Accounting-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.“

FOUR (4) FUNCTIONS

1. Recording-systematically and chronologically noting business transactions in the appropriate books.

Different Accounting Books

A. Sales journal

B. Purchase journal

C. Cash Receipt Journal.Book

D. Cash Disbursement Journal/Book

GENERAL JOURNAL-is also known as journal voucher. Journal voucher allows for detailed explanation of a posting transaction. It is the book of original entry

-posting of miscellaneous business transactions

-correcting errors

-month end adjustments

GENERAL LEDGER-is the book of final entry.

2. Classifying

3. Summarizing

4. Interpreting

Accounting-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.“

ACCOUNTING EQUATION

ASSETS=LIABILITIES + OWNER’S EQUITY

LIABILITIES=ASSETS-OWNER’S EQUITY

OWNER’S EQUITY-ASSETS-LIABILITIES

FIVE (5) FINANCIAL STATEMENTS

1. INCOME STATEMENT

2. BALANCE SHEET

3. STATEMENT OF OWNER’S EQUITY/ STATEMENT OF STOCKHOLDER’S EQUITY/Statement of Changes in Equity

4. STATEMENT OF CASH FLOW

5. NOTES TO FINANCIAL STATEMENTS

1.Basic Financial Statements

Financial statements required by the ASC: balance sheet, statements of income and retained earnings, statement of cash flow and related notes.

New regulations issued by the SEC regarding to the form and content of the financial statement.

2.Business combination

Methods that are allowed: Purchase and Pooling-of-Interest

Goodwill arising under the purchase method is amortized over estimated life, not exceeding 40 years.

Straight-line method is used for amortization

3.Consolidation

A parent company is required to prepare consolidated financial statements when:

a. The total liabilities of an entity in the group exceed P50 million, or total liabilities of the group are more than P150 million

b.The parent company falls under one of the following categories:

• A company’s securities are offered for sale to the public

• A financial intermediary

• An issuer of registered commercial papers

4. Marketable Securities

Treatment:

1.Marketable securities held for working capital purposes: carried at the lower of aggregated cost or market value

2.Long-term marketable securities: valued similarly

3.Other long-term investments: accounted for under the equity method, or cost method.

5. Inventories

These are stated at the lower of cost market.

Determined based on following cost flow assumptions: Average Cost, FIFO, LIFO and specific identified method.

Market is determined by replacement cost (which should not be more than NRV and not less than NRV reduced by a normal profit margin.

6. Property, Plant and Equipment

PPE are evaluated at cost (-) allowance for depreciation.

In periods of inflation, revaluation based on appraisal rights is allowed.

Methods for depreciation: Straight-line, units of production, sum-of-digits and declining balance method.

PPE are usually depreciated over the life of the asset.

7. CapitalCapital in excess of par is shown separately.Treasury stocks are shown at cost as a deduction from capital.8. Provisions and Reserves

All companies with material temporary differences are required to apply deferred tax accounting.

The provision for income tax is the sum of deferred tax expense or benefit and income tax currently payable or refundable.

Business Entity Concept

- activities of a business are recorded separately from the activities of the stakeholders.

- this separation allows us to measure the performance and the financial position of each entity independent of all other entities.

Cost Concept

- Assets and services that are acquired should be recorded at their actual cost and the accounting record continues to be based on cost rather than current market value.

Reliability or Objectivity Principle

- Accounting records and statements are based on the most reliable data so that it will be as accurate and as useful as possible.

Going-concern Concept

- Accountants assume that the business will continue operating for the foreseeable future.

Time-period Concept

- Ensures that accounting information is current and is reported at regular intervals.

- The timely representation of accounting data aids the comparison of business operations over time (ex. Year to year, quarter to quarter)

Stable-Monetary-Unit Concept

- Accounting information is expressed primarily in monetary terms.

- Accountant’s basis for ignoring the effect of inflation and making no adjustments for the changing value of foreign currencies.

Comparability Principle

- Accounting Information must be comparable from business to business.

- Financial statements must be comparable from one period to next.

Revenue (realization) Principle

- Revenue should be recorded when it is earned and not before.

Matching Principle

- Governs the timing of expense recognition in financial statements.

- Accountants match or offset the revenue appearing in an income statement with all the expenses incurred.

Adequate Disclosure Principle

- A company’s financial statements should report enough information for outsiders to make knowledgeable decisions about the company.

- A company should report material, relevant, reliable, and comparable information about its economic affairs.

Materiality Concept

- Companies must perform strictly proper accounting only for significant items and transactions.

Conservation Concept

- Accountants should base their estimates on sound logic and select accounting methods which neither overstate nor understate the facts.

- Accountants should select the accounting option which produces a lower net income for the current period and a less favorable financial position.

Consistency Principle

- When the company has adopted a particular accounting method, it should follow that method consistently rather that switch method from one year to the next.

1. INCOME STATEMENT-the financial statement that shows how the profitable the firm has been during the past year.

REVENUE- is income that a company receives from its normal business activities, usually from the sale of goods and services to customers.

Examples: sales revenue service revenue Rental revenue

EXPENSES- It is an outflow of cash or other valuable assets from a person or company to another person or company.Examples: rent expense

advertising expensemiscellaneous expensesalaries and wages expensecost of good soldutilities expense such PLDT, Meralco,

Maynilad BALANCE SHEET-the financial statement that presents a snapshots of the firm’s assets and the source of the money used to buy those assets The

balance sheet must follow the following formula:Assets = Liabilities + Owners' Equity

Liabilities= Assets- Owner’s Equity

Owner’s Equity= Assets- Liabilities

Assets- the things that the company owns

>Any item of economic value owned by an individual or corporation, especially that which could be converted to cash

Current assets- assets that can be easily converted into cash

Non-current assets-assets that cannot be easily converted into cash

Liabilities-the firms/company debtsCurrent liabilities-debts or obligations that need

to be paid within a short period of time. Non-current Liabilities- debts that do not need

to be settled within a short period of timeOwner’s Equity-represents the owner’s

personal investment in the firm

There are 5 major items included into current assets:

1. Cash and cash equivalents — it is the most liquid asset, which includes currency, deposit accounts, and negotiable instruments (e.g., money orders, cheque, bank drafts).

2. Short-term investments — include securities bought and held for sale in the near future to generate income on short-term price differences (trading securities).

3. Receivables — represents customer’s unpaid bills

ACCOUNTS RECEIVABLE

NOTES RECEIVABLE

INTEREST RECEIVABLE

4. Inventory — trading these assets is a normal business of a company.

stocks of raw materials

finished goods or partially finished goods

5. Prepaid expenses — these are expenses paid in cash and recorded as assets before they are used or consumed.

PREPAID RENT

PREPAID INSURANCE

Contra asset-deductible from current assets

NON-CURRENT ASSETS-

Ex. Accounts receivable

Allowance for doubtful accounts/bad debts

NON-CURRENT ASSETS

Accumulated depreciation

CURRENT ASSETSLANDBUILDINGEQUIPMENTSFURNITURES AND FIXTURESCONTRA-ASSET (ACCUMULATED DEPRECIATION)

INTANGIBLE ASSETSFRANCHISETRADEMARKGOODWILLCOPYRIGHTPATENTLICENSESROYALTIES

CURRENT LIABILITIESAccounts payableNotes payableLoans payableSalaries and wages payableUtilities payableNON-CURRENT LIABILITIESBonds payableMortgage payable

CORPORATION Stockholder’s Equity

Capital stock-The number of shares authorized for issuance by a company's charter, including both common stock and preferred stock.

Retained Earnings-refers to the portion of net income which is retained by the corporation rather than distributed to its owners as dividends

Dividends-the portion of income to be distributed to shareholdersSOLE PROPRIETORSHIP

Owner’s Equity > Owner’s capital-Debt or equity funds

provided by the owner(s) of a business; sources of owner's capital are personal savings, sales of assets, or loans from financial institutions

> Owner’s drawing/withdrawal-Withdrawals of owners are treated as a reduction of equity.STATEMENT OF CASH FLOW

-the firm’s cash inflows and outflows from its operations as well as its investments and financing activities. It contains several sections namely:

Cash Flow generated by the firm’s operations The first section starts out with the net

income. Since the net income is derived by deducting all expenses from the revenues,

amortization and deferred taxes are added back. Next all the changes in current assets and current liabilities are either be added or deducted. The net result is called CASH PROVIDED BY OPERATIONS.

Cash Flow invested in plant and equipment The second portion deals with cash

expenditures on fixed assets. Cash Flow generated from financing

activities such as the sale of new bonds and stocks.

The third section shows the Cash generated from or spent on financing activities such as sale of new stocks, flotation of new bonds, payment of debt and paying out dividends.