I. Accounting Defined
ASC (Accounting Standards Council)
Accounting is 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. Three important activities in the accounting process:
A. Identifying – the recognition or non-recognition of “accountable” events.
- an event is accountable or quantifiable when it has an effect on assets, liabilities, and equity.
- ONLY economic activities are emphasized and recognized in financial accounting. * 2 classifications of economic transactions:
External transactions or exchange transactions are those economic events involving one entity and another entity. E.g. Purchase of merchandise from a supplier, borrowing money from a bank, sale of merchandise to customer and payment of salaries to employees. Internal transactions are economic events involving the entity only. E.g. Production – process by which resources are transformed into products. Casualty – any sudden and unanticipated loss from fire, flood, earthquake and other event ordinarily termed as an
act of God or act of nature. B. Measuring/ Measurement – process of determining the monetary amounts at which the elements of the financial statements are to be recognized and carried in the balance sheet and income statement. The measurement bases are:
Historical cost - measure of value used in accounting in which the price of an asset on the balance sheet is based on its nominal or original cost when acquired by the company. Current cost - values assets at their current replacement cost rather than at the price originally paid for them, the approach taken by historical cost accounting. Current cost accounts are drawn up by adjusting the historical cost for inflation and the usual adjustments such those as for depreciation. (Book Value) Realizable value - the net value of an asset if it were to be sold, taking into account the cost of making the sale and of bringing the asset into a saleable state. (NRV) Present value - is the present value of net cash inflows generated by a project including salvage value, if any, less the initial investment on the project. C. Communicating – process of preparing and distributing accounting reports to potential users of accounting information. * Accounting as the “language of business”.
Recording or journalising – the process of systematically maintain a record of all economic business transactions after they have been identified and measured Classifying – sorting or grouping of similar and interrelated economic transactions in their respective class. * Is accomplished by posting to the ledger
Summarizing – preparation of financial statements which include the statement of financial position, income statement, statement of comprehensive income, statement of cash flows and statement of changes in equity II. Basic purpose of Accounting
* To provide quantitative financial information about a business that is useful o statement users particularly owners and creditors, in making economic decisions * To supply financial information to statement users so they could make informed judgement and better decision III. Accounting Profession
Republic Act No. 9298 – the law regulating the practice of accountancy in the Philippines. * Known as the “Philippine Accountancy Act of 2004”
Board of Accountancy – the body authorized by law to promulgate rules and regulations affecting practice of the accountancy profession in the Philippines. IV. Practice of Accounting Profession
Public Accounting – in essence, is the practice of the accountancy profession
1. Auditing (or specifically external auditing) - is the examination of financial statements by independent certified public accountant for the purpose of expressing an opinion as to the fairness with which the financial statements are prepared.
2. Taxation service – includes the preparation of...
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