Assignment #1

1.) What is accounting?

Accounting is a practice and body of knowledge concerned primarily with methods

for recording transactions, keeping financial records, performing internal audits, reporting
and analyzing financial information to the management, and advising on taxation matters.

It is a 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 provides information on the resources available to a firm, the
means employed to finance those resources, and the results achieved through their use.

2.) Importance of Accounting

Accounting helps in decision making, planning, and controlling processes. It's with
the help of accounting there will be documents which will be factored in carrying out these
processes. Again with these methodical documents, they help in reduction of theft and
frauds.

Availability of accounting in any business transactions ignites the business to run

with efficiency, effectiveness and accuracy manner on all the activities undertaken. This
leads to more productions since the management will make the right decision and proper
planning due to the good flow of transactions in a business.

3.) Definition of Accounting Principles

Accounting principles are the rules and guidelines that companies must follow when
reporting financial data. The common set of U.S. accounting principles is the generally
accepted accounting principles (GAAP). To remain listed on many major stock exchanges in
the U.S., companies must regularly file financial statements reported according to GAAP.

Accounting principles help govern the world of accounting according to general rules

and concepts. They form the groundwork for the more complicated, detailed and legalistic
rules of accounting. There are a number of principles, but some of the most notable include
the revenue recognition principle, going concern principle, accrual principle and matching
principle. 
Accounting principles differ from country to country. Since accounting principles
differ across the world, investors should take caution when comparing companies from
different countries. The issue of differing accounting principles is less of a concern in more
mature markets. Still, caution should be sued as there is still leeway for number distortion
under many sets of accounting principles.U.S. GAAP is based on three important sets of
rules: the basic accounting principles and guidelines, the generally accepted industry
practices, and the detailed rules and standards that have been issued by the Financial
Accounting Standards Board (FASB) and the Accounting Principles Board (APB).
4.) Development of Accounting Procedures

Accounting has a very long history that dates back hundred years ago when a
Franciscan Monk named Luca Pacioli invented double-entry bookkeeping.
During the years of unprecedented economic growth, companies took the lead in the
modernization of financial reporting by providing clear, comparable and reliable financial
information to investors.

The continuing pressures on the accounting profession to establish accounting

standards has prompted the American Institute of Accountants (now known as the AICPA)
and the New York Stock Exchange to start an effort to review and revise financial reporting
requirements. A few years later, the Securities Act of 1933 and the Securities Exchange Act
of 1934 were passed into law to restore investor confidence. The Securities Act sets forth
the accounting and disclosure requirements for the initial offering of stocks and bonds while
the Securities Exchange Act sets the reporting requirements for secondary market offerings.

The 1934 act also created the U.S. Securities and Exchange Commission (SEC) which
was mandated with both the power and responsibility for standard-setting of financial
accounting and reporting for publicly-traded companies. But the SEC while keeping the
power to set standards has chosen to delegate its rule-making responsibilities to the private
sector. This means that if the SEC does not conform to a specific standard issued by the
private sector, it has the authority to change that standard, which it has done in the past.

Despite delegating its rule-making responsibility, the SEC issues its own accounting
pronouncements called Financial Reporting Releases (FRRs).

A committee of the American Institute of Accountants, the Committee on

Accounting Procedure (CAP) was the very first private-sector standard setting body. During
its existence from 1938 to 1959, the CAP issued 51 Accounting Research Bulletins (ARBs).
Since, it has not established a financial accounting conceptual framework, its rule-making
approach of dealing with accounting and reporting problems and issues was subject to
severe criticism. 

The CAP was then replaced by the Accounting Principles Board (APB) which was able
to issue 31 Accounting Principles Board Opinions (APBOs), 4 Statements and several
interpretations during its tenure from 1959 to 1973. In contrast to its predecessor, it
attempted to establish a conceptual framework with its APB Statement No. 4 but failed. In
addition to its unsuccessful effort to create a framework, it was also under fire for its
apparent lack of independence because its board members were supported by the AICPA
and that other interest groups were not represented in the rule-making process.

5.) The Phases of accounting

There are four basic phases of accounting: recording, classifying, summarizing and
interpreting financial data. Communication may not be formally considered one of the
accounting phases, but it is a crucial step as well. All accounting information should be
communicated properly to the appropriate parties after analyzing. Accounting reports must
be prepared and distributed, and should include the basic income statement and balance
sheet, as well as additional information including accounting ratios, diagrams, graphs and
funds flow statements.
 Recording is a basic phase of accounting that is also known as bookkeeping. In this
phase, all financial transactions are recorded in a systematical and chronological
manner in the appropriate books or databases. Accounting recorders are the
documents and books involved in preparing financial statements. Accounting
recorders include records of assets, liabilities, ledgers, journals and other supporting
documents such as invoices and checks.

 The classifying phase of accounting involves sorting and grouping similar items
under the designated name, category or account. This phase uses systematic
analysis of recorded data in which all transactions are grouped in one place. For
example, "travel expenses" might be a category that accountants use to classify
expenses relating to company travel. The term “ledger” refers to the book in which
classifications are recorded.

 The summarizing phase of accounting involves summarizing the data after each
accounting period, such as a month, quarter or year. The data must be presented in
a manner which is easy to understand and use by both external and internal users of
the accounting statements. Graphs and other visual elements are often used to
complement the text data.

 The interpreting phase of the accounting process in concerned with analyzing

financial data, and is a critical tool for decision-making. This final function interprets
the recorded data in a manner which allows end-users to make meaningful
judgments regarding the financial conditions of a business or personal account, as
well as the profitability of business operations. This data is then used to prepare
future plans and frame policies to execute financial plans.