St.

Louis College VALENZUELA

Maysan, Valenzuela City

COLLEGE DEPARTMENT

CSBU- Business Software Application

Weekly Module Number #3

Accounting- The Language of Business

Intended Learning Outcomes

At the end of this module, you should be able to:

● Define accounting and accounting policies.

● Narrate historical background of accounting.
● Explain the accounting information system.
● Identify the purpose of financial statements.
● Identify the users of financial statement and their use of the financial statements.
● Explain the underlying assumptions and qualitative characteristics of financial
statements.
● Explain the constraints on relevant and reliable information.
● Identify and define the elements of financial statements and the common account titles.

Introduction and Engagement

Our week is a review of your basic accounting; we will compress your basic accounting
in one module, so everyone is expected to be cooperative on our modular class.

Definition of Accounting

Accounting is defined as an information system that measures, processes, and

communicates information primarily financial in nature, about in identifiable entity for the
purpose of making economic decisions. Accounting has been referred to as a language of
business because it is the communication link between the entity and the users of financial
information. These users of financial information are decision makers. These decision makers
are the management of the entity, the employees, the investors, the lenders, the government,
and the consuming public. Some decision makers are within the company; others are outside of
the company. Entity or company may refer to a business or a non-business organization. It may
refer to a sole propriertorship, a partnership or a corporation. It may be engaged in service,
merchandising, or manufacturing. It may be privately owned unit or government unit.

Purpose of Financial Statements

Financial statement:

● Balance Sheet
- a statement of the assets, liabilities, and capital of a business or other organization at a
particular point in time, detailing the balance of income and expenditure over the
preceding period.
● Income Statement
- An income statement is one of the three important financial statements used for
reporting a company's financial performance over a specific accounting period, with the
other two key statements being the balance sheet and the statement of cash flows.
● Cash Flow Statement
- the total amount of money being transferred into and out of a business, especially as
affecting liquidity.

The objective of FS is to provide information about financial position, result of operation

and cash flow of enterprises and of individuals. However, financial statements do not
provide all information needed by their users to enable them to make economic decisions.

FS shows the results of management’s stewardship of the resources entrusted to it. The
FS should present fairly the financial position, financial performance and the cash flows of
an enterprise in accordance with generally accepted accounting principles.

Users of Financial Statements

● Investors -a person or organization that puts money into financial schemes, property,
etc. with the expectation of achieving a profit.
● Employees -a person employed for wages or salary, especially at nonexecutive level.
● Lenders -an organization or person that lends money.
● Suppliers -a person or organization that provides something needed such as a product
or service.
● Customers -a person or organization that buys goods or services from a store or
business.
● Government Agencies -A government or state agency is a permanent or semi-
permanent organization in the machinery of government that is responsible for the
oversight and administration of specific functions, such as an intelligence agency.
● Public -of or concerning the people as a whole.
● Management -the process of dealing with or controlling things or people.

Activity: Research on the reasons why these users need a financial statement.

(Financial statements are important because they contain significant information about a
company's financial health.)
Underlying Assumptions

● Accrual basis of accounting means that the effects of transaction and other events are
recognized when they occur and not when cash or its equivalent is received or paid.
● Going concern assumption means that the business will continue in operation for the
foreseeable future, that the enterprise does not intend nor need to liquidate nor need ti
liquidate or cut its operation to a material extent.

Qualitative Characteristics of Financial Statements

● Understandability -is the concept that financial information should be presented so that
a reader can easily comprehend it.
● Relevance - is associated with information that is timely, useful, has predictive value,
and is going to make a difference to a decision maker.
● Materiality -therefore relates to the significance of transactions, balances and errors
contained in the financial statements.
● Reliability -refers to whether financial information can be verified and used consistently
by investors and creditors with the same results. Basically, reliability refers to the
trustworthiness of the financial statements.
● Faithful representation -is the "correspondence or agreement between the accounting
measures or descriptions in financial reports and the economic phenomena they
purport to represent."
● Substance over form -is an accounting concept which means that the economic
substance of transactions and events must be recorded in the financial statements
rather than just their legal form in order to present a true and fair view of the affairs of
the entity.
● Neutrality -which means that financial statements must be free from errors or from
other missions.
● Prudence -states that an entity must not overestimate its revenues, assets and profits,
besides this it must not underestimate its liabilities, losses and expenses.
● Completeness -is an assertion that the financial statements are thorough and include
every item that should be included in the statement for a given accounting period.
● Comparability -can be defined as the extent to which the information provided in the
financial statements is comparable across different firms and time periods.

Activity: Research about qualitative characteristics of financial statements.

Elements of Financial Statement

● Balance Sheet
 Assets
 Liabilities
● Income Statement
 Income
 Expenses
● Cash Flow Statement
 Balance sheet elements
 Income statement elements

Reference: Introductory Accounting by Solita Frias