Accounting 1_prelim Topics_copy for Students_sept 23 2010

8/8/2019 Accounting 1_prelim Topics_copy for Students_sept 23 2010

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ACCOUNTING 1ACCOUNTING 1PRELIMSPRELIMS

Stephen I. BañaresStephen I. Bañares



House Rules

During exams/quizzes:

± One seat apart

± Closed notes ± Cellphones not allowed; bring calculator

No special project is given (for the purpose

of passing the subject or raising the grade)



Definition of AccountingDefinition of Accounting

By the Committee on Accounting Terminology of the

American Institute of Certified Public Accountants

Accounting is 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 a financial character and interpreting the

results thereof.



4 Phases of Accounting4 Phases of Accounting

Recording: systematically and chronologically noting business

transactions in the appropriate accounting books. This is

bookkeeping.

Classifying: sorting accounting entries and grouping similar items.

Summarizing: summing up the classified accounting data into

financial statements.

Interpreting: analyzing the financial statements to provide answers

to management questions.



Important Points in the Definition of Important Points in the Definition of AccountingAccounting

1. It is about quantitative information.

2. The information is likely to be financial.

3. The information should be useful in decisionmaking.



6 Direct Users of Financial Reports6 Direct Users of Financial Reports

1. Owners ± he is interested to know whether the

business should be maintained, increased, decreased

or disposed of completely. Further, he is interested to

know whether he is getting a fair return of hisinvestment.

2. Management ± To the management, financial

information serves as a measure for making futurefinancial decisions and a measure of its effectiveness.

3. Prospective Investors ± Through the financial

statements, the prospective investor can determine

whether to acquire ownership in the firm.



6 Direct Users of Financial Reports6 Direct Users of Financial Reports

4. Creditors ± Through the financial reports, the creditor

would know whether the borrower is capable of

paying his obligations as these become due.

5. Government ± The government needs accounting

information to regulate the firm¶s activities and

determine the basis for taxation policies.

6. Employees ± Employees are interested in

information to enable them to assess the ability of the

firm to provide remuneration and other benefits.



Business Organizations According to ownership

Single or sole proprietorship owned only by one

person. Usually, the owner is also the manager of the business

Partnership has two or more owners. Theowners, called partners, agree on the capital

contributions, management of the firm, distributionof profits and losses, etc.

Corporation this is the business organization of not less than five persons. It is organized byoperation of law.



Business Organizations

According to nature of business Service Concern. This deals with the rendering of

services to customers such as tailoring shops,firms of CPAs, lawyers, etc.

Trading or Merchandising Deals with the buyingof goods and selling the same goods in the sameform for profit. Examples are department stores,

grocery stores. Manufacturing Concern Involves purchase of raw

materials and converting these into finishedproducts. Examples are textile manufacturingfirms, candy manufacturing firms.



Business Transactions DefinedBusiness Transactions Defined

1. Focal point of any business organization.

The data that we record in the accountingbooks.

2. Always concerned with a financial event

and expressed in monetary terms.

3. An exchange of a thing of value for another

thing of value.



Common Business TransactionsCommon Business Transactions2. Purchase of materials, equipment or services

Involves the disbursement of money for the

materials, equipment, or services needed by a

business entity

³Cash purchase´ is when materials, equipment or services are bought on cash basis. Documents:

Cash voucher; check voucher ± a document used

when disbursement is made using a bank check

In a credit purchase transaction, the buyer pledges

to pay at a later date. Document: A/P Voucher

The things of value received by the buyer are the

materials, equipment or services, while the thing of

value given away is the ³promise to pay at a later date´.

In Accounting, a ³promise to pay at a later date´, from the

buyer¶s viewpoint is called a ³payable´.



Basic Purpose of AccountingBasic Purpose of Accounting

³Accounting identifies, measures and communicates

information about entities for use in making informed

judgment and decision´.

Primary task of an Accountant - to supply financial

information to statement users so that they could make

informed judgment and better decision.



Generally Accepted Accounting PrinciplesGenerally Accepted Accounting Principles

(GAAPs)(GAAPs)

The conventions, rules and procedures

necessary to define what is accepted accounting

practice. The principles have developed on the basis of

experience, reason, custom, usage, and practical

necessity.

The development of GAAPs is formalized

through the creation of Accounting Standards

Council.



Relevant GAAPsRelevant GAAPs

1. Conservatism

You are allowed to provide for all possible losses, but you should

never, never anticipate gains.

Among several possible alternatives, the alternative with the

lowest figure will be chosen.

2. Cost

Financial transactions are recorded at acquisition cost rather than

at market value.

The accounting records only reflect at what price the assets were

acquired, not what they are presently worth.

3. Dual-aspect

Each financial transaction affects at least two accounts which

may either be an asset and/or equity account.

As such, Accounting is often referred to as a double-entry

system.



Relevant GAAPs (cont¶d)Relevant GAAPs (cont¶d)

4. Entity

Personal transactions should be segregated from business

transactions.

Non-business transactions should not be recorded in the books.

5. Going-concern An entity is to make profit and does not envision an immediate

liquidation of the business.

Current resale values of assets are not primarily significant to

owners since the intent of the business is to use the assets rather

than to sell them.

6. Consistency

Once an accounting method has been chosen, it must be

consistently used every accounting period.




7. Money-measurement

All financial transactions must be capable of being measured in

terms of money.

Transactions are recorded in terms of monetary value and not in

terms of economic values or the purchasing power of the peso.

8. Materiality

The recording and treatment of events or transactions are to be

dictated by the usefulness of the results.

If a financial transaction, when recorded or omitted, would

grossly distort any of the financial statements, then that

transaction is said to be material and should be recorded.

Expenditures which could either be capitalized or expensed are

often dictated by the materiality of the figures.




9. Matching

All the costs/expenses for the period must be properly matched

with all the revenues for the same period.

Any expense or revenue before or after this period must be

excluded.

10. Time-period

An accounting period or an accounting cycle can be a month, a

quarter, six months, or one year.

Owners of a business usually prefer regular monthly reports to

keep track of their operations; those for outsiders are usually

done intermittently or for a one-year period.11. Reliability

The accounting data must be dependable and legally defensible.

It must reflect an honest basis of measurement and must be

properly documented.




12. Realization

Revenues are normally recognized at the time goods or services

are provided to the customers at the price agreed upon, and not

upon the actual collection of the income unless the cash basis of

accounting is being used.

Expenses are likewise normally recognized at the time they areincurred, and not upon the actual payment of the expenses

unless the cash basis of accounting is used.

The actual realization of the cash in or cash out is not necessary

for the transaction to be recorded under the accrual basis of

accounting.

13. Comparability

Financial data to be comparable must have a common base.

The same or similar businesses may be compared as long the

accounting period is the same.

The same accounting practices must be applied from period to

period.




14. Disclosure

The financial statements of a business must be reliable and

reflective of its operations.

Full disclosure must be made in the financial reports, especially

those provided to outside parties.

Footnotes may also be included.

15. Impartiality

The financial reports must not contain personal bias.

It must be objective, not subjective.

Personal feelings/opinions must not be allowed to cloud the real

issue (s).



The T-Account Business transactions cause increases and

decreases in the accounting values. To record

these changes, a business firm makes use of accounts.

An account is an accounting device used tosummarize the increases and decreases in the

asset, liability and proprietorship of the business. A simple form of account looks like a big letter T, thus it is called a T-account. It has a left side and a right side.



The Accounting EquationThe Accounting Equation

Assets = Liabilities + Capital

OR

Assets - Liabilities = Capital



The Accounting Equation (cont¶d)The Accounting Equation (cont¶d)

LEFT

(Debits)

RIGHT

(Credits)

RIGHT

(Credits)

ASSETS(Debit +)

(Credit -)

Eq uals LIABILITIES(Credits +)

(Debits -)

Plus Capital(Credits +)

(Debits -)

Cash Loans payable

Capital /(Credits +)(Debits -)

Drawing

(Debits +)(Credits -)

Accounts

ReceivableAccounts payable

Revenues

(Credits +)(Debits -)

Inventory Expenses

(Debits +)(Credits -)



Rule of Debit and Credit Debit to: Credit to:

1. Increase assets 1. Decrease assets

2. Decrease liabilities 2. Increase liabilities3. Decrease proprietorship due to: 3. Increase proprietorship due to:

- Withdrawal of assets - Investment by the ownerby the owner - Decrease in expenses & losses

- Increase in expenses & losses - Increase in income- Decrease in income



The Chart of AccountsThe Chart of Accounts

A list of account titles used by the business. This

serves as a guide to the bookkeeper.

The accounts are divided into sections : assets,liabilities, capital/proprietorship, income, cost,

expenses.

Each account title is assigned a code number:alpha, numeric, or alpha-numeric codes.



Sample Chart of AccountsSample Chart of Accounts Assets

Current Assets

Cash on hand

Cash in bank

Petty cash fund Advances to employees

Accounts receivable

Marketable securities

Investments

Merchandise inventory

Prepaid expenses

Accrued income receivable

Supplies on hand (or Supplies unused or Stationery & supplies on hand)

Shortages



Sample Chart of AccountsSample Chart of Accounts

Assets

Fixed AssetsLand

Building

Furniture, fixtures & equipment

Transportation equipment

Leasehold rights and improvement




Assets

Other Assets

Franchise

Goodwill

Patent

Copyright

Contra ± Asset Accounts

Allowance for doubtful accounts ( deducted from Accounts

Receivable)

Accumulated depreciation ± Building ( deducted from Building) Accumulated depreciation - Furniture, fixtures & equipment (deducted

from Furniture, fixtures and eq uipment)

Accumulated depreciation - Transportation equipment (deducted

from Transportation eq uipment)



Sample Chart of AccountsSample Chart of AccountsLiabilities

Current Liabilities

Accounts payable

Loans payable, current portion Accrued expenses

Unearned income or Deferred income

Advances from employees

Overages

Non- Current or Long-term Liabilities

Loans payable, non-current portion

Bonds payable



Sample Chart of AccountsSample Chart of AccountsC apital

For Sole Proprietorship/Partnership

SIB, Capital

SIB, Drawings or SIB, Personal

For Corporation

(Capital is called Stockholders¶ Equity)

Capital Stock Additional paid-in capital

Retained Earnings




Revenues or Income

Service fee/Service income (³Sales´ for Trading and Manufacturing

Concern)

Rent incomeInterest income

Dividend income

Miscellaneous income

C ost Cost of sales



Sample Chart of AccountsSample Chart of AccountsE xpensesSalaries and wages

Rent expense

Bad debts

Transportation & travelling

AdvertisingInsurance

Telephone

Power, light and water (or Utilities expense)

Depreciation

Amortization of leasehold rights & improvements

Supplies usedRepresentation

Interest expense

Miscellaneous expense



ExerciseJournalize the following transactions:

AB Cruz Legal ServicesJune 2008June 1 Bought equipment from ABC Trading on credit, P15,000.June 2 Purchased from CDE Bookstore office supplies worth P1,000.

Paid in cash.June 5 Billed FGH Corp. for P12,200 for legal services rendered.

June 7 Completed legal work for Juan de la Cruz and collected P9,500.June 8 Paid P5,000 to ABC Trading as partial payment of account.June 10 Paid P7,500 cash for legal books ordered and received.June 12 Received cash for P17,000 representing professional fees paid

by various clients.

June 13 FGH Corp. paid one-half of its account.June 14 Paid the telephone bill for the month, P500.June 15 Paid the secretarys salary, P4,500.June 20 Paid the rent of the office space, P6,000.June 30 Received P5,000 from a client for legal service rendered.



THE E N DTHE E N D

THANK YOU!THANK YOU!

Accounting 1_prelim Topics_copy for Students_sept 23 2010

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