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W O R D ...BUSINE

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BUSINESSAn economic activity of buying and selling in order to obtain profit.

actions that involve the production, distribution, and consumption of goods and services at all levels within a society.

Formally, it is an economic unit that obtains and controls resources and then engages in buying and selling of goods or services with a view of enhancing these resources.

MAJOR OBJECTIVE OF THE BUSINESS

GENERATION OF SALES

How can you manage your business well?Through…ACCOUNTING

How does Accounting help in facilitating the management of the business?

Accounting facilitates the 3 major management functions:

Planning Execution EvaluationAccounting records show the past performance of the business which may as serve guide to come up with a better plan.

Accounting helps in recording the transactions that you have executed.

Accounting helps in comparing and evaluating the actual performance based on what is planned.

How can my business be successful?In order to be successful,your business must be…

Above

Average

Two guide questions to have a successful business:

1. Why would your customer buy from you?

2. What can you offer to your customers that your competitors cannot?

How can you answer these two questions??but…

Know

Your

OPERATIONS

success inBUSINESSismeasured

intermsofPROFIT

PROFIT• Obtained when the amount you received is more than the

amount you paid for the goods or services you sold.

• This increases the value of funds and resources of the business.

Take note that :

Expenses

should contribute to the generation of Profit

ACCOUNTING 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.

-Accounting Standards Council

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 Institute of Certified Public Accountants

Actually,

ACCOUNTING is an Information System that

measures business activities

processes information into reports

communicates the reports to decision makers

ACCOUNTING INFORMATION SYSTEM

FINANCIAL STATEMENTS

ACCOUNTING AS THE LANGUAGE OF THE BUSINESS

STAKEHOLDERS or USERSReview the reports and make decisions

ACCOUNTING INFORMATION SYSTEMProcesses the financial information and prepares the reports

COMPANYAccumulates accounting information through its various transactions

Accounting ReportsA. Managerial Reports

-these are internal reports that are prepared for management use.-this information need gave rise to a course called Management Accounting

B. General Purpose Financial Statements-main source of information of stakeholders or users-these are audited by CPA who attests to its fair presentation and validity.

C. Tax Returns -all firms are required to file tax returns to the Bureau of Internal Revenue.

D. Special Reports -some firms are required to prepare these reports as needed by the nature of their operation. -Zenaida Vera Cruz-Manuel

REPORTINGPROCESS

MANAGERIALREPORTS

SPECIALREPORTS

AUDITEDREPORTS

TAXREPORTS

MANAGEMENT

REGULATORY AGENCIESBSP,SEC

TAX AGENCIESBIR

EMPLOYEESINVESTORS CUSTOMERSSUPPLIERS REGULATORYBOARD

LENDERS

CHANNELS OF ACCOUNTING INFORMATION FLOW

FINANCIAL STATEMENTSIncome Statement

Statement of Changes in Equity

Statement of Financial Position

Statement of Cash Flows

How much wealth was produced?

Change in owner’s wealth

How much wealth was accumulated?

What cash has come and gone out?

Income StatementReports the financial performance of the business. (Zenaida Vera Cruz-Manuel)

Profit or loss statementStatement of earnings

Two components:

Income Expense

INCOME-represents inflow of cash or other assets coming from a client or customer for service rendered or for merchandise sold.

Revenue- income coming from the normal course of business.Gain- an income which may arise but not really from its

normal course of operation.

EXPENSES-the consumption of asset or using of service to generate revenue.

-Zenaida Vera Cruz-Manuel

Statement of Changes in EquityShows the activities for a period of time that caused the owner’s equity to change. (Zenaida Vera Cruz-Manuel)

EQUITYCONTRIBUTIONS

REVENUES WITHDRAWALSEXPENSES

Statement of Financial PositionShows how healthy the enterprise is when it shows the accumulated resources and debts of the business with a list of its assets, liabilities and equity.

CAPITALLIABILITIES

ASSETS

ASSETSAre economic resources owned by the business.

A resource obtained and controlled by the enterprise as a result of a past event and from which probable future economic benefits are expected to flow to the enterprise. (Zenaida Vera Cruz-Manuel)

Is the ability of the asset to produce future cash flow for the business entity whether directly or indirectly.

Asset

Current Assets

Non Current Asset

Include cash and cash equivalents which are not restricted in use as well as other assets expected to be realized into cash or intended to be sold or consumed within the normal operating cycle or one year, whichever is longer. (Zenaida Vera Cruz-Manuel)

Residual definition. All other assets not classified as current.

LIABILITIESSimply defined as an obligation to do or pay.

An obligation arising from past event, the settlement of which is expected to result an outflow of resources of an enterprise. (Zenaida Vera Cruz-Manuel)

Liabilities

Current Liabilities

Non Current Liabilities

Debts or obligations reasonably expected to be liquidated in the normal course of the enterprise’s operating cycle or paid within one year by the use of current assets or creation of other current liabilities. (Zenaida Vera Cruz-Manuel)

Long term liabilities or obligations which are payable longer than one year. (Zenaida Vera Cruz-Manuel)

CAPITALAfter deducting the liabilities from the assets, the net asset shows the net worth or net value of the firm which belongs to the owner. (Zenaida Vera Cruz-Manuel)

Illustration:Assume Mr. Dela Cruz contributed P300,000 cash in a barber shop:

Assets

Cash P300,000

Capital

Dela Cruz, Capital P300,000

To illustrate furtherAssume Mr. Dela Cruz borrowed cash of P150,000 from the bank for the business.

Assets

Cash P450,000

Capital

Dela Cruz, Capital P300,000

Liabilities

Loan Payable P150,000

ACCOUNTING EQUATION

LIABILITIES CAPITALASSETS REVENUES EXPENSES= + + -

But as Algebra dictates, all terms must be expressed positively.

+

Demonstration problem:

(to illustrate the effects of the transactions in the accounting elements)

Apr 1 Mr. Dela Cruz opened a travel agency by investing cash of P50,000 and two coasters worth P800,000 3 Borrowed P100,000 from JH Bank 7 Bought tables and chairs and paid cash of P50,000 15 Computer, air conditioner and various equipment were purchased on

account from Hoji Co. for P40,000 18 Mr. Dela Cruz made a cash withdrawal of P5,000 for personal use 20 The account due to Hoji Co. was paid on cash

DATE ASSETS = LIABILITIES + EQUITY

April Cash Cars Equipment Furniture

Loans Accounts Capital Drawings Payable Payable

50,000

800,000 850,00013

100,000100,000

Bal 150,000 800,000 850,0007 (50,000) 50,000

Bal 100,000 800,000 50,000 100,000 850,000

15 40,000 40,000

Bal 100,000 800,000 40,000 50,000 100,000 40,000 850,00018 (5,000) (5,000)

Bal 95,000 800,000 40,000 50,000 100,000 40,000 850,000 (5,000)20 (40,000) (40,000)

Bal 55,000 800,000 40,000 50,000 100,000 -- 850,000 (5,000)

945,000 = 100,000 + 845,000

Statement of Cash FlowsExplains why the amount of cash changed over a period of time.

Makes a listing of the cash inflow activities (cash receipts) and the cash outflow activities (cash payments) of the business.

- (Zenaida Vera Cruz-Manuel)

How do financial statements look like?

HARDY TOURIncome Statement

For the month ended April 30,2014

Service Income P55,000Less Operating Expenses Rent Expense P12,000 Salaries Expense 10,000 Repair Expense 8,000 Gas & Oil Expense 1,000 Utilities Expense 750 31,750 Net Income P86,750

HARDY TOURCapital Statement

For the month ended April 30, 2014

Dela Cruz, Capital April 1 P900,000 Add Net Income P86,750 Total 986,750 Less Drawings (10,000) Dela Cruz, Capital April 30 P976,750

HARDY TOURStatement of Cash Flows

For the month ended April 30, 2014

Cash flows from operating activities:Cash received from customers 100,000Cash paid for expenses (55,000)Net cash provided by operating activities 45,000

Cash flows from investing activities:Acquisition of furniture & fixtures (60,000)Acquisition of equipment (20,000)Net cash used for investing activities (80,000)

Cash flows from financing activities: Investment by Dela Cruz 75,000Withdrawal by Dela Cruz (10,000)Loan from bank 130,000Net cash provided by financing activities

195,000

Net increase in cash P 160,000

HARDY TOURStatement of Financial Position

April 30, 2014

Assets

Cash P160,000Accounts Receivable 20,000Cars 800,000Equipment 45,000Furniture & Fixtures 50,000Total P1,075,000

Liabilities & Capital

Loans Payable P 98,250Dela Cruz, Capital 976,750

Total P1,075,000

DEFINITION OF TERMS RELATED TO ACCOUNTING

Generally Accepted Accounting Principles (GAAP)

Represent the “rules, procedures, practice, and standards followed in the preparation of financial statements”

Like laws that must be followed in financial reporting.

-Valix

Accounting AssumptionsFundamental premises on which the accounting process is based.

Enhance the understanding and usefulness of the financial statements.

-Valix

Going Concern Assumptionmeans that in absence of evidence to the contrary, the accounting entity is viewed as continuing in operation indefinitely.

Assets are normally recorded at cost.

Foundation of the Cost Principle.

Assets should be recorded initially at original acquisition cost

-Valix

Basic AssumptionsAccounting Entity

-the entity is separate from the owners, managers, and employees who constitute the entity.

-the transactions of the entity shall not be merged with the transaction of the owners.

-The reason for the entity assumption is to have a fair presentation of financial statements.

-Valix

Time Period Assumption-the indefinite life of the entity is subdivided into time periods

or accounting periods which are usually of equal length for the purpose of preparing financial reports on financial position, performance and cash flows.

Calendar year - 12 month period that ends on December 31.

Natural business year- 12 month period that ends on any month of the year when the business is at the lowest or experiencing slack season.

-Valix

Monetary Unit Assumption-all business transactions are measured and recorded using

only one unit of measurement.(Valix)

Money used as a medium of exchange, most practical unit of measuring financial data.

Accrual Accounting-income is recognized when earned regardless of when

received and expense is recognized when incurred regardless of when paid.

-Valix

Qualitative Characteristics• Relevance

(quality of information that will make a difference and influence a statement user to make a meaningful decision.)

• Faithful Representation(the actual effects of the transactions shall be properly accounted for and reported in the financial statements.)

-Valix

• Relevance

-Predictive value (must be useful in projecting what might take place in the future) -Zenaida Vera Cruz-Manuel

-Feedback value (must give the information about past performance of the business.) -Zenaida Vera Cruz-Manuel

-Materiality (Will depend on whether an item(by its nature or size) will influence user’s decision or not) -Zenaida Vera Cruz-Manuel

• Faithful Representation

-Completeness (the result of the adequate disclosure standard or the principle of full disclosure.)

-Neutrality (the information contained in the financial statements must be free from bias)

-Free from error (there are no errors or omissions in the description of the phenomenon or transaction, and the process used to produce the reported information has been selected and applied with no errors in the process)

-Valix

Conservatism- when alternatives exist, the alternative which has the least

effect on equity should be chosen.

“in case of doubt, record any loss and do not record any gain”

-Valix

Enhancing qualitative characteristics

• Comparability (uniform application of accounting method from period to period

within an entity.) • Understandability

(requires that financial information must be comprehensible if it is to be most useful)

• Verifiability(different knowledgeable and independent observers could reach consensus)

• Timeliness(financial statements must be available or communicated early enough when a decision is to be made)

-Valix

Measurement of elements• Historical Cost

(amount of cash or cash equivalent paid or the fair value of the consideration given to acquire an asset at the time of acquisition.)

• Current Cost(amount of cash or cash equivalent that would have been paid if the same or equivalent asset was acquired currently.)

• Realizable Value(the amount of cash or cash equivalent that could currently obtained by selling the asset in an orderly disposal.)

• Present Value(the discounted value of the future net cash inflows that the item is expected to generate in the normal course of the business.)

-Valix