Ang Chopsuey

8/13/2019 Ang Chopsuey

1/7

Definitions of ACCOUNTING

Accounting Standards Council (ASC) - 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.

American Institute of Certified Public Accountants (

AICPA) - Accounting is 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 a financial

character and interpreting the results thereof.

American Accounting Association (AAA) - Accounting is

the process of identifying, measuring and communicating

economic information to permit informed judgement and

decision by users of information.

Identifying means the recognition or nonrecognition of

"accountable" events. Not all business activities are

accountable. An event is accountable or quantifiable when it

has an effect on assts, liabilities and equity.

Measuring or measurement is the process of determining the

monetary amounts at which the elements of the financial

statements are to be recognized and carried in the balance

sheet and income statement.

Communicating is the process of preparing and distributing

accounting reports to potential users of accounting information.

BASIC PURPOSE OF ACCOUNTING

The basic purpose of counting is to "provide quantitative

financial information about a business that is useful to

statement users particularly owners and creditors, in makingeconomic decisions."

PUBLIC, PRIVATE, AND GOVERNMENT ACCOUNTING

Public Accounting, in essence, is the practice of the

accounting profession. Individual practitioners, small

accounting firms and large multinational organizations render

independent and expert financial services to the public such

as:

Auditingor specifically external auditing is the "examination of

financial statements by independent certified public accountant

for the purpose of expressing an opinion as to the fairness with

which the financial statements are prepared".

Taxation service includes the preparation of annual income tax

returns and determination of tax consequences of certain

proposed business endeavors.

Management Advisory Service has no precise coverage but is

used generally to refer to services to clients on matters of

accounting, finance, business policies, organization

procedures, product costs, distribution and many other phases

of business conduct and operations.

Private accounting means that CPAs are employed in

business entities in various capacity as accounting staff, chie

accountant, internal auditor and controller. The highes

accounting officer in a business entity is the controller. Among

the more important areas of private accounting are:

Financial accounting- is the branch of accounting that is

primarily concerned with the measurement and communication

of information that summarizes and reports the financia

condition and operating results of a business enterprise.

Management accounting- the specific information needs of the

internal data-users, principally the management, are provided

by the internal reporting functions of the accounting system

called management accounting. Also known as manageria

accounting, it is a useful tool in achieving the functions o

management

Internal Auditing- An internal auditor is an employee of the

business enterprise, who have the responsibilities of evaluating

the efficiency of operations and determining whether the

business' policies are being followed consistently in alorganizational levels of operations.

Government Accounting "encompasses the process o

analyzing, classifying, summarizing and communicating al

transactions involving the receipt and disposition of

government funds and property and interpreting the results

thereof.

ACCOUNTING VS BOOKKEEPING

Bookkeeping involve those mechanical and repetitive recording

and classifying procedures related to the business activities of

a natural or artificial person, until the voluminous financiainformation is summarized and reported in the form of financia

statements. Bookkeeping is only a part of the wider field of

accounting. It is the clerical side of accounting.

Among others, accounting includes the analysis and

interpretation of financial statements, the income tax work, the

design and installation of an accounting system, audits, and

the preparation of forecasts, budgets, and feasibility studies.

TYPES OF BUSINESSES

Service enterprise- this type if business provides various

forms of services, not tangible products, to its customers or

clients. A service enterprise recognizes income in the form of

fees, rents, interests, royalties, retainers, or commissions.

Merchandising enterprise (buy and sell)- a trading o

merchandising enterprise buys ready -to-use products and

then sells these products, without changing the form of the

materials bought and sold, to end-consumers or to othe

processors or manufacturers at higher prices.

Manufacturing enterprise- a manufacturer, also called a

fabricator, producer, or processor, is in the normal business of

producing the product that he sells.


2/7

FORMS OF BUSINESS OWNERSHIP

Single Proprietorship - a business that is owned by one

person is called single proprietorship, a sole proprietorship, or

just plainly proprietorship. From an accountant's point of

view, a business enterprise is looked upon as a separate and

distinct from that of the owner. This assumption is known as

thebusiness entity principle. However from a legal viewpoint,

the business enterprises of a proprietor is not separate and

distinct from himself.

Partnership- a partnership form of business has two or more

owners called partners. The formation of a partnership requires

some form of a written or oral agreement between the partners

because of the business entity principle applied in accounting,

a partnership is looked upon as an entity that is separate and

distinct from that of the partners. from a legal viewpoint, a

partnership is not considered separate from its partners.

Corporation- a business that has ts ownership capitalization

divided into hundreds or thousands of transferable chares of

stock is called a corporation. the corporation must have at

least five owners or investors called stockholders or

shareholders.

GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

(GAAP) , they are Conventional- they become generally

accepted by agreement, often tacit agreement, rather than by

formal derivation from a set of postulates and basic concepts.

The principles have developed on the basis of experience,

reason, custom, usage, and practical necessity.

Simply stated, generally accepted accounting principles

represent the "rules, procedures, practice and standards

followed in the preparation and presentation of financial

statements." GAAP are like laws that must be followed in

financial reporting.

Although called principles, these are not rigid or fixed, but are

continually evolving in response to the changes in the business

environment.

BASIC ACCOUNTING CONCEPTS

Accrual basis accounting- under this basis, the amount of

net profit or loss is determined by deducting the total expenses

incurred (whether the expenses are already paid for or not)

from the total earned income for the same time frame(whether

the income is already collected or not).

Going Concern Assumption/ continuity assumption- under

this assumption, the primary financial statements of a business

enterprise are prepared on the assumption that the normal

operations of the business enterprise will continue indefinitely.

Other Concepts

Business entity principle. This concept assumes that the

business and its owner are separate and distinct entities. as

such, there should be separate accounting and reporting of the

transactions, resources, obligations, income, and expenses of

the business and those of the owner.

Periodicity Concept. the assumption that the operating life of

the business may be divided into time-periods is known as the

periodicity concept or time period concept. The use of equa

time-periods for reporting purposes is helpful so that the

reported information would have the qualities of timeliness and

comparability.

Concept of the equality of value received and value given

up. The recording and reporting of the business transactions

are based on the assumption that for every value received

there is an equal value given up.

Monetary concept.because of this concept, the transactions

recorded in the books of accounts and the elements reported

in the financial statements are expressed in terms of a

common unit of measurement, the peso.

Matching concept. Under this concept, there should be a

simultaneous recognition of income and the corresponding

expenses that are directly or indirectly contributory to the

earnings of such income.

QUALITATIVE CHARACTERISTICS OF FINANCIAL

INFORMATION

Qualitative characteristics are the qualities or attributes tha

make financial accounting information useful to the users.

Qualitative characteristics that relate to content of financia

statements are relevanceand reliability. Actually, these are the

primary qualities of financial statements.

Qualitative characteristics that relate to presentation o

financial statements are understandability and comparability

These are the secondary qualities of financial statements.

Relevance. Relevance means "thecapacity of information tomake a difference in a decision by helping users form

predictions(predictive value) about the outcome of past

present, and future events, or confirm or correct prior

expectations(feedback value)."

Timeliness is an important ingredient of relevance, along with

feedback value and predictive value, because relevan

information furnished after a decision is made is useless or of

no value.

Reliability. Reliability is the "quality of information that assures

users that the information is free from bias and error, and

faithfully represents what it purports to represent."

Factors that enhance the reliability of financia

information

1. Faithful representation- means that the actua

effects of the transactions should be properly accounted for

and reported in the financial statements. Faithfu

representation is synonymous with verifiability or objectivity.

2. Substance over form- If information is to represen

faithfully the transactions and other events it purports to

represent, it is necessary that they are accounted for in


3/7

accordance with their economic substance and reality and not

merely their legal form.

3. Neutrality- means that the financial statements

should not be prepared as to favor one party to the detriment

of another party. To be neutral, the information contained in the

financial statements must be free from bias.

4. Conservatism/Prudence - Under conservatism,

when alternatives exist, the alternative which has the least

effect on equity shall be chosen. Prudence is the desire to

exercise caution when dealing with the uncertainties in the

measurement process such that assets or income are not

overstated and the liabilities or expenses are not understated.

5. Completeness - requires that relevant information

should be presented in a way that facilitates understanding and

avoids erroneous implication. Completeness is the result of the

adequate disclosure standard or the principle of full disclosure.

Understandability. Understandability requires that financial

information must be comprehensible or intelligible if it is to be

useful. Accordingly, the information should be presented in a

form and expressed in terminology that a user understands.

Comparability. Comparability means the ability to bring

together for the purpose of noting points of likeness and

difference. Comparable information presents similarities and

dissimilarities. Comparability may be made within an entity

(horizontal comparability or intracomparability) or across

entities (intercomparability or dimensional comparability).

Implicit in comparability is the principle of consistencywhich

requires that "the accounting methods and practices should be

applied on a uniform basis from period to period."

ACCOUNTING CONSTRAINTS

Accounting constraints are the factors that may affect the

relevance and reliability of financial accounting information.

a. Timeliness. Timeliness requires that the accounting

information must be made available or communicated early

enough when a decision is to be made. Relevant information

may lose its relevance if there is undue delay in its reporting.

b. Cost and benefit. The cost and benefit constraint is a

consideration of the cost incurred in generating information

against the benefit to be obtained from having the information.

c. Materiality. Materiality is a practical rule in accounting which

dictates that strict adherence to GAAP is not required when the

items are not significant enough to affect the evaluation,

decision and fairness of the financial statements. Materiality is

relativity. What is material for one entity may be immaterial for

another.

d. Balance between qualitative characteristics. In practice,

a balancing or tradeoff between qualitative characteristics is

often necessary.

Components of a Complete Set of Financial Statements

1. Statement of Financial Position2. Statement of Financial Operation3. Statement of Changes in owners Equity4. Statement of Cash Flows5. Notes to Financial Statement

Recognition and Measurement in the Financial Statements

Recognition the process of reporting an asset, liability

income or expense on the face of the financial statements oan entity. It involves the inclusion of peso amount in the entitysfinancial statements.

Measurement the process of determining the monetaryamounts at which the elements of the financial statements areto be recognized and carried in the statement of financiaposition and statement of financial operation.

3 Elements in the Statement of Financial Position

Assetresources controlled by the entity as a result of pasttransactions or events and from which future economicbenefits are expected to flow to the entity.

Liability present obligations of the entity arising from pastransactions or events the settlement of which is expected toresult in an outflow from the entity of resources embodyingeconomic benefits.

Equity residual interest in the assets of the entity afterdeducting the total of its liabilities.

2 Elements in the Statement of Financial Operation

Incomeincrease in economic benefit during the accountingperiod in the form of an inflow or increase of asset or decreaseof liability that result in increase in equity, other thancontribution from owners.

Expenses decrease in economic benefit during theaccounting period in the form of an outflow or decrease ofasset or increase of liability that result in the decrease inequity, other than distribution to owners.

Accounting Cycle

a. The recording phase concerned with the collection oinformation about economic transactions.

1. Analyzing analysis of the documentation of business

activities provides the basis for making an initial record of eachtransaction.

2. Journalizingthe recording of transactions in chronologicaorder in the appropriate journals.

3. Posting the transfer of information recorded in thejournals to the appropriate accounts in the ledger.

b. The summarizing phase the recorded information isorganized and summarized for decision making purposes.

4. Preparing the unadjusted trial balance the triabalances, usually prepared in a worksheet, provides asummary of the information as classified in the ledger, as welas a general check in the accuracy of the posting.


4/7

*Worksheet used to facilitate the preparation of adjustingjournal entries and financial statements.

#Trial Balance#Adjustments#Adjusted Trial Balance#Statement of Financial Operation#Statement of Financial Position

5. Adjusting entries before financial statements can beprepared, all relevant information that has not been recordedmust be determined.

a. Accrued revenue revenue already earned but not yetcollected.

b. Accrued expenseexpense already incurred but not yetpaid.

c. Prepaid expense expense already paid (or otherwise

recorded) but not yet incurred. Payment may initially debited toan* Asset Account* Expense Account

d. Unearned revenuerevenue already collected but not yetearned. Collection may be initially credited to a*Liability Account*Revenue Account

6. Preparing financial statements statements summarizingoperations and showing financial positions and cash flows areprepared from the information on the worksheet.

7. Preparing the closing entriesbalances in the nominalaccounts are closed in to appropriate owners equity account.

8. Preparing a post-closing trial balance(optional) a post-closing trial balance is taken to determine the quality of thedebits and credits after posting the adjusting and closingentries.

9. Preparing the reversing entries(optional) an entry thatis exact reverse of an adjusting entry as to account title andamounts. Reversing entries are usually made at the same timeas closing entries but are dated the first day of the nextaccounting period.

*At the beginning of a new period, the following types ofadjusting entries may be reversed:#Accrued expenses#Accrued revenues#Prepaid expenses when the original debit was to an expenseaccount#Deferred revenue when the original credit was to a revenueaccount

PARTNERSHIP - is an organization where two or more

persons bind themselves to contribute money, property or

industry into a common fund with the intention of dividing the

profits among themselves. (New Civil Code, Article 1767)

FEATURES OF PARTNERSHIP

1. Voluntary Association

2. Legal Entity

3. Co-ownership of property

4. Taxable Entity

5. Mutual Agency

6. Limited life

7. Unlimited Liability

KINDS OF PARTNERSHIP

1. As to Liability

General and Limited Partnership

2. As to Property

Universal Partnership of Property and Universa

Partnership of Profits

KINDS OF PARTNERS

1. General and Limited Partner

2. Capitalist and Industrial Partner

3. Real and Nominal Partner

4. Ostensible and Secret Partner

5. Universal and Particular Partner

PARTNERS CAPITAL ACCOUNT

1. INVESTMENTS -contributions made are credited

to each partners capital account to increase the

partners equity.

2. PERMANENT WITHDRAWALS -withdrawals o

capital are debited to each partners capita

account to decrease the partners equity.

PARTNERS DRAWING ACCOUNT

1. SHARE IN THE NET PROFIT -credited to the

drawing account to increase the partners equity and

become a source of regular drawings by the partner

or SHARE IN NET LOSS is debited to the drawing

account to decrease the partners equity and his

source of regular drawings.

2. PERSONAL DRAWINGS -oftentimes called salaries

but are in fact withdrawals of profits and are debited

to the drawing account to decrease the partners

equity.

OPENING OF THE BOOKS OF THE PARTNERSHIP

CASE 1 Contribution in the form of Cash, Property and

Industry

CASE 2 Contribution of Property with an attached liability

CASE 3 Investment of an already existing business with the

old books closed and new partnership books opened

CASE 4 Both partners invested their businesses with one of

the sole proprietorship books used as the partnership books

CASE 5 Investment of an already existing business with

recognition of bonus and new books are set up for the

partnership

METHODS OF DIVIDING PROFIT AND LOSS

1. Arbitrary Ratio (any agreed ratio)


5/7

2. Capital Ratio based on any of the following:

a. Initial or original capital

b. Beginning yearly capital

c. Ending yearly capital

d. Average capital

3. Interest on investments, balance in an agreed ratio

4. Salaries to partners, balance based on investments

made

5. Interest on investments, salaries to partners, balance

in an agreed ratio6. Interest on investments, salaries to partners, bonus to

managing partner, balance in an agreed ratio. Where

bonus is expressed as:

a. A distribution of profit (a certain percent of net

income)

b. An expense (a certain percent of net income after

bonus)

DISSOLUTION

-occurs when ownership changes

-a change in the relation of the partners ceasing to be

associated in carrying on the business (ARTICLE 1828 of the

New Civil Code)

Admission of a New Partner:

1. By Purchase

a. Transfer of interest is equal to the amount paid to

the selling partner

b. Transfer of interest is less than the amount paid

by the buying partner

c. Transfer of interest is greater than the amount

paid by the buying partner

d. Transfer of interest with revaluation of asset

(upward adjustment)

e. Transfer of interest with revaluation of asset

(downward adjustment

2. By Investment

a. New partners investment is equal to his capital

credit

b. New partners investment is equal to his capital

credit. Assets of the partnership are to be

revalued.

c. Capital credit for the new partner is lesser than

his actual investment. The difference is given as

bonus capital to the current partners.d. Capital credit for the new partner is higher than

his actual investment with the difference given as

bonus by the original partners.

IMPLIED ASSET REVALUATION OR BONUS

1. No asset revaluation or bonus

2. Bonus to new partner

3. Bonus to current partners

4. Asset revaluation for current partners

5. Asset revaluation and bonus

Withdrawal of a Partner

Death or Incapacity of a Partner

LIQUIDATION

-is the process of winding up the affairs of the business which

normally will take four steps to accomplish

1. Lump-Sum

2. Installment Liquidation

Steps in the Liquidation Process1. Realization of Other Assets/ Other Non-Cash Assets2. Settlement of 3

rdparty obligations

3. Settlement of deficiency4. Payment of partners

a. Loanb. Capital

Cash Priority ProgramOrder of Priority1. 3

rdparty liabilities

2. Partners loan account3. Partners capital account

Settlement of Capital Deficiency1. Right of off-set2. Additional investment3. Absorption by other partner

CORPORATION an artificial being created by operation o

law having the right of succession and the powers, attributes

and properties expressly authorized by law or incident to its

existence.

Characteristics of Corporation

1. Artificial Being

2. Created by operation of law3. right of succession4. Powers, attributes and properties expressly authorized bylaw or incident to its existence5. Ownership interest comprised of share capital6. Management by a board of directors

Advantages of a Corporation

1. Limited liability of shareholders2. Transferability of shares3. Continued life existence4. Greater source of funds

Disadvantages of a corporation

1. Complicated in formation and operation2. Greater degree of government control and supervision3. Centralized management4. Heavier income tax

Kinds of Corporation

1. Stock Corporation- subject to income and business taxes2. Non- Stock corporation- created for civic, charitable, orreligious purposes. They are composed of members, noshareholders. These corporations are generally tax exempt.


6/7

Components of a Corporation

(a) Incorporators(b) Corporators(c) Shareholders/ members(d) Subscribers

SHAREHOLDERS EQUITY

Also known as net assets, net worth, book value,stockholders equity, or equity is the residual interest of the

shareholders in the assets of the corporation after deductingthe total amount of corporate liabilities.

Elements of Shareholders Equity

1. Total share capital (total capital stock)

(a) Share Capital - represents the amount of the total par or

stated value of the shares issued.- the amount fixed in the articles of incorporation to besubscribed and paid in or secured to be paid in by theshareholders of the corporation.

Authorized Share Capitalthe amount fixed in the articles ofincorporation.

Par Value- refers to the fixed amount assigned to each equityshare

No par, Stated Value- the issue price of no par shares mayvary from time to time as it is usually fixed on the basis of theshares book value.

(b) Subscribed Share Capital- is the portion of the authorizedshare capital that has been subscribed but not yet fully paidand therefore still unused.

(c) Subscriptions receivable - unpaid portion of thesubscribed share capital

(d) Treasury Shares- issued shares reacquired by the issuingcorporation which is treated as a reduction from the totalshareholders equity.

2. Other reserves3. Accumulated profits/losses (formerly called retainedearnings and deficit, respectively)

Share and Share Certificate

The share capital is divided into shares evidenced by sharecertificates. A share represents the interest of a shareholder inthe corporation.

A share certificate is the instrument or document thatevidences the ownership of a share.

Share Premium - is the portion of the paid in capitalrepresenting the excess over the par or stated value.

Two Classes of Share Capital

1. Ordinary Share - ordinary share is so called because theordinary shareholders have the same rights and privileges. Theordinary shareholders have no fixed or specific return oninvestment.

2. Preference Share - the preferences usually pertain to thepreference shareholders claims on dividends and net assets inthe event of liquidation. The preference shareholders have onlya limited or fixed return on investment.

Classifications of Preference Share Capital

1. Cumulative Preference Shares - the right of preferredshareholders to receive dividends in arrears is given andprotected and given priority before any payment of dividend is

made to common shareholders.

2. Noncumulative Preference Shares- the right of preferredshareholders to receive dividend in arrears is lost.

3. Participating Preference Shares - the preferredshareholders have the right to receive additional dividend afterthe dividend for both ordinary and preferred shares are paid.

4. Nonparticipating Preference Shares - they are entitledonly to receive dividends that are declared during the currenyear.

5. Convertible Preference Shares- they are given the optionto convert the preference share into ordinary shares or othersecurities of the investee corporation.

6. Redeemable or Callable Preference Shares - the issuedpreference shares can be bought back by the issuingcorporation with a specific call or redemption price.

Accounting for Share Capital Transactions

1. Authorization involves recording of capital share uponapproval by the SEC.

2. Subscription involves accounting for share capitaassigned to potential shareholders who agreed to pay aconsideration in the future.

3. Issuance involves accounting for share capital upon theshareholders full payment of his subscribed capital shares.

4. Reacquisitioninvolves accounting for the acquisition andretention of the corporations own equity shares previouslyissued.

5. Retirement involves accounting for the acquisition andretirement of the corporations own share capital.

Issuance of Share Capital for Noncash Consideration

Rule 1. If issued for tangible or intangible property, the value oshare capital issued is equal to values according to the

following order of priority:1. Fair market value of the property received.2. Fair market value of the share capital issued.3. Par value of the share capital issued.

Rule 2. If issued for services received, the value of sharecapital issued is equal to the values according to the followingorder of priority.

1. Fair market value of the services rendered.2. Fair market value of the share capital issued.3. Par value of the share capital issued.


7/7

Rule 3. If issued in consideration for equity shares owned byother corporations, the value of share capital issued is equal tothe values according to the values according to the followingorder of priority:

1. Fair market value of the equity shares received.2. Fair market value of the share capital issued.3. Par value of the share capital issued.

Treasury Shares the equity shares owned by the issuingcorporation that have been issued and then reacquired but not

cancelled.

Sources of Treasury Shares

1. Repurchase of own shares but not cancelled.2. Delinquent subscription without a highest bidder assumedby the corporation.3. Corporate own shares donated by the shareholder to thecompany itself.

Accounting for Treasury Shares

Treasury sharesare accounted for at cost irrespective of thepar value, stated value or market value of the share capitalacquired.

Transactions involved in the accounting for treasury shares:

1. Acquisition2. Reissuance3. Retirement

Share Splits or Stock Splits

Stock split is a share capital transaction which may change

the number of original shares and par or stated value per sharebut not the total amount of the share capital of the company.This share capital is effected only if authorized by the SEC.

Share Split/ Stock Split/ Split-Up an increase in thenumber of shares outstanding resulting in a reduction in thepar value per share. This is made when the corporationbelieves that a lower price of share capital would attract moreinvestors to the company.

Split-Down/ Opposite Share Split/ Reverse Share Splitadecrease in the number of shares outstanding with acorresponding increase in the par value per share. This usuallyhappens when the corporation determines that a higher priceof share capital would create prestige and other businessadvantage to the company.

PREPARED BYCESAR FELIPECHENIE FELIX

HAZEL PAJARILLAGACYNTHIA ANNE MARIE LOPEZ

KARLA JIN RODRIGUEZ

Documents

Ang Chopsuey