Advantages  Disadvantages   Appropriate for small number of people who want to contribute capital/services to a business. Corporation   It is an artificial being created by law with a separate judicial personality from its owners. Can be formed by merely forging a contract.

Limited liability of owners/shareholders Easy transfer of ownership -. Tax Authorities. public companies to adopt IFRS 5 . Heavily regulated by the government Fixed tax rate of 35% Agency Problem between the shareholders and management Generally Accepted Accounting Principles    Set of standards that are used as basis in the preparation of financial statements.> stability in ownership A lot of documentary requirements to set up. different countries use their own accounting standards.S. the SEC announced it will require all U. Sources: Law – Securities Regulations Code.S. U. A set of accounting rules accepted by the profession. Civil Code  Standard-setting bodies – Financial Reporting Standards Council/International Accounting Standards Board  International Financial Reporting Standards • Historically. ▫ Difficult for investors to compare companies that operate in different countries • The IASB has developed international standards (IFRS) ▫ In the past. considered its GAAP to be the strongest set of standards • In November 2008.6/17/2011 Corporation Advantages  Disadvantages       Suitable for large capital requirement businesses.

6/17/2011 Objective Provide information to various users that is useful for their economic decision making Qualitative Characteristics Understandability Reliability Relevance Comparability Constraints Timeliness Balance between qualitative characteristics Benefits versus Costs Assumptions Accrual Accounting Stable Monetary Unit Going Concern Economic Entity Elements Assets Liabilities Equity Income Expenses Users of Accounting Information Investors Suppliers and trade creditors Employees Creditors Government and its agencies Customers Public Qualitative Characteristics Understandability Relevance Reliability Comparability 6 .

6/17/2011 Constraints Timeliness Balance between qualitative characteristics Benefits versus Costs Assumptions • Transactions and other events are recognized when they occur • Entity will continue to exist indefinitely Assumptions • Transactions of owners separate from the company. • Recorded at historical cost without regard to the purchasing power of the peso 21 Copyright ©2011 Pearson Education South East Asia 7 .

 Liabilities   Owner’s Equity  The Accounting Equation ASSETS = LIABILITIES + OWNER’S EQUITY Assets Liabilities Owner’s Equity 8 . Residual claim over the assets of the business – that is. Examples are: Cash. Receivables.6/17/2011 The Accounting Equation ASSETS = LIABILITIES + OWNER’S EQUITY Assets Liabilities Equity Elements of Financial Statements  Assets  Resources that the company owns that has value and has the potential to bring economic benefit into the business. existing debts and obligations of the entity. Plant Assets. Unearned Revenue. Inventory. the portion of assets that belongs to the owners. Claims against the assets of the business – that is. It is that portion of total assets after paying off the obligations of the company. Examples are: Accounts Payable. etc. Notes Payable.

They are decreases in Owner’s Equity as a result of operating the business. Outflow due to doing business  DECREASE: Expenses  Increases and Decreases in Owner’s Equity  INCREASES  Capital Infusion/Investment – assets that the owner puts into the business.  Inflow from doing business.   Outflow due to doing business Expanded Accounting Equation ASSETS = LIABILITIES + (REV + INV – EXP – W/DRW) Assets Liabilities Owner’s Equity (+) Revenues Investments (-) Expenses Withdrawals 9 . DECREASE: Capital Drawings/Withdrawal – resources taken away by the owner to the business. They are decreases in Owner’s Equity as a result of operating the business. INCREASE: Revenue   Due to Business Operations  gross increases in owner’s equity resulting from business transactions entered for the purpose of earning income.  Expenses – cost of assets consumed or services used in the process of earning revenue.  DECREASES Capital Drawings/Withdrawal – assets withdrawn by owner from the business for personal use.  Revenue – gross increases in owner’s equity resulting from business transactions entered for the purpose of earning income. It is the inflow from doing business.6/17/2011 Increases and Decreases in Owner’s Equity  Due to Owner Transactions   INCREASE: Capital Infusion/Investment – resources contributed by the owner to the business. Cost of assets consumed or services used in the process of earning revenue.

 Notes to Financial Statements  10 . A report showing the balances of Assets. expense and net income for the period given. A report showing the details of the financial statement items.6/17/2011 Accounting for Business Transactions   Each transaction affects the fundamental accounting equation of A = L + OE Transaction analysis shows the effects of certain transactions on the accounting equation.  Statement of Changes in Owner’s Equity   Statement of Financial Position  Complete Set of Financial Statements  Statement of Cash Flows  A report showing the summary of cash inflows and outflows of the firm. It shows the revenues. withdrawals and net income—over a given period. A report showing changes in owner’s equity – investments. Complete Set of Financial Statements  Statement of Comprehensive Income/Profit or Loss  A report showing the financial performance of the firm. liabilities and equity of the firm as of a given date.

6/17/2011 Expanded Accounting Equation ASSETS = LIABILITIES + (REV + INV – EXP – W/DRW) Assets Liabilities Owner’s Equity (+) Revenues Investments (-) Expenses Withdrawals 11 .

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