FINANCIAL ACCOUNTING

MIDTERM REVIEWER

CHAPTER 1:
Accounting: Process of I, R, S, and C econ. Info that is useful to economic decisions.
● Identifying: ACCOUNTABLE EVENTS = A,L,E.Q, I, E
● Recording: Journalizing and Posting
● Communicating: summarizes the info.

3 TYPES OF ACCOUNTING INFORMATION:

● Quantitative: numbers/units
● Qualitative: notes/words
● Financial: Money

BOOKKEEPING: the process of recording the accounts of an entity (no interpretation)

ACCOUNTING: covers the whole process. (I,R,C)

USERS OF ACCOUNTING INFO:

● Internal Users: are directly involved in the operation (Business directors)
● External Users: are not directly involved (Existing/potential investors)

TYPES OF ACCOUNTING INFO:

● Special Purpose Accounting Info: meets specific needs of internal Users to be
prepared by MANAGEMENT ACCOUNTING: internal users
● General Purpose Accounting Info: meets the command needs of external Users,
to be prepared by FINANCIAL ACCOUNTING: external users

FRA LUCA PACIOLI (1494) : Doule Entry Recording System.

BRANCHES OF ACCOUNTING:
1. Financial Accounting: focuses on general purpose: external users.
2. Management Accounting: focuses on special purpose: internal users
3. Government Accounting: government and its instrumentalities
4. Auditing: inspection of an entity’s financial statement
5. Tax Accounting: preparation of tax returns
6. Cost Accounting: recording/analysis of the cost of materials, labor, etc.
7. Accounting Education: teaching of accounting/related subjects
8. Accounting research: careful analysis of economic events
FORMS OF BUSINESS ORG:
1. Sole proprietorship: (one indiv) -DTI
2. Partnership: (partners) - SEC
3. Corporation: (stockholders) - SEC
4. Cooperative: (members) - CAD

TYPES OF BUSINESS ACTIVITIES:

1. Service
2. Merchandising
3. Manufacturing

CHAPTER 2
Accounting Concepts and Principles: sets of logical ideas and procedures
● Philippines Financial Reporting System (PFRAS)
● Generally Accepted Accounting Principles (GAAP)

BASIC ACCOUNTING CONCEPTS:

1. Separate Entity Concept: business is separate from the owner
2. Historical Cost Concept: assets are recorded at the original acquisition cost
3. Going Concern Assumption: firm’s continuous operation
4. Matching (Cause and Effect) records expenses alongside revenues earned.
5. Accrual: method of recording revenue and expenses when a transaction occurs
6. Prudence: Conservatism - Degree of Caution
7. Time-Period: Divided into series
8. Stable Monetary Unit: A, L, E, I, OE are stated in PESO
9. Materiality Concept: Material and Imatterial amount
10. Cost Benefit: Cost should not exceed the benefit
11. Full Disclosure Principles: both Materiality and Cost benefit
12. Consistency Concept: Application of policy
 CHAPTER 3
ACCOUNTING EQUATION:
● Assets = Liabilities + Equity
● Liabilities = Assets - Equity
● Equity = Assets - Liabilities

ASSETS: economic resources you control, resulted from past events, can provide
economic benefits.

LIABILITIES: present obligations, resulted from past events, require economic

resources.
● Legal Obligation; contract, legislation, law
● Constructive Obligation: past actions

EQUITY: ‘asset less liabilities. ‘Capital’ ‘net worth’ ‘net assets’

EXPANDED ACCOUNTING EQUATION:

● Assets = Liabilities + Assets + Income - Expense

INCOME: increase
EXPENSES: decrease

- Represents profit or loss

EX:
Equity, Beginning Equity, Beginning
Add: Income or Add: Profit/Less: Loss
Less: Expenses Equity, Ending
Equity, Ending

● IF TOTAL INCOME: expenses is +

● IF TOTAL EXPENSES: all is -
 ADDITIONAL INFO:

● Journal: used to record a business event as they occur throughout the year.
● Two accounts: minimum number of accounts that accounting entries can have
● Essential element of a liability:
1. A present obligation
2. Arising from past event
3. Expected to cause an outflow of economic benefits

● T-account:
Account format that displays debits, credits, balances, and headings.
The account format that displays debits on the left and credits on the right
● Financial accounting: reports to the STAKEHOLDERS after the completion of the
accounting year.
● Account receivable: The right to receive money in the future
● Accrual basis of accounting:
-Revenues are recorded when they are earned, regardless of when the cash is
received.
-Liabilities are recorded when they are incurred, meaning when goods or
services are received or obligations are undertaken, regardless of when the cash
payment is made.

● Retained earnings statement: Dividends are reported on this.