Introduction of Accounting

Introduction of Accounting

Define Accounting based on the definitions given by the following accounting authorities:

a)    Accounting Standard Council (ASC)

“A service activity. Its function is to provide quantitative information, primarily financial in nature, about economic entities, that is intended to be useful in making economic decision.”

b)    American Institute of Certified Public Accountants (AICPA)

“ The art of recording, classifying and summarizing in a significant manner and in terms of money, transactions and events which are in part at least of financial character and interpreting the results thereof.”

c)    American Accounting Association (AAA)

“The process of identifying, measuring,  and  communicating economic information to permit informed judgments and decisions by users of the information.”

Functions of Accounting

The Primary Function  then is to prepare financial reports and provide them into economic decision makers in accountants.

The Basic Function of accounting is described in these definitions of accounting provided by the American Accounting Associations (AAA). 

The Advanced or Critical Function of accounting is its audit function

n  To test the reliability of the financial reports, trace fraudulent transactions and locate and rectify accounting errors in a sheet.

Purpose of Accounting

The purpose of accounting is to help people or financial users see clearly the true picture of the business firm in terms of financial aspects that should be reliable, relevant and in complete manner.

 In our generation today business minded people should always consider informative management for vital survival of a business firm. The management must  knew the word “Right” ; Right time, Right information  in the Right way  in order to control business affairs with the economic decisions that might result in minimal uncertainty.

Objectives of Accounting

The overall objective of financial accounting is to provide useful information for economic decision making.

The output of the financial accounting process serves as useful input for making rational investment, and other similar economic decisions.

Specifically, the objectives of accounting are the ff.

1)    To ascertain the result of the firm operations;

2)    To ascertain the financial position of the firm; and

3)    To assist financial users in predicting the enterprise’s financial capacity regarding future cash flows, financial conditions and results of operations.

Accounting Terms

Q: What is an Asset?

Assets defined as resources or things of value owned by an enterprise .It may classified as physical form (such as cash and inventory), but  also  may classified as not physical form (such as patents and copyrights).

The assets are classified into Current Assets and Noncurrent Assets.

Q: Defined Current Assets?

Current Assets may classify in following criteria are met:

o   Cash or Cash equivalent

o   Expected to realized, or consumption in operating cycle.

o   Primarily trading purposes or short-term.

Currents Assets

·     Cash – any item on hand with monetary value that a bank will accept for the deposit and all amount currently on deposit with the bank in the name of the business.

Including:

- Coins and Currencies

--  Personal checks

 -- Money orders

-Travelers checks

-Bank drafts

·       Accounts Receivable – the amounts collectible on open accounts of the customers. These represent debtor’s oral promise to pay on certain amount to the business and the right of the business to collect in peso.

Example: Receivables from sales of goods or services.

·       Note Receivable - a promissory note receive by the firm from its debtors and customer a written promise to pay.

·       Accrued Interest Receivable – The interest earned on the note receivable but not yet received in cash.

·       Inventories – assets for sale in the normal operation in the business, production for sale, or in the form of supplies or materials or even rendering of services.

Example:                                                                             

 Merchandise Inventory

Work-in-process inventory

Raw material inventory

·       Prepaid Supplies - diff. supplies which have been bought for use in the office but are not still unused.

Example: Unused Coupon Bond, ink, ball pen, notebook etc.

Q: What is Non-Current Assets?

Non-Current Assets are tangible, intangible, operating and financial assets of a long-term nature or simply defined as an asset that does not meet the criteria of current assets.

 Q: What are Non- Current Assets?

Non-Current Assets

·      Land – the site owned by the firm on which the business building is constructed.

·      Building – the structure owned by the firm used in the operation of the firm.

·      Furniture and Fixture – long-lived items used by the business. Such as showcases, counters, containers, display racks, as well as furniture used for office like desks, chair and cabinets.

·      Equipment – defined as machinery that used in the business; like for example computers, delivery equipment, machinery used in conveying packing, sorting and altering commodities.

Contra- Valuation Accounts

·       Allowance for Doubtful Accounts – refers to an amount estimated uncollectible on receivable in compliance with the principle conservatism. May also known as “allowance for uncollectible accounts “and “allowance for bad debts”.

·       Accumulated Depreciation – a periodic cost of using depreciable plant assets. In accordance with the systematic cost allocation principle, the acquisition cost depreciable plant asset should be allocated as expense over its useful life.

Example

o   Accumulated depreciation of Building

o   Accumulated depreciation of Office Equipment

Liability Accounts

Q: What is a liability?

A liability refers to the present obligation to pay cash or cash equivalent by an entity, represent claims against the assets of the firm.

Liability accounts have normally belonged to credit balance. It is classified into two parts also; Current and Non- Current liabilities.

Q: What is Current Liabilities?

Current Liabilities meet the following criteria:

ü Expected to be settled in the firms operating cycle.

ü Due to be settled within twelve months of the statements or Financial Position Date.

Q: What are Current Liabilities?

Current Liabilities

·       Accounts Payable – an obligation to pay or debt to creditors for money borrowed or merchandise.

Example:

Obligation arising from the purchases account

·       Notes Payable – refers to a promissory note issued by the firm to its creditors for money borrowed or merchandise and other assets bought to credit.

·       Accrued Interest – the interest incurred in the current period but not yet paid.

·       SSS Premium Payable –refers to the representative of the amount of the employee and the employer contribution to SSS which are not yet remitted.

·       Withholding Tax Payable – refers to the amount of income tax withheld from the salary of the employee on behalf of BIR

Q: What is Non-Current Liability?

Non-Current Liability – comprises the portion payable beyond on year of a long term liability or may refers to the one does not meet the criteria of current liability.

Ø All other liabilities should be classified as Non-Current Liabilities.