TRACY JOY RESULTAY PRINCIPLES OF ACCOUNTING

BSIT 2F ASSIGNMENT 1

DEFINITION OF ACCOUNTING:
Accounting is one of the key functions for almost any business. It may be handled by a
bookkeeper or an accountant at a small firm, or by sizable finance departments with dozens of
employees at larger companies. The reports generated by various streams of accounting, such
as cost accounting and managerial accounting, are invaluable in helping management make
informed business decisions.

PURPOSE OF ACCOUNTING:
The purpose of accounting is to accumulate and report on financial information about the
performance, financial position, and cash flows of a business. This information is then used to
reach decisions about how to manage the business, or invest in it, or lend money to it. This
information is accumulated in accounting records with accounting transactions, which are
recorded either through such standardized business transactions as customer invoicing or
supplier invoices, or through more specialized transactions, known as journal entries.

NATURE OF ACCOUNTING:
Accounting can be defined as the act of classifying and summarising money-related matters in a
detailed manner that can be easily interpreted. This definition highlights both the nature and
scope of financial accounting.
To start a business, the initial investment is made by the proprietor, which is referred to as the
capital. The additional funds can be raised through loans, investments, etc. Now using this
money, assets are bought and additional expenditures are made. All this is done with the target
to generate profit for the organisation. The fund transfers between different parties and money
infusion in the business need to be recorded formally so that all the concerned stakeholders are
well informed about the financial health of the company.
The nature of financial accounting is outlined as follows:
 Identifying monetary transactions – First, the transaction has to take place and be
identified so that it can be accounted for. To identify financial transactions, store and
check the receipts and bills of every transaction is a must. Sometimes, the exchange of
money is not directly involved, but it still needs to be identified. This involves
depreciation in the value of goods over time, which forms an important aspect of
financial accounting.
 Measuring and recording transactions – The value of transactions has to be measured
in terms of money and those concerned with revenues and expenditures need to be
recorded. The recording is done in journals.
 Classifying payments – The huge data needs to be classified in a record known as a
ledger. For example, all salary-related expenses can be classified under one column.
Leasing related data can be classified in another column and so on.
TRACY JOY RESULTAY PRINCIPLES OF ACCOUNTING
BSIT 2F ASSIGNMENT 1
 Summarisation – The larger the corporation, the more complicated the record. Hence,
the record needs to be summarised in a form where it can be easily comprehended.
 Analysing, interpretation, and communication: The summarised data needs to be
analysed well and interpreted so that it can be communicated to the concerned
stakeholders so that they have the full knowledge of the company’s financial position.

FUNCTIONS OF ACCOUNTING:
All companies use accounting to report, track, execute, and predict financial transactions.
Accounting department functions revolve around storing and analysis of financial information
and overseeing monetary transactions.
To simply explain the functions of accounting in business, we can say that it creates a fiscal
history for any company. The main functions of accounting deal with tracking and reporting
information for internal and external uses.
What are the functions of financial accounting? The functions of financial accounting may be
classified as Historical or stewardship functions, and managerial functions. Historical accounting
functions are communicating financial information, recording financial transactions, finding net
results, exhibiting financial affairs, analyzing financial data, and summarizing and classifying
financial data. Managerial finance accounting functions include control of financial policy,
formation of planning, preparation of the budget, cost control, evaluation of employee
performance, and prevention of errors and fraud.
Accountants perform various functions of accounting. The three groups of functions performed
by accountants may be classified as reporting, analysis, and budgeting. The functions of
accounting in a business include the following:
Business costs and revenue:
This is the main function of financial accounting. Tracking business spending with respect to
income helps keep a tab of business costs and revenue. Like managing personal finances,
accountants record expenses and payments to maintain accurate and updated records of
company funds. The main function of bookkeeping is to record what expenses and payments
are undertaken by the business.
Accounts receivable:
Proper financial accounting ensures that the payments due to the company are received on
time. An accountant tracks the business profits regularly to ensure that revenue flow into their
bank accounts is not interrupted.
Accounts payable:
The accounts payable function focuses on paying the company’s bills. This function ensures
that the business completes all the payments due on time and verifies that payments are done
only to legitimate requirements. Setting the due date for the payments is also part of the
accounts payable function. Clarity on payments helps in the effective management of funds.
Payroll:
TRACY JOY RESULTAY PRINCIPLES OF ACCOUNTING
BSIT 2F ASSIGNMENT 1
The payment of employees’ paycheques is part of the payroll function. The salaries of
employees are deducted from the company fund. In addition to paycheques, employee benefits
are also paid from the company fund. The accounting function helps decide how employees are
compensated for their work based on how their wages affect a company’s profits.
Financial reporting:
Storage and calculation of financial data are usually done using digital systems. A publicly
owned company is required to prepare and submit quarterly and yearly reports for shareholders
containing information on assets, profits, and losses of the business. Private firms also need to
prepare financial reports to understand the financial resources of their firm.
Financial analysis:
Companies use financial accounting for performance analysis. This analysis is performed by an
external or an internal person by considering the entire business operations. Financial analysis
helps identify process loopholes and bottlenecks and determine ways to improve
process outcomes, by considering the financial outcomes of processes. Financial analysis may
also suggest changes to employee departments or ways to streamline production processes to
reduce wastage.
Compliance and tax audits:
Registered businesses need to comply with tax and compliance regulations. The laws and
standards laid down by Internal Revenue Services and the Securities and Exchange
Commission are to be adhered to by all businesses. Adherence to all the monetary and legal
regulations is ensured by the financial accounting function. This function reports the financial
working of the company and ensures that all local, national, and international compliance
regulations are adhered to in all financial transactions.
Fraud prevention:

Money mismanagement or wastage is curbed by the financial accounting function. The

company’s assets are safeguarded from internal and external fraud by incorporating
cybersecurity measures. Accountants need to be aware of ways to ensure the security and
safety of digital financial data. They also need to track financial data to ensure that employees
are not mismanaging or wasting the company’s resources for personal gain or profit.
Financial budgeting:

Setting the company’s financial budget is the responsibility of the accounting function. Preparing
the organizational budget is based on financial data from the past and projections for future
growth. Accountants are also in charge of preparing department-wise budgets and for special
projects across the organization.
Determining profitability, liquidity, and solvency:

Documents prepared by the financial accounting function provide a clear view of the financial
position of the company. The main aim is to ascertain the financial performance and position of
the enterprise and convey the information to all the stakeholders.
TRACY JOY RESULTAY PRINCIPLES OF ACCOUNTING
BSIT 2F ASSIGNMENT 1
Various functions of accounting are involved in managing the financial resources of the business
optimally. The role of accounting in a business is to enable management with financial data that
forms the background for future growth strategies. The data provided by the financial accounting
function about the company’s assets, liabilities, cash position, and profits help in making data-
driven strategic decisions.

SCOPE OF ACCOUNTING:
Reporting the account statement to various stakeholders highlights the scope of accounting.
Various parties in various forms use this information for their benefit and the benefit of the
company.
Financial accounting keeps the company’s various stakeholders updated about its financial
health. It should help each stakeholder make decisions regarding the company’s business. For
example, it allows shareholders to understand the profit-making subsidiaries of the business. To
indirect and direct investors, it gives them an idea of whether the company is worth investing in
or not. Employees need to stay updated about it too, so they know whether the company they
are working in is in good financial health or not.
 Reporting to shareholders: Shareholders are entities who invest their money in the
business seeking profit from their investment. Since they have invested their own money
in the business, they need to be reported on the overall financial position of the company
involving the number of outstanding loans, assets, expenses, revenue streams, and so
on.
 Reporting to the Public: The companies listed on the stock exchange are the ones in
which the general public can also invest. Since the public also becomes an investor,
account statements have to be made public so that they are fully aware of their
investment choices.
 Reporting to Government: It is necessary for tax purposes. Governments need to be
aware of the financial position of the businesses which come under their jurisdiction.
 Reporting to employees: Employees are indirect stakeholders and they must know about
the company’s financials which helps them stay informed regarding their job security.

OBJECTIVES OF ACCOUNTING:

Financial accounting needs to fulfil the following objectives:

1. Providing accounting-related information to all the concerned parties: When we talk
about a large business or organisation, it is not just the owner who is concerned with the
financial position of their entity. There are several other concerned parties like
TRACY JOY RESULTAY PRINCIPLES OF ACCOUNTING
BSIT 2F ASSIGNMENT 1
shareholders, investors, managers, tax officers, auditors, etc., who are concerned with
the company’s finances.
2. To ascertain profitability: A business can either make a profit or a loss in its operations.
To measure which way the company is going, we need financial accounting.
3. Keeping systematic records: For the smooth running of any company, it is essential to
maintain a systematic financial record and keep stakeholders abreast of the financial
situation all the time.
4. Ascertaining the financial position: To know how much the business owes to other
parties or how much is owed to it, proper financial records need to be maintained.

WHAT ARE THE BRANCHES OF ACCOUNTING?

 Financial Accounting
 Management accounting
 Cost Accounting
 Tax accounting
 Auditing
 Accounting information systems
 Forensic accounting
 Fiduciary accounting
 Public accounting
 Governmental accounting

TYPES OF BUSINESS ORGANIZATION AND THEIR ACTIVITIES:

The five forms of business organizations include the following:

 Partnership
 Corporation
 Sole proprietorship
 Cooperative
TRACY JOY RESULTAY PRINCIPLES OF ACCOUNTING
BSIT 2F ASSIGNMENT 1
 Limited liability company
Partnership
You can classify a business partnership as either general or limited. General partnerships allow
both partners to invest in a business with 100% responsibility for any business debts. They don't
require a formal agreement. In comparison, limited partnerships require owners to file
paperwork with the state and compose formal agreements that describe all of the important
details of the partnership, such as who is responsible for certain debts.
Some advantages of partnerships include:
 Easy to establish: Compared to other business structures, partnerships require minimal
paperwork and legal documents to establish.
 Partners can combine expertise: With more than one like-minded individual, there are
more opportunities to increase their collaborative skillset.
 Distributed workload: People in partnerships commonly share responsibilities so that
one person doesn't have to do all the work.
Disadvantages to consider:
 Possibility for disagreements: By having more than one person involved in business
decisions, partners may disagree on some aspects of the operation.
 Difficulty in transferring ownership: Without a formal agreement that explicitly states
processes, a business may come to a halt if partners disagree and choose to end their
partnership.
 Full liability: In a partnership, all members are personally liable for business-related
debts and may be pursued in a lawsuit.
An example of a partnership is a business set up between two or more family members, friends
or colleagues in an industry that supports their skill sets. The partners of a business typically
divide the profits among themselves.
Corporation
A corporation is a business organization that acts as a unique and separate entity from its
shareholders. A corporation pays its own taxes before distributing profits or dividends to
shareholders. There are three main forms of corporations: a C corporation, an S corporation
and an LLC, or limited liability corporation.
Advantages of corporations include:
 Owners aren't responsible for business debts: In general, the shareholders of a
corporation are not liable for its debts. Instead, shareholders risk their equity.
 Tax exemptions: Corporations can deduct expenses related to company benefits,
including health insurance premiums, wages, taxes, travel, equipment and more.
 Quick capital through stocks: To raise additional funds for the business, shareholders
may sell shares in the corporation.
TRACY JOY RESULTAY PRINCIPLES OF ACCOUNTING
BSIT 2F ASSIGNMENT 1
Disadvantages include:
 Double taxation for C-corporations: The corporation must pay income tax at the
corporate rate before profits transfer to the shareholders, who must then pay taxes on an
individual level.
 Annual record-keeping requirements: With the exception of an S-corporation, the
corporate business structure involves a substantial amount of paperwork.
 Owners are less involved than managers: When there are several investors with no
clear majority interest, the management team may direct business operations rather than
the owners.
Common examples of corporations include a business organization that possesses a board of
directors and a large company that employs hundreds of people. About half of all corporations
have at least 500 employees.
Related: Corporate Life Cycle: Everything You Need to Know
Sole proprietorship
This popular form of business structure is the easiest to set up. Sole proprietorships have one
owner who makes all of the business decisions, and there is no distinction between the
business and the owner.
Advantages of a sole proprietorship include:
 Total control of the business: As the sole owner of your business, you have full control
of business decisions and spending habits.
 No public disclosure required: Sole proprietorships are not required to file annual
reports or other financial statements with the state or federal government.
 Easy tax reporting: Owners don't need to file any special tax forms with the IRS other
than the Schedule C (Profit or Loss from Business) form.
 Low start-up costs: While you may need to register your business and obtain a
business occupancy permit in some places, the costs of maintaining a sole
proprietorship are much less than other business structures.
Disadvantages include:
 Unlimited liability: You are personally responsible for all business debts and company
actions under this business structure.
 Lack of structure: Since you are not required to keep financial statements, there is a
risk of becoming too relaxed when managing your money.
 Difficulty in raising funds: Investors typically favor corporations when lending money
because they know that those businesses have strong financial records and other forms
of security.
Some typical examples of sole proprietorships include the personal businesses of freelancers,
artists, consultants and other self-employed business owners who operate on a solo basis.
TRACY JOY RESULTAY PRINCIPLES OF ACCOUNTING
BSIT 2F ASSIGNMENT 1
Related: What Is Equity? Tips for Small Business Owners
Cooperative
A cooperative, or a co-op, is a private business, organization or farm that a group of individuals
owns and runs to meet a common goal. These owners work together to operate the business,
and they share the profits and other benefits. Most of the time, the members or part-owners of
the cooperative also work for the business and use its services.
Advantages of a cooperative include:
 Greater funding options: Cooperatives have access to government-sponsored grant
programs, like the USDA Rural Development program, depending on the type of
cooperative.
 Democratic structure: Members of a cooperative follow the "one member, one vote"
philosophy, meaning that everyone has a say, regardless of their investment in the co-
op.
 Less disruption: Cooperatives allow members to join and leave the business without
disrupting its structure or dissolving it.
Disadvantages include:
 Raising capital: Larger investors may choose to invest in other business structures that
allow them to earn a larger share, as the cooperative structure treats all investors the
same, both large and small.
 Lack of accountability: Cooperatives are more relaxed in terms of structure, so
members who don't fully participate or contribute to the business leave others at a
disadvantage and risk turning other members away.
Many cooperatives exist in the retail, service, production and housing industries. Examples of
businesses operating as cooperatives include credit unions, utility cooperatives, housing
cooperatives and retail stores that sell food and agricultural products.
Limited liability company
The most common form of business structure for small businesses is a limited liability company,
or LLC, which is defined as a separate legal entity and may have an unlimited amount of
owners. They are typically taxed as a sole proprietorship and require insurance in case of a
lawsuit. This form of business is a hybrid of other forms because it has some characteristics of a
corporation as well as a partnership, so its structure is more flexible.

ACCOUNTING CONCEPTS AND PRINCIPLES:

Accounting Concepts
TRACY JOY RESULTAY PRINCIPLES OF ACCOUNTING
BSIT 2F ASSIGNMENT 1
Accounting concepts are basic assumptions on which we base our accounting records. They
are the things that we assume but, in certain cases, that may not be correct.
For example, one of the most common assumptions is that money has a stable value. We all
know that this is not really correct because inflation continuously erodes the value of monetary
units.
However, it would be tedious and of no great value to keep amending every company’s
accounting records on the basis of an ever-changing value of the monetary unit. For this reason,
we assume that money has a stable value.
Everyone accepts this assumption and all accounting records and statements prepared on the
basis of this assumption are generally accepted by all concerned.
In this fact—namely, acceptance by all concerned—lies the importance of adhering to these
accounting concepts or assumptions.
Common accounting concepts are given below:
 Cost concept of accounting
 Business entity concept
 Money measurement concept
 Going concern concept
 Dual aspect of accounting concept
Accounting Principles
Accounting principles are the rules that have emerged from the use of basic accounting
concepts. These rules have evolved over a long period of time; they represent the collective
wisdom of accounting history.
Adherence to these rules ensures that accounting records are maintained on more or less the
same basis by all business units and can, therefore, be relied upon and used for comparison.
As a business language, accounting must be simple to understand for the people who own or
manage the company’s affairs. So, to achieve that purpose, standards were invented that were
uniform, scientific, and easily adaptable for all.
These standards are known as accounting principles.
If these principles didn’t exist, the situation would be disastrous. Every accountant would
practice accounting on their own terms and conditions, making it impossible for people attached
to the company’s affairs to understand them.
Uniformity would also be missing. Therefore, accounting principles play a crucial role in
ensuring that accounting practices are uniform, scientific, and easily adaptable.
It is imperative to follow accounting principles when measuring business routines, which may
include incomes, expenses, and other aspects.
Significant accounting principles are mentioned as follows:
TRACY JOY RESULTAY PRINCIPLES OF ACCOUNTING
BSIT 2F ASSIGNMENT 1
 Principle of objective evidence
 Accounting period principle
 Matching principle
 Accrual principle
 Conservatism or prudence principle
 Consistency principle
 Materiality principle
 Principle of adequate disclosure

DEFINITION OF ASSET:
What Is an Asset?
An asset is a resource with economic value that an individual, corporation, or country owns or
controls with the expectation that it will provide a future benefit.
Assets are reported on a company's balance sheet. They're classified as current, fixed,
financial, and intangible. They are bought or created to increase a firm's value or benefit the
firm's operations.
An asset can be thought of as something that, in the future, can generate cash flow, reduce
expenses, or improve sales, regardless of whether it's manufacturing equipment or a patent.
CLASSIFICATION OF ASSET:
Current Assets
In accounting, some assets are referred to as current. Current assets are short-term economic
resources that are expected to be converted into cash or consumed within one year. Current
assets include cash and cash equivalents, accounts receivable, inventory, and various prepaid
expenses.

While cash is easy to value, accountants periodically reassess the recoverability of inventory
and accounts receivable. If there is evidence that a receivable might be uncollectible, it'll be
classified as impaired. Or if inventory becomes obsolete, companies may write off these assets.

Some assets are recorded on companies' balance sheets using the concept of historical cost.
Historical cost represents the original cost of the asset when purchased by a company.
Historical cost can also include costs (such as delivery and set up) incurred to incorporate an
asset into the company's operations.
TRACY JOY RESULTAY PRINCIPLES OF ACCOUNTING
BSIT 2F ASSIGNMENT 1
Fixed Assets
Fixed assets are resources with an expected life of greater than a year, such as plants,
equipment, and buildings. An accounting adjustment called depreciation is made for fixed assets
as they age. It allocates the cost of the asset over time. Depreciation may or may not reflect the
fixed asset's loss of earning power.

Generally accepted accounting principles (GAAP) allow depreciation under several methods.
The straight-line method assumes that a fixed asset loses its value in proportion to its useful life,
while the accelerated method assumes that the asset loses its value faster in its first years of
use.1

Financial Assets
Financial assets represent investments in the assets and securities of other institutions.
Financial assets include stocks, sovereign and corporate bonds, preferred equity, and other,
hybrid securities. Financial assets are valued according to the underlying security and market
supply and demand.

Intangible Assets
Intangible assets are economic resources that have no physical presence. They include
patents, trademarks, copyrights, and goodwill. Accounting for intangible assets differs
depending on the type of asset. They can be either amortized or tested for impairment each
year.2

EXAMPLES OF ASSET:
Personal assets can include a home, land, financial securities, jewelry, artwork, gold and silver,
or your checking account. Business assets can include such things as motor vehicles, buildings,
machinery, equipment, cash, and accounts receivable.

DEFINITION OF LIABILITY:
A liability is something a person or company owes, usually a sum of money. Liabilities are
settled over time through the transfer of economic benefits including money, goods, or services.
Recorded on the right side of the balance sheet, liabilities include loans, accounts payable,
mortgages, deferred revenues, bonds, warranties, and accrued expenses.
Liabilities can be contrasted with assets. Liabilities refer to things that you owe or have
borrowed; assets are things that you own or are owed.
TRACY JOY RESULTAY PRINCIPLES OF ACCOUNTING
BSIT 2F ASSIGNMENT 1

CLASSIFICATIONS OF LIABILITY:
Businesses sort their liabilities into two categories: current and long-term. Current liabilities are
debts payable within one year, while long-term liabilities are debts payable over a longer period.
For example, if a business takes out a mortgage payable over a 15-year period, that is a long-
term liability. However, the mortgage payments that are due during the current year are
considered the current portion of long-term debt and are recorded in the short-term liabilities
section of the balance sheet.
Current (Near-Term) Liabilities
Ideally, analysts want to see that a company can pay current liabilities, which are due within a
year, with cash. Some examples of short-term liabilities include payroll expenses and accounts
payable, which include money owed to vendors, monthly utilities, and similar expenses. Other
examples include:
 Wages Payable: The total amount of accrued income employees have earned but not
yet received. Since most companies pay their employees every two weeks, this liability
changes often.
 Interest Payable: Companies, just like individuals, often use credit to purchase goods
and services to finance over short time periods. This represents the interest on those
short-term credit purchases to be paid.
 Dividends Payable: For companies that have issued stock to investors and pay a
dividend, this represents the amount owed to shareholders after the dividend was
declared. This period is around two weeks, so this liability usually pops up four times per
year, until the dividend is paid.
 Unearned Revenues: This is a company's liability to deliver goods and/or services at a
future date after being paid in advance. This amount will be reduced in the future with an
offsetting entry once the product or service is delivered.
 Liabilities of Discontinued Operations: This is a unique liability that most people
glance over but should scrutinize more closely. Companies are required to account for
the financial impact of an operation, division, or entity that is currently being held for sale
or has been recently sold. This also includes the financial impact of a product line that is
or has recently been shut down.
Non-Current (Long-Term) Liabilities
Considering the name, it’s quite obvious that any liability that is not near-term falls under non-
current liabilities, expected to be paid in 12 months or more. Referring again to the AT&T
example, there are more items than your garden variety company that may list one or two items.
Long-term debt, also known as bonds payable, is usually the largest liability and at the top of the
list.
Companies of all sizes finance part of their ongoing long-term operations by issuing bonds that
are essentially loans from each party that purchases the bonds. This line item is in constant flux
as bonds are issued, mature, or called back by the issuer.
TRACY JOY RESULTAY PRINCIPLES OF ACCOUNTING
BSIT 2F ASSIGNMENT 1
Analysts want to see that long-term liabilities can be paid with assets derived from future
earnings or financing transactions. Bonds and loans are not the only long-term liabilities
companies incur. Items like rent, deferred taxes, payroll, and pension obligations can also be
listed under long-term liabilities. Other examples include:
 Warranty Liability: Some liabilities are not as exact as AP and have to be estimated. It’s
the estimated amount of time and money that may be spent repairing products upon the
agreement of a warranty. This is a common liability in the automotive industry, as most
cars have long-term warranties that can be costly.
 Contingent Liability Evaluation: A contingent liability is a liability that may occur
depending on the outcome of an uncertain future event.
 Deferred Credits: This is a broad category that may be recorded as current or non-
current depending on the specifics of the transactions. These credits are basically
revenue collected before it is recorded as earned on the income statement. It may
include customer advances, deferred revenue, or a transaction where credits are owed
but not yet considered revenue. Once the revenue is no longer deferred, this item is
reduced by the amount earned and becomes part of the company's revenue stream.
 Post-Employment Benefits: These are benefits an employee or family members may
receive upon his/her retirement, which are carried as a long-term liability as it accrues. In
the AT&T example, this constitutes one-half of the total non-current total second only to
long-term debt. With rapidly rising health care and deferred compensation, this liability is
not to be overlooked.
 Unamortized Investment Tax Credits (UITC): This represents the net between an
asset's historical cost and the amount that has already been depreciated. The
unamortized portion is a liability, but it is only a rough estimate of the asset’s fair market
value. For an analyst, this provides some details of how aggressive or conservative a
company is with its depreciation methods.
TRACY JOY RESULTAY PRINCIPLES OF ACCOUNTING
BSIT 2F ASSIGNMENT 1

EXAMPLE OF LIABILITY:

DEFINITION OF OWNER’S EQUITY:

The proportion of the total value of assets of the company, which can be claimed by the owners
(in case of a partnership or sole proprietorship) or by the shareholders (in case of the
corporation), is known as the Owner’s equity. It is a figure that arrives when the liabilities are
deducted from the value of total assets.
TRACY JOY RESULTAY PRINCIPLES OF ACCOUNTING
BSIT 2F ASSIGNMENT 1
 The owner’s equity is among the three important sections of the balance sheet of the
sole proprietorship’s balance sheet and is a component of the accounting equation.
 It is also said to be a residual claim on assets of the business because the liabilities
have higher claims. Thus it can also be viewed as the source of business assets.