NATURE OF ACCOUNTING Fundamental Concepts 1. ENTITY CONCEPT- considered the most basic concept in accounting. An accounting entity is an organization or a section of an organization that stands apart from other organizations and individuals 382 separate economic unit. Simply put, the transactions of different entities should not be accounted for together. Each entity should be evaluated separately. 2. PERIODICITY CONCEPT- An entity's life can be meaningfully subdivided into equal time periods for reporting purposes. This allows the users to obtain timely information to serve as a basis on making decisions about future activities. For the purpose of reporting, one year is the usual accounting period. * Calendar Year- starts in January and ends in December * Fiscal Year- starts in any month and ends after 12 months 3. STABLE MONETARY UNIT CONCEPT- The Philippine Peso is a reasonable unit of measure and that its Purchasing power is relatively stable. It allows accountants to add and subtract peso amounts as though each peso has the same purchasing power as any other peso at any time. This is the basis for ignoring the effects of inflation in the accounting records. PURPOSE OF ACCOUNTING The basic purpose of accounting is to supply financial information to users to help them make informed judgments and better decisions. Accounting is the language of business. ‘Accounting is the language used to Communicate financial information to interested parties such as business owners, creditors, employees, government, etc. Communicate Financial Status Assist Se Decision Making Future Activities Ensure Control AssetsCLASSIFICATIONS OF BUSINESS TRANSACTIONS AND EVENTS Business A business (also known as enterprise or firm) is an organization engaged in the trade of goods, services, or both to consumers. Profit-oriented businesses are businesses administered to earn profit to increase the wealth of owners. Non-profit organization is an organization that uses income to achieve its specific goals rather than distribute them. Business Events vs. Business Transactions EVENTS. ‘TRANSACTIONS L.Meaning All incidents or occurrences that relate to the business or have an impact on the business of the entity. Those events which have immediate and measurable monetary impact on the books of accounts of the entity. 2.Exchange Events other than transactions do not involve exchange of value or resources. Transactions involve exchange of value of resources. 3.Measurability | Events other than transactions are not immediately measurable in monetary value. Transactions are measurable in monetary value. 4.impact on | Events have an impact on business, but, Bamneae events other than transactions do not have an immediate monetary impact. Their impact could be more far reaching and seen in the future. Transactions have immediate monetary impact on the finances of a business. 5.Disclosure in | Events, other than transactions are not the Books of | recorded through the books of accounts. Account They however may be disclosed in management report or annual report or audit report as it may have monetary impact for the business in the future. Transactions are recorded through journal entries in the books of accounts. G.Inclusion Events can either qualify as transactions or not depending on the impact that they have. All transactions are events.7.Scope ‘The scope of events is wide as it ‘The scope of transactions is narrower as it encompasses all occurrences that concern _| includes only those events that have ‘the business. immediate and measurable monetary impact. 8.Examples death of key persons, labor union strikes | business dealings such as purchase and sale Of goods and services. Cash vs Credit Transactions transaction in which cash is paid or received immediately at the time when transaction occurs is known as cash transaction. For example, you seli some goods to Mr. John for Php 50.00 and Mr. John immediately pays Php 50.00 cash for the goods purchased. It is a cash transaction because you have immediately received cash for the goods sold to your customer. Similarly, you buy furniture for your business for Php 7,500.00. You immediately pay Php 7,500.00 cash to the supplier and get the possession of furniture. It is also a cash transaction, |n today’s modern business world, cash transactions are not limited to the use of currency notes or coins for making or receiving payments, all transactions made using debit or credit cards issued by financial institutions are also categorized as cash transactions. na credit transaction, the cash does not change the hands immediately at the time when transaction ‘occurs. In other words, the cash is received or paid at a future date. For example, you buy some merchandise from your vendor for Php 1,000.00. Upon your request, your vendor agrees to receive the payment of Php 1,000.00 for goods sold to you next week. You take the possession of the goods and transport them to your Store. It is a credit transaction because you have not made the payment in cash immediately at the time of Purchase of goods. Similarly, you sell some goods to Mr. Sam for Php 150.00. Mr. Sam requests you to receive the payment of Php 150.00 next month. You agree. Mr. Sam takes the goods to his home for use. This is also a credit transaction because you have not received the payment in cash at the time of sale of goods to Mr. Sam. In today’s business world goods are mostly purchased and sold on credit. Examples of Events and Transactions * Received Loan Proceeds from the bank amounting to Php 1,000,000.00 Opened a Bank Account & deposited Php 20,000.00 Purchased Land for Php 4,000,000.00 Received advance payment for the sale of Land amounting to Php 8,500,000.00 Bought a Motorcycle to be used for delivery for Php 85,000.00 Started small business by investing Php 100,000.00 and furniture and fixtures Purchased Goods for Php 10,000.00 Sold 80% of those Goods for Php 12,000.00 Bought supplies amounting to Php 5,000.00 Paid Income Tax on Profit made during the period Received Advance amount of Php 15,000.00 from Customers to whom you promised to supply after 1 month © Manager for 25 years retired