Chapter One

Seite 1

INTRODUCTION TO ACCOUNTING AND BUSINESS

ACCOUNTING IS PART OF DAILY LIFE

Budgeting - The process of receiving money, planning, and allocating it according to ones' needs.

Revenues - Income generated from normal business operations. Gross income figure.

Expenses - Cost of operations that a company incurs to generate revenue.

Net Income - The amount of revenues left after paying for the expenses.

What is net worth and why is this important?

Net Worth - represents your wealth or finance which is made up of properties or assets.

Assets - a resource with economic value that an individual, corporation, or country owns or controls with the expectation that it will provide a future benefit; makes up your Net Worth.

Liabilities - an obligation to, or something that you owe to somebody else.

NET WORTH = ASSETS - LIABILITIES

Knowing your Net Worth is important because it affects your status in life. Knowing how much your Net Worth is helps you how to improve it and make it grow (through profits).

NET WORTH AND ACCOUNTING

In a business, one must make a record of the progress of their financial activities.

If money received from goods or services is greater than money spent for expenses, then there is a profit made.

Making these "diaries" or transaction records is basically what Accounting is.

Bookkeeping - the recording, storing, and retrieving of financial transactions for a business, NPO, individuals, etc.

Financial Analysis - Interpretation of the financial reports.

YOU ARE A DECISION MAKER

Business needs:

Sufficient knowledge, skills, and interest on the product or service

Enough capital and where to get more if insufficient

Other resources beside cash for business operations

How much are the operating costs

Location

Price of product or service

Competition

One needs business knowledge and accounting knowledge in order to succeed.

BUSINESS AND ACCOUNTING

Managing the assets of a BUSINESS is required to produce more wealth; to manage these efficiently, one must have sufficient financial information.

ACCOUNTING is what gives the decision makers, managers, or stakeholders of a business the financial information they need.

ACCOUNTING INFORMATION

Questions about the business the accounting information answers:

The status of a business regarding profit

Liquidity (Ability to generate cash) of a business and how they manage liabilities

Solvency (Ability to pay liabilities when due) of a business and how they manage financial pressure

Amount of money coming in and out

If the creditors were paid on time

Returns of profit on investments

Accounting prepares four financial reports which are called General Purpose Financial Statements,

Statement of Financial Position - progress report showing a list of assets and liabilities.

Income Statement - performance report of revenues against costs and expenses.

Statement of Cash Flows - cash report showing where we got and where we used the money.

Statement of Owner's Net Worth - progress report showing changes in wealth.

A good accountant is able to prepare accurate financial reports and interpret them well.

A good stakeholder is also able to understand the reports, evaluate them well, and come up with good decisions.

HISTORY OF ACCOUNTING

Traces of accounting were found in Babylonia and Egypt.

In the 15th century, accounting records were also kept at Grecian ports.

First accounting book was written by Cotrugli in Naples

Modern double-entry bookkeeping system was prepared by Luca Pacioli in 1494 entitled Summa de Aritmetica.

In the Philippines, bookkeeping was introduced by the Spaniards and the bookkeeper Tenedor de Libro; however, accounting was already present before they were introduced.

BUSINESS, ITS MOTIVE AND ROLE IN SOCIETY

Business - economic unit that engages in buying and selling goods or services.

Business success is measured in terms of profit and increase in funds.

The Business/Economic Cycle

Business: Earn Profit

Profit: Generates more resources or funds for the business

Funds: Possible business expansions

Expansions: Increased job opportunities and taxes paid

Taxes: Helps fund government projects

Projects: Benefits the people and the economy

SOURCES OF CAPITAL

Primary source: Owner or Investors

Return OF Capital - Investors get back what was invested.

Return ON Capital - Investors receive more than the amount invested.

Secondary source: Relatives, friends, bank, or a cooperative. (If the funds from the primary source are not enough.)

Micro-finance programs - helps low-income Filipino entrepreneurs fund their projects.

Entrepreneur - one who organizes, manages, and takes the risk of putting up a business.

Business always have risks.

MINIMIZING BUSINESS RISK

Risk - the element of uncertainty in an outcome.

Ways to reduce risk

Careful planning and control of operation

Making business plans and carefully assessing the business you want to put up

Having adequate knowledge about the product or service

Choosing the right form of business and right type of operation.

FORMS OF BUSINESSES

Sole Proprietorship - set up and managed by one person

Advantages

Inexpensive to start (Small amount of capital)

Easily managed

Owner gets all the profit

Easy to start (Regarding requirements and legality)

Disadvantages

Difficult to expand (low capital)

Finite life

Unlimited liability

Partnership - owned by two or more persons called partners who contribute money, property. and talent into a common fund for the purpose of sharing profit among themselves.

Advantages

Easily managed

Management is more efficient

Disadvantages

Finite life

Unlimited liability

Corporation - business organized as a separate legal entity from the owners. When investors buy shares of stocks, they become owners called SHAREHOLDERS. The corporation is managed by the BOARD OF DIRECTORS elected by the shareholders themselves.

Advantages

More capital

Can afford to hire experts (high capital)

Infinite life

More stable because shares can be sold

Higher amounts of profit

One-man corporations are now possible (small time entrepreneurs can enter the corporate playing field)

Limited liability

Disadvantages

Debts to shareholders are difficult to pay (if business goes bankrupt)

Hard to start (More legal and tax requirements)

Board of Directors' possible abuse of power

TYPES OF BUSINESS OPERATIONS

Service - one which provides service

Merchandising - one which buys and sells finished goods or merchandise

Manufacturing - one who buys raw materials, processes these into finished goods and then sells these to customers (merchandisers).

WAYS OF OBTAINING PROFIT

Service - providing services (given if revenues are higher than expenses)

Merchandising - selling finished goods (given if revenues are higher than expenses)

Manufacturing - selling finished goods (given if revenues are higher than expenses)

Profit - revenues>cost and expenses (net profit)

Loss - revenues

Break Even - revenues=cost and expenses

TYPES OF BUSINESS ACTIVITIES

Financing Activities - transactions with creditors or investors used to fund either company operations or expansions. (Includes withdrawals of capital and loans repaid to lenders.)

Investing Activities - Acquisition of properties in land, furniture, machineries, and equipment. (Buying and selling of long term assets.)

Operating Activities - functions related to earning of income by selling goods or services and by incurring expenses.

MANAGING THE BUSINESS

Management - getting things done by using resources and directing people as efficiently as possible to be able to accomplish the goals of the business. (3 Objectives)

Resources used productively

Customers' satisfaction

Profit

Success: Business must be efficient and effective.

Efficient - resource inputs are being used at the least time, effort, and cost to produce the required output.

Effective - able to attain its goals in number of products sold or services rendered given to a specific level of quality.

Management involves four processes:

PLANNING - determining goals and activities to complete these goals

ORGANIZING - creating divisions for specific roles within the business

DIRECTING - overseeing daily operations and activities of the business

CONTROLLING - guarding and guiding people to ensure tasks and activities are done according to plan and some standard of performance.

Different kinds of managers

Production manager - studies what products to produce and the necessities for efficient production.

Marketing manager - studies the market and makes plans according to the study

Finance manager - takes care of the financial resources (how to source it and use it)

Sales manager - oversees selling operations

Personnel manager - takes care of employees and workers

ACCOUNTING AS A BUSINESS LANGUAGE

Accounting - service activity whose function is to prepare financial reports useful about the business; process of recording, classifying, and summarizing financial transactions and interpreting the results.

Accounting is a bridge between the company and the interested users.

USERS OF FINANCIAL INFORMATION

Stakeholders - person who has a "stake" or interest in the business (Users).

Owner or Investor - needs information to minimize risk of losing money and to plan for the business's future

Manager - needs information to evaluate performance of the business

Lender or Creditor - needs information to assess the paying ability of the business-borrower

Supplier - needs information to determine the credit worth of the business and its financial status.

Government - needs information to determine if the business is paying tax and filing required documents

Employee - needs information to assess the ability of the business to grant higher wages, benefits, working conditions, and security of tenure.

Customer - needs information to assess the company's ability to continuously supply the goods they need at the right price and right quantity.

DIRECT users and EXTERNAL users are the ones mentioned above with the exception of management which is an INTERNAL user.

INDIRECT users are stock exchanges, trade associations, regulatory bodies, and financial analysts who rely on the financial statements in their role of regulating, assisting, advising, and protecting clients and investors.

TYPES OF ACCOUNTING AREAS AND THE REPORTS PREPARED

Management Accounting - uses Managerial Reports prepared for management use. Includes additional information such as product cost, estimate of profit to be earned for a planned project, budget, etc.

Financial Accounting - uses Financial Reports which are the main source of information of stakeholders or users. These reports are also called General Purpose Financial Statements and are audited by CPAs.

Tax Accounting - specializes in the determination of taxes and preparation of various tax returns required to be filled up by taxpayers such as: Income Tax, VAT, and Percentage Tax. Reports Tax Reports to Bureau of Internal Revenue (BIR).

Special Reports - some firms by the nature of their organization/operation are required to prepare these for regulations. It's mainly for regulatory agencies.

ACCOUNTING INFORMATION SYSTEM

Accounting Information System - a structure that a business uses to collect, store, manage, process, retrieve, and report its financial data in an orderly and efficient manner to be used by users.

AIS can be classified into two:

Measurement System - (Processing Phase) involves analyzing, measuring, recording, classifying, and summarizing.

Communication System - (Reporting Phase) involves the presentation of formal report which are communicated to decision makers.

AIS Principles (Five Principles)

Control Principle - prescribes that the AIS of the firm must have good internal control

Internal Control - enumerates the methods and procedures necessary to monitor the activities of the business and ensure efficient operation.

Properties protected, Records reliable, Company policies complied with, Performance of business units are properly evaluated.

Cost-Benefit Principle - prescribes that the advantages enjoyed from installing the system must outweigh its cost.

Relevance Principle - prescribes that the information must be reported promptly and that information must be useful to enable Musers to reach a conclusion and make a decision.

Compatibility Principle - prescribes a system designed to fit the unique characteristics of the company: its personnel, activities, and structure.

Flexibility Principle - prescribes that the company's system should allow for changes, if change is needed to come up with timely and updated information in response to industry demand, government promulgations, technological advances, and competitive pressures.

Components of an Accounting Information System (Five Components) (People to Equipment)

People - personnel (involved in Phase 1 to Phase 4)

Documents - supports the data (gathered in Phase 1)

Records - books of accounts that must be maintained by the accounting department.

Methods - procedures of doing (Phase 1 to Phase 4)

Equipment/devices - processes data and generate information which are then summarized into financial reports. (Phase 1 to Phase 4)

Explained

Data processing starts with the gathering of documents which are proof of business transactions

Transaction - activity or event taking place in business which is expressed in terms of money

Business document - describes in words and amounts the nature of the transaction

Internal Control requires these documents be properly controlled, numbered, and stored.

Documents come from various departments

Personnel prescribed by Internal Control are the only ones allowed to handle business transactions and prepare these documents.

Documents are received by the Accounting Officer or Clerk which are then analyzed, measured, recorded, and classified. Device used to record data is called INPUT DEVICE. (Can be manual or computerized) Data input is called a JOURNAL ENTRY. (Other ex. scanner and bar code readers used in recording groceries)

Recorded data are now placed in a book called JOURNAL. To be understood by decision makers, the data in a journal (which is too diverse) is organized and classified into related groups and stored in another book called the LEDGER. Phases 2 and 3 of the system covers the mechanical or procedural phase of accounting called BOOKKEEPING.

Methods (either manually or electronically) process captured data from the documents in a meaningful manner by journalizing, classifying, summarizing, and interpreting.

Finally, the organized data become meaningful information when summarized and reported in the financial statements prepared by the accountant. Accountants then interpret the financial data through financial statement analysis which will be useful to decision makers.

COMPUTERS DO NOT REPLACE ACCOUNTANTS

Output devices - where information may be drawn out such as the printer.

Electronic data processors have freed accountants from the routine aspects of processing data but computers CANNOT THINK, CANNOT EVALUATE, OR RENDER JUDGMENT.

Computerized Accounting System: Input to Process to Output

FINANCIAL REPORTS ILLUSTRATED

Business Enterprise - term used for any business venture or undertaking. May be called a COMPANY if it is a partnership or a corporation.

Financial reports are prepared annually but interim reports such as monthly reports are permitted.

Profit enhances wealth.

General Purpose Financial Statements Illustrated

Income Statement - reports the financial performance of the business and is also called profit or loss statement or statement of earnings. Lists down income earned and expenses incurred.

Statement of Changes in Owner's Equity - explains the activities for a period of time that caused the owner's equity to change. Four factors affect equity:

Investments

Withdrawals

Profit

Loss

Statement of Cash Flows - shows what caused the change in the cash; inflows and outflows of cash in the business. Shows three kinds of activities:

Financing - investment of the owner and cash loan

Investing - Acquisition and sale of properties

Operating - Revenues and Expenses

Statement of Financial Position (Balance Sheet) - shows how healthy or robust the enterprise is when it shows a listing of the accumulated resources (cash and properties) owned and a listing of the accumulated liabilities (debts or obligations to pay) owed by enterprise. NET WORTH of a firm is also called OWNER'S EQUITY.