Accounting And Business Management: Arlene R. Dulay Instructor Iii

ACCOUNTING and BUSINESS MANAGEMENT ARLENE R. DULAY

Instructor III ARLENE R. DULAY

11/12/2018

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Introduction to Accounting

• The

learners demonstrate an understanding of the definition, nature, function and history of accounting.

ARLENE R. DULAY

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Accounting – is the process of IDENTIFYING, RECORDING and COMMUNICATING economic events of an organization to interested users.

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IDENTIFYING – this involves selecting economic events that are relevant to a particular business transaction. RECORDING – this involves keeping a chronological diary of events that are measured in pesos. COMMUNICATING - occurs through the preparation & distribution of financial & other accounting reports. 11/12/2018

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Nature of Accounting

• Accounting is a service activity.

Accounting provides assistance to decision makers by providing them financial reports that will guide them in coming up with sound decisions.

• Accounting

is a process. A process refers to the method of performing any specific job step by step according to the objectives or targets. Accounting is identified as a process, as it performs the specific task collecting, processing & communicating financial information. 11/12/2018

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• Accounting

is both an art and a discipline. Accounting is the art of recording, classifying, summarizing and finalizing data. The word “art” refers to the way something is performed. It is a behavioral knowledge involving a certain creativity and skill to help us attain some specific objectives. Accounting is a systematic method consisting of definite techniques and its proper application requires skill and expertise. 11/12/2018

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• Accounting

deals with financial information and transactions: Accounting records financial transactions and data, classifies these and finalizes their results given for a specified period of time, as needed by their users.

• Accounting

is an information system: Accounting is recognized and characterized as a storehouse of information. 11/12/2018

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History of Accounting

• The

Cradle of Civilization: Around 3600 B.C., record-keeping was already common from Mesopotamia, China and India to Central and South America. The oldest evidence of this practice was the “clay tablet” of Mesopotamia w/c dealt with commercial transactions at the time such as listing of accounts receivable and account payable. 11/12/2018

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14th Century – Double-Entry Bookkeeping

• The

most important event in accounting history is generally considered to be the dissemination of double-entry bookkeeping by Luca Pacioli in 14th Century Italy. (The father of Accounting). Pacioli was much revered in his day and was a friend and contemporary of Leonardo da Vinci. The Italians of the 14th nd 16th centuries are widely acknowledged as the fathers of modern accounting and were the 1st commonly use Arabic numerals, rather than Roman business accounts. 11/12/2018

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French Revolution (1700)

• The thorough study of accounting and development of accounting theory began during this period. Social upheavals affecting government, finances, laws, customs and business had greatly influenced the development of accounting.

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The Industrial Revolution (1760-1830)

• Mass production and the great importance of fixed assets were given attention during this period.

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19th Century – The Beginnings of Modern Accounting in Europe and America

• The

modern formal accounting profession emerged in Scotland in 1854 when Queen Victoria granted a Royal Charter to the institute of Accountants in Glasgow, creating the profession of the Chartered Accountant. (CA) In the late 1800s, setting up accounting practices becoming the origins of several U.S. accounting firms. The first national US accounting society was set in 1887. (AICPA) 11/12/2018

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The Present – The Development of Modern Accounting Standards and Commerce

• The

accounting profession in the 20th century developed around state requirements for financial statement audits. Beyond the industry’s self-regulation, the government also sets accounting standards, through laws and agencies such as Security and Exchange Commission(SEC). As economies worldwide continued to globalize, accounting regulatory bodies required accounting practitioners to observe International Accounting standards. This is to assure transparency & reliability, & to obtain greater confidence on accounting information used by global investors. 11/12/2018

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Activity 1

• Make a 2 groups. The first group will act out the definition of accounting while the second group will act out the evolution/history of accounting.

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Branches of Accounting

• Financial Accounting – is primarily concerned with the recognition, measurement and communication economic activities. This information is communicated in a complete set of financial statements. It assumed under this branch that the users have one common information need. Financial accounting conforms with accounting standards developed by standard-setting bodies. 11/12/2018

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Examples of financial reports

• Balance sheet • Income statement • Statement of cash flows 11/12/2018

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Management Accounting

• Management

accounting emphasizes the preparation and analysis of accounting information within the organization. The objective of managerial accounting is to provide timely and relevant information for those internal users of accounting information, such as managers and employees in their decision-making needs.

• Managerial

accounting involves financial analysis, budgeting and forecasting, cost analysis, evaluation of business decisions and similar areas. 11/12/2018

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Government Accounting

• Government is the process of recording, analyzing, classifying, summarizing and interpreting financial information about government in aggregate and detail reflecting transactions and other economic events involving the receipt, spending, transfer, usability and disposition of assets and liabilities. 11/12/2018

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Auditing

• 2 types of auditing: 1. External auditing

– refers to the examination of financial statements by an independent CPA with the purpose of expressing an opinion as to fairness of presentation and compliance w/ generally accepted accounting principles (GAAP).

2. Internal

auditing – deals with determining the operational efficiency of the company regarding the protection of the company’s assets, accuracy & reliability of the accounting data & adherence to certain management policies. It focuses on evaluating the adequacy of a company’s internal control structure by testing segregation of duties, policies & procedures, degrees & controls implemented by management. 19 11/12/2018 ARLENE R. DULAY

Tax Accounting

• Tax accounting helps clients follow rules set by tax authorities. It includes tax planning and preparation of tax returns. It also involves determination of income tax and other taxes, tax advisory services such as ways to minimize taxes legally, evaluation of consequences of tax decisions, and other tax-related matters. 11/12/2018

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Cost Accounting

• Cost

accounting refers to the recording, presentation and analysis of manufacturing costs. Cost accounting is very useful in manufacturing businesses since they have the most complicated cost process. cost accounting will also help the owner set the selling price of his products. 11/12/2018

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Accounting Education

• Accounting

professionals can become faculty members of educational institutions. Accounting educators contribute to the development of the profession through their effective teaching, publications of their research and influencing students to pursue careers in accounting. 11/12/2018

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Accounting Research

• Accounting research focuses on the search for new knowledge on the effects economic events on the process of summarizing, analyzing, verifying & reporting standardized financial information, & on the effects of reported information on events.

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Users of Accounting Information 1. Internal users of accounting information are those individuals inside a company who plan, organize and run the business. They need more detailed information on a timely basis in order to support their decisions.

Management - income/earnings for the period, sales, available cash, production cost. Employees

- profit for the period, salaries paid to employees 11/12/2018

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• 2. The external users of

• Creditors

– for determining the credit worthiness of an organization

accounting information are those • Tax authorities (BIR) – for determining the credibility of the individuals or tax returns filed on behalf of a organizations outside company a company who are • Customers – for assessing the interested in its financial position of its suppliers w/c is necessary for them to financial information maintain a stable source of supply in the long term 11/12/2018

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Activity - boardwork

• Act out internal and external users of accounting information. (10 minutes to prepare for the presentation). Each group should be able to present the information needs of the different users relate theses information to their decisionmaking process. 11/12/2018 ARLENE R. DULAY

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FORMS OF BUSINESS ORGANIZATIONS

• SOLE/SINGLE PROPRIETORSHIP • PARTNERSHIPS • CORPORATION • COOPERATIVES ARLENE R. DULAY

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FORMS OF BUSINESS ORGANIZATIONS

• SOLE/SINGLE PROPRIETORSHIP- a form of business is owned by one person; the simplest and the most common form of business organization. 11/12/2018

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Single Proprietorship Advantages

• The owner keeps all the profits

• The owner makes all the decisions

• It

easy to form and operate ARLENE R. DULAY

Disadvantages

• The life of the is limited to the life owner. • The amount of capital is limited only by the wealth of the proprietor. 11/12/2018

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PARTNERSHIP

•A

form of business owned by two or more persons. The details of the arrangement between the partners are outlined in a written document called articles of partnership.

• Profits are divided among partners based on the agreed sharing.

• The owner is called partner. 11/12/2018

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PARTNERSHIPS

advantages

disadvantages

 higher capital because 2 or more person contribute to common fund

will the

• The profits are divided among partners.

• A partner ca be held liable for the acts of partners.

a lawsuit, the personal  It is easy to operate like • Inproperties of the partners can

sole/single proprietorship

be held beyond their contributions and may be used to answer for any liability of the partnerships. 11/12/2018

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CORPORATIONS

• A corporation is a business organized as a separate legal entity (artificial person) under the corporation law with ownership divided into transferable shares of stocks.

• Emphasize that it is the law (Corp. of the Phils) that creates a corporation.

• The corporation begins its existence from the Articles of Incorporation is approved by the SEC.

• The

Securities and Exchange Commission is the government agency primarily tasked to regulate private corporations in the Phils. 11/12/2018

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• The owners are called stockholder or shareholders • The word ‘Corporation/Incorporation’ appears in the name of entity.

• The voting rights of a shareholder is generally based on the percentage of ownership.

• The

management of the business is delegated by the shareholders to the Board of Directors.

• The ownership is divided into shares & the value of one share may be denominated at a smaller amount.

• The proof of ownership is evidenced by stock certificate. 11/12/2018

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CORPORATIONS advantages

disadvantages

• Can

• It

• Shareholders

• Subject

easily raise additional funds by selling shares of stocks to the public. are not personally liable for the debts of the corporation. The extent of their liability is limited to their equity (ownership)

is relatively complicated to set up. to several legal restrictions as listed in the Corporation Code of the Philippines 11/12/2018

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COOPERATIVE

•A

cooperative is duly registered association of persons w/ a common bond of interest, voluntarily joining together to achieve their social, economic & cultural needs. • The owners are called members who contribute equitably to the capital of the cooperative • The members are expected to patronize their products & services. • This form of business organization is regulated by Cooperative Development Authority. ARLENE R. DULAY

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COOPERATIVE advantages

• Enjoys

certain tax exemption privilege.

disadvantages

• Limited

distribution

of

surplus. • Requires continuous education programs for members. • Promotes the • The members have active & concept of sharing direct participation in the resources. business of the cooperative. ARLENE R. DULAY

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TYPES OF BUSINESS ACCORDING TO ACTIVITIES

• Service business • Merchandising business • Manufacturing business

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3 Types of business organization

• Service business This type of business offers professional skills, advice and consultations

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Merchandising Business

• This types of business buys at wholesale and later sells the products at retail. They make a profit by selling merchandise or products at prices that are higher than their purchase costs.

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Manufacturing Business

• This type of business buys raw materials and uses them making a new product, therefore combining raw materials, labor and expenses into a product for sale later on.

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ACCOUNTING CONCEPTS AND PRINCIPLES

• ACCOUNTING – is an art of recording, classifying, summarizing in a significant manner and in terms of money, transactions & events, w/c in part, at least of financial character and interpreting the result thereof.

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4 Phases of Accounting 2 kinds of bookkeeping

• RECORDING.

• Single is

This called

technically bookkeeping. Bookkeeping is only a part of accounting.

entry bookkeeping – does not show the two-fold effects of business transactions.

• Double-entry bookkeeping – reflects the two-fold effects of business transactions.

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• CLASSIFYING. Items are sorted and grouped. Similar

items are classified under the same name. (assets, liabilities, capital accounts, revenue accounts, & expenses). • SUMMARIZING. After each accounting period, data recorded are summarized through financial statements. • INTERPRETING. Usually, due to the technicality of accounting reports, the accountant’s interpretation on the financial statement is needed. ARLENE R. DULAY

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• TRANSACTION

– the data we record in the accounting books. Transactions are the economic activities of the firm. These activities could involve one enterprise & other enterprise w/c is called external transaction or it maybe activities within the enterprise w/c called internal transaction. There is always value received and value parted with. ARLENE R. DULAY

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Accounting Elements or Values ASSETS

• Assets are economic

resources owned

by the business.

• 2 types of assets 1. Current assets 2. Non-current assets ARLENE R. DULAY

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2 types of assets Current assets

Non-current assets

• Are those assets w/c can be • Are reasonably converted into cash within a short period of time, usually within one accounting period or within the regular operation of the business or normal operating cycle of the business. ARLENE R. DULAY

those assets not classified as current. They include, among others property, plant and equipment. Property, plant and equipment are tangible assets used in the operation of the business. 11/12/2018

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Current assets

• Cash on hand • Cash on banks • Receivables

• 1.

Inventories

merchandise inventories – held for sale in the ordinary course of business.

– represent • Good-in-process – in amounts collectible from customers arising of the process of production for such sale business.

• Inventories constitute items of • Raw

materials – to be tangible personal property currently consumed in the • Prepaid expenses- are those production of goods or w/c are already paid before services to be available for they are used or consumed. sale ARLENE R. DULAY

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LIABILITIES

• Liabilities

- are debts or obligations of the business to a party other than its owner.

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2 classifications of liabilities

1.

Current or short-term liabilities – are those w/c are due for payment within a short period of time or within one year from the balance sheet.

2.

Fixed or Long-term liabilities - are those w/c mature beyond one year from the balance sheet. 11/12/2018 ARLENE R. DULAY

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Current or short-term liabilities

• Accounts

Payable – are indebtedness arising from purchase of goods and services in the ordinary course of business.

• Notes

Payable – are short-term indebtedness supported by written promises to pay.

• Accrued Expenses – are expenses already incurred but are not yet paid as of the balance sheet. ARLENE R. DULAY

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Capital

• Capital

represents the owners’ equity or investment in the business. Other terms which can be used synonymously are Owner’s Equity or Proprietorship.

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ACCOUNTING EQUATION

• Business transactions affect the assets, liabilities and proprietorship of the business. These effects can be expressed in the accounting equation: ASSETS = EQUITIES

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• Equity is the right, claim or interest of a person over the assets of the business. Liability represents such as claim in the assets of the business and proprietorship is the owner’s or owners’ interest in the business. LIABILITIES

EQUITIES PROPRIETORSHIP ARLENE R. DULAY

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TYPES OF MAJOR ACCOUNTS

• ASSETS – are the resources owned and controlled by the firm.

• LIABILITIES – are obligations of the firm arising from the past events w/c are to be settled in the future.

• EQUITY

or OWNER’S EQUITY – are the owner’s claims in the business. It is the residual interest in the assets of the enterprise after deducting all its liabilities. 11/12/2018 ARLENE R. DULAY

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• INCOME

– is the increase in economic benefits during the accounting period in the form of inflows of cash or other assets or decreases of liabilities that result in increase in equity. Income includes revenue and gains.

• Is a general term to mean any earning made by the business 11/12/2018

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Income

Service

income – refers to earnings derived from services rendered whether on cash or on account. Fees – is another general term used to designate income. Legal fee – is income from rendering legal services, medical fees, accounting fees, dental fees, & other terms may be used to denote income from particular type of professional fees. 56 ARLENE R. DULAY

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Income

Sales is a term to denote income derived from the sales of goods. Commission income – is an income account to designate earning received from selling anything on a commission basis. Other income – is another income account to designate earnings received from sources other than its main source of income. 11/12/2018 ARLENE R. DULAY

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COST AND EXPENSES

• EXPENSES

– are decreases in economic benefits during the accounting period in the form of outflows of assets or incidences of liabilities that result in decreases in equity.

Taxes & Licenses are payments made by business

to the government for its business operations like privilege taxes, percentages taxes, mayor’s permit, others. ARLENE R. DULAY

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Cont. COST AND EXPENSES

Salary expense – refers to the cost of services rendered by the employees or workers of the business.

Supplies

expense- refers to the cost of office

items

Delivery

expense- refers to the cost of transportation in delivering goods and services to customers. 11/12/2018 ARLENE R. DULAY

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Cont. COST AND EXPENSES

Bad debts – refers to that portion of accounts receivable w/c may not be collected.

Depreciation expense- refers to that portion of the cost of the fixed asset w/c has been charged to income during the period.

Insurance expense- refers to the insurance premium paid by the business.

Rent expense – refers to the amount charged for the use of money. 11/12/2018 ARLENE R. DULAY

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Cont. COST AND EXPENSES

Advertising expense- includes promotional expenses in the selling of the products.

Utilities expense- is a term used to denote the cost of light and water consumed by the business.

Repairs and maintenance – are expenses for repairing or servicing buildings, machinery, or equipment of the business. 11/12/2018 ARLENE R. DULAY

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Salesmen salaries – are fixed wages to salesmen. Cost of sales or cost of goods sold – is the purchase price of manufacturing cost of goods sold.

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• CURRENT

ASSETS – are realized(collected, sold, used up)

assets

can

be

• NON-CURRENT ASSESTS – are assets that cannot be realized

• TANGIBLE ASSETS – are physical assets • INTANGLE ASSETS – are non-physical assets such as patents & trademarks ARLENE R. DULAY

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CURRENT ASSETS

• Cash • Account Receivable • Notes receivables • Inventories are assets held for resale • Supplies are items purchased by an enterprise w/c are unused as of the reporting data

• Prepaid expenses are paid in advance. They are assets at the time of payment & become expenses through the passage of time. 11/12/2018

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• Accrued

income – is revenue earned but not collected.

• Short-term investments – are the investments made by the company that are intended to be sold immediately

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Non-current Assets

• Property, Plant and Equipment – are long-lived assets w/c have been acquired for use in operations.

• Long-term

Investments – are the investments made by the company for long-term purposes.

• Intangible assets – are assets without a physical substance. (franchise & copyright) ARLENE R. DULAY

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LIABILITIES

• Liabilities

are the debts & obligations of the company to another entity.

Current Liabilities. Liabilities that fall due(paid, recognized as revenue)A/P, utilities payable, unearned income Non-current liabilities – are liabilities that do not fall due (N/P, Loans payable, mortgage payable) ARLENE R. DULAY

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Current Liabilities • Accounts Payable – are amounts due, or payable to, suppliers for goods purchased on account or for services received on account. • Notes Payable – are amounts to 3rd parties supported by promissory notes. • Accrued Expenses – are expenses that are incurred but not yet paid (ex. Salaries) • Unearned Income- is cash collected in advance; the liability is the services to be performed or goods to be delivered in the future. 11/12/2018

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Interest Payable – is the interest due to an interest bearing note. Accrued interest expense is a term synonymous with interest payable.

Taxes payable – are taxes due for government not yet paid by the business.

Salaries payable – are salaries not yet paid by the business to its employees or workers. ARLENE R. DULAY

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Non-current Liabilities

a. Loans Payable

b. Mortgage Payable- is a long term liability account that refers to debt secured by a mortgage on rea state.

Owner’s Equity – is residual interest of the owner from the business. It can be derived by deducting liabilitie from assets. 70 ARLENE R. DULAY

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• Capital

– is the value of cash and other assets invested in the business by the owner of the business. • Drawing – is an account debited for assets withdrawn by the owner for personal use from the business. • Income – is the increase in resources resulting from performance of service in selling of goods. • Expense - is the decrease in resources resulting from the operations of business. ARLENE R. DULAY

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BOOK OF ACCOUNTS

JOURNAL

A Journal is a book of accounts wherein business transactions are recorded for the first time. It is also called as the book of original entry.

Journalizing – is the first step in the accounting cycle. It is the process of recording transaction in journal.

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2 Types of Journals GENERAL JOURNAL The general journal is the most basic journal. Typically. A general journal has spaces for dates, accounts titles and explanations, reference and 2 amount columns.

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The journal makes several significant contributions to the recording process:

• It discloses in one place the complete effects of a transaction.

• It provides a chronological record transactions. • It helps to prevent or locate errors because the debit and credit amounts for each entry can be easily compared. ARLENE R. DULAY

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A general journal contains the following columns: Date – the date of the transaction is entered in the column; transactions are recorded in a systematic manner and in a chronological order. Account titles and explanations – this column contains the debit and credit accounts and a brief explanation of the entries. Folio/ref – this contains the post reference number or the ledger page w/c the accounts are transferred. ARLENE R. DULAY

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• Debit – contains the amount debited which is entered first at the extreme left margin of the column headed “ Account Titles and Explanations” and the amount of the debit is recorded in the debit column.

• Credit - contains the amount credited which is indented & entered on the next line in the column headed “ Account Titles and Explanations” and the amount of the debit is recorded in the credit column. ARLENE R. DULAY

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SPECIAL JOURNAL

• Cash Receipts Journal – used to record all cash that has been received • Cash Disbursement Journal –used to record all transactions involving cash payment • Sales Journal Sales on Account Journal) used to record all purchases of inventory on credit • Purchase Journal – used to record all purchases of inventory on credit ARLENE R. DULAY

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