Accounting- is one of the key functions for What Is Accounting?

almost any business. It may be handled by

a bookkeeper or an accountant at a small Accounting is the process of recording
firm, or by sizable finance departments with financial transactions pertaining to a
dozens of employees at larger companies. business. The accounting process
includes:
Luca Bartolomeo de Pacioli - an Italian  Analyzing
mathematician, Franciscan friar,  Recording
collaborator with Leonardo da Vinci, who  Summarizing
described double-entry bookkeeping in his  financial transactions or events
“Summa de Arithmetica, Geometria, over an accounting period
Proportioni et Proportionalita” in 1494.  reporting these transactions in the
Accounting History During the Roman form of financial statements
Empire- During the reign of the Roman (Income Statement, Balance
Empire, accounting continued to evolve Sheet, Capital Statement and
much further. “The Deeds of the Divine Statement of Cash Flows) to
Augustus” is an account of Emperor government regulatory, and tax
Augustus’ financial dealings. It listed collecting agencies.
such quantities as distributions to the Branches of Accounting
people, grants of land, building of 1. Financial Accounting- Financial
temples, money to military veterans, accounting involves recording
religious offerings, and money spent on and categorizing transactions for
theatrical shows and gladiator events. business. This data is generally
Accounting During the Middle Ages - historical, meaning it’s from the
During the Middle Ages, bartering was past. It also involves generating
the primary form of money-changing, but financial statements based on
when Europe changed to a monetary these transactions.
economy is the 13th Century, merchants 2. Cost Accounting - Cost
began relying on bookkeeping to keep a accounting is considered a type
record of multiple transactions. This is of managerial accounting. Cost
when double-entry bookkeeping got its accounting is most commonly
start, which is when a debit and credit used in the manufacturing
value is entered for each transaction by industry, an industry that has a lot
the accountant. Merchants at the time of resources and costs to
used accounting as a new recording manage. It is a type of accounting
system. used internally to assess a
Accounting Systems in Today’s company’s operations. Cost
Generation - Nowadays, there are accounting concerns itself with
accounting standards, auditing recording and analyzing
regulations, and ethical standards for manufacturing costs.
accountants to follow. Along with this 3. Auditing - There are two types of
standard is the advancement in auditing:
technology and accounting has gone  external auditing- an
through many changes throughout the independent third party
ages. Through all the changes, reviews a company’s
accounting technology has always financial statements to
played a part in making the accountant’s make sure they are
job just a little easier. presented correctly and
 comply with GAAP and
IFRS.
 Internal auditing- involves
evaluating how a business
divides up accounting
duties, who is authorized
to do what accounting
task and what procedures
and policies are in place.
Internal auditing helps a
business to zero in fraud,
mismanagement and
waste or identify and
control any potential
weaknesses in its policies
or procedures.
4. Managerial Accounting -Also
known as management
accounting, this type of
accounting provides data about a
company’s operations to
managers. The focus of
managerial accounting is to
provide data that managers need
to make decisions about a
business’s operations, not comply
strictly with GAAP. Managerial
accounting includes budgeting
and forecasting, cost analysis,
financial analysis, reviewing past
business decisions and more.
Cost accounting is a type of
managerial accounting.
5. Accounting Information Systems -
Known as AIS for short,
accounting information systems
concerns itself with everything to
do with accounting systems and
processes and their construction,
installation, application and
observation. This can include
accounting software management
and the management of
bookkeeping and accounting
employees.
6. Tax Accounting- Tax accounting
involves planning for tax
diminution, payment scheme and
the preparation of tax returns.
This branch of accounting helps
businesses to comply with
regulations of the Philippine
Taxing Authorities, more
particularly the Local Government
Units for the Mayor’s Permits,
BIR for the Internal Taxes and
Bureau of Customs for taxes on
importation and exportation.
7. Forensic Accounting -This
specialized accounting service is
trending in accounting and is
becoming increasingly popular.
Forensic accounting focuses on
legal affairs such as inquiry into
fraud, legal cases and dispute
and claims resolution.
 Forensic accountants
need to reconstruct
financial data when the
records are incomplete.
This could be to decode
fraudulent data or convert
a cash accounting
system to accrual
accounting. Forensic
accountants are usually
consultants who work on
a project basis.
8. Fiduciary Accounting- This
branch of accounting centers
around the management of
property for another person or
business. Fiduciary accounting
covers estate accounting, trust
accounting and receivership (the
appointing of a custodian of a
business’s assets during events
such as bankruptcy).
Purposes and Uses of Accounting
Information
- to accumulate and report on
financial information about the
performance, financial position,
and cash flows of a business.
Accounting provides people
interested in the business or
company with various pieces of
 information regarding business
operations, this information is
then used to reach decisions
about how to manage the
business, or invest in it, or lend
money to it.
Uses of Accounting Information
1. A common use of accounting
information is measuring the
performance of various business
operations. While financial
statements are the classic
accounting information tool used to
assess business operations,
business owners may conduct a
more thorough analysis of this
information when reviewing business
operations.
2. Business owners often use
accounting information to create
budgets for their companies.
Historical financial accounting
information provides business
owners with a detailed analysis of
how their companies have spent
money on certain business
functions.
3. Business owners often use
accounting information to create
budgets for their companies.
Historical financial accounting
information provides business
owners with a detailed analysis of
how their companies have spent
money on certain business
functions.
4. Business owners often use
accounting information to create
budgets for their companies.
Historical financial accounting
information provides business
owners with a detailed analysis of
how their companies have spent
money on certain business
functions.
5. External business stakeholders often
use accounting information to make
investment decisions. Banks,
lenders, venture capitalists or private
investors often review a company's
accounting information to review its
financial health and operational
profitability.
ACCOUNTING PRINCIPLES
(1) the basic accounting principles
and guidelines
(2) the detailed rules and standards
issued by FASB and its
predecessor the Accounting
Principles Board (APB)
(3) the generally accepted industry
practices
The following is a list of the ten main
accounting principles and guidelines
with a highly condensed explanation
of each.
1. Economic Entity Assumption
The accountant keeps all of the business
transactions of a sole proprietorship
separate from the business owner's
personal transactions.
2. Monetary Unit Assumption
In the Philippines economic
activity is measured in Philippine pesos,
and only transactions that can be
expressed in Philippine pesos are
recorded.
3. Time Period Assumption
This accounting principle assumes that it
is possible to report the complex and
ongoing activities of a business in
relatively short, distinct time intervals
such as the five months ended May 31,
2019, or the 5 weeks ended May 1,
2019.
4. Cost Principle
From an accountant's point of view, the
term "cost" refers to the amount spent
(cash or the cash equivalent) when an
item was originally obtained, whether
that purchase happened last year or
thirty years ago.
5. Full Disclosure Principle
If certain information is important to an
investor or lender using the financial
statements, that information should be
disclosed within the statement or in the
notes to the statement.
6. Going Concern Principle
The going concern principle allows the
business to defer some of its prepaid
expenses until future accounting periods.
7. Matching Principle
This accounting principle requires
companies to use the accrual basis of
accounting. The matching principle requires
that expenses be matched with revenues.
8. Revenue Recognition Principle
Under the accrual basis of accounting (as
opposed to the cash basis of accounting),
revenues are recognized as soon as a
product has been sold or a service has
been performed, regardless of when the
money is actually received. Under this basic
accounting principle, a company could earn
and report P1,000,000 of revenue in its first
month of operation but receive P0 in actual
cash in that month.
9. Materiality
Because of this basic accounting principle
or guideline, an accountant might be
allowed to violate another accounting
principle if an amount is insignificant.
Professional judgement is needed to decide
whether an amount is insignificant or
immaterial.
10. Conservatism
The basic accounting principle of
conservatism leads accountants to
anticipate or disclose losses, but it does not
allow a similar action for gains. For
example, potential losses from lawsuits will
be reported on the financial statements or in
the notes, but potential gains will not be
reported.
FORMS OF BUSINESS ORGANIZATION
1. SOLE PROPRIETORSHIP- a
business entity owned by an
individual who has full
control/authority of its business and
owns all assets, personally owes
answers to all liabilities or surfers all
loses but enjoys all the profit to the
exclusion of others.
2. Partnership - Under the Civil Code of
the Philippines, a partnership is
treated as juridical person, having a
separate legal personality from that
of its members.
3. Corporation - Corporation is
composed of juridical persons
established under the Corporation
Code and regulated by the SEC with
a personality separate and distinct
from that of its stockholders.
a. Stock Corporation- Stock
Corporation is a
corporation with capital
stock divided into shares
and authorized to
distribute to the holders of
such share’s dividends or
allotments of the surplus
profits on the basis of the
shares held.
b. One Person Corporation-
A One-Person
Corporation (OPC) is a
corporation with a single
stockholder, who can only
be a natural person (who
must be of legal age),
trust or estate. As an
incorporator, the “trust”
does not refer to a trust
entity but rather pertains
to the subject being
managed by a trustee.
c. Non-Stock Corporation-
Non-Stock Corporation is
a corporation organized
 principally for public
purposes such as
charitable, educational,
cultural, or similar
purposes and does not
issue shares of stock to its
members.
Types of Business Activity
1. Service Business - A service type
of business provides intangible
products (products with no
physical form). Service type firms
offer professional skills, expertise,
advice, and other similar
products. Examples of service
businesses are: salons, repair
shops, schools, banks,
accounting firms, and law firms.
2. Merchandising Business - This
type of business buys products at
wholesale price and sells the
same at retail price. They are
known as "buy and sell"
businesses. They make profit by
selling the products at prices
higher than their purchase costs.
A merchandising business sells a
product without changing its form.
Examples are: grocery stores,
convenience stores, distributors,
and other resellers.
3. Manufacturing Business - Unlike
a merchandising business, a
manufacturing business buys
products with the intention of
using them as materials in
making a new product. Thus,
there is a transformation of the
products purchased. A tangible vs. intangible assets).
manufacturing business
combines raw materials, labor,
and overhead costs in its
production process. The
manufactured goods will then be
sold to customers.
Financial statements- are written reports
prepared by business management to
present its financial affairs in a given
period (monthly, quarterly, six monthly or
yearly).
balance sheet- is a financial statement that
reports a company's assets, liabilities and
shareholders' equity at a specific point in
time, and provides a basis for computing
rates of return and evaluating its capital
structure.
Assets. - The International Financial
Reporting Standards (IFRS) framework
defines an asset as follows: “An asset is
a resource controlled by the enterprise
as a result of past events and from which
future economic benefits are expected to
flow to the enterprise.”
There are three key properties of an
asset:
• Ownership: Assets represent
ownership that can be eventually
turned into cash and cash
equivalents
• Economic Value: Assets have
economic value and can be
exchanged or sold
• Resource: Assets are resources
that can be used to generate
future economic benefits
Classification of Assets
Importance of Asset Classification
1. Convertibility: Classifying assets
based on how easy it is to convert
them into cash.
2. Physical Existence: Classifying
assets based on their physical
existence (in other words,
3. Usage: Classifying assets based
on their business operation
usage/purpose.
Classification of asset as to
Convertibility - If assets are
classified based on their
convertibility into cash, assets are
 classified as either current assets
or fixed assets. An alternative
expression of this concept is
short-term vs. long-term assets.
a. Current Assets - Current assets
are assets that can be easily
converted into cash and cash
equivalents (typically within a
year). Current assets are also
termed liquid assets and
examples of such are:
-cash, cash equivalents, short term
deposits, stocks, marketable
securities, office supplies
b. Non-Current Assets or Fixed
Assets - Non-current assets are
assets that cannot be easily and
readily converted into cash and
cash equivalents. Non-current
assets are also termed fixed
assets, long-term assets, or hard
assets. Examples of non-current
or fixed assets include:
- Land, building, machinery,
equipment, patents, trademarks
2. Classification of asset as to
Physical Existence - If assets are
classified based on their physical
existence, assets are classified
as either tangible assets or
intangible assets.
a. Tangible Assets - Tangible assets
are assets that have a physical
existence (we can touch, feel,
and see them). Examples of
tangible assets include:
-land, building, machinery,
equipment, cash, office supplies,
stocks, marketable securities
b. Intangible Assets - Intangible
assets are assets that do not
have a physical existence.
Examples of intangible assets
include:
-goodwill, patents, brand, copyright,
trademarks, trade secret, permits,
corporate intellectual property
Classification of assets as to Usage -
If assets are classified based on
their usage or purpose, assets
are classified as either operating
assets or non-operating assets.
a. Operating Assets - Operating
assets are assets that are
required in the daily operation of
a business. In other words,
operating assets are used to
generate revenue from a
company’s core business
activities. Examples of operating
assets include:
- Cash, stock, machinery, equipment,
patents, goodwill.
b. Non-Operating Assets - Non-
operating assets are assets that
are not required for daily
business operations but can still
generate revenue. Examples of
non-operating assets include:
- Short-term investments, marketable
securities, vacant land, interest
income or a fixed time deposit
Liabilities -Defined by the International
Financial Reporting Standards (IFRS)
Framework: “A liability is a present
obligation of the enterprise arising from past
events, the settlement of which is expected
to result in an outflow from the enterprise of
resources embodying economic benefits.”
Classification of Liabilities
These are the three main classifications
of liabilities:
 1. Current liabilities (short-term
liabilities) are liabilities that are due
and payable within one year.
2. Non-current liabilities (long-term
liabilities) are liabilities that are due
after a year or more.
3. Contingent liabilities are liabilities
that may or may not arise,
depending on a certain event.
1. Current Liabilities also known as
short-term liabilities, are debts or
obligations that need to be paid
within a year. Current liabilities
should be closely.
. Examples of current liabilities:
2. Accounts payable
3. Interest payable
4. Income taxes payable
5. Bills payable
6. Bank account overdrafts
7. Accrued expenses
8. Short-term loans
2. Non-current liabilities, also known as
long-term liabilities, are debts or
obligations that are due in over a
year’s time. Long-term liabilities are
an important part of a company’s
long-term financing. Companies take
on long-term debt to acquire
immediate capital to fund the
purchase of capital assets or invest
in new capital projects.
-List of non-current liabilities:
- Bonds payable
- Long-term notes payable
- Deferred tax liabilities
- Mortgage payable
- Capital leases
Capital also known as net assets or equity;
capital refers to what is left to the owners
after all liabilities are settled. Simply stated,
capital is equal to total assets minus total
liabilities. Capital is affected by the
following:
1. Initial and additional
contributions of owner/s
(investments)
2. Withdrawals made by owner/s
(dividends for corporations),
3. Income
4. Expense
Income refers to an increase in economic
benefit during the accounting period in the
form of an increase in asset or a decrease in
liability that results in increase in equity,
other than contribution from owners.
Income encompasses revenues and gains.
Revenues refer to the amounts earned from the
company’s ordinary course of business such as
professional fees or service revenue for service
companies and sales for merchandising and
manufacturing concerns.
Gains come from other activities, such as
gain on sale of equipment, gain on sale of
short-term investments, and other gains.
Income Statement
The income statement is the next
financial statement everyone should look at.
It looks quite different than the balance
sheet. In the income statement, it’s about
the revenue and the expenses. It starts with
the gross sales or revenue. Then we deduct
any sales return or sales discount from the
gross sales to get the net sales. From net
sales, we deduct the costs of goods sold, and
we get the gross profit. From gross profit, we
deduct the operating expenses like the
expenses required for daily administrative
and selling expenses. By deducting the
operating expenses, we get the operating
income.
Cash Flow Statement
Cash Flow Statement is the third most
important statement every investor should
look at. There are three separate segments
of a cash flow statement. These are cash
flow from the operating activities, cash flow
from investing activities, and cash flow from
finance activities.
 1. Cash Flow from Operations is the
cash generated from the core
operations of the business.
2. Cash Flow from Investing Activities
relates to the cash inflows and
outflows related to investment in
the company like buying of property,
plant, and equipment or other
investments.
3. Cash Flow from Financing Activities
relates to the cash inflows or
outflows related to debt or equity of
the company. It includes raising of
equity or capital, debt, loan
repayments, buyback of shares, and
similar financing activities.
Net income - For a business, net income
equals is the amount remaining after
subtracting all costs and expenses from
revenue. If the costs and expenses
exceed revenue, it is called net loss and
this is subtracted from the capital or
investment.
Drawings or withdrawals- represent an
amount of cash or non-cash items
removed by the owner or partners from
the business for personal use or
expenditure.