ACCOUNTING PRINCIPLES_ASSIGNMENT NO.1_SUFICIENCIA, JO ANN M.

_PCBET-22-202P_S10:30-1:30

1. What is accounting?
 It is the systematic process of identifying, recording, measuring, classifying, verifying,
summarizing, interpreting and communicating financial information. It reveals profit or
loss for a given period, and the value and nature of a firm's assets, liabilities and owners'
equity. Accounting is the production of financial records about an organization.
Accountancy generally produces financial statements that show in money terms the
economic resources under the control of management; selecting information that is
relevant and representing it faithfully. The principles of accountancy are applied to
accounting, bookkeeping, and auditing.
2. Different Phases of Accounting
 Recording. This is technically called bookkeeping. Some people confuse bookkeeping
and accounting as one and the same. However, bookkeeping is only part of accounting –
the recording phase.in this phase, business transactions are recorded systematically and
chronologically in the proper accounting books. There are two kinds of bookkeeping: the
single entry bookkeeping and the double entry bookkeeping. Single entry bookkeeping
does not show the two-fold effects of business transactions. It shows only the debit or
the credit of each transactions. The double entry bookkeeping, however, reflects the
two-fold effects of business transactions. It shows both credit and debit.
 Classifying. In this phase, items are sorted and grouped. Similar items are classified
under the same name. They may be classified as asset accounts, liability accounts,
capital accounts, income accounts, and expense accounts. This classification is very
useful to management.
 Summarizing. After each accounting period, data recorded are summarized through
financial statements. These reports are submitted to management at the end of each
accounting period or as the need arises.
 Interpreting. Due to the technicality of accounting reports, the accountant’s
interpretation of the financial statement is needed. In this case, analysis are submitted
together with financial statement.
3. What is business risk?
 Business risk is the possibility a company will have lower than anticipated profits or
experience a loss rather than taking a profit. Business risk is influenced by numerous
factors, including sales volume, per-unit price, input costs, competition, the overall
economic climate and government regulations.
4. What do you mean by financial statement?
 Financial statements are written records that convey the financial activities and
conditions of a business or entity and consist of four major components. Financial
statements are meant to present the financial information of the entity in question as
clearly and concisely as possible for both the entity and for readers. Financial
statements for businesses usually include income statements, balance sheets,
statements of retained earnings and cash flows but may also require additional detailed
 disclosures depending on the relevant accounting framework. Financial statements are
often audited by government agencies, accountants, firms, etc. to ensure accuracy and
for tax, financing or investing purposes.
5. Different branches of accounting.
 Financial accounting is a branch of accounting that involves classifying and recording
business transactions as well as presenting and preparing financial statements to be
used by both external and internal users. It focuses mainly on the preparation of the five
basic financial statements including the statement of changes in equity, statement of
financial position, statement of cash flows, statement of comprehensive income and
notes to financial statements which are used by banks, creditors, tax authorities and
financial institutions to assess the company’s financial status and calculate the amount
of taxes owed.
 Cost accounting refers to the process of collecting, summarizing, determining,
evaluating and analyzing costs to enable various alternative courses of action. It deals
with evaluating the cost of products and services offered and calculate the cost by
taking into account all the factors that contribute to the production of the output.
 Management accounting is the branch of accounting that is normally involved with
providing -and financial information that enables managers to better plan for activities.
 Tax accounting largely deals with matters taxation. It helps clients follow rules that have
been put in place by tax authorities. Its main functions include dealing with legal
implications and filing and preparing various tax returns
 Fiduciary accounting basically refers to the evaluation and management of financial
records by a guardian entrusted with prudently taking care and managing property for
someone else's benefit. Some of the most common examples of fiduciary accounting
include estate accounting, trust accounting, and receivership.
 Forensic accounting, otherwise known as legal accounting is the use of accounting in
legal matters such as dispute resolution, investigation and litigation support.
 Auditing is the process of verifying and examining a company’s financial books in order
to establish whether they reflect a true and fair view of the company’s financial status.
There are two main dimensions of auditing:
 External auditing which involves the independent examination of a
company’s books of accounts by an external organization
 Internal auditing which entails the daily and routine examination of financial
books by a company’s employee
 Government accounting. This branch of accounting is mainly concerned with the
utilization and allocation of public funds. It ensures all funds released for various
purposes are utilized accordingly and that each and every penny is accounted for.
6. Forms and Types of Business Organization
 Ownership
1. Single or sole proprietorship. This type of business is owned by one person. The
owner is also the manager of the business. He usually supplies the capital or
borrows fund from banks or other lending institutions.
 2. Partnerships. This is a business organization with two or more owners. The owners
are called partners; agree on the capital contributions, management of the firm,
distribution of profits and losses, and other matters pertaining to the operation of
the firm.
3. Corporation. This is a business organization of no less than five persons. It is
organized by operation law.
4. Cooperative. This kind of business is governed by the “one-member, one-vote”
principle.
 Nature of Business
1. Service concern. This deals with the rendering services to the customers such as
tailoring shops, beauty shops, firms pf CPA’s, lawyers, doctors, and others.
2. Trading and Merchandising Concern. This type of business deals with the buying of
goods and selling of the same for profit.
3. Manufacturing Concern. This involves the purchase of raw materials and converting
these into finished products.
7. Who are the different users of financial statement?
 Owners and investors - Stockholders of corporations need financial information to help
them make decisions on what to do with their investments (shares of stock), i.e. hold,
sell, or buy more. Prospective investors need information to assess the company's
potential for success and profitability. In the same way, small business owners need
financial information to determine if the business is profitable and whether to continue,
improve or drop it.
 Management - In small businesses, management may include the owners. In huge
organizations, however, management is usually made up of hired professionals who are
entrusted with the responsibility of operating the business or a part of the business.
They act as agents of the owners. The managers, whether owners or hired, regularly
face economic decisions – How much supplies will we purchase? Do we have enough
cash? How much did we make last year? Did we meet our targets? All those, and many
other questions and business decisions, require analysis of accounting information.
 Lenders - Lenders of funds such as banks and other financial institutions are interested
in the company’s ability to pay liabilities upon maturity (solvency).
 Trade creditors or suppliers - Like lenders, trade creditors or suppliers are interested in
the company’s ability to pay obligations when they become due. They are nonetheless
especially interested in the company's liquidity – its ability to pay short-term obligations.
 Government - Governing bodies of the state, especially the tax authorities, are
interested in an entity's financial information for taxation and regulatory purposes.
Taxes are computed based on the results of operations and other tax bases. In general,
the state would like to know how much the taxpayer makes to determine the tax due
thereon.
 Employees - Employees are interested in the company’s profitability and stability. They
are after the ability of the company to pay salaries and provide employee benefits. They
 may also be interested in its financial position and performance to assess company
expansion possibilities and career development opportunities.
 Customers - When there is a long-term involvement or contract between the company
and its customers, the customers become interested in the company’s ability to
continue its existence and maintain stability of operations. This need is also heightened
in cases where the customers depend upon the entity. For example, a distributor
(reseller), the customer in this case, is dependent upon the manufacturing company
from which it purchases the items it resells.
 General Public - Anyone outside the company such as researchers, students, analysts
and others are interested in the financial statements of a company for some valid
reason.
8. Why is financial statement important to them?
The general purpose of the financial statements is to provide information about the
results of operations, financial position, and cash flows of an organization. This information is
used by the readers of financial statements to make decisions regarding the allocation of
resources.
9. Three Main Job of an Accountant
 Bookkeeping. Bookkeeping refers to the job of maintaining a company’s financial
records, and it is an essential duty of almost every accountant. The work involves
handling accounts payable, accounts receivable, payroll, creating balance sheets, and
doing other tasks relating to credits and debits. Bookkeepers keep track of how much
money an organization earns and how much it spends and owes. These numbers are
very important for owners because miscalculations can put a company out of business,
so accountants must be extremely detail-oriented. A high level of proficiency in math
and statistics is also required for efficient on-the-job performance because the volume
of data to be analyzed is usually high, and complex formulas may have to be used to
calculate specific figures.
 Tax Preparation. According to US News and World Report, preparing taxes is another
major duty of an accountant. In addition to figuring out how much a person or company
owes to the government in taxes and preparing the actual tax returns, accountants must
also make sure that taxes are filed properly and on time so that no legal penalties are
incurred. Accountants may also develop strategies for decreasing the amount of taxes
owed as long as they are ethical and compliant with the law. Tax accountants work for
individuals, businesses, and governmental organizations.
 Auditing. Many businesses hire auditors to monitor monetary resources. Auditors not
only check for fraud and the intentional misuse of company funds, but they also come
up with methods to reduce the unintentional wasting of resources. More experienced
accountants may act as financial advisors to company executives by offering strategies
to cut costs and, in turn, gain more profit.