1st monthly lessons

Fundamentals of ABM1
Week 1

What is Accounting?

        Accounting is the systematic process of measuring and reporting relevant financial
information about the activities of an economic organization or unit. Its underlying purpose is to
provide financial information. It is capable of being expressed in monetary terms.

        The American Institute of Certified Public Accountants (AICPA) defines accounting as the
art of recording, classifying and summarizing in a significant manner under terms of money,
transaction, and events, which are in part at least of a financial character, and interpreting the
result thereof.

        The Philippine Institute of Certified Public Accountants (PICPA) defines accounting as 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 decisions. 

Four Aspects of Accounting

1. Recording- writing down of business transaction chronologically in the books of account as

they transpire.

2. Classifying- sorting similar and related business transactions into the three categories of assets,
liabilities, and owner’s equity.

3. Summarizing- preparing the financial statements from the transactions recorded on the books
of account designed to meet the information needs its users.

4. Interpreting- representing the qualitative and quantitative financial information about the
business transactions in a language comprehensible to the users of financial statements. By
interpreting the data in the financial statements, users are able to determine the financial standing
of the company as well as its stability and growth potential. Users interpret financial information
relating to specific business decisions. This makes accounting the language of business.

Parties Interested in the Financial Information

1. Investors/owners/stockholders

        They want to know the financial position and results of operations of their business
investment.
2. Government

Financial information is important for tax purposes and in compliance with Securities and
Exchange Commission (SEC) requirements.

3. Financial Institutions/Creditors

        These parties need financial information to determine the capacity of a business
organization to pay obligations.

4. Management

        Financial information is useful to the management for guidance for future actions.

5. Employees

        They are interested to know if they have a future in the company.

Generally Accepted Accounting Principles (GAAP)

These are broad, general statements or “rules” and “procedures” that serve as guides in the
practice of accounting.

These are standards, assumptions, and concepts with general acceptability.

These are measurement techniques and standards used in the presentation and preparation of
financial statements.

History of Accounting

The history of accounting or accountancy is thousands of years old and can be traced

to ancientcivilizations. 

The early development of accounting dates back to ancient Mesopotamia, and is closely related

to developments in writing, counting and money and early auditing systems by the
ancient Egyptians and Babylonians. By the time of the Roman Empire, the government had
access to detailed financial information.

In India Chanakya wrote a manuscript similar to a financial management book, during the period

of the Mauryan Empire. His book "Arthashasthra" contains few detailed aspects of maintaining
books of accounts for a Sovereign State.

The Italian Luca Pacioli, recognized as The Father of accounting and bookkeeping was the first
person to publish a work on double-entry bookkeeping, and introduced the field in Italy. 
The modern profession of the chartered accountant originated in Scotland in the nineteenth
century. Accountants often belonged to the same associations as solicitors, who often offered
accounting services to their clients. Early modern accounting had similarities to today's forensic
accounting. Accounting began to transition into an organized profession in the nineteenth
century, with local professional bodies in England merging to form the Institute of Chartered
Accountants in England and Wales in 1880. 

Difference in Bookkeeping and Accounting

More often, bookkeeping and accounting are mistaken as one and the same. We should clarify
this early on. In terms of scope, accounting is broader as it includes the bookkeeping function.
Bookkeeping, on the other hand, is just confined with the recording of monetary transactions,
which is one part of the accounting process.

Week 2

First is the types of business organizations.

3 Types of Business Organization

1. Sole/Single Proprietorship- business owned and managed by one person.

2. Partnership- a business organization owned and managed by two or more people who
agree to contribute money, property or industry to a common fund for the purpose of
earning a profit.
3. Corporation- a form of business organization managed by an elected board of directors.
The investors are called stockholders and the unit of ownership is called share of stock 

Types of business Operations

1. Service - is a type of business operation engaged in the rendering of services.

2. Trading/Merchandising - is a type of business engaged in buying and selling goods.
3. Manufacturing - is engaged in the production of items to be sold. This type of business
operation is involved in the purchasing and converting of raw materials to finished goods.

GAAP

*These are broad, general statements or "rules" and "procedures" that serve as guides in the
practice of accounting.

*These are standards, assumptions, and concepts with general acceptability.

*These are measurement techniques and standards used in the presentation and preparation of
financial statements.
Week 3
Accountants generally record, collect, analyse, and report on financial data. In most cases,
accountants use the financial records compiled by bookkeepers to prepare financial statements
and reports, and to perform financial analysis
 

What are Accounting Principles?

Accounting principles are the rules and guidelines that companies must follow when reporting
financial data. The Financial Accounting Standards Board (FASB) issues a standardized set of
accounting principles in the U.S. referred to as generally accepted accounting principles
(GAAP). Some of the most fundamental accounting principles include the following:
 

● Accrual principle
● Conservatism principle
● Consistency principle
● Cost principle
● Economic entity principle
● Full disclosure principle
● Going concern principle
● Matching principle
● Materiality principle
● Monetary unit principle
● Reliability principle
● Revenue recognition principle
● Time period principle
 

KEY TAKEAWAYS

● Accounting standards are implemented to improve the quality of financial information reported
by companies.
● In the United States, the Financial Accounting Standards Board (FASB) issues Generally Accepted
Accounting Principles (GAAP).
● GAAP is required for all publicly traded companies in the U.S.; it is also routinely implemented by
non-publicly traded companies as well.
● Internationally, the International Accounting Standards Board (IASB) issues International
Financial Reporting Standards (IFRS).
● The FASB and IASB sometimes work together to issue joint standards on hot topic issues, but
there is no intention for the U.S. to switch to IFRS in the forseeable future.

Branches of Accounting

1. Financial Accounting
2. Management Accounting
 3. Auditing
4. Tax Accounting
5. Fund Accounting
6. Forensic Accounting

Generally Accepted Accounting Principles

Publicly traded companies in the United States are required to regularly file GAAP compliant
financial statements in order to remain publicly listed on stock exchanges. Chief officers of
publicly traded companies and their independent auditors must certify that the financial
statements and related notes were prepared in accordance with GAAP.
Privately held companies and nonprofit organizations may also be required by lenders or
investors to file GAAP compliant financial statements. For example, annual audited GAAP
financial statements are a common loan covenant required by most banking institutions.
Therefore, most companies and organizations in the United States comply with GAAP, even
though it is not necessarily a requirement. 
Accounting principles help govern the world of accounting according to general rules and
guidelines. GAAP attempts to standardize and regulate the definitions, assumptions, and methods
used in accounting. There are a number of principles, but some of the most notable include the
revenue recognition principle, matching principle, materiality principle, and consistency
principle. The ultimate goal of standardized accounting principles is to allow financial statement
users to view a company's financials with the certainty that information disclosed in the report is
complete, consistent, and comparable.
Completeness is ensured by the materiality principle, as all material transactions should be
accounted for in the financial statements. Consistency refers to a company's use of accounting
principles over time. When accounting principles allow choice between multiple methods, a
company should apply the same accounting method over time or disclose its change in
accounting method in the footnotes to the financial statements.
Comparability is the ability for financial statement users to review multiple companies' financials
side by side with the guarantee that accounting principles have been followed to the same set of
standards. Accounting information is not absolute or concrete, and standards such as GAAP are
developed to minimize the negative effects of inconsistent data. Without GAAP, comparing
financial statements of companies would be extremely difficult, even within the same industry,
making an apples-to-apples comparison hard. Inconsistencies and errors would also be harder to
spot.
International Financial Reporting Standards
Accounting principles differ from country to country. The International Accounting Standards
Board (IASB) issues International Financial Reporting Standards (IFRS). These standards are
used in over 120 countries, including those in the European Union (EU). The Securities and
Exchange Commission (SEC), the U.S. government agency responsible for protecting investors
and maintaining order in the securities markets, has expressed that the U.S. will not be switching
to IFRS in the foreseeable future. However, the FASB and the IASB continue to work together to
issue similar regulations on certain topics as accounting issues arise. For example, in 2016 the
FASB and the IASB jointly announced new revenue recognition standards.
Since accounting principles differ across the world, investors should take caution when
comparing the financial statements of companies from different countries. The issue of differing
accounting principles is less of a concern in more mature markets. Still, caution should be used
as there is still leeway for number distortion under many sets of accounting principles.
Week 4

The 6 steps of financial planning are followed by fiduciary advisors and Certified Financial
Planners to create recommendations and financial plans for their clients. These steps can also be
learned and applied by individuals for their own benefit. Learn these financial planning steps and
improve your personal finances. 

What Are the 6 Steps of Financial Planning?

The six steps of financial planning are part of the Certified Financial Planner Board of Standards'
code of ethics and standards. A practicing CFP (TM) is required to know and follow these steps,
starting with establishing the advisor/client relationship, all the way through implementing and
monitoring the plan. 

You can recall the six steps by memorizing the acronym, EGADIM: 

1. Establish the goal/relationship

2. Gather data
3. Analyze data
4. Develop a plan
5. Implement the plan
6. Monitor the plan1

Financial Planning Process Step 1: Establish the Goal /

Relationship
Establishing the goal or relationship is where the adviser introduces himself or herself a client or
prospective client and explains the financial planning process. The adviser may ask open-ended
questions to uncover necessary information to start the plan. This information may include a
range of topics, from financial goals, to feelings about market risk, to dreams about retiring in
the Caribbean. 

The purpose of establishing the goal or relationship is to form the foundation or purpose of
planning itself. Financial planners do this by asking open-ended questions, which are questions
that cannot be answered by a simple yes or no. Here some examples of open-ended questions
you can use in your own planning:

Do-it-yourself can fulfill this step by simply getting to know themselves a bit better with
open-ended questions, like these: 

● What are your feelings about investing in the stock market? Why do you think you feel
that way?
● What are some of your earliest memories and resulting experiences of financial planning
(i.e., first savings account, first checking account, and first credit card)
● What are your financial strengths? What are your financial weaknesses?
● How do you plan to save enough for retirement? 

The step of establishing the goal forms a guiding philosophy to direct investment objectives,
cash management, insurance needs, and other financial instruments to help achieve your specific
financial goals.

Financial Planning Process Step 2: Gather the Relevant Data

The relevant data you gather is required to make recommendations for the appropriate strategies
and financial products to reach your goals. For example, what is your time horizon? Do you want
to accomplish this goal in five years, 10 years, 20 years, or 30 years? What is your risk
tolerance? Are you willing to accept a high relative market risk to achieve your investment goals,
or will a conservative portfolio be a better option for you?

Also, how far along are you in your goals? Do you have any money saved yet? Do you have life
insurance? Do you have a will? Do you have children? If so, what are their ages?

For example, if you are gathering data for retirement planning, some of the key information
needed is your annual income, savings rate, years until proposed retirement, age when you are
eligible to receive Social Security or a pension, how much you've saved to date, how much you
will save in the future, expected rate of return and more.

Financial Planning Process Step 3: Analyze the Data

You've gathered the relevant data, now can analyze it! Continuing the retirement planning
example in Step 2, the data you've gathered can help you arrive at some basic assumptions. Let's
assume you have 30 years until retirement, you've already saved $50,000, you expect an 8.00%
return on your investments, and you can save $250 per month going forward.
You can analyze the data with a financial calculator or you can go to one of many online
calculators, such as Kiplinger's Retirement Savings Calculator, plug in the numbers and see if
your retirement nest egg will be just right for you.

Using a financial calculator, these assumptions will arrive at approximately $920,000 at the
proposed retirement date of 30 years from now. Is this enough? Is your retirement goal
achievable? Often, the initial assumptions are not quite enough to obtain the goal. This where
you begin devising alternative solutions that are in the next step.

Financial Planning Process Step 4: Develop the Plan

Let's say you need $1 million to reach your goal. The previous assumptions (in Step 3: Analyze
the Data) made you about $100,000 short of your goal. If you can handle taking more market
risk, you could increase your exposure to stocks in an aggressive portfolio of mutual funds and
assume a 9.00% rate of return.

If all other assumptions remain the same, and by increasing your expected return by 1.00%, your
30-year time horizon, and savings rates would bring you to a nest egg worth nearly $1.2 million!
But what if you want to keep the rate of return at 8.00%? You could increase your savings rate to
$300 per month and still come close to your goal with $990,000.

The key word in Step 4 is "develop." Financial planning requires devising alternative solutions
that are achievable for each individual. With so many different variables to consider, your plan
needs to develop, which means to evolve with your needs but remain within your capabilities and
risk tolerance.

Financial Planning Process Step 5: Implement the Plan

Implementing the plan means you are putting your plan to work! But as simple as this sounds,
many people find that implementation is the most difficult step in financial planning. Although
you have the plan developed, it takes discipline and desire to put it into action. You may begin to
wonder what may happen if you fail. This is where inaction can grow into procrastination.

Successful investors will tell you that just getting started is the most important aspect of success.
You don't need to start out at a high level of savings or at an advanced level of investment
strategy. You could learn how to invest with just one fund or you could start saving a few dollars
per week to build up to your first investment. Just do it!

Financial Planning Process Step 6: Monitor the Plan

It's called "financial planning" for a reason: Plans evolve and change just like life. Once the plan
is created, it's essentially a piece of history. This is why the plan needs to be monitored and
tweaked from time to time. Think of what can change in your life, such as marriage, the birth of
children, career changes and more.

These life events may require new perspectives or changes to your financial plans. Now think
events or changes beyond your control, such as tax laws, interest rates, inflation, stock market
fluctuations, and economic recessions.

The CFP Board includes a seventh step, Updating the Plan. Some financial planners consider this
to be part of monitoring but it's helpful to remember that plans often require updating.