BASIC PRINCIPLES AND BASIC PRINCIPLES AND CONCEPTS CONCEPTS

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BASIC PRINCIPLES AND BASIC PRINCIPLES AND

CONCEPTS

CONCEPTS

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ACCOUNTING DEFINED ACCOUNTING DEFINED

The process of identifying measuring, and The process of identifying measuring, and

communicating economic information to communicating economic information to

permit informed judgments and decisions by permit informed judgments and decisions by

users of the information users of the information

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ACCOUNTING ACCOUNTING

Language of business Language of business

Is a service activity. It’s function is to Is a service activity. It’s function is to

provide quantitative information, provide quantitative information,

primarily financial in nature, about primarily financial in nature, about

economic entities that is intended to be economic entities that is intended to be

useful in making economic decision.

useful in making economic decision.

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ACCOUNTING SYSTEMS ACCOUNTING SYSTEMS

Objectives of an accounting system:

Objectives of an accounting system:

To process the information efficiently-at low cost To process the information efficiently-at low cost To obtain reports quickly

To obtain reports quickly

To ensure a high degree of accuracy To ensure a high degree of accuracy

To minimize the possibility of the theft and fraud To minimize the possibility of the theft and fraud

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ACCOUNTING CYCLE ACCOUNTING CYCLE

1. Analyze transaction

2. Journalize original entries

3. Post journal entries to ledger

4. Identify, journalize and post adjusting entries

6. Prepare financial statements

5. Journalize and post closing entries

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BRANCHES OF ACCOUNTING BRANCHES OF ACCOUNTING

Financial accounting-

Financial accounting- information information

gathered is intended both for internal (e.g.

gathered is intended both for internal (e.g.

managers) and external (e.g. banks and managers) and external (e.g. banks and

other creditors, government agencies, other creditors, government agencies,

investment advisers, etc.) parties.

investment advisers, etc.) parties.

Information recording is subject to certain Information recording is subject to certain

ground rules internationally known as ground rules internationally known as

Generally Accepted Accounting Principles Generally Accepted Accounting Principles

(GAAP).

(GAAP).

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BRANCHES OF ACCOUNTING BRANCHES OF ACCOUNTING

Management accounting-

Management accounting- information information

gathered is primarily for the use of internal gathered is primarily for the use of internal management. Such information is used for management. Such information is used for

management planning and control.

management planning and control.

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THE NEED OF INFORMATION THE NEED OF INFORMATION

Information Information

Nonquantitative information Quantitative information

Accounting information

Non-accounting information

Operating information

Financial Accounting

Management Accounting

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THREE CATEGORIES OF THREE CATEGORIES OF

ACCOUNTING INFORMATION ACCOUNTING INFORMATION

1.1. Operating InformationOperating Information 2.2. Financial InformationFinancial Information

3.3. Management InformationManagement Information

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OPERATING INFORMATIONOPERATING INFORMATION

Constitutes the largest quantity of accounting Constitutes the largest quantity of accounting information; it provides the basic data for both information; it provides the basic data for both

managerial and financial accounting.

managerial and financial accounting.

FINANCIAL ACCOUNTINGFINANCIAL ACCOUNTING

Information intended for managers and by Information intended for managers and by

external parties, including shareholders, external parties, including shareholders,

banks and other creditors, government banks and other creditors, government agencies, investment advisers and the agencies, investment advisers and the

general public.

general public.

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MANAGEMENT ACCOUNTINGMANAGEMENT ACCOUNTING

Used internally for planning, Used internally for planning,

implementation and control. This implementation and control. This

accounting information is prepared to accounting information is prepared to

aids mangers.

aids mangers.

THREE MANAGEMENT FUNCTION THREE MANAGEMENT FUNCTION

1.1. PlanningPlanning

2.2. Implementation Implementation

3.3. Control Control

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USERS OF INFORMATION USERS OF INFORMATION

OwnersOwners

ManagementManagement

CreditorsCreditors

GovernmentGovernment

Prospective owners and prospective Prospective owners and prospective creditors

creditors

EmployeesEmployees

PublicPublic

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PLANNING PLANNING

The process of deciding what action should be The process of deciding what action should be

taken for the future taken for the future

Budgeting is one important factor of planning, Budgeting is one important factor of planning,

wherein it is the process of planning overall wherein it is the process of planning overall

activities of the organization for the specified activities of the organization for the specified

period of time.

period of time.

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IMPLEMENTATION IMPLEMENTATION

Putting approved plans into action.

Putting approved plans into action.

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CONTROL CONTROL

The process used to assure that the employees performs The process used to assure that the employees performs

properly.

properly.

Accounting information is used in the control process as Accounting information is used in the control process as

am mean of communication, motivation, attention getting am mean of communication, motivation, attention getting

and appraisal.

and appraisal.

Communication

Communication - - when accounting report can assist when accounting report can assist in informing employees about management plan in informing employees about management plan

Motivation

Motivation - - it can induce members of the organization to it can induce members of the organization to act in accordance with company’s goal and objectives.

act in accordance with company’s goal and objectives.

Attention getting -

Attention getting - it signals that the problems ay it signals that the problems ay exist and requires investigation.

exist and requires investigation.

Appraisal

Appraisal - - basis for salary increase, promotion or basis for salary increase, promotion or dismissal

dismissal

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ACCOUNTING PRINCIPLE ACCOUNTING PRINCIPLE

Established by human, ‘a general law or rule adopted Established by human, ‘a general law or rule adopted or professed as a guide to action; a settled ground or or professed as a guide to action; a settled ground or basis of conduct and practice.

basis of conduct and practice.

THREE CRITERIA OF ACCEPTANCE FOR PRINCIPLES THREE CRITERIA OF ACCEPTANCE FOR PRINCIPLES

Relevance

Relevance - when its result in information that is meaningful - when its result in information that is meaningful and useful to those who need to know something and useful to those who need to know something about

about the organization.the organization.

Objectivity

Objectivity - when the information is not influenced by - when the information is not influenced by personal bias or judgment of those who furnish it.

personal bias or judgment of those who furnish it.

Feasibility

Feasibility - that it can be implemented without undue - that it can be implemented without undue complexity or cost.

complexity or cost.

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BASIC PRINCIPLES AND BASIC PRINCIPLES AND

CONCEPTS CONCEPTS

Accounting principles are built on a Accounting principles are built on a

foundation of some basic concepts foundation of some basic concepts

Accounting foundation consists of a set Accounting foundation consists of a set

called Generally Accepted Accounting called Generally Accepted Accounting

Principles (GAAP) Principles (GAAP)

Concepts widely accepted and applied in Concepts widely accepted and applied in

practice practice

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FINANCIAL ACCOUNTING FINANCIAL ACCOUNTING

Governed by Generally Accepted Governed by Generally Accepted

Accounting Principles (GAAP) Accounting Principles (GAAP)

Strike a balance between the criterion of Strike a balance between the criterion of

relevance and the criteria of objectivity and relevance and the criteria of objectivity and

feasibility.

feasibility.

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NATURE AND PURPOSE OF NATURE AND PURPOSE OF

ACCOUNTING ACCOUNTING

3 Types of Accounting Information 3 Types of Accounting Information

Operating Information Operating Information

Management Accounting Information Management Accounting Information

Financial Accounting Information Financial Accounting Information

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OBJECTIVES OF ACCOUNTING OBJECTIVES OF ACCOUNTING

SYSTEMS SYSTEMS

1.1. To process the information efficiently-at To process the information efficiently-at low cost

low cost

2.2. To obtain reports quicklyTo obtain reports quickly

3.3. To ensure a high degree of accuracyTo ensure a high degree of accuracy

4.4. To minimize the possibility of theft or To minimize the possibility of theft or fraud

fraud

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SIGNIFICANT RECORDKEEPING SIGNIFICANT RECORDKEEPING

IDEAS IDEAS

IDEA OF DEBIT AND CREDIT EQUALITYIDEA OF DEBIT AND CREDIT EQUALITY

Every debit must have an equal and Every debit must have an equal and corresponding credit

corresponding credit

IDEA OF BALANCINGIDEA OF BALANCING

One total should always equal some other totalOne total should always equal some other total

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DEBIT AND CREDIT DEBIT AND CREDIT

Assets = Liabilities + Owner’s equity Assets = Liabilities + Owner’s equity

Dr +

Cr -

Dr +

Cr -

Cr - Dr

+

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ACCOUNTING CONCEPTS ACCOUNTING CONCEPTS

1.1. Money measurementMoney measurement

2.2. EntityEntity

3.3. Going-concernGoing-concern

4.4. CostCost

5.5. Dual aspectsDual aspects

6.6. Accounting periodAccounting period

7.7. ConservatismConservatism

8.8. RealizationRealization

9.9. MatchingMatching

10.10. ConsistencyConsistency

11.11. MaterialityMateriality

Assets = Liabilities + Owners equity Assets = Liabilities + Owners equity

Cr - Dr

+

Dr +

Cr -

Dr +

Cr -

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BASIC ACCOUNTING CONCEPTS BASIC ACCOUNTING CONCEPTS

1.1. Money Measurement- An accounting record is made Money Measurement- An accounting record is made only of information that can be expressed in monetary only of information that can be expressed in monetary terms.

terms.

2.2. The Entity Concept- The owners of the business are The Entity Concept- The owners of the business are considered separate and distinct from the business considered separate and distinct from the business itself. Hence, accounts are kept for the entity as

itself. Hence, accounts are kept for the entity as distinguished from the persons associated with the distinguished from the persons associated with the entity.

entity.

3.3. The Going-Concern Concepts- unless there is good The Going-Concern Concepts- unless there is good evidence to the contrary, it is assumed that the

evidence to the contrary, it is assumed that the business will operate indefinitely.

business will operate indefinitely.

4.4. The Cost Concept- The economic resources of an The Cost Concept- The economic resources of an

entity are called assets. An asset is ordinarily entered entity are called assets. An asset is ordinarily entered in the accounting records at the price paid to acquire it- in the accounting records at the price paid to acquire it- that is, at its cost.

that is, at its cost.

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BASIC ACCOUNTING CONCEPTS BASIC ACCOUNTING CONCEPTS

5.5. The Dual-Aspect Concept- Assets= Liabilities+ The Dual-Aspect Concept- Assets= Liabilities+

Owner’s Equity Owner’s Equity

6.6. Accounting Period- Accounting measures activities for Accounting Period- Accounting measures activities for a special time interval, usually one (1) specified.

a special time interval, usually one (1) specified.

7.7. Conservatism- revenues are recognized only when Conservatism- revenues are recognized only when they are reasonably certain, whereas Expenses are they are reasonably certain, whereas Expenses are recognized as soon as they are reasonably possible.

recognized as soon as they are reasonably possible.

8.8. Realization- Revenues are usually recognized in the Realization- Revenues are usually recognized in the period in which goods were delivered to costumers or period in which goods were delivered to costumers or in which services were rendered. The amount

in which services were rendered. The amount

recognized is the amount that costumers are certain to recognized is the amount that costumers are certain to pay.pay.

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BASIC ACCOUNTING CONCEPTS BASIC ACCOUNTING CONCEPTS

9.9. Matching- when a given event affects both revenues Matching- when a given event affects both revenues and expenses, the effect on each should be

and expenses, the effect on each should be recognized in the same accounting period.

recognized in the same accounting period.

10.10. Consistency- Once an entity has decided on a certain Consistency- Once an entity has decided on a certain accounting method, it should use the same method in accounting method, it should use the same method in all subsequent events of the same character unless it all subsequent events of the same character unless it has sound reasons to change methods.

has sound reasons to change methods.

11.11. Materiality- insignificant events may be disregarded, Materiality- insignificant events may be disregarded, but there must be full disclosure of all important

but there must be full disclosure of all important information.

information.

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THREE REPORTS THREE REPORTS

BALANCE SHEET BALANCE SHEET

INCOME STATEMENT INCOME STATEMENT

CASH FLOW STATEMENT CASH FLOW STATEMENT

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BALANCE SHEET BALANCE SHEET

Is a report of status as of a moment of Is a report of status as of a moment of

time, whereas the other 2 statements time, whereas the other 2 statements summarize flows over a period of time summarize flows over a period of time

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INCOME STATEMENT INCOME STATEMENT

Income Statement Income Statement

- summarizes the results of operations

- summarizes the results of operations for a period of time.

for a period of time.

- it is a

- it is a flow reportflow report as contrasted with a as contrasted with a balance sheet which is a

balance sheet which is a status reportstatus report..

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MAMAGEMENT ACCOUNTING CONTRASTED WITH MAMAGEMENT ACCOUNTING CONTRASTED WITH

FINANCIAL ACCOUNTING FINANCIAL ACCOUNTING

Dimension

Dimension Management AccountingManagement Accounting Financial accountingFinancial accounting

1)1) NecessityNecessity Optional Optional RequiredRequired

2)2) PurposePurpose A means to the end of the A means to the end of the assisting management

assisting management Produce statements for outside Produce statements for outside users

users

3)3) UsersUsers Relatively small group; known Relatively small group; known identity

identity Relatively large group; mostly Relatively large group; mostly unknown

unknown

4)4) Underlying structureUnderlying structure Varies according to use of the Varies according to use of the information

information One basic equation:One basic equation:

Asset = Liabilities + Owner's Asset = Liabilities + Owner's Equity

Equity

5)

5) Source of principlesSource of principles Whatever is useful to Whatever is useful to management

management GAAPGAAP

6)6) Time OrientationTime Orientation Historical and estimates of the Historical and estimates of the future

future HistoricalHistorical

7)7) Information contentInformation content Monetary and nonmonetaryMonetary and nonmonetary Primarily monetaryPrimarily monetary

8)8) Information PrecisionsInformation Precisions Many approximationsMany approximations Fewer approximationsFewer approximations

9)9) Report FrequencyReport Frequency Varies with purpose; monthly & Varies with purpose; monthly &

weekly common

weekly common Quarterly & annuallyQuarterly & annually

10)10) Report timelinessReport timeliness Reports issued promptly after Reports issued promptly after end of period covered

end of period covered Delay of weeks or even months Delay of weeks or even months

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11) Report entityReport entity Responsible centerResponsible center Overall organizationOverall organization

12)12) Liability PotentialLiability Potential Virtually noneVirtually none Few lawsuits, but threat is Few lawsuits, but threat is always present

always present

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SIMILARITIES OF FINANCIAL AND SIMILARITIES OF FINANCIAL AND

MANAGEMENT ACCOUNTING MANAGEMENT ACCOUNTING

1. The same considerations that make generally accepted accounting principles 1. The same considerations that make generally accepted accounting principles sensible for purpose of financial accounting are likely to be relevant for purpose sensible for purpose of financial accounting are likely to be relevant for purpose of management accounting.

of management accounting.

2. Operating information is used both in preparing the financial statements and 2. Operating information is used both in preparing the financial statements and in management accounting.

in management accounting.

3. Basic data are collected in accordance with generally accepted financial 3. Basic data are collected in accordance with generally accepted financial principles.

principles.

4. The financial and management accounting information are both used in 4. The financial and management accounting information are both used in decision making.

decision making.

Figure

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