ACCOUNTING

IS
ACCOUNTING
IMPORTANT
TO YOU?
 “Accounting is the process of
IDENTIFYING, RECORDING,
and COMMUNICATING
economic events of an
organization to interested
users.
 IDENTIFYING – this involves
selecting economic events that are
relevant to a particular business
transaction. The economic events of
an organization are referred to as
transactions. Example is the sold of
bread of a bakery business:
 RECORDING – this involves
keeping a chronological diary of
events that are measured in pesos.
The diary referred to in the
definition are the journals and
ledgers which will be discussed in
future chapters.
 COMMUNICATING – occurs
through the preparation and
distribution of financial and other
accounting reports.
 Nature of Accounting

• Accounting is a service activity.

• Accounting is a process
• Accounting is both an art and a
discipline.
• Accounting deals with financial
information and transactions
• Accounting is an information
system:
 Function of accounting in
business
Accounting is the means by which
business information is communicated to
business owners and stakeholders. The role
of accounting in business is to provide
information for managers and owners to use
in operating the business. In addition,
accounting information allows business
owners to assess the efficiency and
effectiveness of their business operations.
Mr. Juan is a retired government employee who
is good at baking. One day he decides to put up a
bakery shop in your barangay. He renovates a
portion of his house to serve as the area for the
production of bread. He purchases baking
equipment and raw materials to produce five
different types of bread. Mr. Juan also hires Jose
to help him with the baking and, at the same
time, to be in-charge of sales. Mr. Juan pays Jose
on a weekly basis. Every day, Mr. Juan’s wife
deposits the daily cash sales in their bank account
at XY Savings Bank. With the help of accounting,
what possible decisions or questions of Mr. Juan
can accounting provide an answer to?
• Is my business earning? (profitability)
• How much daily or monthly sales do I
need in order to recover my fixed cost?
(break-even)
• Do I need to hire additional workers to
help me with my production?
• Can I afford to set up a new store in
another place? Where do I get the funds?
• Can I afford to pay a bank loan?
 USERS OF
ACCOUNTING
INTERNAL USERS
Internal users of accounting
information are those individuals
inside a company who plan, organize,
and run the business. These users are
directly involved in managing and
operating the business. These include
marketing managers, production
supervisors, finance directors,
company officers and owners
 
EXTERNAL USERS
External users are individuals and
organizations outside a company
who want financial information
about the company. These users are
not directly involved in managing
and operating the business. The two
most common types of external
users are potential investors and
creditors.
 Potential Investors use accounting
information to make decisions to buy shares
of a company . Creditors (such as suppliers
and bankers) use accounting information to
evaluate the risks of granting credit or
lending money. Also included as external
users are government regulatory agencies
such as Securities and Exchange
Commission (SEC), Bureau of Internal
Revenue (BIR), Department of Labor and
Employment (DOLE), Social Security
System (SSS), and Local Government Units
(LGUs).
 
Is accounting important to you?
Does it affect your daily activities?
How?
ACCOUNTING
CONCEPTS
AND
PRINCIPLES
Accounting Concepts and Principles
Are set of logical ideas and procedures that
guide the accounting in recording and
communicating economic information.They
provide general frame of reference by which
accounting practice can be evaluated and they
serve as guide in the development of new
practices and procedures.
Accounting concepts and principles provide
reasonable assurance that information
communicated to users is prepared in a proper
way.
Why are Accounting Principles Important?

Generally Accepted Accounting Principles (GAAP) are

important because they set the standards, rules and
procedures that the companies must be follow in the
preparation of Financial Statement. When GAAP apply
by the companies it helps not only the external user but
also the management. The GAAP was develop by the
accounting professionals to guide the preparers of
financial statements in recording and reporting
financial information regarding the business enterprise,
hence aiding in the effective execution of the accounting
procedures and in communicating the financial
condition of the company.
What is the Purpose of Accounting Principles?

The purpose of accounting principles is to

establish the framework for how financial
transaction are recording and reporting on
financial statements. When every company
follows the same standard and rules in
preparation of financial statement, investors,
creditors and other financial statement users will
have easier time to understand the reports and
make a decision based on the financial
statement.
Basic Accounting Assumptions

1. Going concern assumption – states that the

operations of a business is expected to continue
indefinitely. This means that the operations of a
business will not stop in the near future without
the need or intention to stop operations.
Basic Accounting Assumptions

2. Accounting entity assumption – according to

the accounting entity assumption, the business
entity is separate and distinct from its owner or
investor. An entity can be a business, person,
organization, or government. In preparing
financial report about the business, the personal
transactions of the owners are excluded. Its main
purpose is for the fair presentation of financial
report of the company.
Basic Accounting Assumptions

3. Periodicity assumption/Accounting period

assumption – Periodicity assumption states that
a company can report its financial statements
results within a certain designated periods of
time. For example, if the reporting period of the
company for the current year is set at calendar
year, then the same periods should be used in
the next year, so that the result can compared on
a year-to-year basis.
Basic Accounting Assumptions

Accounting Period Assumption states that the

life of the business is broken or divided into
equal time period. Normally, an accounting
period consists of:
• monthly
• quarterly
• semi-annually (six month), or
• annually (yearly)
Most of the company use annual accounting period and adopt either the calendar year
(starts from January 1 and end in December 31) or fiscal year (any 12month period that
starts any day other than January and ends any day other tan December 31)
4. Accrual Basis – is a method of accounting wherein the
revenue is recognized when they are earned regardless of
when they are received or collected whereas expenses are
recorded when they are incurred regardless when they
are paid.
The accrual basis or method of reporting income and
expense:
• Accrued income – income that is already earned but not
yet received or collected.
• Accrued expenses – expenses that already been used or
incurred but not yet paid.
• Deferred income – income that is already received or
collected but nor yet earned.
• Prepaid expenses – expenses that already been paid but
not yet incurred.
5. Monetary Unit – states that a business
should only recorded and reported an
accounting transaction if it can be
expressed in terms of money such as the
Peso.
Basic Accounting Principles
1. Cost Principle – state that the asset purchase or
acquired should be recorded based on the actual
cash equivalent or at its original cost or acquisition
cost and not on the prevailing market value or
future value.

2. Full Disclosure Principle – in the preparation of

financial statement, any knowledge that would
materially affect a financial statements user’s
decision about the company should be disclosed
within the statement or in the notes of the financial
statement.
Basic Accounting Principles

3. Matching Principle – this principle requires that

all expenses must be recorded and matched with
revenue in the period that they incurred rather than
they are paid.

4. Revenue Recognition Principle – revenue should

be recognized as soon as the goods have been
delivered or sold or when the service have been
rendered or performed, regardless of when the
money is actually received.
Basic Accounting Principles

5. Materiality Principle – any business transaction

that may affect the decision of the financial users are
considered important or materials, and should be
reported properly. Materially depends on the size
and nature of the item, ten thousand pesos
(P10,000.00) may not be material to San Miguel
Corporation, but the same amount is quite material
to a small business like Gwapito Barber Shop. In
case of assets that are immaterial to make a
difference in the financial statements, the company
should instead record it as an expenses.
Basic Accounting Principles
6. Conservatism or Prudence Principle – this principle
leads accountant to anticipate or disclose losses, but it
does not allow a similar action for gains. Expenses and
liabilities are recorded when they are probable and can
reasonably estimate, while the revenue and assets can
only be recognized when they are assured of being
received.
7. Objectivity Principle – financial statements,
accounting records, and financial information as a
whole should be free from bias and capable of
independent verification. Accounting records are based
on information that flows from verifiable evidence or
documentation.
Accounting Principles as Applied in Various
Cases

Example 1: Maligaya Company paid P25,000.00

and issued a promissory notes amounting to
P30,000.00 for the purchase of Office Equipment.
The Office Equipment was recorded in the
Balance sheet at P55,000.00

This is an example of Cost Principle the amount

of asset should be recorded based on the actual
cash equivalent or acquisition cost.
THANK YOU !