ACTBAS1 Introductory Accounting for Service Business

Presented by: Mr. Francis H. Villamin DLSU September 8, 2011

Definition of Accounting

Financial Reporting Standards Council

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.

Definition of Accounting

As a service, accounting intends to supply financial reports to be used by economic decision makers. Economic decision making is the main reason why accounting records and reports are prepared.

Definition of Accounting

American Institute of Certified Public Accountants (AICPA)

The 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 financial character and interpreting the results thereof.

Definition of Accounting

As an art, accounting demands critical thinking and creative skills. Accountants gather data and convert them into organized financial reports then draw certain economic meanings from them.

Definition of Accounting

American Accounting Association

The process of identifying, measuring and communicating economic information to permit informed judgments and decisions by users of the information.

Definition of Accounting

As a process, accounting goes through an accounting cycle to summarize the voluminous and repetitive business transactions into organized and understandable financial reports.

Definition of Accounting

Philippine Institute of Certified Public Accountants (PICPA)

A system that measures business activities, processes given information into reports, and communicates those findings to decision-makers.

Nature of Accounting

A service activity A process, an art and a discipline The language of business a. Profitability f. Financial Flexibility b. Liquidity c. Solvency d. Stability e. Capital Structure

Bookkeeping and Accounting

Bookkeeping deals primarily with the systematic method of recording and classifying financial transaction of business. It is considered the procedural element of accounting.

Objectives of Accounting
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2.

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To ascertain the result of the business operations. To ascertain the financial position of the business. To assist financial users in predicting the enterprises financial capacity regarding future cash flows, financial conditions and results of operations.

Fields of Accounting

Financial accounting Management accounting Cost accounting Tax accounting Government accounting

Sectors of Accounting Practice

Public Practice Commerce and Industry Education and Academe Government

Users of Accounting Information

Internal users those who are directly involved in the business enterprise a. Owners b. Management c. Employees

Users of Accounting Information

External users those who are not directly involved in the business enterprise a. Potential investors b. Creditors (which includes money lenders, suppliers and other trade creditors) c. Customers d. Taxing authorities e. Government regulation agencies f. Non profit organizations g. Other users

Forms of Business Organization

Based on ownership a. Sole or single proprietorship b. Partnership c. Corporation

Proprietorship

Business owned by a single person who has complete control over business decisions. This individual owns all the firms assets and is responsible for all its liabilities.

Advantages of Sole Proprietorship

Ease of entry and exit Full ownership and control Tax savings Few government regulations

Disadvantages of Sole Proprietorship

Unlimited liability Limitations in raising capital Lack of continuity

Partnership

Legal arrangement in which two or more persons agree to contribute capital or services to the business and divide the profits or losses that may be derived therefrom.

Advantages of Partnership

Ease of formation Additional sources of capital Management base Tax implication

Disadvantages of Partnership

Unlimited liability Lack of continuity Difficulty in transferring ownership Limitations in raising capital

Corporation

An artificial being created by law and a legal entity separate from its owners. The legal entity may own assets, borrow money and engage in other businesses without directly involving the owners.

Advantages of Corporation

Limited liability Unlimited life Ease in transforming ownership Ability to raise capital

Disadvantages of Corporation

Time and cost formation Regulation Taxes

Forms of Business Organization

Based on operations or activity a. Service concern b. Merchandising or trading concern c. Manufacturing concern

Forms of Business Organization

Service performs an activity for a fee Merchandising involved in selling of finished goods produced by other businesses. Manufacturing involved in the conversion of raw materials into some tangible, physical product.

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Basic Accounting Concepts

These are the ground rules that govern how the accountants measure, process and communicate financial information.

Purpose of basic accounting concepts

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2.

They help increase the confidence of financial statement users that the financial statements are representationally faithful. They provide companies and accountants who prepare the financial statements with guidance on how to account for and report economic activities.

Purpose of basic accounting concepts

3.

They provide independent auditors of financial statements with basis for evaluating the fairness and completeness of those statements.

Entity Concept

The business is regarded as having a separate and distinct personality from that of the owner/s generating its own revenue, incurring its own expenses, owning its own assets and owing its own liabilities. Personal transactions of owners must not be combines with transactions of the business.

Monetary Concept

Money is used as the unit of measure in preparing the various financial reports of the company.

Time Period Concept or Periodicity

It divides the life of the business into regular intervals (usually one year) at the end of which financial statements are prepared. The economic activities undertaken during the life of an accounting entity are assumed to be divisible into various artificial time periods for financial reporting purposes.

Time Period Concept or Periodicity

Calendar Year A twelve-month period beginning January 1 and ending December 31. Fiscal Year The length of the fiscal period is determined by the nature of the business and the frequency of the need of data regarding the financial condition and progress of the business.

Revenue Realization Concept

It provides that income is recognized when earned regardless whether cash is received. a. Income is considered earned when services are fully rendered. b. Income is considered earned when goods or merchandise are fully delivered.

Accrual Concept

It requires that income be recorded when earned regardless of whether cash is received and expense be recognized when incurred regardless whether payment is made.

Matching Concept

This concept states that all expenses incurred to generate revenues must be recorded in the same period that the income are recorded to properly determine net income or net loss of the period.

Objectivity or Reliability Concept

This principles requires that all transactions must be evidenced by business documents free from personal biases and independent experts can verify reports.

Cost Concept

It assumes that the assets are acquired in business transactions conducted at arms length transactions (transactions between a buyers and a seller at the fair value prevailing at the time of transaction).

Going Concern Concept

It assumes that the business is to continue its operations indefinitely. The business will stay in operation for a period of time sufficient to carry out contemplated operations, contracts and commitments.

Conservatism Concept

It assumes that when uncertainty exists, the users of financial statements are better served by understatement than overstatement of net income and assets.

Disclosure Concept

All relevant and material events affecting the financial condition/position of a business and the results of its operations must be communicated to users of financial statements.

Materiality Concept

An item/event is considered material if knowledge of it would influence the decision of prudent users of financial statements.

Consistency Concept

It states that once a method is adopted, it must not be changed from year to year to allow comparability of financial statements between years and between businesses.

Organizations that affect accounting profession

Philippine Institute of Certified Public Accountants Financial Reporting Standards Council Auditing and Assurance Standards Council Professional Regulations Commission Board of Accountancy Securities and Exchange Commission Bangko Sentral ng Pilipinas Commission on Audit

Basic professional values and business ethics

Ethical values provide the foundation on which a civilized society exists. The purpose of ethics is to direct businessmen and women to abide by the code of conduct that facilitates, if not encourages, public confidence in their products and services.

Fundamental Ethical Principles

Professional behavior Professional competence and due care Objectivity Integrity Confidentiality Independence

Thank you. Thats all for today!!!