Accounting 111

Guide Questions:
What are the classifications of business firms?

SERVICE companies perform services for a fee. (e.g. beauty salons,

law firms)

MERCHANDISING companies purchase goods that are ready for sale and
then sell these to customers. (e.g. supermarkets, clothing store)

MANUFACTURING companies buy raw materials, convert them into

products and sell the products to other companies or final
consumers. (e.g. paper mills, drug manufacturer’s)

What are the legal forms of business organization? Enumerate and

explain.

SOLE PROPRIETORSHIP- this business organization has a single owner

called the proprietor who generally is also manager. It tends to be
small service-type business and retail establishments. The owner
receives all profits, absorbs all losses and is solely responsible
for all debts of the business.

PARTNERSHIP- a business owned and operated by two or more persons

who bind themselves to contribute money, property or industry to a
common fund, with the intention of dividing the profits among
themselves. Each partner is personally liable for any debt incurred
by the partnership except limited partner.

CORPORATION- a business owned by its stockholders. It is an

artificial being created by operation of law, having the rights of
succession and the powers, attributes and properties expressly
authorized by law or incident to its existence. The stockholders are
not personally liable for the corporation’s debt.

Who are the users of financial statements and what are their
information needs?

Internal Users -are those who make decisions directly affecting the
internal operations of the business.

Managers are directly involved in operation of the business. They

need accounting data to improve the efficiency and effective of the
organization.

Employees use financial data to assess whether they are receiving

the right compensation and to check if they bargain for higher
remuneration, retirement benefits and employment opportunities.
Officers, also called as the company executives who are interested
to know if the company is doing well in its operation so they can
plan for possible expansion or branching out to widen its
geographical and demographic market.

Internal Auditors, there role is to protect and safeguard the

resources of the company against fraud or irregularities.

External users- are individuals or enterprises that have financial

interest in the business but they are not involved in the day
activities of the organization. These are:

Investors (The providers of risk capital) are interested in

information which enables them to assess the ability of the
enterprise to pay dividends. They need information on whether they
should buy, hold or sell their shares in.

Lenders are interested in information that enables them to determine

whether their loans, and their interest attaching to them will be
paid when due.

Suppliers and other trade creditors are interested in information

that enables them to determine whether amount owing to them will be
paid when due.

Customers are interested in the quality of goods and services that

they are getting from the entity.

Government and their agencies require information in order to

regulate the activities of the enterprise, determine taxation
policies and as a basis for national income and similar activities,

Public are assisted by information through Financial statements

about the trend and recent developments in the prosperity of the
enterprise and the range of its activities.

Why is there a need to divide the life of the business?

It is essential to divide the life of the business to measure

results of operations for each such time period and to portray
financial condition at the end of each period.

How many quarters are there for a year? Name them.

There are 4 quarters in a year.

Quarter 1: January, February, & March

Quarter 2: April, May, & June

Quarter 3: July, August & September

Quarter 4: October, November & December

What are the three annual accounting periods?

Calendar year- a twelve-month period that starts on January 1 and

ends on December 31

Fiscal year- a twelve –month period that starts on any month of the
year other than January and ends twelve month after the starting
period.

Natural business year- a period of 12 consecutive months (or 52-53

consecutive weeks) ending at a low point of an organization's
activities

What is periodicity concept in accounting?

Periodicity is the concept behind providing financial accounting

information about the economic activities of an enterprise for
specified time periods.

When do accountants prepare the financial statements?

Accountants prepare financial statements at the end of the

accounting process.

What are the qualitative objectives of a financial report?

The qualitative objectives of a financial report are:

Relevance - which means selecting the information most likely

to aid users in their economic decisions.
Under-standability - which implies not only that the selected
information must be intelligible but also that the users can
understand it.
Verifiability - which implies that the accounting results may
be corroborated by independent measurers using the same measurement
methods.
Neutrality - which implies that the accounting information is
directed towards the common needs of users rather than the
particular needs of specific users.
Timeliness - which implies an early communication of
information to’ avoid delays in economic decision-making.
Comparability - which implies that differences should not be
the result of different financial accounting treatments.
Completeness - which implies that all the information that
‘reasonably’ fulfils the requirements of other qualitative
objectives should be reported.
When is an item considered immaterial for financial statements?

If users would not have altered their actions, then the omission or
misstatement is said to be immaterial.

Why is accounting considered the “language of business”?

;Accounting is the language of business because it helps people,

both internal and external, to understand what is happening inside
of a business.

;Accounting is the language that managers use to communicate the

firm's financial and economic information to external parties such
as shareholders and creditors.

What is a breakeven sales?

Break even sales is the dollar amount of revenue at which a business

earns a profit of zero. This sales amount exactly covers the
underlying fixed expenses of a business, plus all of the variable
expenses associated with the sales. It is useful to know the break
even sales level, so that management has a baseline for the minimum
amount of sales that must be generated in each reporting period to
avoid incurring losses.

When can we say that the business is making profit? Incurring a

loss?

We can say that the business is making profit if it makes money or

experiences a return of investment and incurring a loss if it
doesn’t make money on a product or service but loses part of more
than what the owner initially invested.

In what instance that doctors, lawyers, engineers, etc. can use

their knowledge of accounting in pursuit to the practice of their
profession?

Why is keeping of records important in business?

Keeping of records is important in a business as it helps monitor

progress towards goal and also it saves time and money.

Why are taxes considered the life-blood of a nation?

Taxes are considered the life-blood of a nation as it funds the

needs of its citizenry in terms of public infrastructure, education,
law and order, and food security. Also without taxes, the government
would be paralyzed for lack of motive power to activate and operate
it.
Discuss the criteria in order for a principle to become generally
acceptable?

The general acceptance of an accounting principle usually depends on

how well it meets these criteria: relevance, objectivity, and
feasibility.

- A principle has relevance to the extent that it results in

information that is meaningful and useful to those who need to know
something about a certain organization.
- A principle has objectivity to the extent that the resulting
information is not influenced by the personal bias or judgment of
those who furnish it. Objectivity connotes reliability and
trustworthiness. It also connotes verifiability, which means that
there is some way of finding out whether the information is
correct.
- A principle has feasibility to the extent that it can be
implemented without undue complexity or cost. These criteria often
conflict with one another. In some cases, the most relevant
solution may be the least objective and the least feasible.

What are the basic accounting principles?

Objectivity Principle. Accounting records and statements are based

on the most reliable data available so that they will be as accurate
and as useful as possible. Reliable data are verifiable when they
can be confirmed by independent observers.

Historical Cost. This principle states that acquired asset should be

recorded at their actual cost and not at what management thinks they
are worth as at reporting date

Revenue Recognition Principle. Revenue is to be recognized in the

accounting period when goods are delivered or services are rendered
or performed.

Expense Recognition Principle. Expenses should be recognized in the

accounting period in which goods and services are used up to produce
revenue and not when the entity pays for those goods and services.

Adequate Disclosure. Requires that all relevant information that

would affect the user’s understanding and assessment of the
accounting entity be disclosed in the financial statements.

Materiality. Financial reporting is only concerned with information

that is significant enough to affect evaluations and decisions.
Materiality depends on the size and nature of the item judged in the
particular circumstances of its omission.

Consistency Principle. The firms should use the same accounting

method from period to period to achieve comparability over time
within a single enterprise. However, changes are permitted if
justifiable and disclosed in the financial statements.

What are the basic accounting assumptions?

Accrual Basis. Financial Statements are prepared on the accrual on

the accrual basis of accounting and not as cash or its equivalent is
received or paid. Under this assumption, the effects of transactions
and other events are recognized when they occur. In short,
transactions are recognized when revenue as they earned, even not
yet received and; expenses as they incurred, even not yet paid.

Going Concern. Financial statements are normally prepared on the

assumption that an enterprise is a going concern and will continue
in operation for a foreseeable future. It is assumed therefore that
the enterprise has neither the intention nor the need to liquidate
its operations

Why should business be regarded as an entity separate and distinct

from the owner?

According to separate entity concept, the business and the owner(s)

of the business are two distinct and separate entities which implies
that assets and liabilities of the business/organization are not the
assets and liabilities of the owner(s).

What are financial statements?

Financial statements are written records that convey the business

activities and the financial performance of a company.

What is a balance sheet?

A balance sheet (statement of financial position) is a financial

statement that reports a company's assets, liabilities and
shareholders' equity of a given period, and provides a basis for
computing rates of return and evaluating its capital structure. 

What information can we get from a balance sheet?

The balance sheet tells investors what a business owns (assets),

what it owes (liabilities), and how much investors have invested
(equity). The balance sheet information can be used to calculate
financial ratios that give investors a general outlook for the
company.

What is the basic accounting equation?

Assets= Liabilities + Owner’s Equity

What is an income statement?

An income statement (Statement of Comprehensive Income) shows the
result of operations for a given period. It also shows whether a
company is making profit or loss for a given period.

What information can we get from an Income Statement?

All revenue and expense accounts for a set period

What is the expanded accounting equation?

A= L+OE (+income-expense)

What is a Statement of Changes in Owner’s Equity?

The statement of changes in equity is prepared to determine the

ending balance of equity or capital account. All changes, whether
increases or decreases to the owner’s interest on the company during
the period, are reported here.

What are the elements of financial statements?

The elements directly related to measurement of financial position

are assets, liabilities, and equity. While elements directly related
to measurement of performance are income, and expenses.

What are assets?

Assets are economic resources owned by the business for future gain.
They are property and rights of value owned by the business.

What are Current Assets? Non-current Assets?

Current assets are assets that are expected to be converted to cash

within a year. Noncurrent assets are those that are considered long-
term, where their full value won't be recognized until at least a
year.

What are account titles?

An account title is the unique name assigned to an account in an

accounting system. An account title is essential when the accounting
staff needs to identify an account, since the title conveys the
purpose of the account.

What are liabilities?

Liabilities include debts obligations to pay and claims of the

creditors on the assets of the business.

Differentiate Current Liabilities from Non-Current Liabilities?

Current liabilities (short-term liabilities) are liabilities that

are due and payable within one year. Non-current liabilities (long-
term liabilities) are liabilities that are due after a year or
more. 

What is Owner’s Equity?

Owner's equity or capital includes the interest of the owner on the

business. claims of the owner on the assets of the business, and the
investment of the owner plus or minus the results of operations
Owner's equity or capital comes from two main sources-investment of
owner and earnings of the business.

How is Capital Account of the owner be given a title?

The owner’s account is shown in the financial statement as “(Owner’s

name, capital account”.

Differentiate Cash on Hand from Cash in Bank.

Cash on hand is a term used to describe the current liquid assets of

a company or individual. This includes actual cash as well as
accessible balances in checking, savings, money market, and other
such accounts. While cash in bank are cash deposited in the
financial institution which are usually the banks. This includes
demand deposit or checking account and saving deposit which are
unrestricted as to withdrawal.

What is Cash Equivalents?

Cash equivalents are short term investments that are readily

convertible to known amounts of cash which are subject to an
insignificant risk to changes in value.

Differentiate Long-Term notes from Mortgage Payable?

Long-term note is an agreement a company enter into with another

party which includes a formal written promise to pay pre-determined
amounts on specific date. While mortgage payable is the liability of
a property owner to pay a loan that is secured by property. 

What is the “asset-offset” of an Accounts Receivable?

If it takes a receivable longer than a year for the account to be

converted into cash, it is recorded as a long-term asset or a notes
receivable on the balance sheet. Under the accrual basis of
accounting, the account is offset by an allowance for doubtful
accounts, since there a possibility that some receivables will never
be collected.

What is the “contra-asset account” of a Depreciable Asset?

The contra-asset account of a depreciable asset is the accumulated

depreciation. It applies to property, plant and equipment except
land as a contra account that contains the sum of periodic
depreciation charges.

Why is “land” not subjected to a depreciation?

The land asset is not depreciated, because it is considered to have

an infinite useful life. This makes land unique among all asset
types; it is the only one for which depreciation is prohibited.

What is Revenue or Income?

Revenue or income refers to the revenues earned or generated by the

business in performing services for a customer or client.

Differentiate Revenue from Gain.

Revenue is the amount earned from a company's main operating

activities, such as a retailer selling merchandise or a law firm
providing legal services. A gain is the result of a peripheral
activity, such as a retailer selling one of its old delivery trucks.
A gain occurs when the cash amount (or its equivalent) received is
greater than the asset's carrying amount

What are Expenses?

Expenses are costs or charges incurred in the process of generating

or earning revenue.

Differentiate Expense from Losses.

The main difference between expenses and losses is that expenses

are incurred in order to generate revenues, while losses are
related to essentially any other activity. Another difference is
that expenses are incurred much more frequently than losses, and
in much more transactional volume.