ABM 002: FABM

ACCOUNTING investments for a person or a business to help make

-A SYSTEMATIC PROCESS OF RECORDING,
CLASSIFYING, SUMMARIZING AND
INTERPRETING FINANCIAL INFORMATION OF
AN ECONOMIC ENTITY
-A SERVICE ACTIVITY that provides quantitative
information for the business entity.
-Accounting is an art
-Accounting is a means and not an end
-Accounting deals with financial information and
transactions
-Accounting is an information system
FOUR MAJOR FUNCTIONS:
RECORDING- To identify and record financial
transactions or activities
CLASSIFYING- grouping of financial data
SUMMARIZING- Financial data and information are
summarized through FINANCIAL STATEMENTS.
INTERPRETING- To understand where those data come
from and what they are for.
ACCOUNTING INVOLVES:
FINANCIAL INFORMATION
-data set that involves monetary transactions of the
business.
TRANSACTION
-exchange of goods and services
ACCOUNT
-device used in analyzing business transactions
ECONOMIC ENTITY
-an entity that is operated to generate profit. In short,
business.
BRANCHES OF ACCOUNTING
AUDITING
-deals with the verification, examination and
establishment of control for accounting records.
BOOKKEEPING
-a process of collecting financial data in a consistent way
COST ACCOUNTING
-deals with the costs of production, processes and
projects.
FINANCIAL ACCOUNTING
-Preparation of financial statements
FINANCIAL MANAGEMENT
-defined as dealing with and analyzing money and
business decisions.
MANAGEMENT ACCOUNTING
-preparing reports for the managers for decision making
purposes.
TAXATION
-deals with the tax matters
GOVERNMENT ACCOUNTING
-concerned with government financial activities.
ACCOUNTING EDUCATION
-concerned with teaching accounting in the academe
ACCOUNTING INFORMATION SYSTEM
-the combination of personnel, records, and procedures
that a business uses to meet its need for financial
information.
USERS OF ACCOUNTING INFORMATION
INTERNAL USERS are people within the business
organization who use financial info
BUSINESS OWNERS
-for analyzing the viability and profitability of their
investment and determining further course of action.
BUSINESS MANAGERS
-used as reference for their daily decision making.
EMPLOYEES
-interested in information about the stability and
profitability of their employers.
-security of tenure
EXTERNAL USERS are people outside the business
CUSTOMERS
-interest about the continuance of an enterprise
especially if they are dependent to it
SUPPLIERS AND CREDITORS
-interested in information that enables them to determine
whether amounts owing to them will be paid when due.
LENDERS
--uses to check on the paying capacity of the customers
first to minimize doubtful or uncollectible accounts.
INVESTORS
-they are concerned with the risk inherent in and return
provided by their investments.
-they assess the ability of the enterprise to pay dividends.
POTENTIAL INVESTORS
-use to check the soundness of an enterprise before they
invest their money
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LABOR UNIONS
-their basis to demand for increase in salary of their
union members
GOVERNMENT
-require information in order to regulate the activities of
the enterprise, and determine taxation policies.
HYBRID BUSINESS
Type of business that engages at least two of other types.
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
-refer to a common set of accepted accounting
principles, standards, and procedures that companies and
their accountants must follow when they compile their
financial statements.
BASIC ACCOUNTING CONCEPTS
ENTITY CONCEPT
-states that the transactions associated with a business
must be separately recorded from those of its owners or
other business.
PERIODICITY CONCEPT
-divides the life of an entity into equal time periods, like
months, quarters, or years.
-allows users to obtain timely information for a specific
period to serve as basis of decision making.
ACCRUAL BASIS CONCEPT
-requires that all business transactions are recognized in
the accounting records when they occur, rather than
when the cash equivalent is saved on period
GOING CONCERN/CONTINUITY CONCEPT
-a company will be able to continue operating for a
period of time that is sufficient to carry out its
commitments, obligations, objectives, so on.
MONETARY CONCEPT
-assumes that only transactions that can be expressed in
terms of money are recorded.
BASIC ACCOUNTING PRINCIPLES
OBJECTIVITY PRINCIPLE
-reliable data and supported by verifiable documentation
HISTORICAL COST
-actual cost
ADEQUATE DISCLOSURE
-all relevant info must be disclosed
MATERIALITY
-information that is significant must be reported
properly.
CONSISTENCY PRINCIPLE
-same accounting method must be used from period to
period.
ELEMENTS OF FINANCIAL STATEMENTS
ASSETS
-these are economic resources owned by the business
expected to yield benefits for future gain. (what the
company owns)
LIABILITIES
-legally binding obligations such as debts, obligations to
pay, and claims of the creditors on the assets of the
business. (what the company owes)
OWNER’S EQUITY OR CAPITAL
-the residual interest in the assets of the entity after
deducing all its liabilities
INCOME
-increases in economic benefits during the accounting
period.
EXPENSES
-decreases in assets or increases in liabilities arising
from business operations on accounting period.
THE ACCOUNTING EQUATION
ASSETS = LIABILITIES + OWNER’S EQUITY
LIABILITIES = ASSETS – OWNER’S EQUITY
OE = ASSETS – LIABILITIES
ABM 002: FABM
ACCOUNT TITLES
ASSETS
CURRENT ASSETS
• CASH
• PETTY CASH FUND
• CASH EQUIVALENTS
• NOTES RECEIVABLE
• ACCOUNTS RECEIVABLE
• ALLOWANCE FOR UNCOLLECTIBLE
ACCOUNTS/ESTIMATED
UNCOLLECTIBLE ACCOUNTS
(CONTRA-ASSET)
• ACCRUED INCOME
• ADVANCES TO EMPLOYEES
• PREPAID EXPENSES
• UNUSED SUPPLIES
NON-CURRENT ASSETS
• LAND
• BUILDING
• MACHINERY AND EQUIPMENT
• FURNITURE AND FIXTURES
• ACCUMULATED DEPRECIATION
(CONTRA-ASSET)
• INTANGIBLE ASSETS (PATENTS,
COPYRIGHT, FRANCHISE,
TRADEMARK, ETC.)
LIABILITIES
CURRENT LIABILITIES
• ACCOUNTS PAYABLE
• NOTES PAYABLE
• ACCRUED EXPENSE
• UNEARNED INCOME
• LOAN PAYABLE
• UTILITIES PAYABLE
• INTEREST PAYABLE
• SALARIES PAYABLE
• TAXES PAYABLE
NON-CURRENT LIABILITIES
• NOTES PAYABLE (LONG TERM)
• MORTGAGE PAYABLE
• BOND PAYABLE
REVENUE/INCOME
• SERVICE INCOME
• PROFESSIONAL INCOME
• RENTAL INCOME
• INTEREST INCOME
• MISCELLANEOUS INCOME
EXPENSES
• SUPPLIES EXPENSE
• RENT EXPENSE
• REPAIRS AND MAINTENANCE
• SALARIES EXPENSE
• UNCOLLECTIBLE ACCOUNTS
EXPENSE
• DEPRECIATION EXPENSE
• TAXES AND LICENSES
• INSURANCE EXPENSE
• UTILITIES EXPENSE
• INTEREST EXPENSE
• MISCELLANEOUS EXPENSE
• GAS AND OIL
DOUBLE-ENTRY SYSTEM OF ACCOUNTING
- Every transaction affects at least 2 accounts.
-A debit entry must have a corresponding credit entry
DEBIT
‘value received’ From the latin word debere
CREDIT
‘value parted with’ From the latin word credere
ADJUSTING ENTRIES
- are journal entries made at the end of an accounting
period
ABM 002: FABM
PURPOSE: for a proper matching of revenues and UNEARNED INCOME – Income collected or
expenses. received in advance and it is not yet considered as
earned. (LIABILITY)
TYPES OF ADJUSTING ENTRIES CASH PXXXX
• ACCRUALS – recognize income earned UNEARNED INCOME PXXXX
regardless of when it is collected and record EXAMPLE:
expense incurred whether it is paid or not. Entry on Oct 1
CASH PXXXX
ACCRUED INCOME/REVENUE – income already UNEARNED RENT INCOME PXXXX
earned but not yet collected (asset) ADJUSTING ENTRY
ASSET PXXXX UNEARNED RENT INCOME PXXXX
REVENUE PXXXX RENT INCOME PXXXX
EXAMPLE: • DOUBTFUL ACCOUNTS
Entry on August 15,
ACCOUNTS RECEIVABLE PXXXX ESTIMATED UNCOLLECTIBLE ACCOUNT- A
SERVICE INCOME PXXXX contra-asset account that provides for possible losses
ADJUSTING ENTRY from uncollectible accounts
CASH PXXXX
ACCOUNTS RECEIVABLE PXXXX UNCOLLECTIBLE ACCOUNT EXPENSE-
Anticipated loss that the business may incur arising from
ACCRUED EXPENSE – expense already incurred uncollectible accounts
but not yet collected.
EXPENSE PXXXX PRO FORMA
LIABILITY PXXXX Uncollectible Account Expense PXXX
EXAMPLE: Estimated Uncollectible Account PXX
Entry on August 31, If na prove na di talaga macocollect, ganito format:
UTILITIES EXPENSE PXXXX Estimated Uncollectible Account PXXXX
UTILITIES PAYABLE PXXXX Accounts Receivable PXXXX
ADJUSTING ENTRY
UTILITIES PAYABLE PXXXX ESTIMATED REALIZABLE VALUE: accounts
CASH PXXXX receivable – estimated uncollectible account
• DEFERRALS – recording advance payment • DEPRECIATION – systematic and rational
(prepaid expense) and recording advance allocations of portions of property and
collection of income (unearned income) equipment over the number of years.
Acquisition cost – is the amount paid or liability
PREPAID EXPENSE – expenses that are paid in incurred when the fixed asset was acquired
advance but not yet incurred. (ASSET) Scrap Value – the estimated value of the asset at the end
PREPAID EXPENSE PXXXX of its economic or useful life.
CASH PXXXX Estimated Useful or Economic life – the estimated
EXAMPLE: length of time usually stated in years that the asset is
Entry on Sep 1, usable. Formula:
Prepaid Insurance PXXXX Depreciation expense = Cost of your asset – scrap value
Cash PXXXX / useful life
ADJUSTING ENTRY Journal entry:
Insurance Expense PXXXX Depreciation Expense PXXX
Prepaid Insurance PXXXX Accumulated Depreciation PXXX
Net book Value= cost – accumulated depreciation
ABM 002: FABM
THE PRODUCT OR OUTPUT OF THE
ACCOUNTING PROCESS
• Statement of Financial Performance/Income
Statement – the result of the operation or the
net income or net loss for the period. This shows
the INCOME and EXPENSES of the business.
MAGSTART SA HIGHEST TO LOWEST
VALUE!!!!
• Statement of Changes in Owner’s Equity –
Shows the increase or decrease of owner’s
investment.
• Statement of Financial Position/Balance Sheet –
Shows the FINANCIAL CONDITION of the
business AS OF THE PERIOD. ASSETS,
LIABILITIES, OWNER’S EQUITY.
• Statement of Cash Flows – It shows the
INFLOW and OUTFLOW of Cash.