ACCOUNTING

(Fundamentals of Accounting)
Introduction to Accounting
An organization whether big or small, profit
oriented or not, and regardless of its form
needs accounting. What is accounting? Who
need accounting information? What are the
uses of accounting information? These are but
some of the questions that we will answer in
this chapter.
Let us start with the definition of accounting. Various are the
Definitions given to accounting.

The Accounting Standard Council gives this definition:

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.


The American Accounting Association in its Statement of Basic Accounting
Theory provides the ff. definition:

ACCOUNTING is the process of identifying, measuring, and communicating
economic information to permit informed judgment and decisions by
users of the information.

Who are the users of accounting information and what are their needs?

The New Conceptual Framework in Financial Reporting has this to say:

Primary Users
- They are the parties to whom general-purpose financial reports are
primarily directed and include the following:
Existing and potential investors need information to help them decide
whether to buy, hold or sell their investment.
Existing and potential lenders and other creditors Need information to help
them determine whether the loans, interest, and other amounts owing to
them will be paid when due

Other Users All other aside from the primary users and include the ff:
Employees Need information to help them assess the ability of the entity to
provide remuneration, retirement benefits, and employment
opportunities.
Customers Need info. To help the assess the continuance of an entity
especially if they have a long-term involvement with or are dependent on
the entity.
Government and their agencies Need info. To regulate business activities of
the entity, determine taxation policies, and as a basis for national income
and similar statistics.
Public Need information to assess the contribution of the entity to the local
economy including the number of people it employs and the patronage of
local suppliers.

Two distinct strands of accounting:
Financial Accounting which seeks to meet the
the needs of the external users

Managerial Accounting which seeks to meet
the needs of Internal decision makers
External or outside users such as investors and creditors are
usually limited to the information presented in the general
purpose financial statements.

Internal users like managers may determine the content,
format, and timing of the reports provided to them to make
them effective in the performance of their jobs.
Forms of Business Organization
Sole or Single Proprietorship single owner

Partnership 2 or more owners.

Corporation owned by shareholders or
stockholder.(not less than 5)
What is the objective of financial reporting?
Used to provide financial information about the reporting
entity that is useful to present and potential equity investors,
lenders and other creditors in making decisions in their
capacity as capital providers.
Elements of Financial Statements
Asset a resource controlled by the entity as a result of past
event and from which future economic benefit is expected to
flow to the entity.
Ex. Cash, Accounts Receivable, Inventory, Land, Building, and
Equipment.
Liability a present obligation of the entity arising from past
event the settlement of which is expected to result in an
outflow from the entity of resource embodying economic
benefits.
Ex. Accounts Payable, Notes Payable, Wages Payable, Income
Taxes Payable.
Equity The residual interest in the assets of the entity after
deducting all of its liabilities. It is increased by income and
contributions (investments) from owners. It is decreased by
expenses and distributions (withdrawals and dividends) to
owners.
Income An increase in economic benefit during the
accounting period in the form of inflow or increase in asset or
decrease in liability that results in equity other than
contributions from equity participants.
Expense A decrease in economic benefit during the
accounting period in the form of an outflow or decrease in
asset or increase in liability that result in decrease in equity
other than distribution to equity participants.