comes

into

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when

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BUSINESS
An economic activity of buying and selling in order to obtain profit. actions that involve the production, distribution, and consumption of goods and services at all levels within a society. Formally, it is an economic unit that obtains and controls resources and then engages in buying and selling of goods or services with a view of enhancing these resources.

MAJOR OBJECTIVE OF THE BUSINESS

Through How can you manage your business well?

How does Accounting help in facilitating the management of the business?

Accounting facilitates the 3 major management functions:

Accounting records the past Accounting helps in Accounting comparing helpsshow in recording the ofthat the you business which and evaluating performance thetransactions actual have may as serve to come up performance based executed. on what guide is with a better plan. planned.

How can my business be successful?

In order to be successful, your business must be

Above Average

Two guide questions to have a successful business:

1. Why would your customer buy from you? 2. What can you offer to your customers that your competitors cannot?

but How can you answer these two questions??

BUSINESS
in terms of

success in

is measured

PROFIT

PROFIT
Obtained when the amount you received is more than the amount you paid for the goods or services you sold.

This increases the value of funds and resources of the business.

Take note that :

should contribute to the generation of

ACCOUNTING
Accounting is 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 decision.

-Accounting Standards Council

Art of recording, classifying, and summarizing in a significant manner and in terms of money, transactions and events which are In part at least of a financial character and interpreting the results thereof.

- American Institute of Certified Public Accountants

Actually, ACCOUNTING is an Information System that

ACCOUNTING INFORMATION SYSTEM

FINANCIAL STATEMENTS

measures business activities processes information into reports communicates the reports to decision makers

ACCOUNTING AS THE LANGUAGE OF THE BUSINESS

COMPANY
Accumulates accounting information through its various transactions

ACCOUNTING INFORMATION SYSTEM

Processes the financial information and prepares the reports

STAKEHOLDERS or USERS
Review the reports and make decisions

Accounting Reports
A. Managerial Reports -these are internal reports that are prepared for management use. -this information need gave rise to a course called Management Accounting B. General Purpose Financial Statements
-main source of information of stakeholders or users -these are audited by CPA who attests to its fair presentation and validity.
C.

Tax Returns

-all firms are required to file tax returns to the Bureau of Internal Revenue.

D.

Special Reports -some firms are required to prepare these reports as needed by the nature of their operation.

-Zenaida Vera Cruz-Manuel

CHANNELS OF ACCOUNTING INFORMATION FLOW

MANAGEMENT

MANAGERIAL REPORTS

TAX AGENCIES BIR

TAX REPORTS AUDITED REPORTS

SPECIAL REPORTS

REGULATORY AGENCIES BSP,SEC

SUPPLIERS

LENDERS

INVESTORS

EMPLOYEES

REGULATORY BOARD

CUSTOMERS

FINANCIAL STATEMENTS
Income Statement Statement of Changes in Equity Statement of Financial Position Statement of Cash Flows
How much wealth was produced?

Change in owners wealth

How much wealth was accumulated? What cash has come and gone out?

Income Statement
Reports the financial performance of the business. (Zenaida Vera CruzManuel)

Profit or loss statement

Statement of earnings Two components: Income Expense

INCOME -represents inflow of cash or other assets coming from a client or customer for service rendered or for merchandise sold. Revenue- income coming from the normal course of business.

Gain- an income which may arise but not really from its normal course of operation.
EXPENSES

-the consumption of asset or using of service to generate revenue.

-Zenaida Vera Cruz-Manuel

Statement of Changes in Equity

Shows the activities for a period of time that caused the owners equity to change. (Zenaida Vera Cruz-Manuel)

EQUITY
CONTRIBUTIONS

EXPENSES
WITHDRAWALS

REVENUES

Statement of Financial Position

Shows how healthy the enterprise is when it shows the accumulated resources and debts of the business with a list of its assets, liabilities and equity.

ASSETS

LIABILITIES

CAPITAL

Are economic resources owned by the business. A resource obtained and controlled by the enterprise as a result of a past event and from which probable future economic benefits are expected to flow to the enterprise. (Zenaida Vera Cruz-Manuel)
Is the ability of the asset to produce future cash flow for the business entity whether directly or indirectly.

Asset
Current Assets
Include cash and cash equivalents which are not restricted in use as well as other assets expected to be realized into cash or intended to be sold or consumed within the normal operating cycle or one year, whichever is longer. (Zenaida Vera Cruz-Manuel)

Non Current Asset

Residual definition. All other assets not classified as current.

Simply defined as an obligation to do or pay. An obligation arising from past event, the settlement of which is expected to result an outflow of resources of an enterprise. (Zenaida Vera Cruz-Manuel)

Liabilities
Current Liabilities
Debts or obligations reasonably expected to be liquidated in the normal course of the enterprises operating cycle or paid within one year by the use of current assets or creation of other current liabilities. (Zenaida Vera Cruz-Manuel)

Non Current Liabilities

Long term liabilities or obligations which are payable longer than one year. (Zenaida Vera Cruz-Manuel)

After deducting the liabilities from the assets, the net asset shows the net worth or net value of the firm which belongs to the owner. (Zenaida Vera CruzManuel)

Illustration:
Assume Mr. Dela Cruz contributed P300,000 cash in a barber shop:

Assets
Cash P300,000

Capital
Dela Cruz, Capital P300,000

To illustrate further
Assume Mr. Dela Cruz borrowed cash of P150,000 from the bank for the business.

Assets
Cash P450,000

Liabilities
Loan Payable P150,000

Capital
Dela Cruz, Capital P300,000

ACCOUNTING EQUATION
ASSETS

LIABILITIES

CAPITAL

REVENUES

EXPENSES

But as Algebra dictates, all terms must be expressed positively.

Demonstration problem: (to illustrate the effects of the transactions in the accounting elements)

Apr 1 Mr. Dela Cruz opened a travel agency by investing cash of P50,000 and two coasters worth P800,000 3 Borrowed P100,000 from JH Bank 7 Bought tables and chairs and paid cash of P50,000 15 Computer, air conditioner and various equipment were purchased on account from Hoji Co. for P40,000 18 Mr. Dela Cruz made a cash withdrawal of P5,000 for personal use

20 The account due to Hoji Co. was paid on cash

DATE

ASSETS

LIABILITIES

EQUITY

April
1 3 Bal 7 Bal 15 Bal 18 Bal 20 Bal

Cash
50,000 150,000 (50,000) 100,000 100,000 (5,000)

Cars
800,000

Equipment

Furniture

Loans Payable
100,000

Accounts Payable

Capital
850,000

Drawings

800,000 50,000 800,000 40,000 800,000 40,000 40,000 50,000 50,000 50,000 50,000

100,000 100,000 40,000

850,000
850,000 40,000 40,000 (40,000) -850,000 (5,000) 850,000 850,000 (5,000)

100,000
100,000 100,000

95,000 800,000 (40,000)

55,000 800,000

40,000

(5,000)

945,000 =

100,000 + 845,000

Statement of Cash Flows

Explains why the amount of cash changed over a period of time. Makes a listing of the cash inflow activities (cash receipts) and the cash outflow activities (cash payments) of the business.

- (Zenaida Vera Cruz-Manuel)

How do financial statements look like?

HARDY TOUR Income Statement For the month ended April 30,2014 Service Income Less Operating Expenses Rent Expense Salaries Expense Repair Expense Gas & Oil Expense Utilities Expense Net Income P55,000 P12,000 10,000 8,000 1,000 750

31,750 P86,750

HARDY TOUR Capital Statement For the month ended April 30, 2014 Dela Cruz, Capital April 1 Add Net Income Total Less Drawings Dela Cruz, Capital April 30 P900,000 P86,750 986,750 (10,000) P976,750

HARDY TOUR Statement of Cash Flows For the month ended April 30, 2014 Cash flows from operating activities: Cash received from customers Cash paid for expenses Net cash provided by operating activities

100,000 (55,000)

45,000

Cash flows from investing activities: Acquisition of furniture & fixtures Acquisition of equipment Net cash used for investing activities Cash flows from financing activities: Investment by Dela Cruz Withdrawal by Dela Cruz Loan from bank Net cash provided by financing activities
Net increase in cash

(60,000) (20,000)

(80,000)

75,000 (10,000) 130,000

195,000

P 160,000

HARDY TOUR Statement of Financial Position April 30, 2014 Assets Cash P160,000 Accounts Receivable 20,000 Cars 800,000 Equipment 45,000 Furniture & Fixtures 50,000 Total P1,075,000 Liabilities & Capital Loans Payable Dela Cruz, Capital P 98,250 976,750

Total

P1,075,000

DEFINITION OF TERMS RELATED TO ACCOUNTING

Generally Accepted Accounting Principles (GAAP)

Represent the rules, procedures, practice, and standards followed in the preparation of financial statements Like laws that must be followed in financial reporting.

-Valix

Accounting Assumptions
Fundamental premises on which the accounting process is based. Enhance the understanding and usefulness of the financial statements.

-Valix

Going Concern Assumption

means that in absence of evidence to the contrary, the accounting entity is viewed as continuing in operation indefinitely.

Assets are normally recorded at cost. Foundation of the Cost Principle.

Assets should be recorded initially at original acquisition cost

-Valix

Basic Assumptions
Accounting Entity
-the entity is separate from the owners, managers, and who constitute the entity.
-the transactions of the entity shall not be merged with the transaction of the owners. -The reason for the entity assumption is to have a fair presentation financial statements. of

employees

-Valix

Time Period Assumption -the indefinite life of the entity is subdivided into time periods or

accounting periods which are usually of equal length for the purpose of preparing financial reports on financial position, performance and cash flows.
Calendar year - 12 month period that ends on December 31.

Natural business year- 12 month period that ends on any month of the year when the business is at the lowest or experiencing slack season. -Valix

Monetary Unit Assumption

-all business transactions are measured and recorded using only one unit of measurement.(Valix)

Money

used as a medium of exchange, most practical unit of measuring financial data.

Accrual Accounting
-income is recognized when earned regardless of when received and expense is recognized when incurred regardless of when paid.

-Valix

Qualitative Characteristics
Relevance
(quality of information that will make a difference and influence a statement user to make a meaningful decision.)

Faithful Representation
(the actual effects of the transactions shall be properly accounted for and reported in the financial statements.)

-Valix

 Relevance
-Predictive value (must be useful in projecting what might take place in the
future) -Zenaida Vera Cruz-Manuel

-Feedback value (must give the information about past performance of

the business.) -Zenaida Vera Cruz-Manuel

-Materiality

(Will depend on whether an item(by its nature or size) will influence users decision or not) -Zenaida Vera Cruz-Manuel

 Faithful Representation
-Completeness -Neutrality -Free from error
(the result of the adequate disclosure standard or the principle of full disclosure.) (the information contained in the financial statements must be free from bias) (there are no errors or omissions in the description of the phenomenon or transaction, and the process used to produce the reported information has been selected and applied with no errors in the process) -Valix

Conservatism
- when alternatives exist, the alternative which has the least effect on equity should be chosen. in case of doubt, record any loss and do not record any gain

-Valix

Enhancing qualitative characteristics

Comparability
(uniform application of accounting method from period to period within an entity.)

Understandability
(requires that financial information must be comprehensible if it is to be most useful)

Verifiability
(different knowledgeable and independent observers could reach consensus)

Timeliness
(financial statements must be available or communicated early enough when a decision is to be made) -Valix

 Historical Cost

Measurement of elements

(amount of cash or cash equivalent paid or the fair value of the consideration given to acquire an asset at the time of acquisition.)

Current Cost

(amount of cash or cash equivalent that would have been paid if the same or equivalent asset was acquired currently.)

Realizable Value

(the amount of cash or cash equivalent that could currently obtained by selling the asset in an orderly disposal.)

Present Value

(the discounted value of the future net cash inflows that the item is expected to generate in the normal course of the business.) -Valix