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Chapter 1 - Basic Accounting Environment

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Chapter 1 - Basic Accounting Environment

Uploaded by

Namor Onisa
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Chapter 1: Basic Accounting Environment

1. Accounting and Bookkeeping


Accounting has been defined by the Committee on Terminology of the American Institute of
Certified Public Accountant as “ 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 result thereof”. This definition emphasizes the four phases of
accounting namely, recording, classifying, summarizing and interpreting. The recording phases of
accounting of accounting technically known as bookkeeping.

Accounting cannot exist independently of bookkeeping. An accountant must necessarily know the
principles and mechanics of bookkeeping but a person may be a bookkeeper even if he does not
know the analytical and interpretive function of accounting. Hence, those who study accounting
are taught first the fundamentals of bookkeeping.

2. Accounting Process

3. Financial Statements - show the financial information of the company before making a
decision. The basic financial statements which are prepared at the end of the accounting period
are:
a. Balance sheet or Statement of Financial Position – it shows the financial condition of the
business. This statement contains assets, liabilities and capital as of given date/period. “As of”
means the statement contains cumulative figures from the start of the business operation up to
the present statement date.
b. Income Statement – it shows the result of business operations. It gives the idea whether the
business enterprise is making profit or losses for a period of time. “For a period” means the
statement contains figure that transpired only during the period of the statement date. This
statement contains income, cost and expenses.
c. Statement of Owner’s Capital - It is the progress report showing changes in the capital
account.
d. Statement of cash flows – It gives information about the cash sources and the cash uses of
the business enterprise during a given period of time. There are three kinds of activities under
this statement:
a. Operating activities (revenue and expenses)
b. Financing activities (availment of loan and additional capital of the owner)
c. Investing (acquisition and sale of properties)
4. Accounting as a language of business. It can communicate between the business and the
financial users and base on the financial information, it can speak in a language that users must
understand.
5. Users of financial information (stakeholders)
• Owner or investor – the one who puts capital in a business enterprise. They want to know if
the business is profitable or is the business accumulates sufficient profit to remain stable.
• Manager – the one running the business. They want to know if the plans that are being
implemented benefits the business and is the business operating properly. Losing business
depletes profit and it a reflection of inefficient management.
• Lender/ creditor or supplier – they want to know the paying ability of the business when the
debt becomes due and the estimation of the liquid assets.
• Government – they want to know if the business paying the correct taxes and filing all
necessary required documents.
• Employees – they want to assess the business if the business has the ability to give high
salaries, benefits, good working conditions and security of tenure.
• Customer-they want to know the capability of the business to have long business relationship
base on their goods they need at the right price and quality.
6. Basic accounting concepts and principles
a. Entity concept - this concept states that the personality of the owner and the
personality of the business are distinct and separate from each other. When a person
opens a business, he will give a name to his business enterprise. Since the owner and
the business are separate entities, each can transact business separately. The business
can buy, sell, may enter into contracts, pay liabilities, and many others as if it had one
personality.
b. Objectivity principle - also called the reliability principle. Transactions should be
verifiable by other parties and properly supported by evidence.
c. Cost principle - transactions have to be recorded at the amount that one has actually
paid for.
d. Materiality principle - the materiality of an account is a matter of professional
judgment. The skill of an accountant judging an account is essential.
e. Matching principle - for accounting purpose, match the expense incurred to the
revenue earned.
f. Accounting period - a period of 12 months. It can be calendar or fiscal period
g. Revenue Recognition - determines the specific conditions under which income
becomes realized as revenue/income and the income pertaining to it is measurable
h. Conservatism - recognizing expenses and liabilities in the least amount of time. When
one has an option to choose several outcomes where the probabilities are most likely to
occur, he should choose the transactions resulting in a lower amount of profit or a
deferral of a profit.

7. Forms and types of business organization

8. Forms and types of business organization


a. A service business - is one which engaged in the rendering of services to others, like
the laundry shop, beauty parlor, barber shop, law firm, dental clinic and medical clinic.
b. A merchandising business - is one which engaged in the buying and selling of goods
or commodities. Example, grocery store, textile store, drug store, and department store.
c. A manufacturing business – is one who is engaged in the manufactured of products
or the conversion of raw materials into finished products which are then sold.

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